I had an informative interview with Matthew Stork, the newly appointed chief executive of Aim-traded Cambridge Cognition (COG:67p), 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.
Mr Stork joined the company three months ago as chief operating officer with the mandate to play a key role in driving penetration of cognitive and clinical assessment markets and forming strong relationships with corporate partners. In late April, he replaced Dr Steven Powell as chief executive when Dr Powell became chairman. It’s an interesting appointment as Mr Stork has expertise in a broad range of relevant sectors including healthcare IT, diagnostic imaging, clinical service delivery, capital devices and pharmaceuticals. He previously held executive roles at General Electric, Toshiba Medical and Smith & Nephew.
It’s timely, too, given that Cambridge Cognition raised £2.3m net of expense in a placing, at 72p a share, in early March this year, primarily to accelerate sales growth overseas and investment in:
■ Electronic clinical outcomes assessment (eCOA) trials, which capture data electronically from patients, clinicians, and caregivers in clinical trial, a market worth £700m a year and one predicted to grow by 17 per cent in 2019. The company won eCOA contracts with a number of global pharma customers since the start of 2018 including GlaxoSmithKline, Bristol-Myers Squibb, and Roche.
■ Digital health solutions. Cambridge Cognition’s 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).
A hot market
Mr Stork sees digital health as a “really hot area”, and rightly so as from a standing start two years ago, the company now has six clients including Novartis, Abbvie and Amgen.
For example, a few months ago, Cambridge Cognition landed a £1.3m three-year contract with a major pharmaceutical company to provide digital health technologies for application in a clinical stage development programme. The technology enables patients diagnosed with an autoimmune disorder to be followed during a clinical trial, completing cognitive testing both at site and remotely using a mobile testing platform for smartphones.
This approach provides the sponsor with data on individual day-to-day variability in cognitive performance that would otherwise be difficult to capture and quantify. The platform also integrates passive physiological data captured in real time on a wearable device, adding physical context for participants' behaviours. Interestingly, Mr Stork says that the company is in discussions with several large pharmaceutical customers on other contracts. It’s realistic to expect positive newsflow to emerge.
Interestingly, Mr Stork forecasts that voice-driven clinical trials will become a very large market, taking a sizeable portion of current clinical trials market. It’s a sensible prediction to make given the scope for artificial intelligence (AI)-based digital biomarkers to be deployed in order to increase sensitivity to subtle cognitive impairment and move beyond what is said by patients in the trial to understand how it is said. That’s because neurological disorders are often characterised by changes to fine movements which are reflected in changes to the voice.
Current methods to capture these changes rely on subjective, in-clinic assessments, or sophisticated analysis by speech and language therapists. The opportunity is for AI biomarkers to be developed to implement complex paradigm – extracting digital biomarkers of movement, electrophysiology and voice cognitive load. This approach is not only more cost effective, but far more efficient, too, thus benefiting patients enrolled in the trials, and pharmaceutical companies.
Commercialising technology
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. The addition of the aforementioned £1.3m digital health contract lifted the order book to £7m by mid-March, giving substance to house broker finnCap’s forecast of annual revenues rising by a third to £8.2m this year. That’s still not enough to break-even as analysts are pencilling in an operating loss of £0.3m.
However, as adoption of the company’s product suite gains traction, and recurring revenues build, then it’s only realistic to expect the order book to grow further to underpin a move into profitability in 2020 when finnCap predicts an operating profit of £700,000 on revenue of £10.2m. Please note that these forecasts exclude any contribution from significant partnerships Cambridge Cognition may yet sign, a highly likely possibility in my view. The point being that once the company moves into profitability, then a higher proportion of the 85 per cent gross margin it earns on sales will drop through to operating profit as the operational leverage of the business kicks in, thus offering scope for accelerated profit growth once this inflexion point is reached.
The bottom line is that having seen the share price double from my original buy price of 87p ('Positive thinking', 19 Apr 2017) to 173p when I took the shares off a buy recommendation (‘Cambridge gains recognition’, 19 Jun 2018), I feel that they are now back to a level where the risk:reward ratio is skewed heavily to the upside and I am turning buyer once again. A Capital Markets Day at the end of last week should spark some investor interest, too. Buy.
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