A new paradigm in flexible endoscopic surgery
Creo Medical Group PLC (AIM:CREO) develops and sells surgical devices for minimally invasive endoscopic surgery, mainly to remove suspected early-stage bowel cancers and also to expand cases of a narrowed oesophagus. These devices are single-use and fit onto standard flexible endoscopes. Robotic use is being added. Around 50 top-tier medical centres and 100 key opinion leaders (KOLs) around the world use Creo's products.
Its flagship multifunctional product, Speedboat Inject (Speedboat), uses dual-energy: electrical bipolar radio frequency energy for precise cutting plus super high-frequency microwave energy for controlled coagulation (to stop bleeds). It also uses an integrated needle to lift the tumour before cutting. A unique ceramic hull allows Speedboat to cut close to underlying tissues. These features boost tumour resection success rates.
The core unique selling point is that interventional endoscopists can carry out entire resections faster with one Speedboat. Competing technologies require multiple tools and exchanges which increases time and cost. Speedboat Inject and the advanced dual-energy CROMA Platform are patented, US Food and Drug Administration (FDA) approved and CE marked with a growing body of evidence (over 1000 clinical procedures) for validation.
Creo now has a major collaboration with Intuitive, the US$79bln market cap market leader in sophisticated robotic-assisted surgery. Longer-term, 3-5 years, we expected significant revenues.
Introduction
Creo sells directly to hospitals in North America, the UK and Europe through expert sales and clinical teams and training programmes. It now has a regional hub in Singapore for Southeast Asia. In 2020, Creo strengthened its European sales network by acquiring Albyn Medical. Creo also developed its US sales operation.
Albyn accounted for the bulk of 2021 sales and gross profit (£25.2mln and £11.6mln). Sales generated by Speedboat and other devices rose from £31k in 2020 to £312K in 2021. Management expect Albyn sales to increase by £1mln in 2022 and Speedboat sales to double quarter-on-quarter (up to £1mln) as core accounts increase from 30 to 80. Creo estimates breakeven at c.500 accounts, implying around £47mln of annual sales from 2025 onwards.
Net cash on 31 December 2021 was £44mln following a share placing in 2021 (£36.4mln gross at 182.5p/share). The operating cash burn was £26mln before investments of £7.8mln giving a £33.8mln outflow before net funding of £32mln.
A prospective price/sales ratio of 6.4x reflects market expectations of high growth given the benefits of dual-energy technology and the lack of competing products. There are timing risks from bureaucratic healthcare payment systems and the need to train more interventional endoscopists. As sales momentum builds, we expect Creo to establish a dominant market position.
Building momentum
Year end Dec 31 · 2020 · 2021 · 2022
Revenue (GBP-mln) · 9.0 · 25.2 · 27.3
Gross Profit (£mln) · 4.0 · 11.6 · 12.8
EBIT £ min · 23.5 · 29.9 · 29.7
Speedboat is used to perform a procedure known as endoscopic submucosal dissection (ESD). Because of the way Speedboat improves on traditional ESD, Creo and the NHS refer to it as Speedboat submucosal dissection (SSD). As a general guide, Creo expects to sell two Speedboat devices per account per week at a UK list price of about £900. SSD is used in two main procedures:
- for the removal of complex but early-stage colon cancers that have not spread beyond the colon wall; and,
- for oesophagus dilation, which is surgery that opens up a constricted oesophagus, a condition known as achalasia.
'Complex' colorectal tumours are those longer than 20mm. The prevailing method to remove these lesions in the west is endoscopic mucosal resection (EMR), which is a simpler, though less effective, technique than ESD. The more sophisticated ESD is seldom used in the west, an imbalance Creo aims to rectify with SSD — an 'optimised' version.
This is important because ESD/SSD can often replace colectomy, which is a highly invasive open surgery that involves removing a whole part of the bowel to excise a tumour. This can require a colostomy (stroma) bag for up to six months. Avoiding this by using SSD is obviously better for the patient and could save the NHS £10,000 per case, according to Creo. A National Institute for Health and Care Excellence (NICE) health technology assessment is planned for 2022 and is crucial to widespread UK Speedboat adoption. Figure 1 shows the innovative Speedboat device.
Sophisticated endoscopic therapy
Figure 1 - Speedboat Inject
Source: Creo
The 'retractable injection needle' injects saline to loosen and lift tissue layers. 'Bipolar electrodes' channel localised electrical energy to enhance cutting precision. 'Microwave coagulation' leverages the 'non-penetrative' qualities of microwave energy to provide operators with more time and control when sealing bleeds. The 'protective hull' allows the device to tunnel between mucosal layers and remove the suspected lesion from below without damaging the muscle layer. All these functionalities in one device enhance operational agility.
One newer device of particular interest is SpydrBlade (Figure 2). This is a scissor-shaped device that similarly harnesses bipolar and microwave energy. It is useful for cutting highly vascularised tissue. It has been described as “the holy grail of interventional endoscopy” by Rob Hawes MD. It is CE marked but not yet FDA approved, although management has indicated that this could happen near-term.
Figure 2 - SpydrBlade
Source: Creo
Market opportunity
The market for endoscopic surgical devices is driven by strong bowel cancer screening trends and a growing awareness of the benefits and availability of minimally invasive therapy.
On average 28mln colonoscopies are performed in the US and Europe each year, of which 5.5mln identify a polyp (lesion). Roughly 15% of these (825,000) are suited to ESD, which gives a maximum annual potential revenue opportunity of £745mln for Speedboat (Figure 3); however, ESD/SSD may be preferentially used by clinicians for more complex lesions and early-stage cancers; there may be up to 266,000 of these giving US$240mln in potential revenues.
Figure 3 - EU and US Speedboat core market
Source: Creo
What is driving growth in colonoscopy uptake?
- Strong evidence of its effectiveness at detecting early-stage colorectal cancers. Colorectal cancer incidence has been declining by roughly 2% a year in the US while participation in the recommended once-every-ten-years colonoscopy check-up for 50 to 75-year-olds has risen from 51.7% (2008) to c.70% now (Chen, C. 2018 and Djenaba, J. 2020). The UK has registered similar patterns regarding participation (58% in 2017 and 71% now) and incidence (-6% over the last decade).
- Ageing populations. This demographic has more intestinal problems (they are also more suited to the type of non-invasive therapy Creo offers).
- The recent rise in bowel cancer incidence amongst younger generations. This has prompted authorities to lower recommended starting age for routine screenings.
EMR's issue is that as the lesion's size increases (over 15mm) it struggles to excise all the diseased tissue. This impairs tumour examination, increases tumour recurrence and makes follow-up resections more likely. One study showed that ESD achieves recurrence rates of 0.7% and en-bloc resection rates of 89.9%, which is far better than 12.9% and 34.9% for EMR (Arezzo et al.(2016)). Given ESD/SSD extra sophistication it can also remove those larger, more malignant tumours that would traditionally be resected via open surgery (colectomy). Speedboat has already removed lesions greater than 10cm, which is considered highly complex and targets colectomy replacement for half its procedures.
Despite the success of traditional ESD in Asia using single-function devices from Olympus and Pentax, adoption has lagged in the west due to the procedure's complexity and the lack of expert knowledge. Creo's multifunctional Speedboat device addresses these adoption issues by simplifying the ESD procedure, and it has a well-regarded training programme alongside to speed adoption. Its innovations are underpinned by a unique application of Advanced Energy.
Figure 4 - Electrosurgery
Source: Creo Medical Website
Moving away from mono polar energy
Creo has a patent on the single-port delivery of advanced bipolar radio frequency and super high frequency (5.8Ghz) microwave energy. The predominant energy source in surgical endoscopy is monopolar energy.
In monopolar action, Figure 4, electrical currents pass all the way through the body to grounding plates under the skin. This means more current needs to be used and this can cause localised charring. In the bipolar format, a lower electrical current is localised to the gap between the two 'forcep-shaped' electrodes.
Creo leverages bipolar technology to bring superior cutting precision to the Speedboat device and to reduce the risk of collateral thermal damage (remote tissue burn) associated with monopolar activity. Endoscopic procedures tend to be more intricate, and so suit bipolar action.
Competing, older ESD cutting devices all use monopolar energy (Olympus’s DualKnife/Hook Knife, Pentax’s Splash-M Knife, Erbe’s Hybrid Knife and FujiFilm’s FlushKnife/ Clutch Cutter). Only one product, which is a coagulation instrument, uses bipolar energy: Boston Scientific (NYSE:BSX)’s bipolar GoldProbe catheter.
Microwave coagulation
5.8GHz microwave energy as used by Speedboat generates heat from the friction of 'excited' water molecules. Compared to electrical heating, microwave energy produces a lower temperature haemostatic effect, which offers operators more time (6-10 seconds, as opposed to 1-2, using bipolar/monopolar) to seal bleeds evenly and safely. The rapid heat intensification using monopolar energy, as used by other devices, increases the risk of collateral thermal damage to healthy surrounding tissues.
The seamless delivery of bipolar and microwave energy by Speedboat increases control and gives operators the confidence to descend deep into the sensitive and highly-vascularised submucosal layer of the colon wall and secure those resection outcomes associated with ESD. SSD dissects even deeper than traditional ESD thanks to Speedboat's insulated hull, which protects the muscle layer underneath and allows the device to scoop up tissue from below — hence the name 'Speedboat'.
See Tsiamoulos (2019) for a short description and action video.
System architecture
- CROMA (Figure 5): Creo's plug-and-play platform, which controls the energy flow.
- Kamaptive Technology: Creo's proprietary, full-spectrum energy integrator, which, through CROMA, delivers bipolar radio frequency and microwave energy to surgical tools. The energy type is selected by use of a simple foot pedal.
- Device set (Figure 6): six endoscopic tools performing dissections, resections, haemostasis and ablation for gastrointestinal (GI) conditions.
Figure 5 - CROMA Energy Platform
Source: Creo Medical
Figure 6 - Devices
Source: Creo Medical
Table 1 shows Creo's different devices and the territories where each is approved.
Table 1 - Product table
Source: Proactive Research
BPRF — Bipolar radio frequency; MW — Microwave energy; NOTES — Natural orifice transluminal endoscopic surgery
Business model
Razor-blade model
Creo plans to sell CROMA 'power' boxes at a discount in order to build out an installed base from which recurrent and high-value single-use device sales can flow. Management predicts that two single-use devices will be sold per account per week at a margin of >70%. 500 accounts (roughly 250 (US), 150 (EU) and 100 (Asia)) is the estimated breakeven point, showing this business model's potential to create value quickly. Once established, patented surgical tools have a natural moat given that doctors traditionally wed themselves to one technology. The convenience of saline injection, cutting and coagulation all in one device means that surgeons will probably not want to return to the tedious process of swapping devices mid-operation.
Royalties
The company has made progress in a series of licensing talks for its SlypSeal and MicroBlate technologies. We think licensing will be an important factor to consider given general open innovation trends across healthcare, CROMA's innovation-friendly plug-and-play architecture, and the widespread surgical application of advanced energy, notably in robotics and laparoscopy (keyhole surgery through an abdominal incision).
Intuitive deal
On May 23, Creo announced a multi-year collaboration agreement with Intuitive, a company whose da Vinci system (Figure 7) has dominated the robotically-assisted surgery market for two decades. Intuitive has a capitalisation of US$78bn and reported 2021 sales of US$5.7bn. At the end of 2021, there were 6,730 da Vinci systems installed worldwide. Intuitive already has capabilities in advanced bipolar coagulation instruments; however, Intuitive does not have any dual power devices or supplies, so the partnership with Creo opens a further range of sophisticated tools once Speedboat and other devices are adapted to the da Vinci robotic system. This will enable Intuitive to explore the added precision of bipolar cutting and microwave coagulation. Like Creo, Intuitive has a big focus on minimally invasive colorectal surgery. Instruments are manipulated by the arms of the robot (Figure 8) directed remotely by the surgeon.
Figure 7 - Da Vinci
Source: Intuitive Surgical (NASDAQ:ISRG)
Figure 8 - Da Vinci in action
Source: ResearchGate
Sales strategy
Creo has a direct sales team consisting of 20 people in the US and 40 through Albyn in the UK, Germany and France. There are about 10 people covering Asian markets. The sales teams collaborate with their local networks of key opinion leaders (KOLs) who, as well as identifying unmet surgical needs and assisting with product design, help Creo set up Speedboat training programmes in leading healthcare centres. Gastroenterologists come to these programmes, learn the latest SSD techniques and then use them in their hospitals. It typically takes 25 procedures to get comfortable with Speedboat.
In the US, Creo aims to convert around 2,000 EMR and ESD trained surgeons to SSD. The company has identified 325-350 key centres, of which c.25 are current users. The sales target is to expand to 80-90 centres. Beyond this, there are about 2,000 community hospitals offering long-term growth potential.
An important future factor will be gaining a CPT code for ESD and SSD procedures. This is not a problem for the large specialist centres; however, for broader clinical use, a CPT coding will speed reimbursement so is seen by us as a key step in developing the Speedboat market. Gaining a CPT code is a collaborative effort between medical professional bodies and device manufacturers.
Treatment of colorectal pre-cancerous and localised cancerous lesions
Western gastroenterologists commonly use the costly EMR-colectomy methodology. That is, small lesions are removed endoscopically using a wire loop (EMR) and larger lesions are removed surgically by taking out a section of the bowel which requires a short-term colostomy or stoma bag (to collect the bowel contents) to be fitted while the rejoined bowel heals. This is expensive and unpleasant.
Removing a tumour ‘en-bloc’ (whole) is considered a core oncological principle as it markedly reduces the recurrence rate. By cutting deeper into the tissue, ESD/SSD is better at securing a margin of healthy tissue around the lesion. This facilitates more accurate histological staging and improves cancer management. The simpler old snaring technique of EMR makes full tumour removal problematic, especially for lesions greater than 15mm, and results in piecemeal resections. Cancer recurrence is common and invasive surgery is often required to mop up the ‘residue’.
The ESD method, certainly outside Japan where it was developed, has seen slow uptake due to poor device innovation, insufficient local ESD training and the time and skill needed to master the technique. Nonetheless, the medical consensus appears to be that ESD’s better resection rates, of which SSD is an improved version, outweigh the added skill requirements and any additional risks of the procedure. However, barriers to its use remain.
SSD, through the dual-delivery of bipolar radio frequency and microwave energy and with Creo's comprehensive training programmes, updates the old ESD paradigm. It can therefore grow to dominate more of the middle ground between sub-optimal EMR and highly invasive colectomy. Wider use of SSD would mean fewer follow-up resections, fewer stoma (colostomy) bags, faster patient recovery and cost savings. Creo estimates that Speedboat has already saved the NHS £2mln (Source: Final results, 2021).
Colectomy is used for those lesions considered ‘unresectable’. This is the removal of an entire section of the colon wall in which the tumour is embedded. Though it surpasses ESD in terms of resection; operational risk is greater, hospital stays are longer and patients often require stoma bags. Given this burden, colectomy should only be performed when absolutely necessary and studies are finding that advanced endoscopic techniques like SSD are achieving resection outcomes that in the most severe cases still warrant colon preservation. Creo notes that SSD can replace open surgery in the treatment of localised colorectal cancer; that which has not yet spread beyond the colon wall to nearby lymph nodes, c.39% of the total (Seigel, Cancer Statistics (2021)). Speedboat has already been used to remove tumours up to 14cm, which is highly 'complex'.
Speedboat's high surgical impact with a US$240mln potential US market
Complex growths (over 20mm as defined by the Japanese guidelines) account for 10-15% of total cases. With 1.4m polyps found in the US every year, this equates to 140,000 – 210,00 potential SSD indications per annum. This is a potential market of US$126-US$189mln. These lesions are preferentially removed by endoscopy and Speedboat offers improved functionality.
In addition, localised colorectal cancer afflicts about 56,500 people in the US every year giving a further US$51mln market potential; US$240mln in total. Although we recognise that not all localised colorectal cancers will be removed endoscopically, we feel that given Speedboat's improvements on existing ESD tools, it is possible that it will significantly increase its share of resections currently done via EMR, especially those in the 10-20mm range.
POEM - Speedboat use in the oesophagus
Speedboat is also being used in the upper gastrointestinal (GI) tract for achalasia via an endoscopic procedure known as Peroral endoscopic myotomy (POEM). In achalasia, nerve damage to the muscles causes the oesophagus to contract and narrow. The root cause is unknown. The POEM procedure cuts the muscles (myotomy) in the oesophagus to help the patient swallow and take food. Use should increase as smaller Speedboat versions come to market.
This is an important secondary market application for Speedboat. Evidence indicates that POEM myotomy is more effective than surgical myotomy or the alternative use of a ballon to forcefully expand the oesophagus, the two common techniques. However, POEM is still less known and used. There can also be issues with gastric reflux after POEM. Surgical myotomy has an 85% success rate after 10 years.
MicroBlate platform
MicroBlate technology uses microwave energy to ablate tumours. Ablation is the destruction of cancer cells through controlled heating. Ablation is used for treating various cancers (mainly kidney, liver and lungs) where surgery is not an option and it either complements or replaces chemotherapy. Traditional ablation therapy is carried out through laparoscopic (key-hole) surgery, usually using radio frequency energy. Recent research is indicating that ablation using microwave energy can lead to more uniform necrosis and lower the heat sink effect (Vogl et al (2017)). This means that ablation can be more precise, quicker, and safer. Furthermore, MicroBlate delivers microwave therapy endoscopically (i.e. without abdominal incisions), which is another major innovation that could significantly improve the tool-set of an oncologist keen to administer effective yet minimally invasive cancer treatment.
In June 2021, Creo reported on an interesting single-patient case study from 2020 using MicroBlate Fine (Figure 9). The device was used to ablate an unresectable neuroendocrine pancreatic tumour in a patient expected to live just three months. The patient is still alive today, the tumour has not returned and the tissue around the site is homogenous. The surgeon, Dr Robles-Medranda, praised the ‘precision’ microwave energy gives when ablating a ‘difficult’ lesion using ultrasound guidance. It is worth noting, however, that 'neuroendocrine' tumours are relatively rare, making up just 2% of pancreatic cancers (1,200 of about 61,000 pancreatic cancers per year in the US (SEER)).
Existing treatments for neuroendocrine tumours include Welireg (belzutifan, Merck), which costs US$26,400 a month and was approved in 2021. Lynparza (olaparib, AstraZeneca) is another, more general pancreatic cancer, and it costs US$13,886 per month. On this basis, the potential upside for MicroBlate is large; however, more significant trials and survival outcomes are needed to validate the approach.
Minimally invasive ablation therapy could be applied to lung cancer, a prevalent and lethal cancer, where existing treatment (radiotherapy/percutaneous ablation) is invasive, costly and largely ineffective. Against a backdrop of expanding pulmonary screenings and with a more favourable safety profile, bronchoscopic ablation has been identified by Creo as a possible breakthrough therapy (Figure 10). To that end, Creo has leveraged MicroBlate technology (Figure 11) to develop a bronchoscopic tool to navigate narrow airways and use precision microwaves to treat pre-cancerous or ‘inoperable’ lung tumours more safely than percutaneous (skin incisions) ablation. This could be about an US$11mln market.
Figure 9 - MicroBlate to treat cancer
Source: Creo
Figure 10 - Bronchoscopy
Source: MedlinePlus
Figure 11 - MicroBlate
Source: Creo
Financials
The company reported revenue of £25.2mln for 2021 (year-end 31 Dec), Table 2. Albyn Medical contributed £24.8mln to this revenue figure with £312k of Speedboat and other device sales and a £50k research grant. Albyn was 90% acquired in July of the 2020 fiscal year (FY20). Higher expenses of £41.5mln (vs £27.6mln) reflect the consolidation of Albyn's costs, an increase in staff numbers, and increased investment into Creo's sales infrastructure, especially in the crucial US market. Research & development (R&D) costs were £12.9mln, included in admin, up from £10.2mln in 2020.
Our 2022 revenue expectation of £27.3mln is based on Creo growing the number of 'power accounts' from 30 to 80. This should generate an extra £1mln worth of Speedboat and CROMA revenue. We also expect growth of about £1mln in Albyn revenues and some minor initial Intuitive payments. We expect gross margins to be stable over 2022 but then trend higher from 2023 and beyond as higher-margin Speedboat and other devices become a greater part of the sales mix. Operating profits will be affected by marketing costs and by tax credits, £4mln of tax credits are estimated by us for 2022; however, these are difficult to forecast.
Table 2 - Profit and Loss
Source: Creo Reports, ProActive estimates
The balance sheet, Table 3, shows a rise in PPE (property, plant and equipment) fixed assets as a result of 2021 investments (see Table 4 and cash flow discussion). FY21 Inventory and accounts receivable were £13.3mln offset by £9.9mln of accounts payable. Inventories and other working capital are high as Ablyn is a distributor of third party products, so requires stock for immediate dispatch, and has multiple customer accounts with long payment periods.
We forecast lower cash use (Table 4 and discussion) in 2022 due to lower capital investment and no immediate acquisitions. In 2021, Creo raised net cash of £34.3mln in new equity. After the net cash outflow of £1.9mln, there was £43.5mln cash at FY21 year-end. We expect this to fall to just over £16mln by December 2022. As there is modest Albyn growth expected and as higher-margin core Creo products are still in the early high-growth phases with strong marketing investment, we presume that further equity or loans will be required in 2023 to sustain the growth trajectory and make R&D and clinical validation investments needed.
Table 3 - Balance Sheet
Source: Creo Reports, ProActive estimates
The cash flow (Table 4) shows a 2021 net loss of £24.6mln. There was depreciation of £2.6mln plus equity-paid, so non-cash charges of £2.6mln. Tax credits owed from 2021 are £5.7mln and the tax credit received from 2020 was £3.4mln; net tax cash due is £4.3mln with a deferred tax asset of £1.7mln.
After a working capital outflow of a net £4.3mln, the FY21 operational cash use was £26mln. Capital expenditure in FY21 was £7.8mln due to the acquisition of electronic supplier Aber (£1.8mln net of cash) and the purchase of the freehold of the Creo site in Chepstow for £6mln. We assume these new PPE assets have long depreciation and amortisation periods so have reduced the expected depreciation charge for 2022.
Table 4 - Cash Flow
Source: Creo reports, ProActive estimates
Investment summary
Creo operates in a medical device market where innovative technology is essential for a small company to stand out. Creo has patented and approved products operating in a range of indications. The lead Speedboat product is key but other products, like MicroBlate and SpydrBlade, are highly innovative and could develop into major product lines. The Intuitive deal brings further credibility to the energy technology owned by Creo's Kamamptive brand. It brings the prospect of a powerful marketing partner and access to the large robotics market once the Creo products have been adapted.
The overall route to success is in sales and distribution. The Albyn acquisition boosted European sales capacity. A strong UK NICE recommendation on SSD will provide further adoption impetus in the home market.
The key region remains the US. Competition is strong from industry heavyweights (Medtronic, Boston Scientific (NYSE:BSX) and Johnson & Johnson (NYSE:JNJ)) who will have similar endoscopic aspirations and can leverage their dominant position in the medical device supply chain; however, they do not have dual-energy technology.
As surgery levels return to, and probably start to exceed pre-pandemic levels, Creo now looks ahead to a 2022 quarter on quarter doubling of Speedboat sales. This higher use is driven by increased clinical training and familiarity with SSD. Approval of SpydrBlade by the FDA will also help US sales development.