Creo Medical Group PLC (LON: CREO)

Creo Medical Group PLC (LON: CREO) is an FTSE AIM 100 Index listed medical equipment company. It focuses on the emerging field of surgical endoscopy, a recent development in minimally invasive surgery. The Company has framework distribution agreements for the UK, several European markets, the USA, South Africa, and the Asia-Pacific region to give its devices a route to market in multiple countries worldwide.

Growth Prospects

• Multipurpose Medical Platform: CROMA Advanced Energy Platform delivers microwave and bipolar radiofrequency energy through a single accessory port. The technology provides significant advantages in time, costs, and outcomes.
• Rich Product Pipeline: The Company has a promising product pipeline. It has more than 326 worldwide patents and more than 800 pending patents.
• Solid Market Potential: The Company has substantial market potential as there is constant pressure on the healthcare players to reduce cost and improve quality. On the other hand, patients are becoming more and more aware of their options. At the end of FY20, the Endoscopy market scope was around USD 30 billion, growing at a CAGR of 6.3%, of which energy systems and instruments is valued at USD 4.9 billion. The energy sub-segment of the global laparoscopic devices market was valued at USD 3 billion in FY18 and is expected to reach USD 5.88 billion by FY27 at a CAGR of 7.6%. Furthermore, the Robotic surgery market was valued at USD 4.8 billion in FY20, and the market is expected to reach $9.65 billion in FY25 at a CAGR of 17%.
• Scalable Business Model: The Company's business model is designed so that it can be easily scaled up using minimal efforts. The Croma platform uses a razorblade model with a single-use device suite that delivers superior outcomes to physicians and patients.

Key Risks

• Failure to Develop Products: The Company might fail to develop and get the approval of marketable products. It could not only impact future revenue projections and market share.
• IP Risk: The Company constantly face the threat of infringement of its technology. Moreover, it could also inadvertently infringe a third party’s patent, which could lead to litigation.
• Regulatory Risk: The Company cannot assure regulatory approvals for its product pipeline. Also, the healthcare medical equipment industry is highly regulated; any non-compliance could lead to fines and penalties.
  

Now we will analyze some key fundamental and shareholders statistics of Creo Medical Group PLC

Financial and Operational Highlights (for six months ended 30 June 2021 as of 30 September 2021)

(Source: LSE Website)

• Financial Summary: The Company generated revenue of £12.9 million in H1FY21. The operating cost increased mainly due to the increased clinical and development activities and investment in headcount and business infrastructure to support the transition. In addition, the expansion of the portfolio led to an increase in R&D expenses to £5.2 million.
• Funding: The Company raised additional funding of £36.3 million in September 2021 to further strengthen Creo's balance sheet and to provide resources to enable the exploration of several strategic opportunities
• Operational Progress: CREO announced that it had gained FDA 510(k) clearance for its MicroBlate Flex product, which is the fourth device within Creo's portfolio of flexible endoscopy devices for the gastrointestinal ('GI') market to receive FDA regulatory clearance.
• Commercial Developments: The Company continues to receive commercial orders for Speedboat Inject, in line with expectations on pricing and volume at this early commercialisation stage. The Company has established offices in the US and APAC, which will act as the growth catalyst in FY21 and FY22.

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 7 October 2021, at 10:30 AM GMT+1, CREO’s shares traded at GBX 166.25, down by 0.15% against the previous day closing price. CREO’s 52-week High and Low were GBX 235.79 and GBX 137.88, respectively.

On a daily chart, the stock price is sustaining between the lower Bollinger band and the middle Bollinger band. Hence, there could be an uptick in the stock price in the near term. Also, the 14-RSI at around 24.87 indicates that the stock is trading near the oversold territory, which suggest trend reversal in the near term.

Over the last five years period, CREO’s stock has delivered a decent positive return of ~108.08%. Also, it has outperformed the FTSE All-Share Pharmaceuticals & Biotechnology Index with a return of about -41.13% and the FTSE AIM 100 Index with a return of about 49.76%.

Valuation Methodology: Price/Sales per share (NTM) (Illustrative)

Business Outlook

CREO focuses on maintaining a solid R&D pipeline while prioritising Company's Build, Buy, Partner strategy. The Company would emphasize on licensing its Kamaptive technology that can increase the number of markets. In addition, the orders for its Speedboat Inject continue to increase. The management continues to focus on clinical education centres in all key markets to continue growing excellent clinical outcomes and adoption. The Company also established US and APAC offices, which will be a catalyst to increase growth in 2021 and 2022. Overall, the Company remains optimistic about returning to pre-covid levels in all key markets with an increase in Creo's core technology orders in H2FY21.

Considering the Company’s product pipeline, unique and scalable business model, huge market opportunity, and support from the valuation using the above method, we have given a “Speculative Buy” recommendation on Creo Medical Group Plc at the current price of GBX 166.25 (as on 7 October 2021, at 10:30 AM GMT+1), with a lower-double digit upside potential based on 15.45x Price to NTM Sales per share (approx.) on FY21E sales per share (approx.)

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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