ASX BRIEFS
Welcome to 'ASX BRIEFS,' the definitive podcast for enthusiasts, investors, and professionals keen on staying ahead of the curve in the Australian Stock Exchange (ASX). Hosted by Andrew Musgrave, 'ASX BRIEFS' delves deep into the heart of Australia's financial markets, bringing you insightful conversations with the minds shaping the future of investing down under. Each episode, join Andrew as he interviews a diverse lineup of fund managers, executives, and industry insiders, offering you a unique blend of expert analysis, strategic insights, and the latest trends affecting the ASX. Whether you're a seasoned investor or just starting out, 'ASX BRIEFS' is your go-to source for comprehensive updates and thought-provoking discussions designed to inform, inspire, and empower your investment journey. Tune in to 'ASX BRIEFS' and take the pulse of Australia's financial markets right at your fingertips.
ASX BRIEFS
COGSTATE LTD (CGS) - CEO Brad O'Connor discusses Mind Metrics and Brain Health
Ever wondered how scientists accurately measure brain health across thousands of patients in dozens of countries speaking 30 different languages? That's exactly what Cogstate has mastered over its 25-year journey to become a leader in neuroscience technology.
Brad O'Connor, CEO of Cogstate Limited, takes us behind the scenes of this fascinating ASX-listed company that's quietly revolutionizing how brain health is measured globally. What began as a digital disruptor creating computerized cognitive assessments has evolved into an essential partner for pharmaceutical companies developing new treatments for conditions like Alzheimer's disease, depression, and rare neurological disorders.
The numbers tell a compelling story of innovation driving efficiency. While many companies struggled during the pandemic, Cogstate found ways to do more with less—reducing their workforce by 25% while simultaneously achieving record revenue growth. Their secret? Strategic implementation of AI and advanced analytics that allow them to manage clinical trial endpoints with unprecedented accuracy and at global scale.
Beyond impressive financials—60% gross margins, 20% EBIT margins, and US$34 million in cash with no debt—it's Cogstate's vision for the future that captivates. O'Connor shares how their technology might soon help everyday people assess their cognitive health from home, similar to using a thermometer before deciding whether to see a doctor. With pharmaceutical spending on central nervous system diseases projected to approach oncology levels within a decade, Cogstate stands at the forefront of a massive market opportunity.
Ready to explore how brain health technology is creating both better patient outcomes and compelling investment opportunities? Listen now to discover why Cogstate's digital cognitive tools are becoming indispensable in both clinical research and healthcare settings worldwide.
Andrew Musgrave Host
Welcome to another episode of ASX Briefs, where we dive deep with leaders of Australia's most innovative companies, and today we're speaking with Brad O'Connor, the CEO of Cogstate Limited, a pioneering neuroscience technology company that's transforming how brain health is assessed in both clinical research and healthcare. The company's cutting-edge digital cognitive assessment tools are used globally in clinical trials and primary care, helping accelerate the development of new medicines and improve early detection of cognitive decline. With the focus on efficiency, accuracy and scale, the company is making meaningful strides in both the biopharmaceutical and healthcare sectors. Brad, thanks for joining me today and welcome to the ASX Briefs podcast.
Brad O'Connor Guest
Wonderful to be here.
Andrew Musgrave Host
Now, Brad, for investors who may be unfamiliar with Cogstate, can you just start by just giving us a brief overview of the company?
Brad O'Connor Guest
Yeah, so Cogstate was founded late 90s, early 2000, And so they've been going for around 25 years now. We originally started with the investment thesis around providing clinicians with digital tools to measure cognition. So, we started as a digital disruptor. We developed computerised cognitive assessments. We had those approved by the regulators, so we're class two medical device. We've been approved by the FDA, the TGA here in Australia or other jurisdictions.
Primarily we've, um we've taken those assessments into clinical trials markets.
So, our customers are pharmaceutical companies and biotech companies who are developing new drugs, generally speaking in central nervous system diseases. But over the course of, I suppose, 25 years, what we've done is we've really pivoted the business a little bit to manage all of the endpoints associated with the measure of cognition in those clinical trials. So, in many ways we're an endpoint quality company. So, our customers rely on us to make sure that the data that's coming through in their clinical trials is reliable, is accurate, and we've been able to develop those systems so that we can do that on a global scale. So if you're running a global clinical trial, you might be doing that in 20 countries in 30 languages, and really the challenge is to make sure that all of those assessments are exactly the same and that the only thing that changes is the person on drug or is the person not on drug, and you want to see the separation of those two groups. So, we work with pharmaceutical companies to do that and make sure we get that quality of data.
Andrew Musgrave Host
Okay, and touching on the financials, the company achieved record revenue this half and a significant increase in EBIT. So, what were the key operational drivers behind this strong performance?
Brad O'Connor Guest
There's a couple of things there. It's both a revenue and a cost story. So, if we start with the revenue first, we're seeing growth just in terms of investment from pharmaceutical companies in central nervous system diseases, so we're seeing just an increase in demand for services from companies like us, and so that's really where we're seeing the growth of those revenues. We have a lot of long-dated contracts, so we do a lot of work in Alzheimer's disease, for example, and those trials can run for three, five, even eight years, and so we have really good visibility in respect of that revenue. We've got around $100 million US of contracted revenue that will roll off in future periods, so really good sort of, I suppose, base of revenue that we're then seeking to build on by signing new deals all the time.
And then the other aspect in terms of the margin growth that we've seen is we're increasingly using technology to improve the delivery of our services, and a lot of it is trying to find error in data, and obviously, with what's happening in terms of advanced analytics and AI, we're able to utilise that to find that error in the data that we're looking for. And that's meant for us really a reduction in headcount. So, we were about 210 employees as we went into the pandemic. We're now about 155 employees. So, we're down substantially but we're doing substantially more revenue with those 155 people. So, we're running our gross margins around 60% and then EBIT margins around 20%. We think that's really a sustainable model for us.
Andrew Musgrave Host
And just touching on those clinical trials you mentioned, the revenue jumped 27%. So, can you just tell us a bit more about the demand dynamics you're seeing in this segment?
Brad O'Connor Guest
Yeah, so, as I said before, a lot of work in Alzheimer's disease, but we're also seeing a real pickup in other areas, things like mood disorders, which includes depression and anxiety. So really increasing investment there. A lot of work in paediatric and rare diseases. We're seeing a lot of biotechs focus on those. We're proud to be working with a fellow ASX company, Neuron, in relation to their development of their rare and paediatric programs, just as an example. So, we're seeing pickups across the board there, but really a lot of the growth driven by the investment in Alzheimer's disease. So about 60% of our revenue comes from Alzheimer's disease.
Andrew Musgrave Host
And the company has a healthy cash position of circa $34 million. So how are you balancing efficiency gains with scaling for future growth?
Brad O'Connor Guest
Yeah, so US$34 million, so really healthy cash position, no debt. So, the challenge for us in terms of that capital allocation is just thinking through what's the right investments that we need to be making in the business. I mentioned before the work we've been doing around advanced analytics and AI. We're going to continue to invest in that and we see lots of opportunities for improved product there. But at the same time, you know, largely speaking we expect that to be consistent with the level of investment we've been making over the last couple of years, and that's around sort of $4 million or $5 million of R&D we've been spending a year. Most of that gets expensed maybe about a couple of million each year. We're putting onto our balance sheet and amortising off as well. So, we're balancing that kind of investment with return for shareholders. So, we've been undertaking a share buyback over the last sort of 18 months, you know, and so we've been quite active there, and again during the quarter just finished, the March quarter, we were fairly active there, buying back around $3.5 million Aussie worth of stock.
Andrew Musgrave Host
Okay. Looking at strategic partnerships, the amended global licensing agreement with Eisai is a major development. What strategic advantages has this change created for Cogstate in global markets?
Brad O'Connor Guest
I suppose it's important to understand context here. So, we signed an exclusive agreement with Eisai so a worldwide exclusive back in 2020. We converted that to a non-exclusive agreement in April of 2024. So, the rationale for that was that the nature of the exclusive arrangement really tied us up in terms of what we could be doing outside of clinical trials. We see a real opportunity to use our technology as a direct-to-consumer tool where we can identify people who might be appropriate for inclusion in clinical trials, and we had some interest in pharmaceutical companies who were interested in that. But we were bound by this exclusive nature of our relationship with Eisai. So we've converted that to a non-exclusive relationship and with the agreement of Eisai, and that's just allowing us to explore different ways that we might utilize that technology, both in that what we call the healthcare setting, which is providing our technology to primary care physicians or GPs, as well as how we might use that with our pharmaceutical company customers.
Andrew Musgrave Host
You've also announced a new partnership with Medidata in October 2024. So, can you explain the nature of that partnership and has it started to add to your sales pipeline yet?
Brad O'Connor Guest
Yeah, so Medidata are a really big supplier of technology to the clinical trials industry.
So they provide technology, essentially electronic data capture technology, where all the assessments that were conducted in the clinical trials are recorded on their EDC system. They want to move into central nervous system diseases but don't really have the scientific expertise to do that. So, we've partnered with them to help them move into that central nervous system disease space. For us, what that means is really providing scale that we don't have. So just to put some numbers around this, so Cogstate's commercial development team of around seven people within Medidata it's around 700 people. So, they're doing billions of dollars of revenue, they're running thousands of clinical trials, and so for us, what it's giving us is that access to scale of a different, you know, really substantially larger commercial team is seeing a substantially larger number of opportunities, and we're really excited about that. So, we've seen a pickup in sales proposals coming in almost immediately and we're starting now to see some of those proposals roll off into signed contracts. So, it's exciting.
Andrew Musgrave Host
And the software license mix in clinical trials increased to 19%. So how do you see software playing a larger role in your long-term revenue model?
Brad O'Connor Guest
Yeah, so the license fees, which is primarily related to our digital cognitive assessments sort of, has fluctuated between around 13% up to sort of 19%, 20% historically. So, the 19% we see as pretty consistent of what we'd expect going forward. I think what's going to be interesting is, as we seek to, I suppose, digitise or automate some of the error detection and you know work that we're seeking to do how that moves from being a service fee to a licence fee and you know so ideally, over time, what we'd like to see is an increase in those license fees as a percentage of total revenue and a decrease in service fees. And yeah, and that's certainly where we're investing at the moment.
Andrew Musgrave Host
And Cogstate's tools have potential applications beyond clinical trials. So, are there new use cases or verticals you're exploring?
Brad O'Connor Guest
Yeah, so we've I mean we partnered with Eisai, as we mentioned before, in that healthcare market or that GP market.
We think there's an opportunity also in our consumer market.
You know, we a lot of the focus group work that we've done, particularly in the United States, suggests that people are, as they age, are really worried about their memory and their cognition, and they're interested in understanding how they're going. So, are they the same and are they normal compared to everybody else? But interestingly, we've found that they'd like that information you know, in the comfort of their own home, if you like, rather than getting it. They just want to have a sense of am I normal and do I need to go and talk to someone about this, as opposed to looking like they're just unnecessarily nervous. They're worried well, presenting at the GP when there's nothing wrong with them, and so we think, similar to how you use a thermometer at home, you stick it in your ear, or you take your temperature and you can make some rough assessments about whether I need professional guidance in relation to this. We think there's a role to play in cognition as well, and so we're really interested in exploring what that might look like as a means of either identifying people who might be appropriate for clinical trials or identifying people who might be appropriate to go on to some of the new drugs that are being approved.
Andrew Musgrave Host
Okay, Brad. Well, to wrap things up, as we look towards the second half of 2025, what are some of the key milestones or catalysts investors should keep an eye on?
Brad O'Connor Guest
I think for us it's still just we're seeking to maintain those margins in revenue growth that we've shown over the last sort of 18 months, really looking, you know that we're expecting strong, continued cash flow from the business. We'll continue to look at the buyback of our shares as that makes sense. We won't necessarily buy a set amount of shares every day, but we will be looking, you know, and the market's providing lots of turmoil and opportunities for you know, both for buying and for standing out of the market at the moment, you know. But really, I think the major catalyst for our business is just increased pharmaceutical company spend and biotech company spend in relation to central nervous system diseases, and I mentioned before, we're really seeing that investment take off. Our analyst reports that we rely on show that spend in central nervous system diseases approaching oncology perhaps over the next 10 years. So, I think there's a good wind at our back, which we like.
Andrew Musgrave Host
Okay, Brad. Well, it's been great to get an update on the company. So, thanks for your time and we look forward to the next update from Cogstate in the upcoming months.
Brad O'Connor Guest
Thank you very much, Andrew.
Andrew Musgrave Host
That concludes this episode of ASX Briefs. Don't forget to subscribe and we look forward to catching you on our next episode.