Creo Medical FY22 results and recent funding
Creo Medical has announced FY22 results and the final payments to acquire the last 5% of the Albyn distribution business. In March, Creo completed a successful placing, subscription, and open offer raising a total of £33.7mln gross (we estimate about £31.7mln net). Top-line revenues of £27.2mln were announced in January, so the full results confirm the end-of-year cash at £13.1mln and the loss at £25.4mln.
Our updated 2023 estimates are for revenues of about £36mln due to strong sales of Creo core products (up to 300%) and related consumables especially in the US market. With ongoing cost control and lower R&D, this is expected to give a loss of about £15mln and a cash outflow before funding of about £17mln. Year-end 2023 cash could therefore be about £27mln.
The fundraising allows 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. We also note the clinical trial of the FDA-approved MicroBlate product to treat solid cancers. This will add cost but is needed to develop the market for the innovative product.
Strong cash position
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, Creo's 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 £24.9mln 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 is now planned to 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 retained pending H1FY23 results which will enable better tracking of key US progress. We assume a possible 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 · 2021 · 2022 · 2023 · 2024
Revenue (GBP-mln) · 25.2 · 27.1 · 36.5 · 47.6
Gross Profit (£mln) · 12 · 13 · 19 · 26
EBITDA (£M) · (19.0) · (22.8) · (11.8) · (6.6)
The scenario, Chart 1, envisages relatively flat European distributor sales of up to £30mln with £24.8mln achieved 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
In FY23, we are hoping for nearly 300% growth in Creo's core products like Speedboat. This improves margins.
The forecast FY25 adjusted EBITDA, Chart 2, 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, is not likely to pay tax before 2027.
Chart 2 - Positive adj-EBTDA by 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 is 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.
Revised FY23 and new FY24 financial forecasts
Given the more detailed forecast models from Creo and FY22 results, we have revised our financial forecasts for 2023 and provided a new forecast for FY24. P&L Table1, Cash Flow Table 2 and Balance Sheet Table 3.
In FY23 we continue to think revenues could improve significantly after training surgeons in the US and the opening of the Singapore support hub in 2022. We expect FY23 revenues of about £36mln and an adjusted EBITDA loss of £11.7mln. Year-end FY23 cash could be about £27mln although this is obviously affected by clinical costs and working capital movement.
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