Creo Medical — Building momentum in 2022

Creo Medical (AIM: CREO)

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Research: Healthcare

Creo Medical — Building momentum in 2022

Creo Medical’s H122 results highlighted its progress in developing and commercialising its minimally invasive electrosurgical devices. Creo’s core asset, Speedboat Inject, continued to gain traction in H122, supported by an initial licensing payment from Intuitive Surgical (signed in May 2022) and complemented by the mature European consumables business, which remains a stable revenue stream. We see upside potential from the multi-year collaboration with Intuitive Surgical but await further details before reflecting this in our estimates. Creo’s outlook remains focused on wider adoption of its six products in the flagship CROMA platform. In reflecting the H122 results and rolling our model, we have increased our valuation to £489m or 269p/share, from £434m previously.

Soo Romanoff

Written by

Soo Romanoff

Managing Director - Head of Content, Healthcare

Healthcare

Creo Medical

Building momentum in 2022

H122 results

Healthcare equipment
& services

14 September 2022

Price

68.0p

Market cap

£123m

Net cash (£m) at 30 June 2022

14.0

Shares in issue

181.5m

Free float

75.9%

Code

CREO

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.7)

(31.7)

(63.0)

Rel (local)

1.6

(33.0)

(62.9)

52-week high/low

184p

67p

Business description

Creo Medical is a UK-based healthcare company focusing on the development and commercialisation of minimally invasive electrosurgical devices. It has six products in the flagship CROMA platform, all of which have been CE marked and four of which have been cleared by the FDA. In 2020 Creo acquired Albyn Medical, which provides it with profitable products and a direct salesforce in Europe.

Next events

FY22 results

Mid 2023

Analysts

Soo Romanoff

+44 (0)20 3077 5700

Adam McCarter

+44 (0)20 3077 5700

Nidhi Singh

+44 (0)20 3077 5700

Creo Medical is a research client of Edison Investment Research Limited

Creo Medical’s H122 results highlighted its progress in developing and commercialising its minimally invasive electrosurgical devices. Creo’s core asset, Speedboat Inject, continued to gain traction in H122, supported by an initial licensing payment from Intuitive Surgical (signed in May 2022) and complemented by the mature European consumables business, which remains a stable revenue stream. We see upside potential from the multi-year collaboration with Intuitive Surgical but await further details before reflecting this in our estimates. Creo's outlook remains focused on wider adoption of its six products in the flagship CROMA platform. In reflecting the H122 results and rolling our model, we have increased our valuation to £489m or 269p/share, from £434m previously.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/20

9.4

(23.0)

(12.8)

0.0

N/A

N/A

12/21

25.2

(29.7)

(14.6)

0.0

N/A

N/A

12/22e

28.7

(25.8)

(12.1)

0.0

N/A

N/A

12/23e

33.8

(23.7)

(11.1)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

H122 results reflect improved Speedboat traction

Creo recorded 5.7% y-o-y revenue growth in H122 to £13.6m, supported by improving traction from the core Speedboat Inject device (driven by a 2x increase in procedure volumes) and initial revenues from the robotics deal. The consumables business recorded sales of £12.8m (H121: £12.8m). The operating loss of £15.9m was above H121’s £11.1m, largely due to the increased scale of the business. Sequentially however, the performance improved due to lower product development and clinicals costs, which is anticipated to continue. We have reinstated FY22 estimates, largely in line with previous figures, and introduced FY23 estimates.

Robotics deal with Intuitive offers upside

In May 2022 Creo entered into a long-term agreement with Intuitive Surgical (a US-based medical robotics developer for minimally invasive surgeries) to optimise certain Creo products to be compatible with Intuitive’s robotic technology. The agreement entails joint regulatory studies prior to approval, which can take up to 18 months. The first ‘upfront’ payment was recorded in this update although the specifics were not disclosed. While we await further details on deal terms, we believe this agreement reinforces the company’s differentiated offering and Creo could be entitled to potential royalties and milestones.

Valuation: £489m or 269p per share

Our valuation has increased to £489m or 269p/share, from £434m or 240p/share, mainly due to rolling forward our NPV and revised foreign exchange rates, offset partially by a lower net cash balance. We estimate that the company will need to raise a total £30m before the end of FY24 and profitability in 2025, pending any impact from the announced deal with Intuitive.

Speedboat traction

Creo Medical reported 5.7% y-o-y revenue growth in H122, growing momentum in the adoption of its core CROMA technology platform and the flagship Speedboat Inject device. Core products generated £0.9m in H122 revenues (versus £0.1m in H121 and £0.3m in FY21), which included an undisclosed upfront payment from the Intuitive deal. However, consumables (Albyn Medical and Boucart Medical, acquired in H220 and Aber Electronics, acquired in H221) remains the key revenue contributor, recording sales of £12.8m during the period, in-line with the H121 figure.

In H122, Creo’s continued focus on the commercialisation of its Speedboat Inject device and CROMA platform resulted in increased orders during the period, which were in line with management’s expectations both in terms of volume and price. During the period Speedboat Inject was also used to treat multiple peroral endoscopic myotomy oesophagus and stomach procedures on patients in the US, along with additional indications treated in Europe, the Middle East and Africa including a gastrointestinal stromal tumour (GIST), reflecting the expanded scope of the device.

Under its clinical education programme, Pioneer, the number of clinicians equipped to provide training on Creo’s technology doubled in H122 (versus H221) which, according to management, has resulted in a 100% increase in both procedure volumes and regular users globally. As a reminder, Creo’s training programme is an important driver for sales growth as these trainees typically convert into long-term customers. As COVID-19 headwinds subsided, Creo was able to develop its training programme by organising several regional and multinational events and expanding its access to new territories, notably in the Asia-Pacific region (in particular, Singapore and Thailand). The company has opened a regional hub in Singapore to support the near-term product launch plan. As a result, the expansion efforts have led to an increase in the pipeline of clinicians to-be-trained and the company remains ‘in line’ to achieve management's target growth in the number of regular users by end-FY22.

Another key development during the period was the US launch of several consumable GI products (currently marketed in Europe), which the company plans to offer as bundled products with its core technology/asset portfolio to potentially generate incremental revenues per procedure. Creo opened a new office in the United States in July 2021, to act as a learning centre and training laboratory to support its US roll-out plan.

Deal with Intuitive is a major step forward

In May 2022, Creo announced a long-term robotics collaboration with category leader, Intuitive Surgical (a US-based medical robotics developer for minimally invasive procedures). The agreement aims to combine Intuitive’s robotics platform and Creo’s Kamaptive technology. The agreement will entail co-development for undisclosed Creo product(s) for compatibility and for FDA regulatory studies, which we understand will likely require c 18 months to complete. While the exact deal terms have not been disclosed, the terms of the agreement include joint clinical studies and the potential for royalty and milestone payments to be received by Creo. We believe this agreement reinforces the Creo’s differentiated offering in an evolving subsegment and holds significant upside potential on successful development. We await further details on the collaboration before incorporating it in our valuation.

Intuitive Surgical (Nasdaq: ISRG) is a world-leading developer of robotic-assisted surgery platforms with its da Vinci and Ion endoluminal robotic systems. It had an installed base of 6,859 systems at the end of December 2021 (including 6,730 da Vinci surgical systems) and recorded revenue in excess of $5.7bn in 2021.

In addition to the aforementioned deal, Creo has entered into non-binding heads of terms with a number of parties to provide third-party access via potential licensing deals to its advanced energy Kamaptive technology (specifically for SpydrBlade, Cool Plasma and MicroBlate). These agreements are an effort to develop a potential market in additional surgical areas, such as laparoscopic surgery, robotically assisted surgery and non-thermal plasma sterilisation, where Creo does not currently have operational presence.

Financials

Creo’s H122 revenue growth was driven by an improved contribution from Creo’s core products and nearly stable revenues from its mature consumables business. Revenue from consumables (consisting of the Albyn Medical, Boucart Medical and Aber Electronics businesses) stood at £12.8m in H122, broadly in line with H121. The acquisitions have enhanced Creo’s product reach and sales network across European markets (Creo also acquired Albyn’s 70-person sales and marketing team as part of the July 2020 deal) and added a continuous revenue stream to its business operations. The company continues to explore other agreements and options to strengthen its distribution network in the United States and Asia-Pacific and aid in the launch of Albyn’s product portfolio in the United States. Most of the company’s revenue in H122 (94%) was generated by the Creo Europe Consumables business and only 7% by its core products.

Revenue from Creo’s core products grew to £0.9m in H122 versus £0.1m in H121; the growth was led by improved sales from Speedboat Inject and the upfront payment received from Intuitive for the Kamaptive licensing agreement. While not material at this stage, we expect the Kamaptive technology to be a key value driver for the company in the medium term.

Gross margin slightly improved to 48.1% in H122 versus 47.5% in H121. However, the reported operating loss increased to £15.9m in H122 (H121: £11.1m due to higher operating expenses, largely attributable to increased personnel costs for the larger direct salesforce, along with additional infrastructure costs related to investments in infrastructure in the United States, UK and Asia-Pacific). On a sequential basis, however, the operating performance improved (operating loss of £18.8m in H221) due to lower product development and clinical costs, with management expecting this declining trend to continue. We have reflected these lower infrastructure costs in our FY22–23 forecasts based on the H122 performance and directional guidance from management.

In H122, cash flow used in operating activities increased to £15.7m (H121: £12.3m) due to higher R&D expenses and the expansion of the US commercial operations. With net cash of £14.0m at end H122, we estimate that Creo will need to raise a further £30m (FY23: £20m and FY24: £10m), which we model as illustrative debt, to support its growth plan before reaching profitability in FY25. These estimates may change when we have more information about the announced deal with Intuitive.

Valuation

We have adjusted our valuation upwards to £489m or 269p per basic share, from £435m or 240p per basic share, mainly due to rolling forward our NPV and revised foreign exchange rates. This has been partially offset by a lower net cash position (£14m vs £56m in our October 2021 calculation). We note that the recent Intuitive agreement has upside potential on successful commercialisation, and we plan to incorporate the deal into our valuation once we have more clarity on deal terms.

Exhibit 1: Creo Medical valuation

Product

Main Indication

Status

Probability of successful commercialisation (%)

2026e sales (£m)

rNPV
(£m)

CROMA Platform

GI, soft tissues and pulmonology

Market/registration

70

383

432.0

Albyn Medical

Urology, gynaecology and GI

Market

100

30

43.1

Total

 

 

 

 

475.1

Net cash (30 June 2022)

14.0

Total firm value

489.2

Total basic shares (m)

181.5

Value per basic share (p)

269

Options (m)

7.5

Total number of shares (m)

189.0

Diluted value per share (p)

259

Source: Edison Investment Research

Exhibit 2: Financial summary

£'000s

2020

2021

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

9,429

25,161

28,679

33,769

Cost of Sales

(5,394)

(13,576)

(14,535)

(16,312)

Gross Profit

4,035

11,585

14,144

17,457

Sales, General & Administrative and Research & Development Expenses

(25,525)

(38,359)

(37,327)

(38,454)

EBITDA

 

 

(21,441)

(26,722)

(23,135)

(20,948)

Underlying EBITDA (Adjusted for R&D tax credit)

 

 

(18,295)

(20,978)

(19,258)

(17,398)

Operating Profit (before amort. and except.)

 

 

(23,037)

(29,284)

(25,697)

(23,510)

Intangible Amortisation

0

0

0

0

Other

49

52

48

49

Exceptionals

(447)

(623)

0

0

Operating Profit

(23,484)

(29,907)

(25,697)

(23,510)

Net Interest

22

(432)

(152)

(158)

Other

0

0

0

0

Profit Before Tax (norm)

 

 

(23,015)

(29,716)

(25,849)

(23,668)

Profit Before Tax (reported)

 

 

(23,462)

(30,339)

(25,849)

(23,668)

Tax

3,146

5,744

3,877

3,550

Deferred tax

(0)

0

0

0

Profit After Tax (norm)

(19,869)

(23,972)

(21,972)

(20,118)

Profit After Tax (reported)

(20,316)

(24,595)

(21,972)

(20,118)

Average Number of Shares Outstanding (m)

155.8

164.4

181.3

181.3

EPS - normalised (£)

 

 

(0.128)

(0.146)

(0.121)

(0.111)

EPS - Reported (£)

 

 

(0.13)

(0.15)

(0.12)

(0.11)

Dividend per share (£)

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

32,994

39,442

39,222

39,091

Intangible Assets

28,529

27,255

26,572

25,889

Tangible Assets

3,378

8,603

9,066

9,618

Other

1,086

3,584

3,584

3,584

Current Assets

 

 

60,510

61,167

36,289

38,342

Stocks

6,812

8,504

9,105

9,469

Debtors

5,633

4,830

5,505

5,726

Cash

45,092

43,534

17,380

18,849

Other

2,973

4,299

4,299

4,299

Current Liabilities

 

 

(21,837)

(19,737)

(15,057)

(15,481)

Creditors

(16,024)

(14,356)

(15,057)

(15,481)

Short term borrowings

(5,813)

(5,381)

0

0

Long Term Liabilities

 

 

(8,861)

(7,554)

(7,554)

(27,554)

Long term borrowings

(6,542)

(5,175)

(5,175)

(25,175)

Other long term liabilities

(2,319)

(2,379)

(2,379)

(2,379)

Net Assets

 

 

62,806

73,318

52,900

34,398

CASH FLOW

Operating Cash Flow

 

 

(15,815)

(23,199)

(18,431)

(16,099)

Net Interest

(173)

(463)

0

0

Tax

(291)

(2,349)

0

0

Capex

(576)

(6,122)

(2,342)

(2,432)

Acquisitions/disposals

(20,586)

(1,752)

0

0

Financing

159

34,208

0

0

Dividends

0

0

0

0

Other

0

0

0

0

Net Cash Flow

(37,282)

323

(20,772)

(18,531)

Opening net debt/(cash)

 

 

(80,331)

(32,737)

(32,978)

(12,205)

HP finance leases initiated

0

0

0

0

Exchange rate movements

36

(303)

0

0

Other

(10,348)

221

(1)

0

Closing net debt/(cash)

 

 

(32,737)

(32,978)

(12,205)

6,326

Source: Company reports, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Creo Medical and prepared and issued by Edison, in consideration of a fee payable by Creo Medical. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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1185 Avenue of the Americas

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United States of America

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Level 4, Office 1205

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General disclaimer and copyright

This report has been commissioned by Creo Medical and prepared and issued by Edison, in consideration of a fee payable by Creo Medical. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

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New York +1 646 653 7026

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Research: Investment Companies

BB Biotech — Great valuation potential

According to BB Biotech’s (BION) investment team, the biotech industry has never looked in such a good position. Following a sell-off in the last 18 months, a combination of fundamental industry strength and discounted valuations has recently attracted investors to return to the biotech market. In the sector, BION is differentiated from the Nasdaq Biotechnology Index by its concentrated portfolio (c 30 stocks) of what the investment manager, Bellevue Asset Management, believes to be best-in-class biotech growth opportunities. The BION team continues to focus on its core portfolio of biotech staples, such as Moderna, blended with undiscovered, innovative companies, bringing new technologies.

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