The business

Creo Medical Group (LSE:CREO) is a medical devices company operating in the emerging field of surgical endoscopy. In layman’s terms, that’s operations carried out via tubes with cameras.

The company’s leading product is called Speedboat, which is a device attached to an endoscope and used to cut out or vaporise pre-cancerous growths in the digestive tract. Endoscopes are normally only used to investigate or diagnose diseases, not treat them.

This means the company’s technology is a bit of a game-changer, both in terms of patient outcomes (less invasive procedures) and cost savings for healthcare systems. In fact, it’s been demonstrated that the Speedboat device saves the NHS between £5,000 and £10,000 per procedure compared with existing methods. Speedboat is now used across the globe.

Creo Medical is built on a razor-and-blades business model, where there’s the one-time sale of the razor (or medical device, in this case), followed by years of recurring revenue from the blades (consumables). This is an attractive business model because it is underpinned by reliable, recurring income from consumables.

The numbers

Despite ongoing disruptions from Covid-19, total sales grew to £25.2m, according to the 2021 annual report. This was up substantially from 2020’s £9.4m figure, though that was also a year marred by the pandemic.

The loss before tax did widen to £30.3m over the same period, which means the company is far from profitable. Management expects this loss to narrow substantially now that it has built out the foundations for growth. Of course, only the company accounts will inform us whether that happens.

Creo Medical currently has £26m in cash. At its current rate of cash burn, it should be good for just under a year or so before needing to raise further money. If and when that happens, the share price could head lower, depending on the financing details. So this is a serious risk I need to consider.

International growth and a massive partnership

The group opened its first US headquarters last year, with its commercial roll-out in the key US market advancing rapidly. It has also opened a regional hub in Singapore to support its move into Asia.

The company has a strategy of build, buy, partner, and it has been making eye-catching progress recently in the partnering side of this strategy. It has signed a multi-year collaboration with Intuitive Surgical, the global leader in robotic-assisted surgery.

Under the agreement, the company’s products are to be made compatible with Intuitive Surgical’s robotic technology. A number of milestone payments to Creo Medical have been agreed, as well as royalties for products sold in the future.

I think the fact a global leader like Intuitive Surgical has chosen to partner with a small company like Creo Medical is a massive endorsement for its products and technology. The company’s current market cap of just £97m seems extremely attractive to me. With shares down 64% so far in 2022, I’d class this penny stock as a hidden gem.

Operations are aimed at the medical device market and particularly the “emerging field” of surgical endoscopy. The directors asserted in the report that during the 18-month period, the firm made “considerable progress” developing its Speedboat device for use in Gastrointestinal (GI) therapeutic endoscopy, which is the first in a “suite of products” being developed for the CROMA Advanced Energy platform.

Still loss-making and revenue-free

It all sounded exciting and the directors reckoned operations have been moving along the path to commercialisation, but so far, the company has been losing money. Indeed, there was an underlying operating loss of £12.6m in the period, which compared to a loss of £5.6m for the prior 12-month period to June 2017.

As with all early-stage, loss-making enterprises, the big question is, will operations start to generate an income before the firm’s cash runs out? On that score, the news was positive. In August 2018, a placing of new shares raised £48.5m before expenses and has “substantially strengthened” the balance sheet with the firm reporting cash and cash equivalents of £44.6m at the end of the period, up from £13.7m in June 2017.

The directors now intend to accelerate physician training and the commercial rollout of the firm’s products “internationally” over the next few years. The race is on, but which will come first: meaningful operating cash inflow, or an empty bank account? There seems no doubt that the share remains speculative. If things click operationally and Creo Medical starts to generate decent revenues, shareholders could do well. But if the cash runs out before that happens, shareholders could suffer significant dilution or even total loss of their investment.

Optimistic outlook

Chief executive Craig Gulliford seemed optimistic in today’s report saying that the company has established a solid platform for future growth and the directors look forward “with confidence to another exciting year in 2019.”  However, he also owned up to not underestimating the challenge of changing the structures required to roll out the company’s system, or of gaining regulatory clearance for the other devices in the pipeline. But feedback from clinicians seeing the product in use has been positive.

However, I’d point out that, although Creo Medical’s Initial Public Offering was during December 2016 when it arrived on the stock market, the company was founded in 2003. So it’s been in the product development stage for a long time. Maybe we are indeed close to commercialisation. Chief financial officer Richard Rees believes so, saying in the report that the recent placing provided Creo Medical with the long-term platform to enable the further development of “multiple products through to commercialisation.”

Nevertheless, Creo Medical remains a jam-tomorrow proposition and carries high risks for investors. I’m looking for jam-today that comes with ongoing potential, so I’ll look elsewhere.