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Cogstate Acquisition Discussions Halted

Cogstate (CGS: $1.18) came close to being acquired in the recent weeks with discussions with an interested group beginning in December and negotiations ending last week.


Cogstate (CGS: $1.18) came close to being acquired in the recent weeks with discussions with an interested group beginning in December and negotiations ending last week.


Bioshares understands that it was a strategic partner that had showed interest in the business, which suggests a contract research organisation for which Cogstate may have been a suitable bolt-on acquisition or one of its ECoA partners. Cogstate has become highly specialised in conducting cognitive assessments and managing clinical studies in the CNS field.

The potential acquiror had been granted due diligence in late January. A revenue downgrade reported this week may have been a factor in M&A discussions ceasing; this week Cogstate also announced that around US$5 million in expected FY2023 revenue has been moved out to be recognised in the next financial year, and revenue for this financial year is expected to be slightly lower (by 6%-9%) than the PCP. Revenue in FY2022 was US$45 million with a profit before tax of US$10.7 million.

Aside from the delay in acknowledging some revenue for this financial year, it has been a very strong half with respect to sales contracts signed, totalling US$27.9 million. Bioshares estimates that the company should be profitable with over US$40 million in annual revenue. Contracts signed in the last two years totalled US$82.5 million in FY2022 and US$47 million in FY2021.

The company expects to be cashflow positive from operations for the second half of this financial year. Cogstate's outstanding future revenue from assigned contracts was US$147 million at the end of last year.

As Cogstate's revenue surpasses US$50 million and profitability grows, which should occur next year given the momentum in new contracts being signed (US$110 million in the last 18 months), the company will become an increasingly attractive acquisition target. Recent M&A discussions have highlighted that the business is for sale, at the right price.

Strong Activity in Share Trading
Prior to the acquisition discussions being announced, Cogstate shares experienced heavy trading, with the stock sold off when it was announced that the acquisition would not be proceeding. CEO of Cogstate Brad O'Connor said that only a small number of internal executives had knowledge of the acquisition discussions and that an internal audit has been conducted with no breaches identified. Cogstate has had a very strong track record with keeping the market updated with business developments, including frequent updates on business forecasts.

Cogstate shares have been heavily sold off in the process and represent excellent buying. Its core business is heavily focused on trials in Alzheimer's disease, in which there is substantial and building interest given the FDA approval (accelerated) of Lecanemab early this year. Bioshares expects Lecanemab to also gain full approval later this year in the US and government reimbursement. Lecanemab will be sold by Eisai & Co and Biogen, with Eisai having licensed the Cogstate test, presumably to help identify suitable patients for treatment.

Cogstate is capitalised at $205 million with US$29 million in cash at the end of last year.

Bioshares recommendation: Strong Buy


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