2023-07-28 09:15:00 ET
Summary
- TransMedics' Organ Care System is driving market share gains by displacing the standard cold storage method for organ preservation.
- The National OCS Program removes barriers to adoption and improves transplant center efficiency, leading to increased acceptance of the OCS technology.
- Recent manufacturing capacity expansions and investments in a dedicated logistics network are expected to further drive adoption of the OCS technology.
- The combination of TMDX’s OCS technology with its NOP network will lead to market share gains and broader market growth over the next 5+ years.
- Assuming a 30x EBITDA multiple on 2027 EBITDA yields a price target of $150, or a 15% annualized return from today’s price.
The following segment was excerpted from this fund letter.
Thesis
- Organ Care System drives market share gains through displacement of existing cold storage standard of care; market share gains supplemented by overall market growth as technology enables increased utilization of existing donor pool combined with expansion of donor pool.
- National OCS Program removes barriers to adoption and drives transplant center efficiency, serving as the catalyst for transplant center acceptance.
- Recent manufacturing capacity expansions combined with upcoming investments in a dedicated logistics network represent an inflection point for adoption.
- Broad support from all stakeholders as OCS technology improves patient outcomes, lowers cost of care for hospitals/insurers and drives increased volumes at transplant centers.
Company Overview
TransMedics (“TMDX”), headquartered in Andover, MA, is a leader in normothermic machine perfusion technology utilized for organ preservation during the organ transplant process. TransMedics’ Organ Care System (“OCS”) is an FDA approved portable organ perfusion system that is designed to replicate near-physiologic conditions for donor organs outside of the human body. The OCS pumps (perfuses) warm (normothermic), oxygenated blood through organs attached to the system, which enables extended organ retrieval distances along with assessment and optimization of donor organs during transport. By replicating the physiologic conditions of the body, the OCS systems improves post-transplant outcomes and facilitates increased utilization of donor organs. The OCS device is approved for use with lungs, hearts and livers and is the only FDA approved device for multiple organs.
Source: TransMedics Investor Presentation (May 2023)
To support broader adoption of the OCS technology, TMDX has designed a National OCS Program (“NOP”), which consists of on-staff surgeons and perfusionists located in 16 cities across the country who can procure and deliver donor organs to recipient hospitals. The NOP effectively serves as an outsourced procurement and logistics network for transplant hospitals, which increases surgeon capacity. In addition to the efficiency gains, the NOP network also lowers barriers to adoption of the OCS technology as hospitals are no longer required to purchase the machine nor train staff to use the console.
Organ Care System: Improving Organ Donor Utilization
Due to limitations on geographic transplant distance and reluctance to use extended criteria organs, organ donor utilization rates have remained stubbornly low. This has led to poor outcomes for patients on transplant waitlists and excessive costs for the healthcare system while patients remain on the waitlist. Prior to FDA approval of the TMDX OCS console, static cold storage was the industry standard for donor organ transportation. After donor organs were procured by the recipient transplant center, they were placed on ice in an Igloo cooler for transport back to the recipient hospital. This static cold storage approach deprived the organs of oxygenated blood and subjected the organ to ischemia, or time-dependent injury due to a lack of oxygenated blood. Ischemia risk from cold storage limited the time a donor organ could be maintained outside the body to 4-6 hours, thus restricting the geographic distance between donors and recipients. Additionally, diagnostic tests and therapeutic treatments could not be performed on the organ since the organ was not metabolically active during cold storage. As a result of these limitations, marginal organs were unutilized because transplant centers could not ensure optimal post- transplant outcomes. The cold storage standard of care has been a key factor that has resulted in surprisingly low organ donor utilization rates: 18% for lungs, 27% for hearts, 62% for livers.
Source: TransMedics Investor Presentation (May 2023)
TDMX’s OCS system eliminates many of the variables that cause low utilization of donor organs. The perfusion of warm, oxygenated blood minimizes the ischemia risk and extends the amount of time an organ can be held outside of the body prior to transplant. This enables broader geographic matching of donors, a significant limitation for organ utilization prior to the OCS technology. Additionally, by placing the donated organ on the OCS system, transplant centers can assess the viability of the organ through diagnostic tests and can even perform therapeutic work to improve post-transplant outcomes. This has served to increase the use of marginal organs, or extended criteria organs, which has improved overall donor utilization rates. Data from TMDX’s clinical trials exhibits how the OCS technology significantly increased donor organ utilization.
Source: TransMedics Investor Presentation (May 2023)
The most profound impact of OCS technology on extended criteria organs has been through the expansion of the donor market through utilization of donation after circulatory death (“DCD”) organs. Prior to the availability of OCS technology, donor hearts were only available from donation after brain death (“DBD”) donors given that hearts that stopped beating (DCD) were considered too risky for use in transplantation. With the approval of the OCS technology, DCD hearts can effectively be brought back to life with the TMDX system. Use of DCD hearts has expanded the pool of available donor organs and has contributed to the growth in total heart transplants.
Source: United Network for Organ Sharing, OPTN Dashboard
NOP Supporting OCS Adoption, Surgeon Capacity Expansion
The OCS technology is clearly an improvement upon the cold storage standard of care for organ preservation, however adoption of the technology was slow prior to TMDX’s launch of the National OCS Program. Hospitals were hesitant to spend CAPEX on the OCS system given high costs and uncertain utilization of the machine.
Additionally, usage of the console required training of staff, which further increased the cost of ownership and negatively impacted transplant center efficiency. By introducing the NOP, TMDX removed these barriers to adoption: hospitals avoid the CAPEX required to purchase the console and training of staff is no longer necessary. Removing barriers to adoption was important, but the efficiencies gained by transplant programs through utilization of the NOP have served to further increase market acceptance of the OCS technology. Transplant centers that utilize the NOP no longer dispatch transplant teams to procure organs, which effectively doubles the capacity of their transplant teams. Importantly, all NOP costs are reimbursable, which means that the profitability of the transplant center is not impacted by utilization of this service. Utilization of the NOP has increased from 47% of all TMDX transplants in Q4 2021 to 89% of all cases in Q1 of 2023. Going forward, the NOP will likely account for the majority of TMDX’s volume.
The significant growth of the NOP in 2022 has led to logistics constraints for the company. Currently, TMDX utilizes private jet brokers to arrange planes for organ recovery and delivery, which adds significant costs to the process.
More importantly, TMDX has outgrown this brokerage network as the capacity of available jets is running low. Given projected growth of OCS adoption over the next few years, TMDX believes demand will exceed brokered jet capacity and has made the decision to build its own air transportation fleet. Through the issuance of convertible notes in May 2023, TMDX raised $400mm which will be utilized to either buy or lease a dedicated fleet of private jets. Control of the logistics network will not only enable more efficient transport of organs, it will also lower the logistics costs for transplant centers as brokerage fees and rental fees to plane owners will be eliminated. The efficiencies and cost savings that the NOP will enable for transplant programs should drive even faster adoption of OCS technology. While the OCS is the core technology improving transplant outcomes, the NOP will enable adoption of the technology and serve as a barrier to entry for future competitors. The cost to build a competing network combined with uncertain utilization is likely to deter competitors from replicating the TMDX NOP, which is poised to have a significant first mover advantage compared to peers.
Competition
The competitive environment for TMDX is fragmented and consists of both direct competition from companies with NMP devices as well as indirect competition from other technologies. TMDX is the only company with FDA approval for a NMP device for multiple organs and is the only company with a complete procurement and logistics network (following acquisition/lease of jets). As such, TMDX is the clear industry leader and I believe the combination of superior technology with a robust service component will enable the company to maintain its lead over potential competitors. A summary of the competitive landscape is outlined below.
- XVIVO : FDA approved NMP device for the lungs and recently received FDA approval for a clinical trial in hearts that will utilize hypothermic machine perfusion. Similar to TMDX, XVIVO has a competing organ recovery service, Star Teams, that they acquired in 2021. STAR has 8 thoracic surgeons on staff and only offers lung and heart retrieval. During Q1 ’23, XVIVO retrieved 146 organs, or 1/3 the volume that TMDX’s NOP platform procured during the same time period. STAR’s reception in the market demonstrates viability of the outsourced organ retrieval business model. Interestingly, XVIVO announced a private jet partnership in early July 2023 (5 planes), also noting that logistics capacity would be critical to future growth. XVIVO currently has $18mm of cash on hand and likely needs to raise significant capital in order to compete with TMDX. The commercial viability in 3 organs along with a scaled service offering provides TMDX a significant first mover advantage relative to XVIVO.
- OrganOX : FDA approved NMP device for livers. Limited funding prevents commercial viability today.
- Hypothermic machine perfusion (“HMP”) : Paragonix has an FDA approved HMP device for hearts and there are multiple companies with clinical trials in the organs that TMDX targets. HMP technology supplies oxygen to the transplant organs, which can extend ischemic times. From a commercialization perspective, the key question is whether the organ performs better post-transplant when preserved at lower temperatures than experienced in the body. Current research suggests that normothermic conditions are better for extended criteria organs, at a minimum. Per Paragonix’ website, their HMP device is only approved for 4 hours, which is the same time allowed for transplant using existing static cold storage, which does not solve the geographic limitation on donor/patient matching.
- Normothermic regional perfusion (“NRP”) : A process that involves restarting the heart inside the body to naturally perfuse organs. This technique bears watching as a potential competitive threat to TMDX. However, there are ethical questions surrounding this process and NRP does not solve the geographic limitations that TMDX’s OCS system solves.
Industry Adoption
It is early in the lifecycle of OCS technology and similar medical devices that provide a good roadmap for ultimate industry adoption do not exist. However, leading transplant centers that have already adopted the TMDX OCS suggest that this technology can expand the organ donor pool by at least 30%. Additionally, early adopters of the OCS/NOP have seen OCS penetration rates approaching 30% of total transplant volumes. Keep in mind that this early success is being achieved despite relatively recent FDA approval of the OCS device in heart and liver, manufacturing constraints on TMDX side, and an incomplete NOP offering. As more facilities grow increasingly comfortable with the technology and NOP network, industry adoption should continue to grow. Important data points about utilization by early industry adopters are presented in the appendix.
Financials
TMDX earns revenue by selling the perfusion set and associated solutions that are utilized while an organ is on the OCS console. This perfusion set is a one-time use item (consumable) that costs $65,000 per transplant (all reimbursed by insurance).
Source: TransMedics Investor Presentation (May 2023)
TMDX charges ~$20,000 for the NOP service that procures and delivers the organ to the transplant center (also reimbursed by insurance). Actual logistics costs will vary based on the length of transport, but range anywhere from $10,000-$30,000.
I assume the heart and liver markets can each expand by 50% by 2027. This TAM expansion is a combination of DCD organ utilization, extended criteria organ utilization and expanded geographic organ matching. I also assume that TMDX penetration of these 2 markets reaches 30% in 2027. Both assumptions seem plausible given comments from early adopters and management’s forecast that both markets can double in size. Locally procured, healthy organs are unlikely to be served by TMDX, so a portion of the market will likely remain inaccessible for the company. Industry adoption rates could exceed 30% if improvements in therapeutics while organs are on the OCS device prove viable or additional clinical evidence demonstrating improved patient outcomes for standard criteria organs is presented. It’s worth noting that TMDX had a 15% penetration in hearts and an 11% penetration in livers during Q1 ’23 when capacity was unable to meet industry demand (implies industry demand is well above these levels already).
I do not forecast strong industry adoption rates for lungs. While management believes that lower industry adoption rates for OCS Lung are due to the COVID impacts on lung transplants, it seems that adoption rates should be increasing now that the pandemic has passed, and overall industry volumes have recovered. This has not occurred and, as such, it appears that there could be structural reasons for lower OCS lung adoption rates.
TMDX Market Share Projections | |||||||||||||||||
2019(A) | 2020(A) | Y/Y Growth | 2021(A) | Y/Y Growth | 2022(A) | Y/Y Growth | 2023(E) | Y/Y Growth | 2024(E) | Y/Y Growth | 2025(E) | Y/Y Growth | 2026(E) | Y/Y Growth | 2027(E) | Y/Y Growth | |
Total US Liver Transplants* | 8,896 | 8,906 | 0% | 9,236 | 4% | 9,528 | 3% | 10,625 | 12% | 11,687 | 10% | 12,622 | 8% | 13,632 | 8% | 14,314 | 5% |
TMDX Liver Transplants** | 54 | 81 | 50% | 24 | -70% | 548 | 2141% | 1,218 | 122% | 1,871 | 54% | 2,265 | 21% | 3,205 | 41% | 4,147 | 29% |
Penetration Rate | 1% | 1% | 0% | 6% | 11% | 16% | 18% | 24% | 29% | ||||||||
Total US Heart Transplants* | 3,552 | 3,658 | 3% | 3,818 |
4% | 4,111 | 8% |
4,556 | 11% |
5,012 | 10% |
5,513 | 10% |
5,954 | 8% |
6,430 | 8% |
TMDX Liver Transplants** | 176 | 218 | 24% | 236 | 8% | 368 | 56% | 806 | 119% | 1,210 | 50% | 1,465 | 21% | 1,721 | 17% | 1,961 | 14% |
Penetration Rate | 5% | 6% | 6% | 9% | 18% | 24% | 27% | 29% | 30% | ||||||||
Total US Lung Transplants* | 2,714 | 2,539 | -6% | 2,524 |
-1% | 2,692 | 7% |
3,001 | 11% |
3,151 | 5% |
3,308 | 5% |
3,474 | 5% |
3,647 | 5% |
TMDX Liver Transplants** | 133 | 95 | -29% | 157 | 64% | 99 | -37% | 99 | 0% | 122 | 24% | 147 | 20% | 176 | 20% | 211 | 20% |
Penetration Rate | 5% | 4% | 6% | 4% | 3% | 4% | 4% | 5% | 6% | ||||||||
Total TMDX Transplants | 363 | 394 | 9% | 417 | 6% | 1,014 | 143% | 2,122 | 109% | 3,204 | 51% | 3,877 | 21% | 5,101 | 32% | 6,319 | 24% |
* Source: OPTN National Database and HCM Estimates **Company Disclosures and HCM Estimates |
By 2027, I forecast TMDX’s OCS system will be utilized for ~6,500 transplants. Management has a target of 7,000- 10,000 transplants by 2027. Successful adoption in the lung transplant community and broader adoption of OCS would bridge the gap between my forecast and the company’s. There could be additional upside from international expansion, although this is low on management’s priority list given current US demand.
In addition to the OCS volumes assumed above, I also assume that NOP will be utilized for 95% of all procedures and the TMDX logistics network can support 60% of these cases. Product gross margins will expand to 85% versus 80% currently as scale and manufacturing efficiencies are realized. Management believes they can achieve service and logistics gross margins of 30%, although I’m more conservative at 25% given my lower volume forecast.
EBITDA margins should normalize in the high 20% range, slightly below management’s forecast of low to mid 30’s (again due to my more conservative volume forecasts). I believe TMDX can support a 30x EBITDA multiple at maturity given the growth outlook and the unique nature of the technology and network that supports it. A 30x EBITDA multiple on 2027 EBITDA yields a price target of $150, or a 15% annualized return from today’s price.
Summary
The combination of TMDX’s OCS technology with its NOP network will lead to market share gains and broader market growth over the next 5+ years. Broad support from all stakeholders due to improved health and financial outcomes provides the backdrop for rapid adoption of OCS technology. The full service NOP offering enables industry adoption and, given the significant financial and human capital requirements, serves as a barrier to entry for future competitors. Recent manufacturing capacity expansion will prove to be an inflection point for growth and TMDX has ample financial capacity to support both near and medium-term growth ambitions. Assuming a 30x EBITDA multiple on 2027 EBITDA yields a price target of $150, or a 15% annualized return from today’s price.
TMDX Appendix
- Vanderbilt (Top Ranked Heart Transplant Program): Currently utilizes TMDX for DCD heart transplants. Vandy's chair of Cardiac surgery believes that TMDX's technology could expand the donor pool of hearts by 30-40%. In 2022, 34% of Vandy's heart transplants were DCD. 1 2
- Carolina's Medical Center (14 th ranked Heart Transplant Program): “We face a nationwide shortage of donated organs. I expect this technology to transform the transplant industry, increasing the national donor supply and helping us transplant more patients in need.” 3
- Mayo Clinic of Florida (19 th ranked Heart Transplant Program): Foresees perfusion used in 20-25% of cases. It’s worth noting that these comments were made before NOP was introduced and this article also notes that one of the biggest hurdles to adoption is cost. The NOP should alleviate the cost concern. 4
- Medical University of South Carolina (20 th ranked Heart Transplant Program): expects OCS to expand their transplant volume by 20%
- Tampa General (22 nd ranked Heart Transplant Program): 20% of heart transplants used TMDX in 2022. 5
- Northwestern (40 th ranked Heart Transplant Program): “In my 20 years as a transplant surgeon, this is the biggest leap forward our field has taken and the best opportunity we’ve had to expand the number of available hearts,” says Dr. Pham. “At Northwestern, we believe this approach will help us to treat and serve more patients with end-stage heart failure. 6
- Hartford Hospital (79 th ranked transplant program): Performed 6 heart transplants using OCS in March 2023. This hospital only performed 20 transplants in all of 2022. 7
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Headwaters Capital - TransMedics: 'Heart In A Box' Technology Revolutionizing The Organ Transplant Industry