Upper GI opportunities opened up
Creo Medical announced in June important upper gastrointestinal (GI) procedures EU clearance for its flagship product Speedboat Inject — its dual-energy endoscopy tool which uses radiofrequency and microwave energy for integrated cutting and coagulation functionality. Before, Speedboat was only cleared for use in the lower GI tract in Europe. Consequently, this clearance opens up new surgical opportunities in upper tract procedures. So far, Speedboat has been used in over 1,500 lower GI tract procedures. Creo now expects to see rapid further uptake of its innovative surgical device.
Creo announced at the end of June the first commercial European use of Speedboat Inject for an upper tract procedure. Dr Adolfo Parra-Blanco of Nottingham University Hospital NHS Trust used Creo's device to remove a sizeable cancerous stomach lesion (around 7cm x 5cm) from a patient in less than two hours. Given this rapid first procedural use and success after its CE clearance, Creo plans to conduct more training for upper GI specialists over the coming months.
The expanded US and EU further clearances for its flagship products coupled with the company's £33.7mln fundraising in April will allow Creo to continue the development of its minimally invasive surgery devices. Creo can also make crucial marketing investments in training surgeons to use its devices (now covering the entire GI tract), and in commercialising its core technology and consumables to markets in the US, Asia, and Europe.
Expanded use for Speedboat device
Creo continues to expand its product offerings with the upcoming release of the SpydrBlade multi-purpose tool in 2023 (pending FDA approval). A slimmer Speedboat version is now available opening up more surgical opportunities. Additionally, Creo's advanced technologies are licensed to robotic surgery companies, and the company's consumable sales in the US are expected to generate a strong revenue stream.
Management aims to achieve a positive adjusted EBITDA by the end of FY25. Sales of Speedboat and the CROMA electrosurgical platform increased threefold in FY22 to around £1mln. Higher margins on core products combined with new clearances for Speedboat and new users flowing from Creo's ongoing training programmes could allow the company to grow its proprietary, higher-margin sales to around £15mln in FY25 at 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. 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.
Future growth
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)
CE clearance for Speedboat use in the upper GI tract according to Medical Device Regulation (MDR) in Europe marks yet another milestone for a device which is already approved for use in the full GI tract in the US, Asia, and other regions.
Figure 1 - Speedboat Inject stages
Source: Creomedical.com
Management state that upper GI tract procedures make up around 40% of the total procedures conducted in FDA-approved regions. This indicates that there could be a significant increase in procedures and therefore sales in Europe of Speedboat and its associated consumables.
Speedboat Inject is used for a wide range of procedures from submucosal dissections — endoscopic resections of lesions in GI tract — to other non-invasive procedures such as oesophagus per-oral endoscopic myotomy for swallowing disorders. For submucosal dissection alone, the company estimates Speedboat-assisted treatments could save the NHS an estimated £10,000 per procedure.
Our 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.
Growth forecasts
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
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 to cash flows to June 2023 (from January). We now assume a 7.5% long-term growth rate as product opportunities expand. Using the Gordon Growth Model, this indicates a possible £290mln value in 2027. Discounted to June 2023 and including intermediate cash flows, this indicates about a £130mln current value, about 37p/share. We expect to revise growth prospects as the business gains more product approvals and increases its user base. A future reduction in inflation could also give an uprated value assessment.
Uprated value to £130mln (37p/share)
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.
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%. We note that if the projected growth rates are achieved and inflation falls, the potential value could be expected to be about £250mln
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