Creo Medical — Progressing on all fronts

Creo Medical is a UK-based medical device company, founded in 2003 and listed 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. The core of the company’s business model is its patented Kamaptive technology, which is a combination of bipolar radiofrequency (RF; most available products use monopolar RF) and microwave energy delivered through the company’s CROMA platform for the purpose of dissection, resection, ablation and haemostasis of diseased tissue.

The company has been employing a three-pronged business strategy (termed ‘Build, Buy and Partner’) and has made progress on all fronts over the past two years. ‘Build’ incorporates the development and commercialisation of its core portfolio of electrical surgical products and includes the Speedboat Inject, Speedboat Slim, SpydrBlade Flex, SlypSeal Flex, MicroBlate Fine and MicroBlate Flex. All six products have been CE marked and five are also cleared for use by the FDA, with the remainder awaiting FDA clearance imminently. The ‘Buy’ or acquisitive strategy is based on complementary bolt-on and strategic acquisitions, for example, Creo’s acquisition of the GI consumables businesses Albyn Medical in July 2020 and Boucart Medical in November 2020. The ‘Partner’ strategy, which involves out-licensing its CROMA/Kamaptive technology platform to third parties, gained significant traction in 2022 with co-development deals signed with two robotics players, Intuitive (May 2022) and CMR (October 2022). Management anticipates that c 80% of long-term value will come from the suite of electrosurgical devices that forms Creo’s core business.

We value Creo Medical at £493m or 272p per basic share using a risk-adjusted NPV model with a 12.5% discount rate. Given recent developments as part of the business strategy, we have split our valuation to reflect the contributions from each of the pillars (‘Build, Buy, Partner’) to our net present valuation (NPV). For the core technology business (Build), with the growing commercialisation and acceptance of Speedboat Inject (800 procedures anticipated in 2022 and 450 clinicians in the training pipeline, a leading indicator of future sales potential) and supported by increased company disclosures and granularity on its commercial strategy and sales expectations (also indicative of commercial progress, in our view), we have increased our probability of success to 100% (from 70% previously). However, we now introduce a slower ramp-up than incorporated earlier in our model based on recent management disclosures. We anticipate that core technology will contribute c £47m in sales by 2027, ramping up to £188m by 2032 (against the management target of £200m). For the mature Consumables business (Buy), we have incorporated the incremental revenue potential from bundling activities ex-Europe (United States and Asia-Pacific) in our model. We have also introduced a contribution from Partnerships in our valuation (Partner), although the current assessment is almost entirely driven by the deal with Intuitive Surgical. We see upside potential from this category as the current collaborations develop and further deals are made. Based on our current estimates, c 78% of our enterprise value for Creo is attributable to the Core technology (CROMA platform and Creo devices), 15% to Consumables (majorly Albyn Medical) and 7% to Partnerships (mainly Intuitive).

While Creo generates a steady revenue stream from its mature European consumables business (c 90% of FY22 revenues of £27.1m), in our view, its valuation case is driven by its core portfolio of electrosurgical devices (led by Speedboat Inject), with the bulk of the contribution from future-years. Following recent management disclosures, we have reduced our top-line estimates for FY22–23 slightly (£31.0m versus £33.8m for FY23 previously). Furthermore, for FY23, we have cut our R&D estimates based on management guidance, which leads to an improvement in our estimated underlying EBITDA loss for the year (loss of £15.8m versus £17.4m previously). We estimate Creo to end FY22 with a net cash position of £6.3m (gross cash of £13.1m as disclosed in the January 2023 trading update, net of our forecast total debt of £6.8m) which, based on our projected burn rates, should fund operations into Q223. We anticipate the need to raise another £25m (FY23: £15m and FY24: £10m), down from £30m previously, modelled as illustrative debt, to support the company’s growth plan. Introducing a relatively slower sales ramp-up in our updated model results in our estimated timeline for achieving net profitability being pushed out to H126 from FY25 previously. We however estimate underlying EBITDA to turn positive in H225 (£1.1m in FY25).

Although Creo’s products are unique in their use of bipolar 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, the requirement for additional training to optimally use and handle the device may make it more challenging to convince surgeons to switch brands or move to a new type of procedure. While some of these concerns have been mitigated by the improving sales traction of and positive feedback on the Speedboat Inject device, future uptake will still be dependent on a range of factors, such as the ability to attract more clinicians to its training programme and converting them into regular users, as well as expanding the usage of CREO devices into broader applications. We see these variables as having a significant bearing on future cash inflows for the company. However, we also believe that the recent licensing agreements for the Kamaptive technology provide another avenue for growth, partially de-risking the dependence on the core portfolio to drive growth. Effective integration of Creo’s technology/devices into the robotics systems of the signed partnerships, if successful, should provide significant growth opportunities for the company in the near future. We see timely access to and availability of funds as another key sensitivity, particularly given the ongoing macroeconomic tightness. The company may need to raise funds through equity issues, which increases dilution risk. Reimbursement may also be an issue as surgical devices are typically 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 (powered by Kamaptive technology) is at the heart of its surgical products and delivers a combination of bipolar RF for endoscopic cutting, resection and dissection, and microwave energy, for coagulation and ablation. While the use of RF in endoscopic procedures is common, it is usually developed as monopolar RF and Creo appears to be unique in using bipolar RF. With bipolar RF, the current is restricted to a specific area, which should help reduce complications compared to monopolar RF, which drives energy across relatively large areas. Products using the CROMA platform include Speedboat Inject, Speedboat Slim, SpydrBlade Flex, SlypSeal Flex, MicroBlate Fine and MicroBlate Flex. All six products have been CE marked and five are also cleared for use by the FDA via the 510(k) pathway, with the remaining expected to be cleared in the near future. The company currently has 125 patent families, which comprise 484 granted patents and 946 pending applications.

Creo’s business strategy is based on three strategic pillars: Build, Buy and Partner; and the company has taken several initiatives to strengthen each pillar. In the past couple of years, the company has made tangible progress across all three categories.

In 2022, Creo witnessed strong momentum in the adoption of its core CROMA technology platform and the flagship Speedboat Inject device. In FY22, the company’s clinical training programme, Pioneer, saw a doubling of clinicians in the training programme (450 in FY22), which resulted in 80 confirmed users out of 150 trained during the year. This is a 4x increase over the 20 users at the end of FY21 and is a leading indicator of future sales potential. Management anticipated closing the year with c 800 procedures for Speedboat Inject. The regional spilt for procedures stands at 40–45% in the United States, 40–45% in Europe and the remaining in Asia-Pacific. In addition to upper and lower GI procedures, Speedboat Inject has been used to treat multiple POEM and stomach procedures on patients in the United States, along with additional indications treated in Europe, the Middle East and Africa, including a GIST, reflecting the expanded scope of the device for the treatment of other indications.

A key factor driving uptake and usage of Creo’s electrosurgical devices is the training of clinicians and specialists in appropriately using the device for endoscopic procedures. Creo’s clinical training programme, Pioneer, provides training to the clinicians on Creo’s technology. Pioneer is an important driver for sales growth as, according to the company, the trainees typically convert into long-term customers. With COVID-19 headwinds subsiding, Creo has been 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 and the company has enrolled around 15 distributors. The expansion efforts have led to an increase in the pipeline of clinicians to be trained (c 450 as of end FY22) and the company remains on track to grow this figure further.

In addition to this, Creo opened US headquarters, in June 2021, supporting commercial roll-out in the United States. Moreover, it purchased the freehold of Creo House, its head office in Chepstow, in June 2021 (for £4.25m) to support its growth plans. All manufacturing activities are likely to be carried out at the UK site, which has annual manufacturing capacity of 100k devices, according to management.

Creo has been supplementing its core portfolio with strategic acquisitions, notably Albyn Medical, Boucart Medical and Aber Electronics. 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, 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 and we expect it to make the bulk of the consumables revenue for Creo. 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 tenfold.

In November 2020, Creo Medical acquired Belgian medical device company Boucart Medical for €4.5m in cash and up to €0.5m in additional considerations, 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. These acquisitions have added a continuous revenue stream to Creo’s business operations, accounting for c 99% of the revenue in FY21 and c 90% in FY22.

In November 2021, Creo acquired Aber Electronics, a UK-based manufacturer of power amplifiers and radio frequency products, which are the key elements in Creo’s products. The acquisition was a material part of the company’s buy strategy as it not only strengthened R&D capabilities but also secured an important part of its supply chain.

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 Creo’s differentiated offering in an evolving subsegment and holds significant upside potential on successful development.

Intuitive Surgical (Nasdaq: ISRG) is a world-leading developer of robotic-assisted surgery platforms. It mainly operates in two types of minimally invasive robotic systems: da Vinci Surgical System and Ion Endoluminal System. While the da Vinci system is an advanced robotic system for complex surgery, the Ion Endoluminal System is mainly used in diagnostic procedures and potential interventional treatment of lung cancer, emphysema, chronic obstructive pulmonary disease and other respiratory disorders. The Ion Endoluminal System received FDA clearance in February 2019, although it currently does not hold a CE mark in Europe. Intuitive had an installed base of 7,865 systems at the end of December 2022 (including 7,544 da Vinci surgical systems and 321 Ion systems) and recorded revenue of $6.2bn in FY22 (see Exhibits 2 and 3).

While Creo has not provided details on its technological collaboration with Intuitive, indicative information suggests that the partnership will initially focus on the newer Ion systems. In the longer term, we see upside potential for a possible collaboration expansion to include the da Vinci systems, which have a much broader footprint and are estimated to have been used in upwards of 10 million procedures to date (Exhibit 4).

The Intuitive deal was followed by a second robotics deal, with CMR Surgical, a global surgical robotics company, in October 2022. Creo Medical signed a non-exclusive licence and royalty agreement with CMR Surgical, wherein CMR will be permitted to integrate certain features of Creo’s Kamaptive technology into CMR’s Versius surgical robotic system, which CMR markets as next-generation laparoscopic surgery robot. The deal represents another win and validation for the company’s ‘Powered by Kamaptive’ licensing programme.

In addition to these deals, Creo has entered into non-binding 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 by management to develop a potential market in additional surgical areas, such as laparoscopic surgery, robotic-assisted surgery and non-thermal plasma sterilisation, where Creo does not currently have an operational presence.

During 2022, Creo witnessed a material uplift in demand for the CROMA platform, reflected in the growing traction of Speedboat Inject and the licensing deals signed during the year. As a result of recent developments and our discussions with management, we have more visibility on the near-term revenue and growth trajectory. We have therefore revised our assumptions and introduced more granularity to our estimates. We base our revenue projections on three focus areas: Core technology, Consumables and Partnerships. Below we present details on our revised methodology.

Core technology includes revenue from Speedboat, CROMA technology and Creo’s other surgical devices. Based on discussions with management, we now use a bottom-up approach to value Creo’s core portfolio. We base our estimates on projected users for Speedboat Inject over the forecast years, segregating them further into three categories based on usage frequency: low, medium and high. Low users include clinicians utilising Speedboat Inject once a month, medium users once a week and high users twice a week. Based on the number of users and the estimated device usage, we calculate (using a weighted average) the number of devices that we expect to be used or procedures to be performed using a Creo device during the year. We use an average price of £750m per Speedboat Inject device (prices are uniform across geographies, according to management) and expect the total number of users to reach over 1,000 by 2026 (Exhibit 5).

We estimate current gross margins for Speedboat Inject at 60% and project them to rise to 70% (by FY25) with increases in sales volume. Note that our model does not currently include contributions from any of the other five devices in the core portfolio, given the very early stages of commercialisation. We see upside from each of these devices as they gain traction in the market and get incorporated in our valuation. For reference, management has indicated similar prices for the other devices with the exception of Microblade Fine ($1,500–1,700/device) and SpydrBlade ($1,200/device). Management has also guided that gross margins for the other devices will be around 60% as well, with the exception of Microblade Fine, for which margins are estimated in the range of 80–90%.

Consumables primarily comprises the integrated businesses of Albyn Medical, Boucart Medical and Aber Electronics and accounts for most of the current revenue for Creo. During 2022, Creo launched several consumable GI products (currently marketed in Europe) in the United States as part of its plan to offer bundled products with its core technology/asset portfolio to potentially generate incremental revenues per procedure. Creo also 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.

We have assumed a nominal growth rate (3.0%) for the business in Europe and have incorporated consumable product sales in the United States and other regions (with estimated consumable revenue potential of c $400/procedure). We estimate peak penetration of 15% by 2026 (ie 15% of all procedures using Speedboat will also use consumable products from Creo).

As Speedboat Inject gains momentum, we believe the contribution from the Consumables division to total revenue will go down in the near future. According to our estimates, the Core technology segment will contribute more than 50% of revenue by 2027, while the rest is likely to come from the Consumables and Partnership segments.

Under Partnerships, we have considered income from licensing agreements like those with Intuitive and CMR. Given limited information and visibility of the terms of the deal with CMR, our valuation for this segment is based on the deal with Intuitive, including milestone payments and device revenues (related to Intuitive’s Ion systems). Based on our estimates, we project £3.0m of milestone income in both 2023 and 2024, followed by £2.0m in 2025. Moreover, we expect device sales to commence in 2024, where we model initial penetration of 2.5% and peak penetration of 10% in 2028 (as a percentage of total procedures performed by the Ion robots). We also assume a 50% probability of success to factor in the risk associated with the early stage of the deal. As highlighted earlier, we see a considerably larger opportunity from the da Vinci robots, which could add significant upside to our estimates and valuation. In Exhibit 6 we show a breakdown of our revenue forecasts by business area.

Although Creo’s products are unique in their use of bipolar 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 £5.2bn in FY22 sales (over half from its endoscopy division) and has a plethora of products serving the GI endoscopy space and electro surgical resection (ESD) procedures.

Even if Creo products are technically superior, requirements for training or optimal use and handling of the device may make convincing surgeons to switch brands or move to a new type of procedure more challenging. While some of these concerns have been mitigated by the improving sales traction and positive feedback on the Speedboat Inject device, future uptake will still be dependent on a range of factors such as the ability to attract more clinicians under its training programme and convert them into regular users, and expanding the usage of Creo devices into broader applications. We see these variables as having a significant bearing on future cash inflows for the company. However, we also believe that the recent licensing agreements for the Kamaptive technology provide another avenue for growth, partially de-risking the dependence on the core portfolio to drive growth. Effective integration of Creo’s technology/devices into the robotics systems of the signed partnerships, if successful, should provide significant growth opportunities for the company in near future.

Additionally, Creo will have to make additional efforts to target the US market, which has limited traction for ESD procedures because of generally longer procedure times and somewhat higher adverse events (although Creo’s products address both concerns), despite better outcomes for 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 increase could be achieved organically or through acquisition, as Creo has done with its Albyn Medical purchase with which it acquired a 70-person EU sales and marketing team.

Based on our cash burn projections, we anticipate the need for Creo to raise funds in Q223 and therefore see timely access and availability of funds as another key sensitivity, although Creo’s business model can be seen as relatively lower risk than that of pre-revenue stage medtech companies. However, particularly given the ongoing macroeconomic tightness, Creo may need to raise funds through equity issues, which increases dilution risk.

Reimbursement may also be an issue as surgical devices are typically bundled into a total payment for the entire procedure. Gaining reimbursement would likely make adoption easier as financial considerations often dominate in the US healthcare industry. However, according to the company, an ESD conducted using Creo products is still significantly less costly 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.

We value Creo Medical at £493m or 272p per basic share (£489m or 269p/share previously) using a risk-adjusted NPV model utilising a 12.5% discount rate. Following the increased commercial traction of Speedboat Inject and more detailed company disclosures on its sales trajectories and strategies, the recent robotics deals and improved revenue visibility, we have reassessed our assumptions and introduced further details to make our estimates more robust. As a result, we split our valuation into three major focus areas: Core technology, Consumables and Partnerships.

For the core portfolio, with the growing commercialisation and acceptance of Speedboat Inject, together with increased company disclosures and granularity on its commercial strategy and sales expectations, we have increased our probability of success to 100% (from 70% previously), although we now introduce a slower ramp-up than incorporated earlier in our model. We calculate that the core portfolio will contribute c £47m in sales by 2027, ramping up to £188m by 2032 (against management’s target of £200m). Overall, our valuation estimate from this segment stands at £379m (£432m previously) due to slower ramp-up in sales than previously anticipated. For the consumables business, our model now includes incremental revenue potential from bundling activities in the United States and Asia-Pacific, which raises the segment valuation to £74.4m (£43.1m previously). Importantly, we now include a contribution from partnerships in our valuation, although the current assessment is almost entirely driven by the deal with Intuitive Surgical (following additional details provided by management on the scope and framework of the arrangement), which we value at £33.7m (based on a 50% probability of success). We see upside potential from this category as the current deals develop and further deals are made. Based on our revised estimates, c 78% of our implied enterprise valuation for Creo is attributable to the Core technology (CROMA platform and Creo devices), 15% to Consumables (mainly Albyn Medical) and 7% to Partnerships (mainly Intuitive).

We have adjusted our estimates based on the changes in our assumptions and valuation methodology, as discussed above. Our FY23 revenue estimate goes down slightly to £31.0m versus £33.8m previously, as we incorporate a more gradual ramp-up in sales based on current trends and management feedback. For FY23, we cut our estimates for operating expenses which leads to an improvement in our estimated underlying EBITDA loss for the year (a loss of £15.8m versus £17.4m previously). The decline in operating expenses comes from the management expectation of lower costs in the near future given that the product portfolio is already developed, reducing the need for incremental R&D. Based on the slower ramp-up expected for Speedboat Inject (compared to our previous estimates), we now expect Creo to reach net profitability in H126 compared to FY25 previously. However, we expect underlying EBITDA, a key metric used by Creo, to turn positive in H225 (£1.1m in FY25).

Creo ended FY22 with gross cash of £13.1m (estimated net cash position of £6.3m excluding our forecast total debt of £6.8m), which, based on our projected burn rates, should be sufficient to fund operations into Q223. We anticipate the need to raise another £25m (FY23: £15m and FY24: £10m), which we model as illustrative debt, to support its growth plan.