US sales boost margins
Creo Medical Group PLC (AIM:CREO) develops and sells surgical devices for minimally invasive endoscopic surgery. These devices are used mainly to remove suspected early-stage bowel cancers including a recent surgical removal of a rare, complex gastrointestinal tumour. The devices are also now being used for per-oral procedures in the oesophagus and stomach. Further, they are licensed by Intuitive, the leading robotic surgery company which creates a major new market opportunity.
Creo released interim FY22 results in early September following the August trading update. Sales in H1 were £13.6mln. Creo core technology, like the Speedboat device, rose to £900k from £200k in the preceding half (H2 FY21) with a doubling of devices used in procedures. This includes Kamaptive power source sales. Albyn distributed third-party products in Europe and the UK had level sales at £12.7mln. As a result of the improving product mix, the gross margin increased from 46% to 48%.
Costs are expected to decline in H2 as R&D projects (£7.5mlm in H1 22) are completed. These will give an expected £2.6mln cash H1 tax credit, paid in FY23. Due to the better sales mix and tighter cost management, cash is expected to be about £16mln at the year-end; it was £26.1mln on 30 June. The underlying loss EBITDA (excluding tax credits) was £11.7mln.
Creo's flagship multifunctional product, Speedboat Inject (Speedboat), uses dual-energy: electrical bipolar radio frequency energy for precise cutting and 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 cutting close to underlying tissues. These features boost tumour resection success rates.This means that interventional endoscopists can carry out entire resections faster with Speedboat. Competing technologies require multiple tools and exchanges which increases time and cost.
Importantly, Creo doubled the number of clinicians receiving training in their products in H1FY22. These training courses are crucial for the commercialisation of Creo’s products in new regions and the uptake of Speedboat and related products in all territories.
Interim FY22 results
We have updated the FY22 and now include an FY23 forecast. We expect excellent growth in Creo core products building on steady Albyn distribution sales to reach a total of £32mln revenue in FY23. With reducing R&D costs and improving margins, the gross profit could rise to about £16mln in FY23 with a reduced adjusted EBITDA loss. Medical device growth tends to be linear as use is tied to surgical procedures run and training of surgeons. The doubling since January 2022 of Speedboat trained surgeons is very indicative of near-term growth. Creo also has a range of versatile other devices some of which, like SpydrBlade, are not yet launched in the US. Creo will need further funding in 2023. We do not see this as an urgent need but its is important that the company can continue to invest in and develop its sales capabilities.
Solid growth in prospect
Year end Dec 31 · 2020 · 2021 · 2022 · 2023
Revenue (GBP-mln) · 9.0 · 25.2 · 28.0 · 32.0
Gross Profit (£mln) · 4.0 · 11.6 · 13.5 · 16.0
Adj. Earnings (£mln) · (18.7) · (19.0) · (21.0) · (17.5)
A key factor in the rapid increase in trained clinicians is Creo’s Pioneer Clinical Education Programme. With the global relaxation of COVID-19 restrictions, Creo can host multiple multinational training events. In June, Creo ran three multi-national courses across three continents, training clinicians from France, the US, South Africa, Chile, and India, just to name a few. This expands awareness and boosts the number of regular users of Creo’s products. This is important in commercialising Creo's technologies and in developing new geographic markets. In April 2022, Creo opened its Asia-Pacific regional hub in Singapore. This supports sub centres, as in Bangkok and Hong Kong, where clinicians are trained and supported to use Speedboat in various clinical situations.
Training key to fast growth
Speedboat is mostly 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.
One breakthrough in recent months was the use of Creo's Speedboat Inject device at the Assaf Harofeh Medical Centre to remove a gastrointestinal stromal tumour for the first time. These are soft tissue bowel cancers and relatively rare.
Creo is now starting to bundle some Albyn disposables with its core products in the US for customer convenience. This will boost revenues going forward.
Novel, multi-functional surgical tools
Figure 1 - Speedboat Inject
Source: Creo Medical
Creo has also grown its licensing revenue stream. Its Kamaptive Technology licensing program allows clinicians to utilise the novel Kamaptive energy integrator which can switch between energy types to select the cutting or coagulating functions of Speedboat. The first licensing agreement announced in May 2022 allows Intuitive, a clinical robotics company, to integrate Creo’s products with their own technology, the leading da Vinci robotic system. Management is working to license the technology further. Having a powerful marketing partner as a second channel into the core USA market is a massive benefit and should develop into a major future market.
Licensing revenue stream
Profit and Loss
The company reported revenue of £25.2mln for 2021 (year-end 31 Dec) and £13.6mln in H1 22, Table 1. Albyn Medical contributed £24.8mln in FY21 with £312k of Speedboat and other device sales. Other income was a £50k research grant. In H1, Creo core products grew 186% with Albyn sales 2.5% higher.
Our revised 2022 revenue expectation of £28mln is based on Creo growing the number of 'power accounts' from 30 to 80. We now think that Creo core products (including some Intuitive revenues) could generate £2.5mln over FY22, which is 700% growth. For Albyn, we expect growth of about 2.5%. We now expect gross margins to rise to 48% and exceed 50% in FY23. This is partly due to cost control but mainly due to the better and improving mix of products.
Table 1 - Creo H1 FY22 Profit and Loss
Source: Creo reports, ProActive estimates
Cash flow
The cash flow, Table 2, shows an FY21 operational cash use of £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. In H1 22, cash outflow was £17.5mln due to a higher operational cash use: £15.8mln in H1 22 vs £26.0mln overall for FY21. However, this was affected by R&D costs and as these drop out, cash outflow for the whole of FY22 is now forecast at £25mln helped by increased margins. Cash use is forecast by us to fall to about £24mln in FY23.
Table 2 - Creo H1 FY22 Cash Flow
Source: Creo reports, ProActive estimates
Balance Sheet
The FY21 balance sheet, Table 3, showed a rise in PPE (property, plant and equipment) fixed assets as a result of 2021 investments. FY21 Inventories and other working capital were high as Albyn is a distributor of third-party products, so requires stock for immediate dispatch, and has multiple customer accounts with long payment periods. 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.
The H1 22 position is similar to the end of FY21 on working capital and liabilities. Tax credits as of 30 June were £6.9mln with payment of the expected £5.7mln FY22 credit in H2 to help cash flow. We roughly expect 31 December cash to be about £16mln. Creo will need further funding in 2023 to maintain its marketing and sales efforts, especially in the key US market. We assume a 'loan' of £5mln in our forecast to maintain positive Dec 23 cash but expect more substantial funding.
Table 3 - Creo H1 FY22 Balance Sheet
Source: Creo reports, ProActive estimates