Creo Medical — Detailed half-yearly reflecting Speedboat traction

H123 was marked by accelerated growth in Speedboat adoption, supported by an increased user base (including high‐volume users), a higher number of procedures using Speedboat, geographic expansion into new territories (notably in Asia-Pacific) and a strong pipeline of clinicians under its Pioneer training programme with the potential to convert into regular users. With the Pioneer training programme at the centre of its commercialisation efforts, Creo operates multiple training centres across Europe, the United States and Asia-Pacific.

In H123, the total number of Speedboat users increased to 115, representing a 44% increase from 80 at the end of FY22 and a 30% increase (91 users) from the end of Q123, reflecting a favourable conversion rate from its training programme. Also, the total volume of procedures using Speedboat Inject in H123 was 50% higher than the FY22 quarterly average. With the current pipeline of more than 125 trainees at end H123, we remain positive about similar momentum for the remainder of FY23 and going forward. With a 2–3x growth target for total users in FY23 (y-o-y), management believes that the total user base at end H123 remains on track with the yearly growth plan.

We note that the launch of the slimmer version of Speedboat Inject in late FY22 helped boost usage of the device and uptake of the training programme in H123. The company hopes for, a similar uptrend with the anticipated launch of Speedboat Flush, the slimmest version of Speedboat, in the second half of the year.

We see a number of catalysts at play, which might create incremental revenue opportunities for the company in the medium to long term. Some of the key developments include expanded scope to upper GI procedures in Europe, NICE guidance and Kamaptive partnerships.

We expect further uplift in Speedboat usage from the recent CE mark for Speedboat Inject for upper GI procedures in June 2023. We note that the CE mark extension nearly doubles the device’s scope across all GI tract procedures in Europe and will likely create new surgical opportunities for additional indications (upper GI), as well as increasing the total user base in the near to medium term. According to management, upper GI procedures currently account for more than 40% of global Speedboat Inject procedures. As the Speedboat Inject device is already in use in full GI tract procedures for cutting and coagulation of soft tissue using radiofrequency and microwave energy across the US and Asia-Pacific, we expect a quick turnaround into regular users for upper GI procedures in Europe.

In June 2023, Creo Medical announced that Speedboat Inject has been selected for assessment by NICE, a UK-based independent expert organisation that provides national guidance on medical practices and technologies. As a standard process, the device will go through a committee review of the headline data and a multi-stage evaluation process by NICE, to investigate Speedboat for endoscopic submucosal dissection of lower GI lesions. We note that NICE works in collaboration with the NHS supply chain and, although not binding, its guidance applies to all NHS trusts in the UK’s public healthcare system. Management expects a response from NICE in the next six to 12 months which, if favourable, might prove to be a springboard for Creo’s growth plans across the important UK market. To date, the company is working with 24 sites in the UK. More recently, Creo was included as a preferred supplier under the NHS Supply Chain endoscopy framework agreement.

While the licensing deals with Intuitive and CMR provide validation for Creo’s Kamaptive technology, the company anticipates an inflection point for the technology platform in late 2024, by which time it expects to launch the combined product with partners. As a reminder, Creo announced a long-term robotics collaboration with category leader Intuitive Surgical in May 2022. The agreement aims to combine Intuitive’s robotics platform and Creo’s Kamaptive technology, and entails co-development and FDA regulatory studies. While the exact deal terms have not been disclosed, the terms of the agreement include joint clinical studies and the potential for Creo to receive royalty and milestone payments. This was followed by a second robotics deal with CMR Surgical, a global surgical robotics company, in October 2022, whereby CMR will be permitted to integrate certain features of Creo’s Kamaptive technology into its Versius surgical robotic system. Creo is exploring additional out-licensing opportunities to further commercialise the technology and create additional growth opportunities, which we view as a sensible step to drive long-term growth.

In H123, Creo reported total revenue of £15.7m, representing 15.1% y-o-y growth from £13.6m in H122. Revenue uptake was mainly driven by its growing endotherapy consumables business and improved momentum for its core technology products (including Speedboat Inject). Revenue from Core technology products, though small, doubled to £0.9m in H123 from £0.4m in H122 and increased over 80% from £0.5m in H222, reflecting momentum for Speedboat. Revenue from the Kamaptive agreements remained largely unchanged y-o-y at £0.5m (H123) indicating ongoing development work and absence of milestone payments during the period. Though we have limited visibility on status of licensing partnerships, we continue to view that the licensing partnerships (especially with Intuitive) hold significant upside potential for the company, given the market penetration and reach of its robotic systems. Endotherapy consumables is Creo’s mature business, accounting for more than 90% of revenues, which grew by 12.0% y-o-y to £14.3m, supported by recent expansion into the US market and first sales generated in H123. Management expects a similar growth trend in H223.

Gross margin for the period was 47.9%, largely similar to H122 (48.1%). During H123, total operating expenses decreased to £20.9m from £22.5m in H122, mainly reflecting the introduction of cost control measures with reduced R&D spend, lower employee headcount and investment in operational capacity. As a result, the operating loss stood at £13.4m in H123 versus £15.9m in H122. The operating cash burn rate was £15.2m (versus £16.7m in H122). With the company transitioning to the commercial stage, with most of its products already developed and its operational infrastructure established, Creo is taking the first steps to increase operational efficiencies as it scales its business. We therefore anticipate a declining trend in operating expenses in near to medium term, providing support for the company to reach break-even in approximately two to three years (while management targets break-even in FY25, we assume H126).

Based on Creo’s H123 results, we have not made any material changes to our forecasts and our near- and long-term assumptions are unchanged. We reintroduce our forecasts (which were withdrawn in our last note pending the release of the H123 financial results).

Our valuation for Creo Medical decreases to £511.9m from £528m previously, mainly due to the reduced net cash balance of £17.3m (including a fixed-term deposit of £15m) at end H123 (£26.5m in gross cash and term deposits offset by £9.2m in interest-bearing liabilities). Our total enterprise value is unchanged at £494.6m as we maintain our long-term assumptions. In addition, given the increased number of shares outstanding, our per-share valuation is now 142p per basic share (versus 150p previously).

At the end of H123, Creo had a cash balance of £26.5m, supported by a March 2023 fund-raise of £33.7m (gross) conducted in a two-step process (see our previous note for more details). Based on our projected cash burn estimates and anticipated cash (revenue) inflows from the Speedboat commercialisation, we estimate that the current cash balance is sufficient to take Creo to operational profitability in H126 (FY25 according to management estimates). Assuming the funds are raised through an equity issue (at the current trading price of 32p/share), Creo would need to issue another 100m shares, resulting in our per-share valuation adjusting to 118p/share.