Creo Medical — Providing energy for endoscopic surgery

Creo Medical is a UK-based medical device company that was founded in 2003 and went public in 2016 on the AIM market. It is focused on the development and commercialisation of minimally invasive electrosurgical devices for a variety of indications in the GI, soft tissue and pulmonological areas. Its CROMA platform delivers a combination of bi-polar RF and microwave energy for the purpose of dissection, resection, ablation and haemostasis of diseased tissue. Products include the Speedboat Inject, Speedboat Slim, SpydrBlade Flex, SlypSeal Flex, MicroBlate Fine and MIcroBlate Flex. All six products have been CE marked and four are also cleared for use by the FDA, with the remainder expected to be cleared in the coming months. In July 2020, Creo Medical announced the acquisition of Albyn Medical, which commercialises products for the urology, gynaecology and GI endoscopy markets. Albyn Medical was purchased for €24.8m plus up to €2.7m in performance related milestones. With this acquisition, besides acquiring profitable products, Creo has also acquired Albyn Medical’s 70-person strong EU sales and marketing team.

We value Creo Medical at £434m or 240p per basic share using a risk-adjusted NPV model utilizing a 12.5% discount rate on the CROMA platform products and a 10% discount rate for Albyn Medical products (as they are more mature). Approximately 75% of the value is attributable to the CROMA platform (focused on the GI market) with the remainder divided between the value of Albyn Medical and net cash. We attribute a 70% probability of success for the CROMA platform as it is still in the early phases of adoption. We forecast that sales will start to mature in 2026, when we expect revenues for the platform to hit £347m, with £205m coming from the US. We will adjust our assumptions as we are further updated on the progress of commercialisation.

The company reported that it had £30.6m in cash and £10.7m in debt as of 30 June 2021 with £12.9m in sales for H121, nearly all of which was attributable to Albyn Medical. The company raised £36.3m in gross proceeds in a Q321 placement and open offer and we project a financing need of an additional £30m before profitability (£10m in 2022 and £20m in 2023), which we expect in 2025. Sales have been minimal historically, but that has changed with the inclusion of Albyn Medical sales and we expect will increase further with the expected penetration of CROMA products.

Although Creo’s products are unique in their use of bi-polar RF and other design elements, the competitive landscape in GI endoscopy and energy products is crowded with a large number of large and legacy players. Even with a better device, it is not an easy to convince surgeons to switch brands or move to a new type of procedure. One of the focus procedures for Creo is endoscopic submucosal dissection (ESD), which has gained limited traction in the US mainly because of generally longer procedure times and somewhat higher adverse events (although Creo’s products address both), despite better outcomes from patients versus the standard of care. Creo Medical may need to meaningfully increase its investment in US sales and marketing to gain significant penetration. This can be done organically or through acquisition, as Creo has done with its Albyn Medical purchase. Reimbursement may also be an issue as there is no separate payment for use of Creo products and they are bundled into a total payment for the entire procedure. Gaining reimbursement will likely make adoption easier as financial considerations often dominate in the US healthcare industry.

Creo Medical is a UK-based medical device company focused on the development and commercialisation of minimally invasive electrosurgical devices for a variety of indications in the GI, soft tissue and pulmonological areas.

Its CROMA platform is at the heart of the company’s surgical products and delivers a combination of bi-polar RF (while use of RF in endoscopic procedures is common, it is usually delivered as monopolar RF; Creo appears to be unique in using bi-polar RF in its stated target indications), which is used for endoscopic cutting, resection and dissection, and microwave energy, for coagulation and ablation. Products using the CROMA platform include the Speedboat Inject, Speedboat Slim, SpydrBlade Flex, SlypSeal Flex, MicroBlate Fine and MIcroBlate Flex.

All six products have been CE marked and four of them are also cleared for use by the FDA via the 510(k) pathway, with the other two expected to be cleared in the coming months.

Although the company’s approvals span a variety of indications and organs the initial commercial focus will mainly be in the GI endoscopy market, which is what the Speedboat products, with the first launch in Q419, are approved for. And within the GI endoscopic market, the focus of the company is to increase penetration within the ESD and peroral endoscopic myotomy (POEM) procedures.

ESD is a relatively new up-and-coming outpatient procedure (most patients go home the same day) to remove early-stage cancerous tumours or polyps from the GI tract. A typical ESD procedure involves marking the perimeter of the lesion, use of a lifting agent around the perimeter of the lesion, the mucosa around the lesion is cut, the submucosa beneath the lesion is dissected and any intraprocedural bleeding is managed with a water jet and haemostatic devices.

Historically, endoscopic mucosal resection (EMR) procedures have been the most used technique for removing early-stage tumours and polyps in the GI tract but it has difficulty in reducing adenomas larger than 2cm.1 Meta-analysis comparing the procedures indicate that ESD has a much higher rate of en bloc resection (where the entire tumour is taken out) than EMR, 91.7% versus 46.7%, respectively. Additionally, the rate of recurrence is much lower in patients who receive ESD at only 0.9% versus the 12.2% recurrence rate for patients receiving EMR.

Two aspects of the procedure although have limited adoption despite the higher rates of efficacy. First, the procedure time is much longer than EMR, with EMR generally taking 30 minutes on average while ESD can take between one and two hours2 likely due to the need for precision as well as the need for frequent instrument changes.3 The extra time is generally worth it for the patient but financial considerations at hospitals and outpatient surgical centres (time per procedure is higher due to the longer procedure time and a surgeon can perform fewer per day, affecting revenue) make this a more difficult sell. That said, an ESD is still significantly cheaper than more traditional surgical colectomy (€3190 vs €8,490).4

Complication rates are also higher with ESD procedures, with a perforation rate of 5.7% versus 1.4% for EMR5 although most perforations are small and can be identified/treated during the procedure using a clip.6 Procedures to treat distal colorectal cancers (involving the descending colon, sigmoid colon, rectosigmoid and rectum) appear to have fewer perforations that proximal colon cancers (involving the cecum, ascending colon and transverse colon).7 There is also a higher bleeding risk of 4.8–5.7% compared to 0.9–1.4% for EMR.8

Creo Medical’s Speedboat can help with both drawbacks of the ESD procedure, which may increase its use. It uses a bipolar RF energy blade, while typically commonly used ESD cutting instruments use monopolar RF. Monopolar RF knives use significantly higher voltages and direct current and heat across the bowel wall, increasing the risk of injury. With the Speedboat, the current is restricted to a specific area, which should help reduce complications9. Also, as the Speedboat incorporates cutting, coagulation and fluid injection devices in one product, procedure times are shorter due to less frequent instrument changes.

With regards to the market size, there are approximately 19m colonoscopies performed annually in the United States with approximately 1.5m procedures performed on US Centers for Medicare & Medicaid Services (CMS) patients that involve removal of polyps, growths or tissue from the large bowel, according to the federal agency. As these numbers are just for Medicare and Medicaid patients, the total number of procedures such as these performed in the US is likely double. While the incidence of new cases of colorectal cancer are approximately 150,000 per year, a large number of people have polyps or adenomas. Adenomas are found in 20–53% of the US population over the age of 50 (approximately 33 million to 62 million people in the US alone).10

The Speedboat is also being used in POEM procedures, a minimally invasive procedure for the treatment of achalasia, an incurable condition that is marked by a failure of the smooth muscle fibres to relax, impairing a patient’s ability to squeeze food down into the stomach, causing an inability to swallow, regurgitation/vomiting, heartburn, gas, chest pain and progressive weight loss. Achalasia can happen at various points along the GI tract such as the myoenteric plexus of the oesophagus, lower oesophageal sphincter, the vagal trunks and the dorsal vagal nucleus.11 Prevalence of the condition appears to be around 10.82 per 100,000, which would indicate around 36,000 cases in the United States.12

Historically, this condition was treated with non-surgical approaches including Botox, balloons and pharmacologic therapy (muscle relaxants). Each of these have significant weaknesses. Botox tends to not have a long-lasting impact on the condition. Symptomatic improvement is 78.6% at one month but then degrades to 40.6% at one year. A second treatment is required in 46.6% of patients.13. Endoscopic balloon dilation (EBD) has a similar issue, although it is typically more efficacious. Symptom relief has been shown to be 84.8% at month one and 68.2% at one year with 25% of patients requiring subsequent dilations. This procedure also has some side effects such as a 1.6% risk of perforation as well as a significant increase in heartburn episodes (approximately one-third of patients studied).14

Pharmacologic agents such as nitrates have been used but efficacy tends to be of very short duration (as low as 30 minutes) and have a high incidence of headache and hypotension. Calcium channel blockers have also been used with some efficacy in 50–90% of patients. However, up to 30% of patients experience significant side effects such as peripheral oedema and headaches.15 Pharmaceutical agents are only typically used in mild disease and when more invasive procedures are inappropriate.

There have been a variety of different surgical approaches used, with laparoscopic myotomy being most popular. 89.3% of laparoscopic myotomy procedures in patients with achalasia were successful. In total, 6.9% of patients treated with this procedure have had perforations, with another 6.3% having further complications. As with EBD, there can be a significant number of heartburn episodes (31.5% without an anti-reflux procedure and 8.8% when this preventative procedure is conducted).16

POEM procedures, unlike ESD (but similar to laparoscopic myotomy), is performed under general anaesthesia and requires a hospital stay (median of one day17). In the procedure a flexible scope is inserted through the mouth to avoid cutting the chest or abdomen. It involves a submucosal injection of saline to create a mucosal bulge, followed by a cut to the oesophageal mucosa. Then a submucosal tunnel is made followed by dissection of submucosal fibres to weaken the sphincter so that food may pass. The success rate of 91.5% at two months and 88.5% at three years is comparable to laparoscopic myotomy.18 However, procedure length tends to be shorter than for laparoscopic myotomy (120 minutes versus 149 minutes) and hospitalisation tends to be shorter (one day versus two days). Complications of the procedure are broadly similar.19

Use of Speedboat in POEM procedures has similar benefits to use in ESD, reduced procedure time due to less need to switch instruments and less risk of injury through the use of bipolar RF.20 Procedure durations are usually around an hour and some of the procedures can be completed in as little as 25 minutes.21 As procedure times can be a major component of a decision whether to use a certain approach, we would expect both Speedboat use in POEM procedures and the overall share of POEM of the achalasia market to increase.

Our assumptions are focused on the market for ESD procedures as POEM procedures are treating a relatively niche market with generally poor data sources. As mentioned, there are approximately 19m colonoscopies performed annually in the United States, with approximately 1.5m procedures performed on US CMS patients that involve removal of polyps, growths or tissue from the large bowel, according to the federal agency. As the median age of people who receive EMR and ESD procedures is around retirement age,22 the total number of procedures such as these in the US is likely double that, at around 3m per year.

We do not have these data for the other major markets but assume a per-capita reduction of 40% in the EU and Japan as they typically perform fewer colonoscopies.23 We assume peak penetration of around 9% as although Speedboat has advantages, ESD will be one of several potential approaches. Additionally, following discussions with the company and in reviewing the market environment, we assume Creo Medical will book approximately £730 per procedure. There is also a fee for the CROMA energy platform device (approximately £22,000) but the future economics are uncertain. Often medical device companies will give these types of permanent-use devices away for free or for nominal amounts to accelerate penetration of their single-use devices (such as Speedboat). Based on these assumptions, our 2026 sales estimate (which is when we forecast the products reaching maturity) is £347m for the US, EU/UK and Japan (representing approximately 475,000 procedures). Any sales outside these regions would provide upside to our estimates. Note that achieving these estimates would likely require significant additional investment in the US sales and marketing team (as assumed in our model) to drive growth in that important market among gastroenterologists.

To give a reference point for this peak sales estimate, Conmed, a major surgical device supplier, estimates the GI endoscopic technologies market is approximately $3.0–3.2bn with the RF energy-based surgical device market valued at $2.7–2.9bn per year.

Additionally, Creo Medical has a vast patent portfolio. As of 31 December 2019, it had 188 granted patents and another 599 pending applications around the world. With this in mind, we are modelling patent protection until 2040.

Outside of the GI space, Creo Medical has also stated an intention of expansion into lung and pancreatic cancers among others. However, these are much more niche markets because colorectal cancer screening guidelines are quite broad and include all adults aged 50–75 years in the United States. For lung cancer, the guidelines only recommend screening for people with a history of smoking at least 20 packs per year or more, who are current smokers or have smoked in the last 15 years and are aged 50–80 years. There are no guidelines for pancreatic cancer screening. Less screening means fewer growths and polyps discovered, functionally reducing the size of the market.

For lung cancer, the total potential screening population is around 15 million24 people compared to 83–85 million for colorectal cancer.25 The current screening standard is low-dose computed tomography (LDCT), which effectively takes x-rays of the chest to detect lesions. The big issue with LDCT is that there is a dose of radiation involved, which in itself may increase the incidence of lung cancer. The typical dose of radiation is 2 millisieverts (mSv), which is equivalent to 243 days of natural background radiation. Follow-up exams, such as full chest CT, would involve a typical dose of 8mSv or 2.7 years of natural background radiation. Over time and if repeated this would lead to unnecessary cumulative radiation exposure greater than that of nuclear industry workers and atomic bomb survivors.26 Another issue with LDCT is that as an imaging technology, even skilled readers can miss a 3mm (or smaller) nodule. Due to this and other reasons, only about 14.4% of the eligible population is generally screened27 (note that this percentage estimate is based on older and more restrictive 2013 guidelines whereas the screening criteria was recently significantly expanded in March 2021). This has a knock-on effect that once the cancer is detected, it has likely already progressed past the point of surgical intervention. According to the National Cancer Institute, only 18% of lung cancer at diagnosis is at the localised stage, where surgery would be most effective (as compared to 37% of colorectal cancers). We estimate approximately 20,000–40,000 surgical procedures for lung cancer per year.

Unlike colorectal and lung cancer, there are no official screening guidelines for pancreatic cancer. According to the consensus reached at the International Cancer of the Pancreas Screening Consortium summit, screening is not recommended for the general population, instead focusing on those with first-degree relatives (parents, siblings and offspring) with pancreatic cancer, a very limited segment of the population. Those with two first-degree relatives with pancreatic cancer have a 6.4-fold greater risk of pancreatic cancer (8–12% lifetime risk) than the general population. Those with three or more first-degree relatives with pancreatic cancer have a 32-fold greater risk (40% lifetime risk).28 Gene testing can provide a signal of risk as well but it is thought it is of limited use at the moment as the genetic basis for susceptibility to pancreatic cancer is unclear.

Endoscopic ultrasound is generally the procedure performed to screen patients for pancreatic cancer. It is similar to colonoscopy as it requires sedation and sometimes general anaesthesia. It involves the insertion of a tube into the mouth, down to the stomach and into the first part of the small intestine. Risks are bleeding and GI perforation, and sometimes infection. So, while accurate, it is far from perfect or patient friendly, which at least partially explains why such a high percentage of pancreatic patients are detected late (only 11% are diagnosed when the tumour is localised). Given there are 60,000 new cases per year of pancreatic cancer, we believe there are fewer than 10,000 pancreatic cancer surgical procedures per year.

Given that lung and pancreatic cancer are much smaller opportunities and will likely take Creo Medical years to develop a market within these indications (although MicroBlate Fine and MicroBlate Flex can already be used in the lung and pancreas in the US and EU/UK), we are not including these in our forecasts. However, that may change as the company provides more evidence of effectiveness and gains momentum with oncologists treating those diseases.

In July 2020, Creo Medical announced the acquisition of Albyn Medical, which designs, manufactures and commercialises a wide variety of products that broadly cover the endourology, urology, urogynaecology, endoscopy, GI motility and coloproctology areas (see Exhibit 5) although 90% of revenues come from the GI endoscopy space.

Albyn Medical was purchased for €24.8m plus up to €2.7m in performance related milestones. Albyn Medical was profitable with €1.7m in PBT for FY19 and contributed £12.8m in sales to Creo in H121. Importantly, with this acquisition, Creo has also acquired Albyn Medical’s 70-person EU sales and marketing team, which has a direct presence in Spain, France, Germany and the UK, effectively increasing its sales and marketing presence by tenfold. In November 2020, Creo Medical announced it was acquiring the Belgian medical device company Boucart Medical SRL for €4.5m in cash and up to €0.5m in additional considerations and folding it into its Albyn Medical subsidiary. Boucart supplies products for the GI market in the Belgium and Luxembourg area and reported PBT of €0.6m in 2019. The Boucart acquisition added a further 10 sales and marketing personnel to the team.

Although Creo’s products are unique in their use of bi-polar RF and other design elements, the competitive landscape in GI endoscopy and energy products is crowded, with a large number of large and legacy players. One of Creo’s biggest competitors is Olympus, which had £5.3bn in 2020 sales (over half from their endoscopy division) and has a plethora of products serving the GI endoscopy space and ESD procedures. Further, even with a better device it is not an easy undertaking to convince surgeons to switch brands or move to a new type of procedure. Creo is focused on the ESD procedure, which has gained limited traction in the US mainly because of generally longer procedure times and somewhat higher adverse events (although Creo’s products address both), despite better outcomes from patients versus the standard of care. Creo Medical may need to meaningfully increase its investment in US sales and marketing to gain significant penetration as it is currently limited to only a few sales and marketing personnel in the important region. This increase can be achieved organically or through acquisition, as Creo has done with its Albyn Medical purchase, which has helped it acquire a 70-person EU sales and marketing team. Reimbursement may also be an issue as there is no separate payment for use of Creo products and they are bundled into a total payment for the entire procedure. However, according to the company, an ESD conducted using Creo products is still significantly cheaper than surgical colectomy (around £10,000 cheaper per procedure), mainly due to lower downstream costs associated with lesion recurrence and a lower number of procedure-related complications. Gaining reimbursement will likely make adoption easier as financial considerations often dominate the decision-making process in the US healthcare industry.

We value Creo Medical at £434m or 240p per basic share using a risk-adjusted NPV model utilising a 12.5% discount rate on the CROMA platform products and a 10% discount rate for Albyn Medical products (as they are more mature). Approximately 75% of the value is attributable to the CROMA platform (especially the GI market), with the remainder divided between the value of Albyn Medical and net cash. We attribute a 70% probability of success to the CROMA platform as it is still in the early phases of adoption (Speedboat only launched in Q419). Additionally, our 2026 sales estimate (which is when we forecast the CROMA products reaching maturity) for the platform is £347m, with £205m coming from the US. We will adjust our assumptions as we are updated on the progress of commercialisation and as additional studies are published using the CROMA devices (both company and physician sponsored).

Creo Medical reported that it had £30.6m in cash and £10.7m in debt as of 30 June 2021 with £12.9m in sales for H121, most of which was attributable to Albyn Medical. The company reported an H121 operating loss of £11.1m (vs £10.6m in H120). It raised £36.3m in gross proceeds in a recent placement and open offer and we project a financing need of an additional £30m before profitability (£10m in 2022 and £20m in 2023). We model this need as illustrative long-term debt.

Sales have historically been minimal but this has changed with the inclusion of the sales of Albyn Medical Products and will change further upon penetration of the CROMA products, though that will likely require significant additional investment in the US sales and marketing team to drive growth in that important market among gastroenterologists. We project revenues of £25.9m in 2021 and £28.4m in 2022 with net losses of £21.2m and £24.4m, respectively.