The past 10 years have seen tremendous disruption occur in so many industries. When we consider the impact of Uber on the Taxi Industry, Netflix for Streaming, Tesla for Electric Vehicles or Airbnb on Hospitality, these have been historical times. Investors in these companies have also enjoyed historical gains.
With this in mind, we invite you to consider a company we have been following for three years now: TransMedics Group, Inc. (TMDX) – a true disruptor in the healthcare field, poised to inflect in 2024.
TransMedics is a commercial-stage med-tech company aimed at transforming Organ Transplant Therapy for end-stage organ failure patients across multiple disease states.
A quick trip to OrganDonor.Gov reveals some very sobering statistics on the current state of Organ Transplantation in the US:
TransMedics came public in late-2019. Up to that point, the Organ Transplant Field had not seen any major innovation for 50 years, relying on Cold Storage (via Dry Ice) to transport donor organs, which severely limited the organ’s longevity and viability. The very real travesty of the situation was that, even with overwhelming patient demand, 70-80% of donor organs were NOT being utilized.
An early initiation by JP Morgan in 2019 summed up the unique advantages of the OCS perfectly:
“By allowing the organ to mimic its natural functions within a human body, [the OCS] better preserves the organ by significantly reducing the added ischemic time normally incurred during transit.
On top of this, the physician can also analyze the function of the organ prior to transplant to both determine the viability of the organ and also to potentially optimize the organ by treating pre-existing conditions or imbalances.”
To showcase the OCS’s capabilities and key advantages, TransMedics conducted the most extensive set of trials ever performed in the transplant market. The stellar results demonstrated a ~4x increase in utilization with the OCS versus Cold Storage.
Moreover, transplant procedures performed with the OCS saw (and continue to see) a dramatically lower number of post-surgery complications:
To expand the overall number of organs that could be utilized for transplant surgery – along with its overall all TAM – TransMedics ran a trial aimed at creating a de novo category, resuscitating hearts with its OCS which had stopped beating for 30-35 minutes. Medically, this is known as Donation after Cardiac Death (DCD). Up to this point, the only donor organs available to the transplant community were of the Donation after Brain Death (DBD) type. The results were transformative.
On November 4, 2021, TMDX announced:
The OCS DCD Heart trial achieved its primary clinical objectives by meeting the primary effectiveness endpoint of 6 months patient survival post-transplant which was 95% for OCS DCD arm vs. 89% for DBD Control arm.
Even when the outcomes were adjusted for all risk factors between the two groups the results were 94% for OCS and 90% for Control (non-inferiority p<0.0001). Of 101 DCD donor hearts that were perfused and assessed on OCS Heart technology, 90 were successfully transplanted resulting in a utilization rate of 89%.
Dr. Jacob Schroder, surgical director of heart transplantation at Duke University Medical Center and the principal investigator for the OCS DCD Heart Trial, confirmed:
"The more widespread use of DCD hearts for transplantation is the biggest thing to happen since the beginning of heart transplantation!"
On April 28, 2022, TransMedics received FDA Premarket Approval for its OCS Heart System for use with organs from donors after circulatory death (DCD), vastly expanding the pool of eligible heart donors in the US.
To complement its revolutionary expansion of transplant organs via DCD, TransMedics also had the foresight to create a world-class infrastructure called the National OCS Program (NOP). The NOP is a clinical and logistical services technology platform which handles the every need of a Transplant Center. Think of it as a one-stop-shop for the Transplant Industry, ameliorating all of the pain points in the transportation of an organ from the Organ Procurement Organization (OPO) to the Transplant Center.
The upsides to NOP are myriad.
By providing end-to-end expert clinical/technology solutions, TransMedics is now able to maximize transplant volume, ensure positive clinical outcomes and reduce the onboard time and learning curve for New Centers adopting the OCS Program. There is a human element to this as well. Gone are the days of a Transplant Surgeon woken up in the middle of the night to scramble to surgery. With NOP, the surgeon could get a good night’s sleep and be in better shape for surgery the next morning, confident the OCS will keep the organ healthy and viable overnight.
On the investor front, NOP has enabled TransMedics to entrench themselves as the primary cog within the Transplant Market, thereby creating a deep moat and a venerable walled garden against future competitors. Any subsequent entrants would need to spend years obtaining FDA approval and spend heavy Capex dollars to create a similar paradigm.
On August 1, 2023, TransMedics announced it would acquire US charter flight operator, Summit Aviation, and re-launch it as TransMedics Aviation. Two days later on the Q2’23 Call, management provided more color on the thought-process behind the tactical purchase.
“[This] marks a strategic shift from relying on private jet brokers. The aim here is to control the entire logistics process from donor to recipient to directly manage all NOP transplant volume in the U.S. by the second half of 2024…
Most importantly, it will further cement TransMedics' competitive advantage, making the competition at this stage almost obsolete.”
Essentially, with case volumes achieving a new high-watermark in Q2 and NOP accounting for ~93% of these cases, TransMedics was experiencing, first-hand, the very real constraints of the charter aviation industry. The overwhelming success of NOP was outpacing charter-plane capacity, as well as highlighting the limited radius of many of these charter routes.
With the acquisition of Summit Aviation, along with the subsequent purchase of a few more planes, TransMedics put forth the initial goal of having 10-15 operational planes, flying from 8 dedicated hubs, by the 1H of 2024. TransMedics aviation would now be capable of covering the entire Continental US.
TMDX incurred a substantial sell-off in August through early-November’23, due to overall market weakness, a protracted selloff in the Med-Tech Group, and certainly, investors’ hesitance at the new foray into aviation. Med-Tech/Healthcare Investors are specialists and typically want such companies to stick to their knitting.
Moving into aviation would dilute gross margins and add another layer of complexity to an already complex business. The Shorts swooped in, driving the stock down 50% in 4 months from $90 to the low-$40s. But they overstayed their welcome.
In early November, TransMedics posted another outsized beat and lifted its revenue guidance dramatically for 2023 too. Note: The EPS number below is incorrect as it contained a series of one-time acquisition write-offs.
The sizeable Q3 beat was not a one-off.
Instead, TMDX has consistently bested estimates for 5 consecutive quarters in a row.
Here is Q1’23 Beat n Raise:
Q2’23 was another strong Beat n Raise:
As we look ahead to Q4, consensus once again appears way too low. We expect another big beat.
In FY’22, TransMedics was able to grow its top-line 20%+ sequentially from Q3 to Q4.
In FY’23, we think revenues grew 15-17% sequentially from Q3 to Q4, which would translate to a $10M+ beat when TMDX’s Q4 report comes out later this month:
As seen above, current Sell-Side modeling has TransMedics’ top-line growth rate decelerating dramatically to only 28% YoY growth in Q3’24. This makes no sense. TMDX is poised to grab incremental market-share from Cold Storage, with most US transplant centers going all in with OCS/NOP in 2024. This presents an opportunity to discerning investors willing to do the work and create their own models.
We think TransMedics growth-rate will stay north of 100% for the next Qs and will exit the year growing 70%+. In aggregate, we’re looking for FY24 Revenue of $420M (+28% above consensus).
At the JP Morgan 42nd Annual Healthcare Conference in Dec’23, TransMedics Management very confidently increased their long-term aspirations to do 15,000 transplants a year toward the end of the decade.
This would translate to ~$1.5B in revenues.
The CFO also made an interesting observation regarding the trade-offs for TMDX in a lower-gross margin structure. There are two:
These remarks buttress our belief that 2024 estimates are too low. In addition, so too is the current consensus for 2025, 2026, and 2027.
With the stage set for TransMedics to post a series of beats over next 2-4 quarters – a key element driving our thesis for an outsized 2024 – we see $125 for the stock in the 2H of the year.
While there has been some short-covering, we adamantly believe the remaining shorts have overstayed their welcome. Short-covering could provide a significant fuse if Q4 crushes estimates as we expect.
Currently, we are seeing money move into the Med-Tech space. ISRG and GKOS have both been big winners the past few months. Both stocks touched 52-week highs on Wednesday. For the first time in almost a year, the buyers are in control of TMDX, forging higher-highs and higher-lows consistently since it put in its definitive long-term bottom in November:
Cleary, execution-risk is front and center for TransMedics. Successfully integrating the aviation business certainly carries risk to it. This is an entirely new business for the company. So a few hiccups would not be surprising in its early stages.
Also, should fuel prices shoot up due to an Energy Crisis, that too would have a deleterious effect on the aviation division’s margins.
Finally, TMDX is not a cheap stock. Should the market turn decisively lower into a long-term bearish trend, Med-Tech valuations could certainly take another substantial leg down – just as they did throughout 2022 and for most of 2023 as interest rates rose.
Having noted these risks, we think they are muted. TransMedics has assembled a strong team to run its aviation division, industry experts in logistics and in aviation. This should temper whatever hiccups may occur.
At $125/shr, TMDX would trade for a ~$4.2B market cap, or 10x our 2024 revenue estimates. This is not uncommon for a true Med-Tech disruptor growing nearly 100%.
We believe TMDX is poised to inflect and move through $100 by the end of this quarter.
We see $125 by the 2H’24, translating to ~40% upside over the next 2-4 quarters.
Eventually, a much larger company will write a check for TransMedics. We think the ultimate price tag will be $150-$200/shr, an event that probably occurs in 2025.
We attach 70% odds TMDX has a positive reaction to its upcoming Q4 Earnings Report, due later this month. We are therefore long both the stock and in-the-money calls. We inherently have a bias in writing this report.
Should TMDX punch through $100, we will begin to take some risk off the table and scale out of the name in the coming weeks/months/quarters as it trends toward our price extension zone around $125.
With strong odds a larger suitor eventually writes a check for the entire company, at much higher prices than $125, we plan to hold a third of our position with a long-term bent.
STOP LOSS: We plan to use $80 as our Stop Loss point on the entire position. If we are wrong, we will re-visit our thesis in the Spring.
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Disclosure: We long TMDX stock and in-the-money calls that expire in June. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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