Creo Medical — Setting the stage for pivotal growth

FY23 saw Creo make significant inroads in expanding the footprint of its core technology franchise. The Speedboat user base increased to 175 users by end-FY23, a c 120% increase from 80 users at the end of FY22 and a c 52% growth over H123 of 115 users. This figure has grown further to 195 users by end-Q124, as per updated data shared by management (Exhibit 1). This likely includes a significant contribution from Speedboat UltraSlim, which launched in December 2023 and has received a positive reception from the market, to our knowledge. The UltraSlim version is Creo’s slimmest Speedboat device to date, after Speedboat Inject and Speedboat Slim, and is designed to be compatible with all endoscopes with a 2.8mm or larger working channel, which accounts for most GI endoscopic procedures undertaken currently. In November 2023, Creo received 510(k) clearance from the FDA for its Speedboat UltraSlim device, following an accelerated clearance pathway in Europe, roughly 18 months earlier than anticipated. First commercial sales were booked in Europe in December 2023, swiftly followed by the US, Latin America and the Asia-Pacific region. Creo has indicated that the Q124 core revenue has increased c 14% over the FY23 quarterly average (c £0.7m in Q124, per our calculations) and Creo expects it to solidify further in Q2, supported by traction of the UltraSlim device.

We also expect increased impetus to come from Speedboat Inject’s CE mark extension for upper GI indications (such as swallowing disorders, oesophageal and stomach cancers) in Europe in June 2023, which potentially doubles the addressable market in Europe. Management estimates upper GI tract procedures to account for over 40% of Creo procedures in the US and Asia-Pacific, which we expect should translate to an increased user base in Europe the near to medium term. With the current pipeline of more than 160 potential users currently undergoing training and mentoring (Exhibit 2), we expect the user base to increase incrementally in the coming years.

Speedboat Inject’s value proposition lies in its ability to undertake endoscopic GI procedures (dissection, resection and coagulation in precancerous and cancerous lesions) in outpatient setting, with the promise to deliver improved clinical outcomes for patients but also cost savings for the healthcare system. The company recently reported real-world healthcare economic data from a procurement analysis for Speedboat Inject-powered submucosal dissection (SSD) procedures by the NHS supply chain. The results were based on 130 SSD procedures related to bowel cancer and therapeutic endoscopy undertaken at East Kent Hospitals University NHS Foundation Trust. When compared with other surgical alternatives, procedures using Speedboat Inject resulted in cost saving of c £5,000 per procedure for the NHS, as well as materially lower hospitalisation periods, an eightfold reduction from 8.4 days to 1.1 days. Key highlights include a 99% reduction in critical care costs, a 91% reduction in accommodation costs (from £3.4k to £0.3k) and a 59% reduction in operating theatre costs (from £8.8k to £3.6k).

We believe this data supports the economic merits of using Speedboat in hospital procedures (driving lower costs and shorter waitlists for procedures), while also benefiting patients with significantly shorter hospitalisation and recovery periods. Management has indicated that costs associated with installing the CROMA box of c £20,000, the power source behind the device, can be recouped in as little as four to five procedures (the cost of the single-use Speedboat device is c £800–1,000). We anticipate this real-world validation will support positive guidance from the National Institute for Health and Care Excellence (NICE), which we expect in the near term, and increased adoption by the NHS.

While Speedboat has been the star of Creo’s core technology franchise, the company has made up ground with its other electrosurgical devices as well, particularly with MicroBlate, which is used in ablation/coagulation of soft tissue, and with SpydrBlade, which is used in resection and coagulation of highly perfused tissue. Both are approaching commercial launch by late 2024 (Exhibit 3). The company noted that the combined potential of these target markets for electrosurgical devices is upwards of US$5bn (Exhibit 4).

Creo’s MicroBlate device is focused on soft-tissue microwave ablation of nodules and tumours in lung, pancreatic, liver, kidney and bladder cancers and is available in two variants: MicroBlate Fine (FDA 510(k) clearance in November 2020) and MicroBlate Flex (FDA clearance in January 2021). Creo has thus far been evaluating these devices under clinical studies and management plans a commercial launch by late 2024 or in early 2025. MicroBlate Flex is being studied as part of a multicentre observational study (announced in April 2023) to assess the safety and efficacy of the device in bronchoscopic microwave ablation of peripheral lung nodules. This study is a post-market, prospective, single-arm, multicentre, non-randomised, observational study, with plans to enrol up to 32 patients across sites in Europe and potentially the US. The first-in-man procedure was conducted in March 2023 and the first use in a robotics assisted surgery (using Intuitive’s Ion robotics system) was noted in November 2023. Management has indicated that, based on interim results from the clinical studies, commercial sales can be launched as early as 2024.

SpydrBlade, which offers laparoscopic dissection and coagulation functionality endoscopically, is prepped for launch in 2024 via Creo’s core sales channels. We believe the same product is also being developed in conjunction with CMR’s Versius surgical robotics systems under a non-exclusive agreement. We also believe that Creo is in talks with Intuitive to develop SpydrBlade to function with Intuitive’s da Vinci robotics system, which could be a considerable market opportunity for Creo, should talks progress.

Creo’s consumables business has grown inorganically through the acquisition of Europe-focused Albyn Medical in July 2020 and continues to drive the company’s topline, with revenues of £26.8m in FY23 (roughly 87% of group revenue), an 8% y-o-y growth over FY22. Although a mature business, we believe the FY23 uptick stems from the commencement of US commercial sales in 2023. Given the size of the US market, we expect consumables sales momentum to continue in the coming years, with further support from planned launches in the Asia-Pacific region and incremental other markets. Management has indicated that over 80% of the revenue from consumables is now coming from products shipped under the Creo brand, which we believe should improve market visibility of the company’s products and support market penetration.

Licensing opportunities continues to be a key growth pillar for Creo and, although there were no new deals announced in 2023, the company began 2024 by signing a collaborative agreement with the Khalifa University of Science and Technology in Abu Dhabi to expand the applicability of its proprietary Kamaptive technology and CROMA platform. In 2022 Creo signed research and commercial partnering agreements with leading robotics players Intuitive Surgical (a global technology leader in robotics surgeries with an installed base of over 9,000 da Vinci and Ion robots across hospitals worldwide) and CMR Surgical, for its surgical robotics system Versius so it can develop compatibility and customise the usage of Creo’s electrosurgical devices with the robots.

As highlighted above, Creo marked a milestone in the applicability of its portfolio with the first use of its MicroBlate Flex device in a robotic-guided lung tissue ablation procedure using Intuitive’s Ion bronchoscopy-focused robotics platform. We note this was part of an ongoing 32-patient clinical study and MicroBlate Flex was used to successfully ablate a 27mm cancerous nodule from a patient’s lung. We expect further procedures to be performed during the study, which, if positive, could translate to a sizeable licencing agreement with Intuitive. While we were previously expecting a definitive commercial agreement and launch in 2024, we note a slight delay in trials due to upgrades in the Intuitive’s robotics system and now expect it to occur in 2025. At the end of 2023, the Ion systems had an installed base of 534 robots, with the majority in the US.

There are fewer available details on Creo’s deal with CMR (non-exclusive) but we believe it relates to Creo’s SpydrBlade device to be used with CMR’s portable Versius robotics system. The company has reported the receipt of a significant, albeit undisclosed, non-cash milestone as part of the deal. We await more updates from management on the progress with CMR, but note that Creo is also in discussions with Intuitive to potential collaborate on a SpydrBlade-da Vinci partnership. If successful, this would be a material win for Creo, given that da Vinci is the largest robotics system globally, with an installed base of 8,606 systems at the end of 2023 (Intuitive holds an estimated 57% global market share in robotic surgical systems).

In FY23, Creo reported total revenue of £30.8m (lower than our estimate of £32.8m), representing 13.2% y-o-y growth from £27.2m in FY22. Revenue from core technology products (Speedboat and CROMA), although still fairly small, increased two-and-a-half times year-on-year to £2.3m in FY23 (from £0.9m in FY22), supported by a late push from initial commercial sales of Creo’s slimmest electrosurgical device, Speedboat UltraSlim, following FDA clearance in November 2023. Revenue (licensing income/milestone payments) from the Kamaptive agreements grew by 21.4% y-o-y to £1.7m (from £1.4m in FY22), indicating continued efforts to develop its Kamaptive licensing programme. Revenue from the mature consumables business, which accounts for around 87% of Creo’s total revenues, was also up by 7.6% y-o-y to £26.8m, supported by expansion into the US market. Management has reported that in Q124, revenue from the core technology products increased by 14% over the FY23 quarterly average (c £0.58m). Consumables sales in Q124 were adversely affected by an early Easter (31 March in 2024 vs 9 April in 2023) although management expects to stay on track with its internal targets for H124. Geographically, management has indicated that Europe and the US account for 40–45% of sales each, with the remaining attributed to other international markets.

Gross margin for the period improved from 48.5% in FY22 to 49.6% in FY23 driven by strong margins in Creo’s core products and Kamaptive’s revenues, along with a stable margin from the consumables business. With a growing contribution from core products in future years, we expect gross margins to continue to improve.

During FY23, total operating expenses decreased to £40.1m from £43.8m in FY22, mainly reflecting the introduction of cost-control measures with reduced R&D spend, lower employee headcount and investment in operational capacity. R&D expenses decreased by 12.5% to £11.8m (£13.5m in FY22) primarily due to the completion of development and regulatory activities related to Creo’s core products. Management has indicated that close to 50% of the R&D expenses in FY23 (c £5–6m) were attributed to development activities under the R&D collaborations with Intuitive and CMR. As these deals progress, the responsibility for funding further development work will shift to the partners, freeing up capital for Creo. In FY23, Creo was reimbursed £2.8m, 20.7% of FY22 R&D expenditure, under the tax credit scheme. SG&A expenses were down by 5.7% to £28.7m, from £30.4m in FY22, and we believe this to have partially been driven by a lower headcount (staff costs reduced to £22.7m in FY23 from £23.1m in the previous year). Benefiting from the higher revenue, an improved gross margin and lower operating expenses, the FY23 operating loss improved to £24.8m in FY23, from £30.8m in FY22. This also translated to an improved operating cash burn position (£21.6m vs £25.0m in FY22).

Based on Creo’s FY23 results and operational visibility, we keep our long-term assumptions unchanged but make minor adjustments to our FY24 estimates. We also introduce FY25 estimates with the model roll-forward. We reduce our FY24 revenue estimates slightly to £40.1m, from £40.8m previously, to account for the timeline extension (from 2024 to 2025) we now expect for commercial launch under the Intuitive collaboration; we were previously estimating £1m from commercial partnership sales in FY24. The decline has been offset by an upgrade in consumables revenues to reflect the FY23 trend. We estimate FY25 revenues to be £54.1m (more conservative than management’s target of over £60m), with £17m coming from core products (c 30% of total revenue), £32.2m from consumables and £4.9m from licensing partnerships (Exhibit 5).

We also make certain adjustments to our FY24 operating expense estimates. While our projections for R&D expenses remain largely unchanged (£9.4m vs £9.2m previously), we increase our SG&A estimate to £30.1m, from £26.8m previously, to account for higher expenses related to the marketing activities for Speedboat UltraSlim and the launch of SpydrBlade and MicroBlate expected in 2024. For FY25 we estimate R&D and SG&A expenses of £7.6m and £31.6m, respectively. Overall, we forecast operating losses of £16.3m and £4.7m in FY24 and FY25, respectively. We estimate Creo will turn cash flow positive in H126 (vs management’s target of FY25).

We continue to value Creo Medical using a risk-adjusted NPV model, valuing all three business areas (core technology, consumables and licensing partnerships) separately. Note that our valuation for the core technology segment includes projections only for the Speedboat franchise presently. We will revise our estimates to incorporate the other products following commercial launch and/or as more information becomes available. This will likely add upside to our valuation.

While we made slight changes to our near-term forecasts, we have kept our long-term assumptions and expectations unchanged. Our valuation for Creo decreases marginally to £506.1m or 140p per share, from £511.9m or 142p per share, with the benefits from rolling the model forward being offset by the lower net cash and cash equivalent balance of £10.2m (£17.3m at end-H123). The net cash balance includes gross cash at hand of £3m, term deposits of £15.5m and interest-bearing liabilities of £8.3m. Exhibit 6 presents the breakdown of our valuation.

Creo ended FY23 with a gross cash balance of £18.5m and this figure stood at £17.4m at the end of Q124. Note that this cash balance was supported by a £33.7m cash injection (gross proceeds) in March 2023 via two rounds of equity raises in March 2023. Based on our topline projections and cash burn estimates, we see Creo sufficiently funded to profitability in H126.