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By HotStockRockets | Tuesday 15 May 2018
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
This is from HotStockRockets at the end of last month; tipped at a 145p offer price, and now circa 170p - to catch such articles first click HERE... To see Britain’s Buffett, Nigel Wray, at the top of the shareholders list is always an encouraging sign and with Cambridge Cognition (COG) this is added to by recent developments…
The company & latest results…
The company describes itself as “a digital neuroscience company developing software products to better understand, detect and treat brain health conditions” and its website emphasises “our science is the recognised gold standard for assessing cognition, validated by over 30 years of data and 100,000 citations in peer-reviewed research - more than any other neuroscience company”. It offers project and study management, consultancy and development services and technology.
Results for the 2017 calendar year showed a swing to a £0.28 million pre-tax loss on revenue 2% lower than for 2016 at £6.7 million. This reflected £0.5 million revenue declines in hardware (to £0.1 million, “no longer a key product field following the migration to a cloud platform”) and software (to £3.3 million, “absence of a major contract win in the year… however, we are achieving a greater number of sales in more stages of the drug development process and across more disease areas than previously”). Services were +£0.8 million to £3.3 million – “reflecting the positive strategic steps taken to diversify our product offering. Not only does this category include the traditional project and study management services but also the increasing amount of consultancy and bespoke development work being undertaken for customers for Recruit and wearable projects”.
The recent developments…
The company has followed those March-announced results with “Major Contract Win and Funding Award” and “Recruitment contracts show strong growth” announcements.
The former “is for a multi-national Phase IV clinical study with a leading pharmaceutical company, which will have a material impact on the company's 2018 and 2019 revenues. Cambridge Cognition will deliver the study's cognitive assessments, patient reported outcomes and clinician reported outcomes on its CANTAB Connect cloud software”, with the announcement also including “The Innovate UK grant will fund a pioneering new programme to develop a non-invasive digital biomarker to better predict who will benefit from a new type of personalised medication in schizophrenia… Identifying underlying neurobiological issues to define a group of patients who will respond best to a new treatment would be of significant clinical and commercial value”.
The latter is that “its CANTAB Recruit software is now established in two major Phase III trials with one of the early adopters increasing its contract value twenty-four fold in the first year of use, totalling over £1.2m”. This SaaS product allows rapid scaling up of recruitment efforts by not requiring participants to visit a study site or take part in more invasive testing, with the company’s CEO, Dr. Steven Powell emphasising “CANTAB Recruit is delivering high-value participant screening directly to end-users at scale and is part of the ongoing expansion of CANTAB products from simple endpoint testing to patient finding and patient population definition”.
We expect the traditional business to continue to churn out results, but the real excitement is in the digital, and particularly that it has “driven testing closer to the patient using wearable and voice activated technologies” - and their IP-rooted high margins. Despite the 2017 swing to loss as the organisational structure was bolstered, gross margin increased from sub 86% to more than 90%. As administrative expenses stabilise, the gross margin will really come to the fore and, having previously suffered delays, “with a strong sales order pipeline the board expects further growth to be delivered this year”.
Of course, contract delays remain a risk but there was £1.9 million of cash (net) on the 2017-end balance sheet and forecasts are for a return to profit (of £0.5 million) this year. Emerging technologies with a strong sales order pipeline and operational gearing is a compelling mix which should then see profit to £1 million and beyond and house broker, finnCap, has a 155p target price, based on a 2019 EV/Sales multiple of 3.0x. We though believe the broker numbers may well prove conservative and see excitement as positive take-up news flow continues to be delivered taking the shares beyond that. As such, we have an initial news-flow based target of 180p.
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