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Cambridge Cognition aiming to accelerate sales growth

The computer-based cognitive assessments company is ramping up investment in two key areas to tap into growing industry demand for its products
March 12, 2019

At the end of last year I covered in quite some detail the pre-close trading update from Aim-traded Cambridge Cognition (COG:77p), a company that has developed a suite of computer-based cognitive assessments to improve the understanding, diagnosis and treatment of neurological and psychological diseases when I rated the shares a hold at 75p (Cambridge Cognition sales shortfall’, 12 Dec 2018).

I will not go over old ground but the key take from the annual results is that the company’s contracted order book at the year-end was up by more than half to £6.08m, highlighting the strong and growing sales momentum in the business. True, the change from IAS18 to IFRS15 reporting meant that instead of reported revenues rising from £6.7m to £7.1m in 2018, as they would have done under IAS18, revenues actually declined from £6.89m to £6.13m, a reflection of how software revenue is spread over the life of a contract under IFRS15 rather than booked in its entirety on signing a contract under IAS18. The flip-side is that visibility over future revenues has improved especially as Cambridge Cognition is performing more bespoke work of a higher value for clients and over longer periods, too.

The other important news is that the company has raised £2.3m net of expense in a placing priced at 72p a share, primarily to accelerate sales growth and investment in both its electronic clinical outcomes assessment (eCOA) trials and digital health solutions businesses. This makes sense as eCOA trials have been gaining traction within the pharmaceutical industry.

That’s because having expanded the capabilities of its cloud-based CANTAB Connect platform, the eCOA technology is able to evaluate treatment safety and tolerability through computerised cognitive assessments that are delivered to patients on touch screen devices. The software platform integrates data collection, reduces administrative burden and saves costs for pharmaceutical clients while at the same time improving data quality throughout the clinical trial. At the end of 2018, the company won its largest eCOA contract to date, a $750,000 (£575,000) 12-month award, taking the total to £2.67m for the year as a whole.

 

Exploiting new digital bespoke products

Cambridge Cognition’s management also see a commercial opportunity to capitalise on demand for its range of digital health solutions.

For example, its voice biomarker technology NeuroVocalix enables the remote assessment of voice-based cognitive measures. Last autumn, the technology was licensed for use in an innovative virtual clinical trial with a global pharmaceutical company. The study included verbal NeuroVocalix cognitive tests delivered alongside Cambridge Cognition's CANTAB and Cognition Kit assessments, all administered directly to study participants on their smartphones.

Traditional methods of clinical trials, which use multiple study sites and require multiple patient visits to sites, have high attrition rates with as many as 40 per cent of Phase III trial participants dropping out, so there are significant cost benefits for customer adopting the technology. Moreover, virtual clinical trials represent a relatively new method of collecting safety and efficacy data, using digital technologies to conduct clinical trials from the comfort of the patients' homes to keep participants engaged with the study, thus leading to better data quality and shorter timelines.

 

Neurological testing in India

It’s not the only new product that has potential as Cambridge Cognition announced a few weeks ago that it has entered into a partnership with a major pharmaceutical company to deliver online neurological testing to patients in India using its cloud-based CANTAB Connect platform.

The contract includes an upfront payment of over £200,000 to adapt an existing CANTAB digital cognitive health product for use by clinicians in the Indian healthcare market. A normative data study is being conducted with 1,500 Indian participants before being validated in a clinical study with a further 1,500 patients. Both studies are being funded by the pharmaceutical partner. Once validated, the sponsor will market the software to clinicians throughout India and pay an annual licence fee to Cambridge Cognition for use of the product plus additional annual fees per clinical user.

The need for a standardised, online screening assessment that can be used by general practitioners is important in combating the burden of neurological diseases in India. Indeed, the new product being developed by Cambridge Cognition will enable general practitioners to conduct expert neuropsychological assessments in 20 minutes and without the need for formal training. Using CANTAB cognitive tests, the software helps to identify early signs of neuropsychological impairment, support timely diagnoses and provide instant feedback to patients at scale.

According to industry experts, over 30m people suffer from neurological disease in India, but neurologists are in short supply, with each one caring for 1.25m of the country’s huge population. As a result, patients are being seen by general practitioners with limited knowledge about neurology, leading to low rates of diagnosis and poor treatment of disorders. Hence the commercial opportunity the partnership aims to exploit.

 

Driving sales momentum, and profitability

Bearing in mind the increasing orders for eCOA and other digital cognitive assessments, the company has sensibly beefed up its board by appointing a chief operating officer, Dr Matthew Stork, with the requisite industry experience (Toshiba Medical, Smith and Nephew) in order to drive market penetration of these products and to form strong relationships with corporate partners.

Analysts have taken note and house broker finnCap is predicting a 34 per cent increase in 2019 revenues to £8.2m and a narrowing of the operating loss from £1.5m in 2018 to £300,000, rising to revenues of £10.2m and an operating profit of £0.7m in 2020. However, these estimates exclude any contribution (and it could be significant) from upfront payments and milestones from pharmaceutical partnerships.

Please note that I first suggested buying the shares at 87p ('Positive thinking', 19 Apr 2017) and advised running profits at 173p last summer after the share price had doubled to 173p (‘Cambridge gains recognition’, 19 Jun 2018). It’s no forlorn hope that high water mark can be reached again if the company’s sales continues to build so to enable the operating gearing of the business to kick in and support a move into sustainable profitability.

Indeed, finnCap’s profit forecasts for 2020 are a good indicator of the above-average operational leverage of the business model, whereby a rising proportion of incremental gross profit falls to the bottom line once the company moves into profit. In the circumstances, I feel Cambridge Cognition’s shares are worth holding onto at 77p. Hold.

 

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