Yet Another Value Podcast - Michael Liu on why he thinks Cogstate $COGZF is a great business wrapped in a special situation play

Episode Date: April 3, 2023

Michael Liu, Analyst at Intelligent Fanatics Capital Management, discusses Cogstate (ASX: CGS) / (OTCQX: COGZF). Cogstate provides computerized cognitive tests for Alzheimer's clinical trials. Michael came on to discuss his thesis on Cogstate and how a failed takeover attempt could create an interesting special situation. For more information about Michael Liu and Intelligent Fanatics Capital Management, please visit: https://if.capital/ You can Follow Michael Liu on Twitter @michael20171 : https://twitter.com/michael2017l Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:51] What is Cogstate and why are they interesting? [6:21] Cogstate Fundamentals [8:01] Why doesn't large pharma, like Biogen, develop these cognitive tests on their own? [10:38] Cogstate value proposition [12:04] Does Cogstate control all the data from the clinical trials? [12:47] Alternative to Cogstate's computerized cognitive tests (pen and paper tests), and understanding competitive landscape [16:08] Current Cogstate market share for their tests vs. pen and paper tests [18:12] Growth in Alzheimer's research and diversifying revenues outside of big Phase II and Phase III clinical trials for Alzheimer's drugs [21:30] Additional R&D post-approval of Alzheimer's drugs (what this means for Cogstate) [25:55] Valuation [29:53] Bookings and revenue recognition (and how that relates to thinking about valuation) [33:44] What caused to the stock to plummet earlier this year February 2023 [35:43] Gaming out why the buyout didn't happen [36:44] Management background [39:16] Recent insider buys and understanding why this happened today vs months ago [43:07] Who the buyers could be for Cogstate [46:18] Closing thoughts on Cogstate - recent buyouts in the Australian space Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by side analysts conduct the calls for you. But that's not all. Stream also provides the ability to

engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. And if you like this podcast, it would mean a lot. If you could follow, rate, subscribe, review it wherever you're watching or listening to it. With me today, I'm happy to have Michael Lou. Michael is an analyst at IFCM. Michael, how's it going? Good. How are you?

I'm doing good. Hey, thanks so much for coming on the podcast. Let me start this podcast with just a quick disclaimer. Way I start every podcast, remind everyone, nothing on this podcast is investing in advice. That's always true, but we're going to be talking about a microcap Australians stock. So it's international. It's small. You know, if that doesn't scream extra due diligence, extra risk, please do your own work. I don't know what does. I'll also throw out just because this is super small. I know Michael has mentioned that IFCM has a position. So I'll disclose that. I even have what I think people would call a tracking position. So it would basically round zero, but I own a couple shares here or there. So I'll throw that out as well. All that out the way,

Michael, the company we want to talk about today is Cog State. The ticker is, I believe in the U.S. it's C-O-G-Z-F is the kind of domestic ticker. I think people are talking, they're going to be familiar with. But yeah, you know, small company, really interesting. I mentioned I've been told because you kind of walk me through a little bit of the story. I was your research was like, insider buying, failed transaction, growthy company, open market purchases, it's just got everything. I've rambled a lot.

I'll flip it over to you. What is Cog State and why are they so interesting? Yeah, sure. So, yeah, thanks for having me. And, you know, Cog-State's a really interesting company, especially now because I think we've been investors in CogState, like you said, for many years. And CogState is and has always been a great company. But right now, in particular, they're down about 40% from highs earlier this year

because of sort of a failed takeover that you alluded to that we can talk about more. Just a variety of technical, non-fundamental related events that have caused stock to go down a lot. So you're left with sort of this great business at the lowest evaluation that it's been in several years. So I think it's a really interesting opportunity here, sort of a great business wrapped up in a special situation play. So sort of going to both of those elements,

the reason it's a great business is like Cox, so Cox State's business is making computerized cognitive tests for Alzheimer's. So these are the tests that you use, that patients do that pharmaceuticals give patients in clinical trials to see if the drug is successful or not in improving the patient's cognition or slowing the worsening of their cognition

to measure the cognitive effects of their drugs. And Cog State is a very dominant player in that market. They're about in the computerized cognitive test space, they're about five times larger than the next biggest competitor. So they're by far the market leader for all intensive purposes, the only player in the market. And they're very, they have a very strong foothold in the market because they have very close relationships

with almost all of the big pharmaceuticals that play in Alzheimer's. So the biggest pharmaceuticals in Alzheimer's are Aizai and Lilly right now. And they're also the two companies that are going to have the first approved drugs in Alzheimer's. Alzheimer's that we can talk about later. But Eli Lilly uses Cox State. They have an agreement to use Cox State on all of their clinical trials. So that's a lot of work that Coxstead does through Eli Lilly.

And Aizai owns, in a couple years, a couple years ago, Aizai bought 10% of Cox State, and they also use them for several trials. And Aizai also has a $50 million license agreement to take Coxst test and bring it to the direct-to-consumer screening market that we can also talk about later. So Cox-State has really good foothold in this industry. that is about to see a lot of growth going forward because of some recent successes in the space that have come from companies like Biogen, Azei, and Eli Lilly.

They've found the first time in 20 years, they've had successful drug readouts in Alzheimer's, and this has sort of catalyzed, you know, the opening of the floodgates for a lot more Alzheimer's R&D going forward. So you can see companies that have previously exited the industry coming back in, like Merck and GSK have, you know, used to be big in Alzheimer's. They sort of took a hiatus over the last couple of years. And now they're coming back in after seeing the successes from these other big pharma.

And then companies like Eli Lilly and Aza that have always been involved are now aggressively ramping their R&D efforts. And because Cox State is the dominant player in this industry, basically all increases in Alzheimer's R&D eventually benefit Cox State and flow down to, you know, Cox State's bottom line. So, you know, historically, Cox State has been a 20% grower. on the top line, you know, bookings for the last, you know, five to 10 years, I think there's room for that to accelerate to 30% plus meaningfully over the next couple of years as these increases in RAD come through. And, you know, the company is profitable. And like I said,

it trades at a very low valuation today. And, you know, on that note, the flip side of what happened to create a special situation right now that makes the company so compelling, their stocks so compelling today. Why don't we pause there? Because I, the special situation, I think, is the sexy kicker, but I do think it's important for people to understand like kind of the fundamentals more. I mean, you know, I'd love to, I, you know, I love a special situation, but I do think the fundamentals and understanding that is really important for understanding, like the, it dropped 40% on, I don't want to say a failed, kind of failed, like a weird special situation. I think people are going to want to know that there's the

fundamental value and understand the business first. So do you mind if we just kind of pause here and then we'll come back to the special situation? Yeah, absolutely. Okay, great. So let's just start. So CogSate makes these development tests. And tell me if I'm wrong, but the way basically people can think of it is, you know, Biogen has that new Alzheimer drug. And what they do is they're literally giving older people, right, an iPad at, if I'm correct, and they are clicking through it. And it's CogSate's test and they're clicking through it and saying, hey, no sign of mental degradation versus last month or last year or some signs of mental degradation. Is that kind of what people should be thinking about this product? Yeah. So for the, you know, 90,

percent of the business today is using the testing clinical trials. And just, you know, you can go to Kasea.com to get a sense of what their tests are, but it's really simple technology. For example, it'll have a card that flips over. And once it flips over, you click on the iPad or you click on, you know, K on your keyboard. And then it tests your reaction time down to the millisecond. It'll say, you know, have you seen this nine of hearts before? It'll show you a sequence of cards. Have you seen this card before? Yes or no. And then they'll test your reaction time. And obviously, if you get the answer correct or not that you've seen the card before, that's short-term and long-term memory. And they can test all these things, you know, to a very

minute scale and get, you know, millisecond level data on. And they have a huge database of patients that have already taken these tests, obviously. So they know what is, you know, mental decline and what isn't and how to assess all of that. So in clinical trials, they give these tests to patients every, I think it's every three months-ish or something like that. And then they measure, you know, half of the arm is taking the drug, half of the arm is taking placebo and they see which side is, you know, getting their cognition benefited or worsening quickly and they compare the two sides, unions and coxate tests. That's the primary use of the technology. I mean, I think the first question that pops up is why, you know, you're dealing

with biogen, you're dealing with Merck. These are literally 100 billion dollars, the richest companies in the world, you know, they can develop anything they want. They're the ones interacting with the patients. I mean, I do think there is something to scale on having the database, but But why doesn't biogen just go out and develop this? As you said, I looked at it and I think that it's a, if I remember correctly, they've got a big ace of spades is the front of their website and their annual report because, you know, it's an ace of flipping over. Why can't biogen just go and develop this on their own and kind of, I mean, it's not like

they're paying tons for this, but just kind of cut coxate out, get something proprietary, maybe that pulls into their models and their data a little bit more. Yeah. So developing the test would take no time. You could code it, you know, anybody could code a test. this to run. I've seen some clickbait websites that have similar, like, see how quick your reaction time is.

Like, it's pretty simple. Yeah, the test is everywhere. What's different about Cox State is they have 20 years of validation of using their tests in clinical trials and about a thousand academic papers studying their tests. Big Pharma is very picky about what they put into a clinical trial. Like the last thing you want to do is to spend a billion dollars running through phase one, two, three trials, getting a really successful result in Alzheimer's, which is already extremely difficult to do. And then go into the FDA, and then once you have your drug approved, the F, or like,

once you have the successful data, the FDA goes, wait, what endpoint did you use to test that drug? We've never heard of that before. Can you go back and redo those trials? That would be horrible. So Cog State is, you know, the only computerized test that has been eunes thus far, to my knowledge, in large phase three sort of pivotal Alzheimer's trials. And that's a big, level of validation that no other company has. And, you know, that's because they've spent so many years sort of slogging through the effort of giving the test away for free to academics for them to study the test and make sure, you know, there's no practice effects. It actually tracks cognition. They can compare it to, they've compared to every single other paper and pencil

tests out there. So the whole, the whole industry is very averse to change. And so it's taken a really, really long time for CogSate to get their place in the industry. And Big Pharma is not going to save a couple of million dollars just by speculating on another startup's test and run the risk of something failing with their endpoint. That's why Aizai has given Cox State 50 million to license their tests for clinical trials. That's why, you know, Cox State does $50 to $100 million a year of bookings

selling this test to Big Pharma. I was about to make that point. I mean, again, it seems like, oh, yeah, we'll bring it in-house to save money. It's like Cogstates revenue for managing, and we'll talk a little bit more about all the other options. Managing all the Alzheimer research through this is 50 million per year. Like that's a fraction of what you're going to spend in one drug on research trials. Like it's a very small part of it. But as you said, if you went with something else and there was any, any issues with it, cool, that's a billion dollars that you just spend an R&D out the window.

You're losing patent protection time. You have to go back and redo everything. You take a huge hit. There's going to be scandalous stories saying that you're not tracking this data well. It's a very small cost, but it's a critical component. So if I'm, go ahead. Yeah, I was just going to say, you know, the other thing you can think about this way is there is precedent as to how much money and time it would take to create a new computerized test and bring it to market. And that's that Cog State started in the early 2000, the IPOed in 2004, at 50 cents a share.

And they've, you know, been for the last like 20 years, they've been unprofitable for maybe 15 or 16 of those years, constantly raising money. They've had to raise a lot of money to do this. It's taken about 15 years for them to finally get ingrained in major late-stage clinical trials. And, you know, that's, and the stock today is at a buck 50 when it IPOed at 50 cents back in 2004, which is not a great IRA if you calculate it. So the financial and time incentive to do this really doesn't exist for competitors or for Big Farm or anybody. And now the data, if I'm, you know, if I'm biogen and I'm using Cogstates app, does Cogstate control the data? So like they control it and then when Merck runs it, they get the data from Merck too. So they can start adding in all these different things.

And I don't know if that's really a network effect, but they get all the kind of results to continue to improve their algorithms and everything. Yeah, absolutely. So that's a big part of, it's like it's a positive feedback loop, like you said. They get more data from the more trials that they're used in. And that allows them to, you know, get a better, smarter test per se. And it's the same thing with the more trials they're used in that validates their test too. The more trials, clinical trials they're used in, the more academic studies.

they're used in, the more validation they guess it's the same feedback loop that makes them more ingrained in the industry. And if I'm biogen, Merck, whoever, and I'm running an Alzheimer's test, and I for some reason choose not to use Cox State, I don't believe there's any other kind of computer app trials that have the FDA seal of approval. So the alternative is kind of just pen and paper. Am I thinking about that correctly? Yeah, exactly. So when I say Cox State is a market leader in computerized tests, computerized tests are only about 10 percent of the the total market. The rest of the market is paper and pencil tests. Now, these paper and pencil tests are not great when you look at them. So you can Google how to do them. So the biggest

ones are like the MMSC and the CDR sum of boxes. These are tests that, you know, I mentioned before how you do Cox's tests and they take your data down to the millisecond. They know every right answer, wrong answer, all of that and they put it together. These tests are more wrote-based. They were developed in the 1970s and 80s through sort of just academic papers and ideas. So there would be tests like, you know, it's a checkbox, like, you know, how severe is your memory loss? Is it mildly severe? Moderately severe or severely severe? You know, and then you check that. And then you do, you know, all these boxes. And then it's actually kind of amazing to think that, you know, multi-billion dollar Alzheimer's drugs are being approved based on these, you know,

very rote, brute force paper and pencil tests that you would think, you know, there's much more sensitive tests that can be made like that can be euns like cogsates today instead of these brute force ones but again it's just reflective of the nature of this industry that you know it's it's very averse to change so these tests have been unions for many decades and they're going to continue to be unions for many decades but like i said before there are many problems with these tests you know one is they're not standardized every single one has to be administered so if i'm in if you're administering a test to me you know and then i go in to the the facility the next month and somebody else is a the new scene of the test. And then, you know, there's other people administering the same test to

my placebo comp in China or something like that. Then, you know, that's a source of, that's a source of difference of potential error. And then there's also a lot of practice effects for those tests. Cox's test was specifically made so that you can't get better at it over time. Whereas a lot of these other tests, like some of them, you'll have you draw the same shape every single time. You draw the same shape twice in a row. You get better at it over time. So there's a whole host of benefit of issues with paper and pencil tests that coxate solves. And maybe the biggest benefit of cogsates test now that's become relevant since COVID is that their tests are able to be administered remotely with basically no difference versus in-person administration. Because again,

their tests aren't really administered. You're just doing it on the computer. Whereas for paper and pencil tests, administering those tests remotely are very difficult. And right now, there's a big growth being seen in what's called decentralized clinical trials, which are clinical trials that are done, you know, remotely with, you know, sort of like over a Zoom call, you do, you do these cognitive tests instead of going in person. I think actually the head of R&D for Takeda on a Twitter space has recently said that all clinical trials, he expects that all clinical trials in the next year will have some form of decentralization element, whereas this was, you know, not really heard of pre-COVID. So Cogstate is, you know, a really big beneficiary of that

tailwind as well. So they're just so much better than the paper and pencil competition. But again, it just takes time to overcome the precedent that's the precedent in the medical space. Not only does it take time, but if you're in the middle of an Alzheimer trial that's running for, call it four years, right? And you started two years ago using paper and pencil. Even if cogsate stuff is way better, you can't just switch over to coxate stuff today, right? That it would invalidate the whole trial. Like, you can't do it until either the drugs approved or disapproved and you have to go back and do a new trial or after the drug's approved and you need to continue monitoring, you could probably design to switch.

But that is, and you said you think of the, 100 of the industry for Alzheimer's research, you think 90% of it is pen and paper right now and 10% of it is Cox 8 and then rounds to zero is some other solution. Yeah, I would say so. I mean, yeah, 90% is pen and paper probably. I think Coxstates said that their market share right now is something like 13%. So maybe we say like 20%. percent is computerized and then Coxstated the majority of that computerized. But again, we're

talking about like a total amount of, in terms of like pivotal trials of phase two and phase three Alzheimer's trials, there's maybe only like 20 to 40 of them in the works right now. So, you know, 1% is not even a single trial. And now a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently, through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions.

They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge,

all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. You know, right now all of the revenue is really coming from something related to Alzheimer trials, that type of stuff, right? So I do think there's a question, hey, Alzheimer's research is booming right now.

But if I reround, let's use COVID. If I were around four years, COVID research, two years, I guess, COVID research would have been booming, and now COVID research has come way down, right? Or if I went back 20 years, I'm sure there's some disease I'm not thinking about that. People were really hot and heavy into doing research. And then five drugs came out. And now maybe there's one or two trials, but like, you know, it's pretty much gone. Alzheimer's the quote unquote nice thing is, which is a dark way to look at it,

but it's a huge market. It's going to take years to solve, maybe not solve. We're going to have lots of things. But, you know, I do worry, hey, if we got two blockbuster drugs approved, three blockbuster drugs approved in the next five years, in the next five years, Cogstate's going to have really nice revenue. But after that, you know, do you just see this huge dryout? So can you kind of talk to Cogstate what their revenues look like outside of big phase two

and phase three trials for these Alzheimer drugs? About 80% of Cogstates business is Alzheimer's. and I don't expect that to change going forward. In fact, I would expect the Alzheimer's side to continue to grow. I think it is a risk that Alzheimer's R&D goes down in the long term, and that has happened in the past before when there were a lot of failures that stringed along in Alzheimer's. And that's when, you know, like I said before,

a couple of those big pharma exited the industry and R&D sort of dried up. You can see that reflected in the stock chart in the 2017-2018 timeframe when it went down, you know, maybe 75% from highs. But right now, Alzheimer's is in a very, very positive place for R&D. So these are blockbuster drugs that are going to come out. But they're blockbuster because they're the first treatments, the first disease modifying treatments ever for Alzheimer's. That's why they're blockbuster, because they're the only things on the market.

In terms of their effectiveness, they're really not that effective. The effectiveness is very marginal at best, and it's something that you may or may not even notice in daily life. That opens, but again, the fact that, that they have found stuff that can be successful opens up the door to additional treatments here. Alzheimer's is, before these recent approvals happened, Alzheimer's was the largest untreatable killer in the world. And today, it's still, you know, a top five disease state or something like that that's now just suddenly been understood to the slightest bit that big pharma can now justify

investing in additional R&D for that. If you look at companies like Eli Lilly and Merck, like 300, 200 to 300 billion market cap companies, you know, there's only a couple of disease states that can move the needle for them, and Alzheimer's is one of them. And Alzheimer's has now been figured out, which I think could open up the room for a lot of R&D growth. I don't think that R&D stops after this. If you look at, you know, large-cap analysts are saying that Alzheimer's R&D is going to two to three X over the coming years after these approvals and the FDA pathway has opened to approve these drugs. And, you know, Alzheimer's scientists have said, you know, this new, all of the stuff that has recently happened is going to, quote, open the floodgates to additional

R&D going forward. So I think, if anything, this is the start of the tailwind rather than the end of it for Alzheimer's. No, that's one of the two points I was trying to drive there. A, like, this is the first line and, you know, it's generally not the first drugs. Like, you're going to have so many improvements. There's going to be so many follow-on trials. Like, I don't think it's like, hey, we get two big blockbusters over the next five years and then research done. Like, I think you're going to get that. But then the other point I was trying to maybe get at, and you can correct me if I'm But I think even once these drugs are approved, because it's Alzheimer's, because it's such a big market, I think there's lots of post-trial research that gets done. And Cog-State will still be having, you know, as they continue to check up on the people that are on there every month, every quarter, every six months to see how their mental acutities doing.

Like, Cog-State still benefits from that type of post-trial research check up all of that. Yeah, absolutely. So that, yeah, so there's two points. So one thing just on the previous point of additional R&D that I'll mention. And then, you know, you're totally right on the real world studies. in the post-approval studies that are going to go down. But the other thing with Alzheimer's R&D is that these drugs that were recently approved

were just based on the same mechanism of action, which was clearing these amyloid plaques in the brain that build up when you get Alzheimer's. There are dozens of other potential mechanisms of action to treat or potentially even cure or prevent Alzheimer's. And that stuff is all in the works as well. So just because this one mechanism action, you know, has had some success, it doesn't mean that suddenly there's no way for a small cap pharma to budget their way

into the market. There are dozens of other things that they can do to, you know, create better versions of this one mechanism in action to clear the plaques, so to clear them better, or to, you know, get rid of, or to benefit a whole host of other things in the brain that are associated that was ever. And what you said about, you know, the real word studies is absolutely correct. So I mentioned before that ASEI has given Cox say a $50 million license to license their test and push it out direct-to-consumer to screen patients for Alzheimer's. That's sort of A-Zai just wanting to, you know, have something out there. So right now, Alzheimer's is really under-diagnosed.

And obviously A-Zi, who owns the leading Alzheimer's drug right now, the cannamab, really wants to push out Cogacet's test to, you know, increase diagnosis of Alzheimer's so that more patients go under drug. You know, it's like they pay $10 for a test. They get $20,000 by selling their drug. It's a great deal for them. So that is something that really benefits from more drugs on the market because then there's more demand for a screening test for Alzheimer's,

and that would be, you know, coxate is really, I think, the only player that has a large financial backer, you know, pushing them out into the market. And there's also potentially a lot more phase four and late-stage trials with these drugs that are getting approved. So the two latest-stage drugs in Alzheimer's right now are lacanamab, which is owned by Aizai, and aninamab, which is owned by Eli Lilly. And once these drugs are approved, there's a lot of stuff that you can do with them.

First of all, there's a lot of stuff that you have to study about them. Like, you know, what's the maintenance dosing regimen that you have to do? You know, can you give them in different delivery formats? So, you know, everybody's trying to work to get their drugs into a subcutaneous delivery format, which is so that the patients can inject themselves instead of having to go to the facility multiple times over a year. So there's all these different tests that they can run. you know, they will have to run conformatory studies to sort of prove out that their test works in the real world. Right now, one thing that's driving that is that CMS has not fully reimbursed these drugs.

Right now, the CMS has, so like Medicare has a ruling in place that says that once these drugs get traditional approval, they get, it's what's called coverage under evidence development. And what the evidence development right now is that they have to enroll everybody that takes a drug, has to enroll in a registry to monitor their cognition and to monitor safety changes as they're taking the drug. So Azai is sort of incentivized to get rid of that, that, you know, thing so that, you know, it just makes it a lot easier for patients to get the drug. And in order to do that, they'll probably have to run a confirmatory trial. And Lily will probably have to run a confirmatory trial as well to just prove out once and for all that their drug actually works,

because right now there's still a lot of suspicion in the industry. Like it's not consensus that these drugs actually work that great or that this mechanism of action works. So there's a lot of stuff that they still have to do just to prove the validity of these existing drugs and let alone, you know, doing additional R&D to find new drugs and new indications and all that, or new mechanisms of action and all that. Perfect. So at this point, hopefully people understand what the company is, why I say kind of moody, why it's pretty moody, very nice growth trajectory in the near medium and long term.

Let's quickly talk valuation and then we'll flip over to that. special situation that I think's got me excited, you excited. A lot of people on Twitter are pretty excited based on my DMs. Let's just talk about you. So as we're talking, I'm looking at the U.S. ticker, again, that's COGZF, trading for a dollar per share. At a dollar per share, you can correct any of my numbers if they're wrong, but I've got the market cap around 175 million, the enterprise value just under 150 million. So I'll just flip it over to you. Disagree with any numbers if I threw them out incorrectly, very possible I did. And then let's just talk EV to sales, EV to earnings, all that type of stuff.

Yeah. So, yeah, I'd say, you know, the EV is something like 14, 150 million U.S. right now. The U.S. symbol is currently trading at a premium to the Australian symbol because I think there's demand in the U.S. to buy in the stock, more than Australia, at least. If you want to buy in Australia, you've got to wake up at some pretty weird hours. It's difficult. You've got to find an Australian broker to go trade it for you. It's hard to buy stuff over in Australia.

Yeah. But, you know, going to valuation, I think looking at, right now the company is in a weird state to be valued because they had a strong profitable year last year where they were trading at a reasonable earnings multiple. And this year there are some revenue and bookings delays that have occurred that have sort of pushed out certain revenue recognition of certain high margin revenue into the next fiscal year, which, you know, their fiscal year ends June. That means, you know, half two of 20. 20, half to have to have calendar, 2023. So stuff is pushed out like six months right now. So I don't think it's appropriate to look at the company on an earnings multiple right now. I think it's better, there are better ways to look at this business. You know, the first thing I would say is that, you know, they have about 40 to 45 million in clinical trials revenues. So they're at about three times sales in that sense. And they also report bookings.

So, you know, that's by far the most leading indicator of this business. And they're trailing bookings is something like 60 million, and I think they can do 80 million this year. So they're at about, you know, two to 2.5 times bookings. And these are, you know, by far on the low end of where the company has traded in the last few years. The company has historically always traded at around two to four times bookings. And right now, like I said, they're around two to two point five times bookings. So they're at the low end of a historical valuation, even though they're at, you know, by far the high end of potential future prospects for growth. there are a few comps out there like I said the second largest computerized cognitive test player

is actually public it's called Cambridge Cognition listed in London and Cambridge currently trades at basically the same valuation as Cox State about 2.5 times sales and about 2.5 times bookings and it's the same thing as CogState even though Cambridge is you know one-fifth of the size far less at scale and with far less of exposure to Alzheimer's, which is, you know, the big sort of moneymaker in this industry is going to see over the next few years. So I don't think the stock is particularly expensive here. The company has sort of a demonstrated ability to get to 20 to 25 percent EBIT margins at scale, which is what they did last year and they still their long-term guidance for bottom-line margins. So three-time sales for 20 percent

event margins at scale is not that commanding of evaluation, especially for a business that could hopefully grow sales at 20 to 30 to 40 percent, you know, over the next couple of years per year. So I think the valuation is very cheap. It's on the low end of where the company has always historically traded. And this is, you know, a very funny contrast to the very high growth prospects that the company has over the next couple of years. So I don't disagree with any of that, But let me just push back on a few things because I think it'll be helpful for people thinking through. Like, you know, you've been following this for years.

I've been following it for a week. But, you know, I read the H1, their most recent earnings call, which they did at the end of February or early March. And they come out and they say, look, you can't comp this year's results to last year's because we signed the largest contract in our history last year. So the results are all funky. You can't comp that. What you can do is maybe comp this year to two years prior.

And they'll give you kind of an apples to apples performance. They say, hey, we're up 10%. versus kind of the comparable period in 2021. If you look forward, I think they were saying look at where our contracts for FY24 are today versus where our contracts for this year were a year ago. And they said, hey, that's about 20% growth. Right.

So I say, okay, you're kind of trading at 10 to 20% growth. As you said, like 2x sales, if you think they can get margins back up to around 20%, that's going to be around, I don't know, what is that if you're 2x sales. That's going to be around 10 to 12 times EBIT. Like, yeah, that sounds pretty, pretty attractive, but it doesn't sound like hit you over the head cheap, you know? So I think that would just be, I look at it and say, oh, up 10% for two years. Like, it just doesn't sound that growthy, that cheap, I think would be the pushback.

Yeah, I don't think revenue, because revenue recognition is just like very lumpy and based on, you know, when certain contracts get recruited and all that. The leading indicator is definitely bookings. And you can see that, you know, bookings now are 60 to 80. million per year in any trailing month, 12-month period that you want to look at. And, you know, if you book 60 to 80 million in bookings every year for a couple of years, you're going to be recognizing 60 to 80 million in revenues per year in, you know, in a couple of years. And I think that's where the company is headed in the long-term trajectory. The near-term is going to be lumpy based on how they get there. But no matter what, those bookings are going to be recognized

as revenues. And I think, you know, there you see a clear path to, you know, continued growth, getting to 60 to 80 to 100 million in bookings. And the thing is, like, there's a lot of delays hitting the company right now. They talk about the main trial getting delayed, but I think there is also another trial, two other actually large trials that were supposed to be started by Eli Lilly late last year that have now been pushed to, you know, maybe a couple months out later this year.

So that, those two trials also are impacting the company. I think that's what, you know, when they talk about their maintaining staffing levels to service contracts that they have coming up in the pipeline, I think those trials are what they're talking about. So to clarify all this, there's, there, Eli literally has this next generation drug called Rem Turnitug, but it's just a better version of denimab that they're working on doing trials for. And those trials, you know, based on stuff on the internet, we're supposed to hit in late 2020, late calendar 2022. And now I think they're expected to be booked somewhere around, calendar 2023. So those trials were supposed to contribute to this year's results as well, but they got delayed. I think all of these delays are related to Cogcada said. Lily's TOW testing partner, Tau is another thing in the brain that builds up when you get Alzheimer's. Lillie's TOW testing partner has had a couple of delays doing their one big trial, which is the big trial, 30 million contract that Cogsate had booked. And I think that's also affecting this next trial they're doing. Lily just is doing this sort of innovative trial design.

where they try to stratify patients by towel loads. So they only test patients, they only enroll patients in the trial that have intermediate towel loads, which is just like a theory that they have, that this will make them a better trial. But it also means that, you know, this is like a new approach.

And so I guess there are delays that are associated with that. But I think they'll be cleared up in the long run. Well, speaking of delays, I think we've covered what the business is. We've talked a little bit about valuation. You know, I think a very simple way to look at it is, as you said, They should be run rating 60 to 80 million in bookings.

Eventually, that will be revenue, 20% margins. That gets you to call it 15 million in EBDA. You're at under 150 million in EB. So less than 10 times kind of the run rate go forward, EBDA. That might take a year to get there, but that's that and there should be growth. Let's talk about it in February, big news, right? The stock is trading over $2 per share. I think that's actually Australian line, not US line, but it's trading over $2 per share.

And all of a sudden, the stock just plummet. And then a couple of days later, they come out. I'll pause there. What happens, cause the stock to plummet? What's the big hullabola? Yeah. So, I mean, before the stock plummeted, it ran from 2 to about 240 on record volume, the largest volume that the company has seen, I think, it's in its lifetime of existence.

And nobody really knew what was going on. And then suddenly on February 18th, the stock goes down 1020%. Next day it goes down 1020%. And it just keeps going down into 160 until it's halted. And then once it's unhalted, it opens out. like 120 or 130, and the stock is now down 50% in a matter of days when nobody really knows what happened. And the company puts out a release, which says that, you know, what was going on was earlier in the year they were in discussions to be acquired. And on February 18, those discussions

ceased. They didn't give many details. Later in the call, they said that the talks fell apart due to disagreements on price, the price that the acquisition would go through. But, you know, in any sense, that information clearly leaked and not to the general public. So there was somebody buying the stock in anticipation of a buyout that didn't happen. That then likely when the bio didn't happen, they likely turned into a fourth seller and now have tanked stock about, you know, like I said, 40 to 50% from highs at the truck. And now it's down maybe, you know, 30 to 40% from highs. Was there something too?

I feel like they said, hey, and I think it related to those lily deferrals that you talked about, they said, hey, one of the reasons the buyer might. might have boxed, it wasn't just price, but we had these revenue deferrals and the buyer was like, I don't know and just kind of walk. Do I remember that correctly or was I misreading that? I don't think the company has officially said that those are the reasons. That's investors putting two and two together because at the same time that they said that the acquisition talks, at the same time that they gave all this detail, they also pre-announced to half one results and half two guidance, which talked about those delays. And that is, that's what investors look at

to say, oh, the stock's down 40%. Look at all this bad fundamental news that has happen. To be honest, the delays really don't impact anything at all because it's just like revenue. Like I said, it's because of particular things that are going on with these big trials that Lily is doing. And it's only moving, you know, revenue a little bit from one quarter to the next. So it's really not that big of a deal. But investors want to, I think, see something of a fundamental, of a fundamental justification for the move there. That's reassuring because, you know, there is a difference between if a buyer walks and if a buyer, like, if you have revenue delays in a buyer walks, right?

Because revenue delays in the buyer walks, like, hey, what is that, is the buyer just that cold footed or is there something else going on where buyer walk on price, like, that happens all the time. And I do think this is a quote from the H-123 call. They said, we'll be unapologetic about seeking to maximize returns for our shareholders. If that means selling the business at some point, we'll consider that. Like, I think they're pretty shareholder aligned. And they were just like, hey, outlook for the business is bright.

We're going to need top dollar if we're going to sell this company. Yeah, no, management here is very good. They're rock solid. I mean, management has backstopped every single fundraising that the company has done since its inception in 2002. The chairman, Martin Meyer, owns, I think, 20% or something like that. Brad O'Connor, the CEO, who I know well, owns 5%. They also recently bought stock when the stock dipped after all this stuff was announced. bought 100,000 of stock. Martin bought 75,000 of stock. The company implemented a $13 million buyback. These are all things that have not happened in a long time. Brad and Martin haven't bought stock since the company's rights offering the last capital raise in 2019 at 26 cents. That was the last time they bought stock. And that turned out to be a very fortuitous time to buy stock, as you can imagine, because now the stock is 150 and it went to a high of 240. So they're smart, they're conservative, and I think they're sort of rational in this game.

They know that the longer they wait, the more business that they get in Alzheimer's, the more some of these approvals come through and people actually see what's going to happen in Alzheimer's R&D, the more they're going to be a desirable asset. And Cog State right now is a very desirable asset for almost every single, you know, CRO or channel partner out there because everybody in the space knows what's coming to Alzheimer's R&D. And, you know, the biggest channel part that they have, which is Clario, which has done work on 75% of all FDA approved drugs over the last few years. Clario doesn't have a big CNS arm, so like central nervous system. So they don't, but they're very, they've said

publicly, they're very focused on getting into Alzheimer's and getting into CNS diseases. And CogSate is sort of, they have a partnership with Cogstate and that's their way of getting into this industry. And that's the case for a lot of companies. Cogstate has brought a lot of their channel partners, a lot of business and Alzheimer's. And so they're a very desirable asset to get a foothold into this industry. So I want to talk about the potential acquires in a second, but as you just, you jump me. I was going to say, like, look, you know, the share price came down, call it 50%. And then you had multiple insiders by the stock of the open market and the company announced

that they were doing. I think their first share buyback ever. And that was set to start. I think they said in the call, they announced it in February. But I think they said, Australian approval said they couldn't start the buyback until March 20th. But, you know, stock down 50% insider buys plus repurchases. You love to see it, right? You love to see it.

But I was talking to someone today about there was a company that had a short report come out, right? And the short report came out. The stock was down and call it 20%. And the next day, the CEO filed a form 4 that said he bought the stock when it was down 20%. And he filed it during market hours. And me and him were talking. And he was like, don't you think that's weird? Like the CEO filed it during market hours instead of waiting as long as possible to file

the form for? Like, was he actually buying stock? or because he saw value? Or was he just trying to like signal to the market that, hey, this short report is wrong. And he was like doing more, I don't want to say market manipulation, but signaling than actually like trying to take advantage. And I hate to read too much into it, but you do wonder like, yeah, they bought some stock, but it wasn't like a wild, wild amount of stock. Do you think there's anything to, hey, this was more than signaling than actually like really taking advantage of the stock down? Because I'll just throw one more thing out while I'm rambling.

Like, yes, the stock came down a lot. But if you look, the stock is back to levels. It was maybe six months ago, right? And you didn't see the urgency for them to inside or buy or buy stock six months ago. So what's the difference today versus just a few months ago? So six months ago, there was significant uncertainty because the phase three readout for Lacanamab was coming out at the end of September. And most analysts were at a below 50% probability that that drug would be successful,

which meant that that would sort of derail Cogstates plans in their partnership with Aizai, as well as sort of cast doubt from the rest of the industry and for the rest of big pharma on the fact that these drugs would be successful. So Lacanamab read out at the end of December, at the end of September, very positively, and that sort of caused one of the spikes that you can see at the end of September in Cogcate stock. And that has sort of catalyzed all of these other, like, cascading effects that I talked about in Alzheimer's R&D that have happened over the past couple of months, sorry, to increase. R&D going forward and to sort of increase

the long-term growth trajectory of Cog State. In terms of, you know, yeah, in terms of the insider motivations, I really can't speak to it. I know that Brad, you know, we've talked to Brad for years. He's a very conservative player. He doesn't like to part with

money very easily. And I think that he bought the stock because he thinks it's cheap. And he's, you know, he's said he thinks the stock is cheap. I mean, they've all said that. So, you know, it remains to be seen. I don't think they filed it immediately after they bought as well.

I think they waited a couple of days, too. No, no, I was just, I was just relating that other anecdote to, you know, it's so funny. You see insider buying and suspicious investors, the first thing is like, is this a red flag over a green flag? Like, no, it's probably pretty good. But that commentary in September is great because I saw the share price and I went and looked through the old news filings and they said, hey, we've had nothing. We don't, there's no like inside information that's causing the spike. But I did kind of wonder in my head, oh, if there was clearly a leaky process this time where the stock went up and then went down before people knew about the buyout.

I was wondering if there was like some type of leak in September. I didn't realize it was like just fundamental news that impact. I didn't put two and two together was just fundamental news that impacted the whole industry that sent it up then. And that does make a, you know, value today should be higher than value six months ago because the industry is in a much better spot. Yeah, absolutely. I mean, that approval really, a lot of the company's values. was contingent on that approval. Last question, and then we can kind of wrap it up

or talk about anything else you want to. I don't believe the company has disclosed who the buyer was. But as you said, CogSaid is in a unique position with a kind of unique asset. They bring a lot of business to their partners. Who do you think there is a, if they have hung up the for sale side, because in my experience,

once a company engages in serious stocks with one company, even if that follows through, like other people kind of know, oh, they are for sale. they're open to the right part. Like, who do you think the other buyers for or who do you think might look to take this out? So I think the company said that the buyer

was a strategic player in the industry. And it's always sort of been suspected that, you know, the company's channel partners would eventually take them out. So Coxstead has a couple of big channel partners. Brad said on the last call, they have about three big ones. I think the known ones are Clario and Clinical Inc.

Are there two major channel partners? So it was likely one of them. And, you know, to speak to your, point, I think, before, like, just in terms of why the buyer potentially walked, both Clario and Clinical Inc. are owned by private equity. So if they were to acquire Coxed, it would be the private equity buying Coch State. And I think private equity is more motivated than most for, you know, in terms of like bottom line and getting an IRA and all that instead of like, you know, just long-term strategic vision. So it's possible that that also played into it when they

saw the revenue deferrals and they saw the sort of lack of profit that would come in the next six to 12 months after they bought this thing they said you know let's just hold off on and maybe the investment committees didn't agree to it or something like that but i think it's most likely that it was clario or clinical ink and one of coxate's main channel partners that bought that offered to acquire them and i think that going forward it's highly likely that one of their channel partners not necessarily the same one but one of the other ones would go and acquire them as well because, like I said, everybody wants to play in this industry. Clarion Clinical Inc have already made a couple of acquisitions themselves

into the CNS and Alzheimer's space. So Calcate is just, you know, the most logical addition for these companies to sort of step up to the next level and become a real player in the Alzheimer's industry in ahead of the upcoming tailwinds. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. and you can access primary research easily and efficiently through their platform.

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spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. Perfect. Perfect. Let's see. Anything else I wanted to talk about? No, look, I think we've covered just about everything I wanted to cover on the call. Is there anything you think we didn't hit hard enough that we should have hit harder or

maybe something we didn't talk about that you think investors should kind of be thinking about? Yeah. I'm looking through my notes as well. I don't think so. I think, okay, so one other thing on the buyout that I think might be relevant is that there were a couple of buyouts that didn't pan out in the last 12 to 24 months in the Australian space. So with EML payments and APN, both of those companies were in talks to be acquired that eventually fizzled out.

And both of those stocks are now down about 75% plus from when those buyout talks happened. I think there is a lingering sort of just like bad taste in a lot of Australian investors mouths after seeing those deals happen. And that sort of might be contributing to the oversized reaction to the Cawcate stock here as well from this buyout talk not happening. But again, you know, it's all speculation as to what can happen. You know, we're still pretty confident that Cog State is a very high quality long-term business. That's why, you know, we're doing this. That's why, you know, I love to talk about this space. And this, you know, if you have conviction, is a very good time to buy into this company.

That's in a, the most, I think, for any medical company to play the Alzheimer's space in a sort of agnostic way where they benefit as long as there's any progress. in the space whatsoever. And, you know, they're profitable, growing with strong management, good ownership, and everything you can ask for at a valuation that's really undemanding, the undemanding and that I think could create very good returns going forward. Fantastic. And look, I do, I kind of was addressing it as the red flag, but you love to see, like, the company's performing well.

It seems to be on an inflection point. You talked about it, I think, on their earnings call, the direct quote was we've seen a huge increase in opportunity over the medium to long term in the marketplace. Short term might be rocky, but huge increase in opportunity. And you love to see right when the stock gets weak, management buys. The company goes to take advantage of cash to buy back shares and increase shareholder value. They say we're going to be unapologetic about seeking to maximize returns for shareholders. Like, that's the type of stuff you love to see as an investor. Yeah, I guess we'll wrap it up there. Michael, I think I'm going

to see you end of April, planet microcap. I think we might be doing another podcast or a panel or something there. So I'm looking forward to that. People can catch us there. But aside from that, I'll tag you on Twitter. I'll remind everybody, four in stock, microcap. You guys have a position in it. I've got a little total of a position.

But anything else we should talk about before we wrap up? I don't think so. Yeah. I think that was a great conversation. Great. Hey, I really enjoyed it. I know you've done your work on it. I'm just, I'm really impressed you managed to pull all the drugs and all the different

companies off the top of your head because these drugs, I mean, once you get over four syllables, it's tough to remember all of these different drugs. Yeah. I mean, Alzheimer's is a fascinating space in general. There's just so much going on. It's fun to just track for the hell of it, you know, but that's just me being weird. Michael, this has been great. Looking forward to talking to you soon. A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.