Creo Medical — Detailed half-yearly reflecting Speedboat traction

Creo Medical (AIM: CREO)

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Research: Healthcare

Creo Medical — Detailed half-yearly reflecting Speedboat traction

Following Creo Medical’s H123 trading update (see our August note), management has reported detailed results, including a 42% increase (sequentially over H222) in the volume of Speedboat Inject procedures, coupled with expansion into the US consumables business market. Creo continues to build momentum with its Pioneer training programme. Management remains active on licensing and regulatory fronts, through its robotic deals with Intuitive and CMR, further exploration of potential licensing for its core technology, Kamaptive, and continued collaboration with the National Institute for Health and Care Excellence (NICE). Adjusting for reported cash, our valuation changes to £512m or 142p per share (versus £528m or 150p per share previously).

Soo Romanoff

Written by

Soo Romanoff

Managing Director - Head of Content, Healthcare

Healthcare

Creo Medical

Detailed half-yearly reflecting Speedboat traction

H123 results

Healthcare equipment and services

14 September 2023

Price

32p

Market cap

£115m

Net cash (£m) at 30 June 2023

17.3

Shares in issue

361.3m

Free float

87.7%

Code

CREO

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.9)

16.1

(51.6)

Rel (local)

(5.7)

17.6

(52.1)

52-week high/low

64p

18p

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

FY23 trading update

January 2024

Analysts

Soo Romanoff

+44 (0)20 3077 5700

Nidhi Singh

+44 (0)20 3077 5700

Creo Medical is a research client of Edison Investment Research Limited

Following Creo Medical’s H123 trading update (see our August note), management has reported detailed results, including a 42% increase (sequentially over H222) in the volume of Speedboat Inject procedures, coupled with expansion into the US consumables business market. Creo continues to build momentum with its Pioneer training programme. Management remains active on licensing and regulatory fronts, through its robotic deals with Intuitive and CMR, further exploration of potential licensing for its core technology, Kamaptive, and continued collaboration with the National Institute for Health and Care Excellence (NICE). Adjusting for reported cash, our valuation changes to £512m or 142p per share (versus £528m or 150p per share previously).

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

25.2

(29.7)

(14.6)

0.0

N/A

N/A

12/22

27.2

(31.0)

(14.9)

0.0

N/A

N/A

12/23e

32.8

(24.3)

(6.6)

0.0

N/A

N/A

12/24e

40.8

(14.8)

(3.5)

0.0

N/A

N/A

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

Speedboat Inject to drive growth

H123 was marked by the improved adoption of Speedboat Inject, with sequential growth (vs H222) in procedures and user base volumes of 42% and 44%, respectively. Given the strong pipeline of the clinicians’ training programme (65% up from H222) and the extended geographic reach (20 countries currently), we anticipate continued acceleration of Speedboat Inject procedures in the near to medium term. With the recent CE mark for upper gastrointestinal (GI) procedures (now eligible to address whole GI tract procedures), NICE recognition and the launch of a slimmer Speedboat, we see incremental revenue growth opportunities ahead.

Cost control measures to attain operational efficiency

Creo’s total revenue growth of 15.1% y-o-y to £15.7m in H123 was mainly led by the expansion of its consumables business into the US market and increased traction of core technology products (including Speedboat Inject). While it intensifies its focus on the commercialisation of its Speedboat Inject device and CROMA platform, the company is also taking active cost control measures to increase operational efficiency and reduce cash burn requirements. As a result, total operating expenses for the period reduced by 7.1% y-o-y and the operating loss improved to £13.4m versus £15.9m in H122.

Valuation: £511.9m or 142p per share

Our valuation for Creo adjusts to £511.9m or 142p per share from £528m or 150p per share previously, mainly reflecting the decreased cash balance of £17.3m at end H123. Based on our cash burn estimates, we estimate that the company has sufficient funds to take it to net profitability in H126, compared to management’s target of FY25.

Speedboat commercialisation on track

H123 was marked by accelerated growth in Speedboat adoption, supported by an increased user base (including highvolume 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.

Exhibit 1: Pipeline

Exhibit 2: User forecasts

Source: Company presentation, September 2023

Source: Company presentation, September 2023

Exhibit 1: Pipeline

Source: Company presentation, September 2023

Exhibit 2: User forecasts

Source: Company presentation, September 2023

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.

Several catalysts at play for upside potential

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.

CE mark expands the addressable market

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.

Exhibit 3: Expanded scope with upper GI procedures

Source: Company presentation, September 2023

Anticipated NICE guidance entails broader access to UK market

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.

Licensing opportunities for Kamaptive technology

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.

Financials

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).

Valuation

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).

Exhibit 4: Creo’s valuation

Product

Main indication

Status

Probability of successful commercialisation

2027 sales
(£m)

rNPV
(£m)

Core Technology (CROMA Platform)

GI, soft tissues and pulmonology

Market

100%

48

385.5

Consumables (Albyn Medical)

Urology, gynaecology and GI

Market

100%

32

75.5

Partnerships (Intuitive)

50%

33.7

Total

 

 

 

 

494.6

Net cash at 30 June 2023

17.3

Total firm value

511.9

Total basic shares (m)

361.3

Value per basic share (£)

1.42

Options (m)

0.0

Total number of shares (m)

361.3

Diluted value per share (£)

1.42

Source: Edison Investment Research

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.

Exhibit 5: Financial summary

£m

2021

2022

2023e

2024e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

25.161

27.169

32.817

40.754

Cost of Sales

(13.576)

(14.047)

(15.015)

(16.321)

Gross Profit

11.585

13.122

17.802

24.433

Research & Development Expenses

(12.869)

(13.492)

(11.468)

(9.175)

Sales, General & Administrative expenses

(28.675)

(30.437)

(27.052)

(26.781)

Underlying EBITDA

 

 

(19.982)

(20.805)

(20.667)

(11.472)

Underlying EBITDA (Adjusted for R&D tax credit)

 

 

(14.238)

(16.764)

(17.027)

(9.249)

Operating profit (before amort. and excepts.)

 

 

(29.284)

(30.756)

(23.954)

(14.642)

Intangible Amortisation

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Exceptionals

(0.623)

0.000

0.000

0.000

Operating Profit

(29.907)

(30.756)

(23.954)

(14.642)

Net Interest

(0.432)

(0.221)

(0.313)

(0.178)

Other

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(29.716)

(30.977)

(24.267)

(14.820)

Profit Before Tax (reported)

 

 

(30.339)

(30.977)

(24.267)

(14.820)

Tax

5.744

4.041

3.640

2.223

Deferred tax

0.0

0.0

0.0

0.0

Profit After Tax (norm)

(23.972)

(26.936)

(20.627)

(12.597)

Profit After Tax (reported)

(24.595)

(26.936)

(20.627)

(12.597)

Average Number of Shares Outstanding (m)

164.4

181.3

313.9

361.3

EPS - normalised (p)

 

 

(14.58)

(14.85)

(6.57)

(3.49)

EPS - Reported (£)

 

 

(0.15)

(0.15)

(0.07)

(0.03)

Dividend per share (£)

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

39.442

41.650

41.002

39.962

Intangible Assets

27.255

27.643

26.752

25.896

Tangible Assets

8.603

10.184

10.427

10.242

Other

3.584

3.823

3.823

3.823

Current Assets

 

 

61.167

33.687

43.254

48.020

Stocks

8.504

9.325

9.968

10.835

Debtors

4.830

6.765

8.171

10.148

Cash

43.534

13.097

1.975

1.675

Other

4.299

4.500

23.140

25.363

Current Liabilities

 

 

19.737

17.483

15.100

15.937

Creditors

9.921

9.000

9.620

10.457

Short term borrowings

5.381

5.616

2.613

2.613

Other short-term liabilities

4.435

2.867

2.867

2.867

Long Term Liabilities

 

 

7.554

8.451

7.425

21.399

Long term borrowings

5.175

6.067

5.041

19.015

Other long term liabilities

2.379

2.384

2.384

2.384

Net Assets

 

 

73.318

49.403

61.730

50.646

CASH FLOW

Operating Cash Flow

 

 

(26.011)

(24.984)

(20.968)

(12.162)

Net Interest

(0.463)

(0.287)

(0.326)

(0.196)

Tax

(2.349)

0.258

(3.640)

(2.223)

Capex

(6.122)

(3.274)

(2.638)

(2.130)

Acquisitions/disposals

(1.752)

(2.753)

0.000

0.000

Financing

34.208

0.000

31.500

0.000

Dividends

0.000

0.000

0.000

0.000

Investments

0.000

0.000

(15.000)

0.000

Other

0.000

0.000

0.000

0.000

Net Cash Flow

0.323

(31.011)

(7.106)

(14.292)

Opening net debt/(cash)

 

 

(32.737)

(32.978)

(1.414)

5.679

HP finance leases initiated

0.000

0.000

0.000

0.000

Exchange rate movements

(0.303)

(0.056)

0.000

0.000

Other

0.221

(0.497)

0.013

0.018

Closing net debt/(cash)

 

 

(32.978)

(1.414)

5.679

19.953

Source: Company reports, Edison Investment Research

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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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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.

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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.

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United Kingdom

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Research: Healthcare

OSE Immunotherapeutics — Publication puts Tedopi back in the spotlight

OSE has announced that the results from its Phase III trial (ATALANTE-1) for Tedopi have been published in Annals of Oncology. While the study results were first presented in September 2021, the company’s share price rose sharply following the publication announcement, highlighting significant interest in the company’s lead cancer vaccine. The results from this trial were encouraging, showing a 41% reduction in the risk of death in the Tedopi arm versus standard of care (SoC) chemotherapy. After discussions with regulators (FDA and EMA), OSE is preparing for a follow-on confirmatory pivotal Phase III trial, which we expect to commence in early 2024.

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