Fundraising lays path to cash flow positivity
Creo Medical has conducted a placing, subscription, and open offer raising a total of £33.7mln gross. In February the company announced the issue of 13,136,800 new Ordinary shares through subscription, and 129,363,200 through a placing at £0.20/share. Fully realised, Creo raised a total of £28.5mln before expenses. Further, Creo offered 26,048,909 open offer shares at £0.20/share, raising £5.2mln. The new shares were expected to trade from 9 March.
As stated in our last note, we expected Creo would need around £15-£20mln in further funding during 2023 as it moves towards positive 2025 cash flows due to investment in doctor training and the year-end cash position of £13.1mln. The fundraising has exceeded those expectations with the open offer being oversubscribed by about 32%. This should allow Creo to continue the development of its minimally invasive surgery devices as well as make crucial investments in training medical professionals to use its devices, and in commercialising its core technology and consumables to markets in the US, Asia, and Europe.
Open Offer
Creo continues to expand its product offerings with the upcoming release of the SpydrBlade multi-purpose tool in 2023. a slimmer Speedboat version is now available opening up more surgical opportunities. Additionally, its advanced technologies are being licensed to robotic surgery companies, and the company's consumable sales in the US are expected to generate a strong revenue stream.
Creo aims to achieve a positive adjusted EBITDA by the end of FY25. To realise this, management expects higher margin core product sales to rise from about £1mln in FY22 to about £15mln in FY25, a Compound Annual Growth Rate (CAGR) of over 90%. Consumable sales could rise in the US to about £12mln; these should add to the steady growth expected in European Consumable sales from about £24.8mln in FY22 to about £30mln in FY25.
Future partnering revenues to 2025 could be in the £3-4mln range. After 2025, we expect robotic company partner sales to rise strongly; clinical validation might start in 2023. The better product mix could take the FY25 gross margin to nearly 60% (about 48% in H1FY22) implying about £35mln gross profit on our forecast revenues of over £60mln.
The indicative valuation has been revised. We assume a possible after-tax profit in the £45-50mln range in 2027 on sales of about £140mln, as indicated by management. We then apply a long-term growth rate of 5% and a discount rate of 25%. On this conservative basis, Creo could be worth about £100mln as of 1 January 2023. We note that if the projected growth rates are achieved and inflation falls, the potential value could be expected to be at least double this, possibly about £250mln.
Positive growth prospect
Year end Dec 31 · 2020 · 2021 · 2022 · 2023
Revenue (GBP-mln) · 9.0 · 25.2 · 27.1 · 36.5
Gross Profit (£mln) · 4 · 12 · 13 · 19
EBITDA (£M) · (18.7) · (19.0) · (22.8) · (10.5)
The total of 168,548,909 new ordinary shares issued is around 92.4% of the company's existing issued ordinary share capital. In total, there are 350,891,272 shares. The issue price of £0.20/share is a discount of approximately 27.9% to the closing mid-market price of £0.278/ordinary share on 15 February 2023, and a discount of about 5.7% to the 30-day volume weighted average price up to 15 February 2023 of £0.212. The £33.7mln raised (we estimate about £31.5mln net) will cover Creo's expenses and the working capital needs over 2024 and into H1 2025, when we estimate the company should be cash flow positive.
Shares in issue
The scenario envisages relatively flat distributor consumable sales through Creo's European operation of up to £30mln after £24.8mln estimated in FY22. Further US consumable sales add to these. Future licensing income is expected to be between £3mln and £4mln whilst the robotics partner companies integrate aspects of the Creo Kamaptive technology.
Chart 1 - Sales to 2025
Source: ProActive Investors, Creo Reports
The forecast FY25 adjusted EBITDA is projected by us to be about £1.0mln after a tax credit of £3mln. Although we do not make a formal forecast we expect Creo to become profitable after 2025, possibly in the range of £45-£50mln by FY27.
Creo, as of FY21, had unused losses of £46.4mln so it is not likely to pay tax before 2027.
Chart 2 - Margins, costs and net profits to 2025
Source: ProActive Investors, Creo reports
A key part of the transition to a positive adjusted EBITDA by 2025 is the curtailment of R&D, down to £6mln from £12.9mln in FY21, and control over admin and sales costs. A rapid 90%+ sales CAGR driven by higher margin Creo core products is also essential and depends on growing the user base by up to 170 surgeons per year.
We have applied an inflation-adjusted 25% discount rate and assumed a 5% long-term growth rate. Using the Gordon Growth Model, this indicates a possible £250mln value in 2027. Discounted to January 2023, this indicates a £100mln current value, about 28p/share. However, if inflation falls reducing the discount rate to, for example, 15%, the NPV could be about £250mln (71p/share) if sales and margins are as forecast.
Exhibit 1 - Creo product range
Source: Creo Medical
Revised financial forecasts FY22 and FY23
Given the more detailed forecast models from Creo and January trading update, we have revised our financial forecasts for 2022 and 2023. P&L Table1, Cash Flow Table 2 and Balance Sheet Table 3. These will be updated later with the FY22 results.
We formerly expected revenues of £28mln with an adjusted EBITDA loss of £21mln and year-end cash of £16mln. We now expect revenues of just over £27mln with an adjusted EBITDA loss of about £23mln; year-end cash was reported as £13.1mln.
In FY23 we now think revenues could improve significantly after training surgeons in the US and the opening of the Singapore support hub in 2022. We formerly expected revenues of £32mln with an adjusted EBITDA loss of £17.5mln. We now expect FY23 revenues of about £36mln and an adjusted EBITDA loss of £11.7mln.
Table 1 - Creo FY22 Profit and Loss
Source: ProActive estimates, Creo reports
Table 2 - Creo FY22 Cash Flow
Source: ProActive estimates, Creo reports
Table 3 - Creo FY22 Balance Sheet
Source: ProActive estimates, Creo reports