Nothing in this article is intended to be financial advice and should not be taken as such, please do your own research before investing.
TransMedics is a relatively small and high-growth, loss-making company with a high valuation. Its 2022 annual revenue jumped to USD 93m; an increase of 208%. It expects 2023 annual revenue to be in the range of USD 138 million to USD 145 million, a growth rate of 48% to 55% Its market capitalisation is close to USD 2.5b. As of 3 March 20233, it is trading at 17.8x price to expected 2023 sales; a very high valuation for a profitless company.
We examine why this company is worth looking at and whether it is capable of growing rapidly and still possibly able to compound.
Nothing in this article is intended to be financial advice and should not be taken as such, please do your own research before investing.
Current situation
There is a significant mismatch between organ donors and their utilisations.
Organ transplants have been unable to fill up many who have been on the waiting list, especially kidney. Many are unable to get the organs. A congressional investigation is raising questions about whether non-profit groups meant to secure organs for transplants from deceased donors are doing enough. About 17 to 20 people a day die on the wait list because they cannot get organs. Getting more organ donors and a better organ transplant system will mean a much bigger potential for TransMedics.
There are many patients that need organ transplants.
Currently, organ transplant is done through cold storage which has several significant limitations, resulting in significant underutilization.
A paradigm shift in organ transplants
TransMedics aims to address the growing need for healthier organs for transplantation; focusing on transforming the standard of care – increasing organ utilization, improving patient outcomes, and reducing transplant costs. Its Organ Care System (OCS) allows organs to be transported to patients with their multi-organ platform.
- Donor organs are maintained in a living, functioning state, perfused with warm, oxygenated, and nutrient-enriched blood (warm blood perfusion).
- The OCS allows physicians to monitor and assess the viability of organs outside the body.
- By replenishing organs with oxygen and nutrients, the health of an organ can be optimized during transport.
It is approved in the U.S., U.K., and the European Union. Currently, reimbursement by insurers is only provided in the U.S. Hospitals outside of the U.S. have been paying for the OCS out of pocket, which indicates how much they value these machines.
Organ Care System (OCS) Heart System – P180051 – FDA
Organ Care System (OCS) Liver – P200031 – FDA
Compared to cold storage, TransMedics’ solution has shown a much high utilisation rate using warm perfusion. It is more expensive, but it allows organs to be transported farther and to sustain less damage; allowing more patients to have access to the much-needed organs.
OCS Heart System for donors after circulatory death (DCD) was most important because the company does not have to compete with the transport of organs on ice since cold transports of hearts from DCD are not allowed. Transmedics created a market where that does not exist before.
A great product (OCS) with a great service (NOP): Strengthening its moat
Besides selling the machine, TransMedics has been able to enlarge its range of services by providing end-to-end services between donors and patients with its National OCS Programme. Transplant centres’ use of the National OCS Program (NOP) has been rising and contributed approximately 90% of total US revenue in Q3 2022. NOP is becoming an integral part of US transplant programs workflow, This is turning its business to be more of an end-to-end service than just sales of its multi-organ platform.
They are working to expand and improve their NOP infrastructure. They are expanding our surgical capabilities and clinical support staff across the board and opening new launch points to expand our geographical reach and coverage in the US. They are also partnering with transplant logistics experts to create a dedicated air and ground logistical network across the US to support the growing NOP transplant activities.
What does this mean?
- This lower the wait time for organ recipients as the potential pool of organ donors across the country becomes available
- The logistics network becomes a competitive advantage. It is a barrier of entry for newcomers while it improves the utilisation and grows the network which in turn increases the barrier of entry.
TransMedics’ financial performance
The company was founded in 1998 and listed in May 2019. From 2018, it was growing well until Covid hit and transplant operations were slowed down. It was only in the second half of 2021 that revenue recovered as transplant operations normalised and grew post-Covid. It has also built up a strong cash position through the issuance of its common stock.
The contribution from the United States has been increasing; representing more than 90% in its latest Q4 2022.
Revenue from OCS Lung has been flat. The company intends to revive OCS Lung transplant volumes post-COVID era. It has initiated a national program aiming to double lung transplant volumes in the US over the next few years.
The table below captured the quarterly earnings press releases on the reasons given for the revenue increases and decreases. Covid affects transplants. Their revenue growth had been strong pre and post-Covid. Let’s observe how their growth will stabilise at.
| Revenue growth yoy | Reasons given by management for their financial performance; extracted from their press releases | |
| Q4 2022 | Up 225% | OCS™ Heart and OCS™ Liver, sales of which were driven by the company’s NOP |
| Q3 2022 | Up 378% | OCS™ Heart and OCS™ Liver, sales of which were driven by the company’s NOP |
| Q2 2022 | Up 151% | Continued increase in commercial sales of the OCS™ Heart and OCS™ Liver in the United States |
| Q1 2022 | Up 125% | Continued increase in commercial sales of the OCS™ Heart and OCS™ Liver in the United States |
| Q4 2021 | Up 27% | Commercial launch of the OCS Heart and OCS Liver in the United States |
| Q3 2021 | Down 24% | Discontinuance of OCS Heart and OCS Liver clinical trial revenue prior to receipt of FDA approvals for both systems in September 2021 |
| Q2 2021 | Up 141% | Stronger sales of OCS Lung and Heart disposable sets in the United States and internationally as transplants recovered from the COVID-19 impacted second quarter of 2020. |
| Q1 2021 | Down 6% | The increase in US net revenue driven by strong OCS Lung and OCS Heart sales, was offset by the completion of the OCS Liver PROTECT CAP and lower transplant activity outside of the US. Note: It did not address specifically the revenue decrease but their revenue increase in the US. |
| Q4 2020 | Up 26% | Recovery of U.S. sales led by the OCS Lung activities |
| Q3 2020 | Down 2% | Lingering impact of the global COVID-19 pandemic through the third quarter. |
| Q2 2020 | Down 40% | Fewer organ transplant procedures performed during the period due to the impact of the global COVID-19 pandemic |
| Q1 2020 | Up 61% | OCS adoption in several areas including US OCS Lung commercial adoption, US clinical trials for OCS Heart and OCS Liver, as well as international OCS Heart. |
| Q4 2019 | Up 71% | OCS Lung adoption and ongoing OCS Heart EXPAND CAP and DCD Heart trials |
| Q3 2019 | Up 78% | Solid growth across all three organ platforms |
| Q2 2019 | Up 94% | Strong growth in the US in all three organ platforms, including U.S. commercial growth of OCS Lung and higher sales of OCS Heart and OCS Liver in U.S. pivotal clinical trials |
| Q1 2019 | Up 86% | Commercial sales of OCS Lung products in the U.S. as well as OCS Liver disposable sets for clinical trial use |
As the company is still free cashflow negative, it has been funding its business aggressively with a mix of equity and debts to grow.
Losses have narrowed significantly in recent quarters as its business surged. Sales & marketing and research & development expenses as a percentage of revenues have reduced.
Competitors
Below is the list of possible competitors. Most of them are private companies and smaller in terms of the number of employees. XVivo and OrganOx were highlighted by TransMedics as their competitors in their reports.
| Founded | Organ transplant | Market cap./valuation | Patents* | Employees* | |
| TransMedics (publicly listed, US) | 1998 | Lung, heart, liver In development: Kidney | USD 2.46b | 20 granted | 212 |
| Xvivo Perfusion (publicly listed, Sweden) | 1998 | Lung | USD 0.67b | 8 granted 3 pending | 118 |
| OrganOx (private, UK) | 2008 | Liver | Not available | 3 granted | 44 |
| Bridge to Life (private, US) | 2005 | Lung, heart In development: Liver | Not available | 1 granted 1 pending | 29 |
| Paragonix (private, US) | 2010 | Lung, heart | Not available | 17 granted 5 pending | 60 |
Xvivo Perfusion’s revenue growth shows quite a similar pattern to TransMedics until 2022. Xvivo Perfusion is more profitable.
The revenues in USD of Xvivo Perfusion and TransMedics have been about the same. It was only in 2022 that TransMedics’ revenue shot up growing at 208% while XVIVO’s revenue grew at 61% year-on-year. Transmedics’ NOP is the differentiator.
Summing TransMedics’ competitive advantages
- It is only FDA approved multi-organ platform (OCS) currently used for the lungs, heart and liver; with the kidney as the next organ. They are also developing the next-gen OCS.
- While competitors are developing a better platform, the logistics network built will be difficult to replicate. Transmedics is entrenching itself in the transplant ecosystem with value-added services such as transportation and logistics, and surgical retrieval. Its geographical coverage across the US has been growing with its dedicated TMDX NOP launch points.
NOP + multi-organ OCS gives Transmedics a strong moat and a high barrier to new entrants. - It is reimbursable by insurers in the United States.
The development and regulatory approvals of a multi-organ platform take years.
Refer to TransMedics 10-K, Annual Report for the year ended December 31, 2021, the section on Regulation, page 14 for details.
Their multi-organ platform (OCS) and their National OCS programme are reinforcing and have a flywheel effect. This is evidenced by
- Revenue from the US grew by 284% year-on-year in 2022.
- US revenue contributed 92.5% of their total revenue in 2022 (90.7% in 2021).
NOP could be the cause for the divergence of revenue growth between TransMedics and XVivo in 2022. NOP will be a programme to pay attention to.
Together with reimbursement by insurers, these create high network effects, high switching costs and a widening moat. There is still a huge market potential ahead of TransMedics.
Things to look out for
Revenue growth and gross margin maintenance
We have to monitor their ability to grow given the potential of organ transplants and their ability to innovate to launch new services, improvements and new value-added services. We also need to monitor their ability to at least maintain the gross margin as their revenue grows.
There are a few impetuses:
- Clinical trials for TransMedics Group’s potential fourth product, the OCS Kidney, are set to begin in 2023 (though there is no mention in their latest earnings). OCS Kidney may represent a big potential given the long waiting list for kidney transplants.
- Their ability to expand their NOP network and increase the frequency of use will be important to their success.
- Insurers outside the U.S. begin paying for the OCS. Hospitals have been paying with their own money. If insurers begin paying, we can expect adoption to increase. TransMedics is currently working on securing reimbursement.
Given their current momentum, TransMedics should be reaping operating leverage. Research and development should be incremental so will its marketing and sales expenses. Losses should be reduced; profitability and free cash flow should emerge soon.
Profitability and free cashflow positive
As revenue grows, losses have to reduce and move towards profitability and free cash flow. We need to monitor their need to take on more debts and issue shares for funding. For now, the metrics are moving in the right direction.
Competition
The market is still at an early stage. There will be keen competition as many see the huge long-term potential of warm perfusion and the total addressable market. Some of their patents have expired too. Hence, TransMedics have to keep moving faster to strengthen its moat.
Valuation
As it is not profitable, price-to-sales is the only meaningful ratio. As of 3 March 2023, it is trading for about 17.8x of 2023 guided sales. The market is bullish about its growth. We have to be wary when the market gets way ahead of the share price especially when the company announces better-than-expected results, clinical trial success, the launch of new products and making significant inroads outside of the US. With a rich valuation, it is priced for perfection and any minor hiccups or less-than-perfect performance will see its share price punished.
TransMedics and the organ transplant sector are definitely worth watching. Where there is honey, there will be bees. Given the long-term high potential and likely government support, there will be new entrants and competition but they have high barriers to entry to overcome. The market is still in the early stage. TransMedics has the potential to grow with the market. We need to continuously validate its ability to continue to pull further ahead of its competitors. While the company’s revenue continues to grow with its share price going up in response, its price-to-sales need to come down to more reasonable level than a more speculative level.
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