In the summer I noted that Aim-traded Cambridge Cognition (COG:75p), a company that has developed a suite of computer-based cognitive assessments to improve the understanding, diagnosis and treatment of neurological and psychological diseases, had announced another contract award from a major pharmaceutical company for the use of its Cognition Kit™ digital health software in a clinical trial. The smart software measures cognitive health on mobile and wearable devices, enabling researchers to gather data in everyday life and clinicians to make more insightful treatment decisions for their patients.
Cambridge Cognition already has a collaboration with US-based Takeda Pharmaceuticals to monitor and assess cognitive function in patients with Major Depressive Disorder (MDD) using a specially designed app on an Apple Watch, highlighting the growing interest in its products from the pharmaceutical industry. Indeed, like-for-like sales in the first half to the end of June 2018 rose by 13 per cent to £3.63m, albeit the move to new accounting standard IFRS15 meant that reported first-half revenue was only £2.75m, a reflection of changes to the way service revenue is now accounted for over the course of a contract.
In a pre-close trading update this morning, the company has stated that revenues for the full year will be £6m under IFRS 15 accounting standards, a £900,000 shortfall compared with finnCap’s estimates at the time of the half-year results in September. Moreover, because the company earns a thumping 90 per cent gross margin on sales, this means that almost all the revenue shortfall passes through to the bottom line. Under the previous IAS18 reporting standard, full-year revenues would have been £7m, a £300,000 rise on 2017, but still shy of the £7.8m finnCap had been looking for prior to the adoption of the new accounting standard and an outcome that supported its prediction of a £500,000 pre-tax profit under the IAS18 reporting standard.
The bottom line is that a £284,000 reported pre-tax loss in 2017 is set to balloon to £1.5m in 2018. Market makers reacted by marking the shares down by 25 per cent to 75p this morning, which clearly makes my decision to run a near 100 per cent paper profit on the shares, at 173p, in the summer the wrong call (‘Cambridge Cognition gains recognition’, 19 Jun 2018).
There is good news, though. As I have noted previously the company continues to win a stream of new contracts, the issue being more the exact timing of the awards. In fact, the directors revealed in today’s update that total sales order intake for 2018 will exceed £7.8m, or more than 50 per cent higher than in 2017. The closing order book of £5.6m is 40 per cent higher than at the same stage of 2017. Furthermore, there are “a number of materially significant contracts expected to be signed in the first three months of 2019”. Understandably, house broker finnCap has placed its 2019 forecasts under review, pending “better visibility over the materially significant sales prospects expected in the first quarter of next year”.
It’s not wishful thinking that the company will land these material contracts as it has been turning its pipeline into firm awards in recent months. For example, only a few weeks ago Cambridge Cognition signed a 12-month clinical trial contract, the largest in a series of recently signed electronic clinical outcomes assessment (eCOA) trials, with a new client, a specialty pharmaceutical developer. Valued at US$0.75m (£600,000), it is the largest of a number of eCOA contracts won since Cambridge Cognition decided to increase the value of its software service by expanding the capabilities of its CANTAB Connect platform.
The latest contract is for a Phase IV trial that will use the company's eCOA technology to evaluate treatment safety and tolerability with objective computerised cognitive assessments and additional clinician-reported outcome measures delivered to patients on touchscreen devices. Performing multiple outcome assessments on Cambridge Cognition’s validated CANTAB Connect platform integrates data collection, reduces administrative burden and saves costs for study sites while improving data quality throughout the trial. This explains why the product has been gaining traction in the pharmaceutical industry.
So, although news of the sales shortfall is clearly disappointing, as is the erosion of the 100 per cent paper profit on this holding, I would advice holding onto your shares if you have been following my advice and await further news on these significant contracts in the pipeline. At the current price the company only has a market value of £15.5m, its net cash of £800,000 is little changed on the half-year end, and it has valuable technology which is gaining traction even if there is an element of risk in the timing of the awards. Hold.
Finally, I will be on annual leave from the close of play today until early in the New Year during which time a number of articles I have been working on will be published on our website.
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