TransMedics Group, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

TransMedics Group, Inc. is a medical technology company that is pioneering a new approach to organ transplantation using its Organ Care System (OCS) technology to preserve organs longer and to assess the quality of the organs before implantation.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: TransMedics Group, Inc. (TMDX) is a commercial-stage medical technology company focused on transforming organ transplantation therapy. Their proprietary Organ Care System (OCS) technology is designed to preserve organs in a living, functional state during the transport process, which extends the timeframe available for transplantation and enables assessment of organ viability. This technology contrasts traditional cold storage techniques that can damage organs during transport.

Revenue Distribution:

TMDX primarily generates revenue through sales of its OCS machines and disposables used in the OCS procedure, which are leased or sold, depending on the customers needs. The company’s OCS product is centered around four core elements, namely:

  1. OCS Lung: The first FDA approved device is for lungs.
  2. OCS Heart: The second FDA approved device is for hearts.
  3. OCS Liver: The third FDA approved device is for livers.
  4. OCS Perfusion Set: A disposable kit that is essential for each procedure.

The company sells its products and services in the U.S., Europe, and other international markets. As it has scaled operations, the U.S. has consistently formed the majority of their revenue generation.

Trends in the Industry: The organ transplantation industry is marked by a critical need for more viable organs and longer transportation times to reach the recipients. The industry faces challenges of organ quality deterioration from cold storage, and logistics issues while transporting organs. Due to the limited organ supplies, a substantial market exists for any solution that helps increase supply, quality, and extend the usable lifetime of organs, making the market a relatively promising one for the company to grow into.

Competitive Landscape: The competition faced by the company is primarily from the existing standard cold storage method, that is widely used across the globe, as well as research into new techniques and medicines that may help maintain organ viability. Because OCS is so different from cold storage, the competition is pretty unique. The company mentions that one of the core strategies for growth is to build a standard of care based on the company’s OCS tech, rather than comparing their tech to other options. The company also mentions that they compete on 3 pillars:

  1. Superior organ preservation
  2. Improved organ selection
  3. Better supply chain logistics

What Makes TransMedics Different: The core differentiator for TMDX is its OCS technology which preserves the organ in a warm, perfusing state rather than traditional cold storage. This allows organs to function normally as they are transported and allows for the potential to be assessed as to which organs can successfully be transplanted. The technology promises to improve the likelihood of successful transplants. They also have a proprietary technology and approach that is difficult for competitors to replicate. The tech allows the ability to perfuse the organ, which essentially keeps the organ alive.

Financial Overview:

  • Revenue Growth: TMDX has shown substantial revenue growth over the past few years, primarily from the expansion of the OCS platform in the U.S. and Europe. Total revenue for the three months ended September 30, 2023 was $73.3 million, which is a 128% increase compared to the same period in 2022. Growth was mainly driven by a 140% increase in disposable and service revenue. They also highlighted that the company increased 145% increase in the number of OCS procedures in the latest quarter compared to last year.
  • Margins: While experiencing rapid revenue growth, the company is struggling to generate profits, while still in the scaling phase. Gross profit margins have been showing improvement each quarter. But Operating expenses remain high due to sales efforts, clinical trials, and research and development, and the company is yet to become profitable.
  • Expenses: R&D expenses for the three months ended September 30, 2023 was $27 million a huge increase compared to the prior year, and sales and administrative expenses for the period was $67.5 million also a huge increase YoY.
  • Profitability: Due to expenses being too high compared to the gross profit, the company has not reached profitability yet.
    • Net loss per share attributable to common stockholders was $ (0.88) for the three months ended September 30, 2023, which is an improvement from $ (2.64) loss in the same period in 2022.
  • Net loss for Q3 2023 was $25 million vs $43 million from 2022.
  • Liquidity: Cash and cash equivalents stood at $164.6 million, and with total assets of 783.6 million and liabilities at 561.7 million, they have a healthy balance sheet in terms of debt and overall liquidity, which provides them a solid runway.
  • Cash Flow: Their cash flow from operations has been negative for the last three years as well, and is still negative. The company, however, did improve their cash flow YoY this quarter. This is an area of concern, however, as they have burned more cash than they have made.
  • Guidance: TMDX has raised the guidance for full year revenue and expects around 266-267 million in revenue with about a negative 7% operating profit in Q4. The company expects revenues will accelerate into the early months of 2024, but profitability will take longer to turn positive.

Moat Assessment: Rating: 2 / 5. The primary moat that TMDX possesses comes from the uniqueness of their product, the Organ Care System (OCS), which provides them a competitive advantage with it’s proprietary tech. This tech also has FDA approval, making it harder for others to introduce competing products. However, competition is primarily by non-obvious players (i.e. cold storage solutions), and the company is yet to reach a scale that would give them a powerful network or cost advantage. They have a high entry price for a hospital to start using them but don’t provide the switching costs that would make it very sticky. Therefore, their moat has potential to increase, but is currently not that large, making them susceptible to competitive forces if better technologies come along, or the current ones become cheaper.

Risks to the Moat and Business Resilience

  1. Technological Obsolescence: A more effective preservation technology may render the OCS less attractive or obsolete. The technology of organ storage is also quickly evolving.
  2. Regulatory Hurdles: Any changes in regulatory approvals could delay future expansion and reduce adoption.
  3. Slow Reimbursements: Any delays or lack in insurance reimbursement could restrict the adoption of this expensive tech. In fact, they have a higher price tag than existing tech, and it could make hospitals hesitant to adopt it.
  4. High Operational Expenses: Significant operating expenses related to the technology and R&D could limit profitability and make future growth dependent on further rounds of financing, making it susceptible to being diluted.
  5. Limited Track Record: Even though the company is gaining more and more usage, the long-term benefits of OCS over other transplant solutions are yet to be observed.
  6. Competitor Developments: While OCS has a first mover advantage, other methods for preserving organs may come to the market, and they may be better and more affordable.
  7. Acquisition Risk: In the case of an acquisition that does not perform as expected, it can drag the company’s finances down, and reduce its ability to reinvest back into the business.
  8. Reliance On Few Products: If there is an issue with any of their main products, it could severely impact their revenues.

Despite these risks, TMDX has some clear resilience:

  1. Their product is significantly better than the traditional methods, giving it an advantage.
  2. They are continually innovating and improving on their platform with the goal to continue offering the cutting edge solutions.
  3. They have FDA approval and certifications that provide them a high level of barrier to entry for other competitors.

Understandability: Rating: 4 / 5. The company’s purpose and their technological solution are easy to understand for laymen. However, some of the details into the financials can get complex. Also, because the company is operating in a specific niche (organ transplantation), it is easier to understand how they make money. But, while it is easier to see how this tech can change the transplant sector, it is hard to see it’s potential and longevity in the market, making the understanding of the business a slightly complicated process.

Balance Sheet Health Rating: 3 / 5. The company has a good cash balance and has managed to raise funds well. However, their high levels of expenses are still concerning as they are not profitable yet. They have relied too heavily on investor funds to keep things going. If the pace of spending continues without clear path towards profit making, this will be a huge concern in the future, leading to a poor balance sheet rating. While the current balance sheet is healthy, it should not be taken for granted that it will continue to be as good without any fundamental changes.

Recent Concerns and Controversies:

  • S&N acquisition: The company has highlighted concerns with their recent acquisition of a subsidiary of Scottish and Newcastle (S&N). Some analysts view the acquisition as diluting ROIC by acquiring a company with low margins.
  • Dilutive funding: While the company has been able to raise funds, it has primarily been through debt and equity, making it vulnerable to the vagaries of the market and the company’s capital structure changes.
  • Cash Burn: The company is still not profitable, meaning it is still burning through cash without any signs of profitability on the horizon.

Management outlook

  • Company’s management has said that their goal is to build a standard of care centered around OCS, rather than just comparing to competitors.
  • While there have been concerns around the S&N acquisitions, management has said it is not going to materially affect their results.
  • They also mentioned that while market growth may fluctuate, their growth is not dependent on market growth but on adoption of their own product.
  • The company has recognized the concern around profitability and are focused on building their revenue and margin growth. They expect to turn a profit in the near future.