Aim-traded Cambridge Cognition (COG:37p), a small-cap company that has developed a suite of computer-based cognitive assessments to improve the understanding, diagnosis and treatment of neurological and psychological diseases, has issued a profit warning that has led to a 45 per cent fall in its share price.
Having seen the shares double in value from my original buy-in price ('Positive thinking', 19 April 2017) to when I subsequently took the shares off a buy recommendation (‘Cambridge gains recognition’, 19 June 2018), I was wrong-footed in my decision to turn buyer again at the time of the company’s capital markets day (‘Cambridge Cognition gaining digital recognition’, 14 June 2019).
One key reason for adopting a more positive stance was that Cambridge Cognition started 2019 with an order book of £6m, up 50 per cent year on year, after booking orders of almost £8m in 2018, giving substance to house broker FinnCap’s forecast that annual revenues would rise by a third to £8.2m this year.
The other reason is that the company’s digital health solutions continue to gain traction with customers. Technology here includes cognition kit (wearable AppleWatch technology to measure cognition health) and NeuroVocalix (voice biomarker that enables the remote assessment of voiced-based cognitive measures). The same is true of electronic clinical outcomes assessment (eCOA) trials, which capture data electronically from patients, clinicians and caregivers in clinical trials, a market worth £700m a year and one predicted to grow by 17 per cent in 2019. Major contract wins in these areas resulted in a closing half-year order book of £6.3m, albeit only 6 per cent up year on year.
The major issue is that Cambridge Cognition’s core clinical trials business has suffered lower sales mainly due to: the merger of two of its large pharmaceutical customers, which led to the ongoing postponement of an expected major contract; a reduction in the number of clinical trials assessing the cognitive safety profile of cardiovascular and pain medication; and some large pharmaceutical companies pruning their late-stage pipelines following some high-profile clinical trial failures.
As a consequence, Cambridge Cognition’s half-year revenue fell by more than a fifth to £2.17m and led to a pre-tax loss of £1.74m. The directors have cut guidance for the full year and now expect annual revenues of only £5.5m, down from £6.1m in 2018, and a pre-tax loss of £2.8m. That loss is 10 times larger than finnCap had been anticipating only a month ago, and the lowered revenue guidance is a third below the house broker’s previous estimate.
Furthermore, although the directors expect a return to revenue growth in 2020 based on a substantial qualified order pipeline for the remainder of the year, and have taken costs out of the business, they are now guiding to expect break-even in the fourth quarter of 2020. This means that finnCap’s previous 2020 operating profit estimate of £700,000, which was based on revenue of £10.2m, is under review until the company releases interim results on 19 September. In the circumstances, it’s understandable that investors have headed for the exit. Sell.
