Creo Medical — Entering phase of accelerating growth inflection

FY22 was an eventful period for Creo Medical, marked by growing adoption of the company’s core CROMA technology platform and its flagship Speedboat Inject device. With a year-on-year three times increase in revenue from Speedboat Inject and CROMA (£0.9m in FY22), a four times increase in user base and a robust training pipeline of clinicians (487 trainees), Creo enters FY23 with a strong foundation to scale operations and expand the scope of its CROMA technology. Reflecting this continued momentum, management has indicated that total procedures (using Speedboat Inject) in Q123 were 50% higher than the FY22 quarterly average and Q422 actual cases.

Creo reported in FY22 the total number of Speedboat users significantly increased to 80 (91 by end-March 2023) compared to 20 users in FY21. More than 1,500 procedures performed to date and 487 potential users under its clinical training programme (Pioneer) further indicate the favourable user response for the device and the near-term sales potential. Increased investment in training and mentoring capability has resulted in an enhanced user base, and Creo plans to continue its emphasis on the Pioneer training programme to sustain the momentum. The company nearly doubled the number of training centres in FY22, resulting in similar growth in the number of physicians on its training programme (450 in FY22 vs 230 in FY21). Creo has a backlog of over 90 trainees, which the company expects to convert into regular users in FY23. Additionally, Creo intends to collaborate with the American Society for Gastrointestinal Endoscopy and other key academic centres such as UCI Health, Mayo, Penn and Baylor to further extend the scope and reach of its training courses in the United States.

Along with enhancing the Speedboat user base, Creo has been focusing on developing a broader product portfolio to increase the operational scope of its offerings. As part of its portfolio expansion strategy, Creo launched a slimer version of Speedboat Inject, Speedboat Slim, in November 2022, which management says is compatible with the majority of currently used endoscopes globally, along with paediatric endoscopes, for both lower and upper gastrointestinal (GI) procedures. With initial orders already received, the company expects Speedboat Slim to contribute to FY23 revenue.

Creo submitted a 510(k) FDA application in February 2023 for Speedboat Flush, the slimmest version of Speedboat, compatible with endoscopes with a 2.8mm working channel, targeting GI lesions (including bowel and upper GI cancer) and swallowing disorders. We note that standard upper endoscopes have an external diameter in the range of 8.0–9.8mm with a 2.4–2.8mm channel. In addition to the US regulatory process, management plans for Medical Device Regulation submission for CE marking in April 2023. Creo expects that the device, after successful regulatory clearance, will be ready for clinical use in H223.

In addition, the company announced a multicentre observational study in April 2023 to assess the safety and efficacy of MicroBlate Flex, a soft tissue microwave ablation device for both liver and pancreas. We note that the device has been CE marked in Europe and received FDA clearance in January 2021. This first in-human clinical study for the device is a post-market, prospective, single-arm, multicentre, non-randomised, observational study, which plans to enrol up to 32 patients in six sites in Europe and possibly one site in the United States. During the trial, MicroBlate Flex will be used in bronchoscopic microwave ablation of peripheral lung nodules. It also requires a post-procedure assessment and six follow-up visits at seven days, 31–45 days, three months, six months, nine months and 12 months. Recruitment for the study has commenced, with the first treatment expected in Q223. The primary completion of the study (which we believe to be the date when the last patient is recruited) is anticipated in March 2024, while the full study completion is expected in March 2025. We believe these observational studies are a step forward in developing and increasing the market potential for Creo’s devices. The user data, if positive, might lead to enhanced adoption of the device. We note that this post-market study is one of several planned by Creo (in collaboration with its Kamaptive technology partners) for its ablation devices in 2023.

Post its acquisition in June 2020, Albyn Medical has been an integral part of Creo’s suite of products, generating stable, and the majority of, revenue (91.6% in FY22) for the company. Creo’s recent announcement relating to the final earnout payment and acquisition of the remaining 5% stake in Albyn Medical (for €1.2m and an additional €1m as a second earnout tranche) is a reflection of the successful integration of and contribution from the mature business. As a reminder, Albyn Medical is a seller of own and third-party consumables and systems (primarily GI endoscopy related) with a core focus on the UK and European markets, and complements Creo’s core portfolio of minimally invasive electrosurgical devices (using proprietary CROMA technology). Creo acquired a 90% stake in Albyn in July 2020 for an equity value of €24.8m and €2.7m in performance-related payments over two years. Creo then acquired another 5% stake in March 2022 (for €1.2m and an additional €1.7m as the first earnout tranche) followed by the balance in April 2023.

In order to leverage the extensive range of Albyn’s endotherapy products (initially marketed only in Europe), Creo launched many of these products in the United States during FY22 as part of bundled products with its core technology. We believe this strategy will not only expand the geographic scope for these products, but will potentially create higher revenue per procedure. Management states that consumables sales in Q123 were up 10% compared to the FY22 quarterly average. As a step forward, Creo plans to use a similar strategy for the consumables launch in Asia-Pacific in FY23.

Creo reported FY22 revenue of £27.2m, an 8.0% y-o-y increase, with growth primarily driven by enhanced sales uptake of its flagship Speedboat Inject (3x growth to £0.9m in FY22 vs FY21) and initial licensing revenue of £1.4m from its existing Kamaptive technology (non-exclusive) agreements. The Consumables segment recorded largely similar revenue at £24.9m in FY22 (vs £24.8m in FY21), however it remains the primary revenue contributor for Creo, accounting for 91.6% of total revenue. During the year, the total number of Speedboat users quadrupled to over 80 in FY22 (91 in Q123) from 20 in FY21, indicating growing market acceptance of the product and a favourable conversion rate from its training programme. Though we have limited visibility of licensing revenue, we expect Creo’s core technology products (3.2% of total revenue or £0.9m in FY22) to be the key growth drivers in the medium to long term. Gross margin for the year increased from 46.0% (FY21) to 48.3%, mainly reflecting improved margins from Consumables sales and no-cost licensing deals.

The total operating loss in FY22 stood at £30.8m, higher than £29.9m in FY21, mainly attributed to increased investment in operational capacity and higher personnel expenses associated with recruitment of senior employees to support the operational growth and completion of R&D projects. Consequently, total operating expenses during the year grew 5.7% (y-o-y) to £43.9m. While sales and marketing expenses recorded a minor increase to £3.8m (FY21: £3.2m), a 4.8% growth in R&D expenses (to £13.5m) was mainly related to completion of key R&D projects in H122. Following this, operating expenses witnessed a decline of 18.7% in H222. As most of the company’s products are now developed, and following the restructuring of its R&D teams, management expects this trend of decreasing operating expenses (as a percentage of sales) to continue, resulting in a yearonyear decline in overall operating expenses in FY23. In Q123, the company recorded 10% lower operating expenses compared to the FY22 quarterly average. We note that the majority of Creo’s ongoing R&D programmes are funded by its licensing partners, such as Intuitive, as part of the licensing agreements. In FY22, Creo was reimbursed £4.0m, 31.4% of FY21 R&D expenditure, under the tax credit scheme. The net loss stood at £26.9m in FY22, higher than £24.6m in FY21.

Although our long-term assumptions remain unchanged for Creo, we have made minor adjustments to our FY23 estimates and have introduced FY24 forecasts. We have revised FY23 revenue estimates to £32.8m (£31.0m previously) based on Speedboat Inject user data in FY22. While we assume moderate growth of 3.4% in Consumables sales in FY23, we estimate core technology to ramp up to account for about 12% of total group revenue (vs 3% in FY22). Additionally, we anticipate income from licensing agreements in FY23. However, given limited information and visibility of the CMR deal terms, we project £3.0m of milestone income from the Intuitive agreement in FY23. We have also increased our FY23 estimate for operating expenses to £41.8m (£38.4m previously) given the trends shown in FY22, but we anticipate a year-on-year reduction (vs FY22) based on company guidance and reduced R&D spending requirements. These changes translate into an operating loss of £24.0m (£21.6m previously). In FY24, we estimate revenue at £40.8m as we expect an accelerated ramp up in core technology products, along with incremental revenues from robotics deals from the Intuitive licensing agreement. We also anticipate the Consumables segment to benefit from bundled sales in the United States and Asia-Pacific in FY24. Reflecting the impact of higher revenue and a further anticipated reduction in operating expenses (£39.1m), our operating loss estimate stands at £14.6m in FY24.

Our valuation for Creo Medical increases to £528m from £493m, mainly due to the higher cash balance resulting from the equity fund-raise of c £32.0m (£26.8m in net proceeds plus £5.2m in gross proceeds) in Q123. Given the increased number of shares outstanding, the per share valuation is now 150p per basic share (vs 272p previously).

In February 2023, Creo raised £28.5m in gross proceeds (£26.8m net) through institutional investors by placing 142.5m new ordinary shares at 20p/share (a 28% discount to the 15 February closing price). The fund-raise was oversubscribed against the minimum target of £25m, indicating strong shareholder support. In addition, the company announced an open offer to existing eligible shareholders to raise another £5.2m in funds via the conditional issue of c 26m ordinary shares, which was fully subscribed in March 2023.

Creo ended FY22 with a cash balance of £13.1m and £11.7m in debt. After incorporating the £26.8m (net proceeds) fund-raise via an accelerated book building process and £5.2m (gross proceeds) from an open offer, we estimate a pro forma net cash position of £33.4m. Based on our projected cash burn rates, we expect the current cash balance should be sufficient to take Creo to operational profitability in H126 (FY25 according to management estimates). Additionally, we expect milestone payments from the CMR deal and potential revenue from several heads of terms agreements could further strengthen the cash flow. These have been excluded from our current estimates due to limited visibility.