Kromek secures Siemens deal that represents potential step change

Kromek Group PLC has signed some important deals before for its detection technology but the $37.5 million tie-up it announced today was like nothing it has done before.

What’s more, the four-year deal covering its cadmium-zinc-telluride (CZT) detector technology with a subsidiary of Siemens is non-exclusive, meaning it not only provides a major endorsement of the company and cash boost over four years, but also allows Kromek the freedom to supply its know-how and IP with other clients.

The AIM-listed company, which also reported a first-half loss before tax of £5.7 million today, said the deal means that it now expects to be profitable for full year to end-April.

It will also see the Durham-based group become sustainably profitable for the first time in its history, said house broker Cavendish.

Deal details

Kromek signed a trio of multi-year agreements with the US arm of Siemens Healthineers, which is a Frankfurt and US OCT-listed €60 billion giant in its own right, as well as being 75%-owned by German colossus Siemens AG.

The deal comprises an enablement agreement, a patent licensing agreement and a supply agreement for Kromek to supply CZT-based detector tiles.

The enablement and patent licensing agreements allow Siemens Medical Solutions USA to produce CZT detectors for SPECT applications will see Kromek receive a total of $37.5 million in cash over a four-year period, with a first instalment of $25 million.

SPECT, standing for single-photon emission computed tomography, are where radioactive tracers are injected into the patient before the brain, heart or bones, for example, are scanned. It is a smaller market than CT scanning but there are said to be around 13,000 SPECT cameras in use in the US.

Under the enablement agreement Kromek will provide its CZT-based detector tiles to Siemens for the duration over four years, with a one year extension at Siemens Healthineers' discretion. It will transfer title of 15 of its current total of 174 furnaces for CZT production to Siemens Healthineers by the end of the four-year period. 

Payment for the supply of tiles is on top of the $37.5 million, but amounts have not been publicly specified. Broker Cavendish sees the potential to “materially add” to revenues for the Advanced Imaging division over the period of the agreement.

At the end of the period, Siemens could continue and extend the supply relationship or could produce themselves using the furnaces and paying a licence fee.

The agreement, as well as just covering SPECT and not the much larger CT market that Siemens is also involved in, by being non-exclusive also means that Kromek is free to resume its work with other original equipment manufacturers, as some other customers had paused their talks with the Kromek due to uncertainty over the outcome of the Siemens talks.

Numbers

The first instalment of $25 million will be received in the current financial year with Kromek saying it will recognise a “material amount” as revenue.

Chief executive Dr Arnaub Basu said the initial payment will be used “to support the delivery of various milestones under the agreements, significantly reduce our debt and strengthen our balance sheet, ultimately enhancing our operational capabilities”.

His comment that the deal enables profits this year “significantly ahead of market expectations” helped lift the shares sharply on the day.

Basu’s confidence that the deal also lays “the groundwork for further growth in revenues and sustainable profitability beyond that period”, did not seem to be reflected in the shares, which despite a 23% jump to 6.5p still leave the shares around 20% from highs seen last year and 40% from those a year earlier.

The Siemens agreements, added Cavendish, also represent “a solid vote of confidence, not only in Kromek’s unique positioning as the largest independent producer and supplier of CZT but also in terms of the depth of Kromek’s intellectual property, know-how and capacity to supply CZT”.

While in April 2023 Kromek signed what was called a “gamechanging” seven-year contract with a top medical imaging manufacturer, today's deal represented a potential next step. 

Cavendish called it a “step-change in both the breadth of agreements that it is capable of securing, and in terms of its future financial profile and revenue-generating capacity.”

The broker forecasts £24.1 million revenue for the full year, adjusted EBITDA of £12.3 million and adjusted pre-tax profit of £4.9 million.