2023-10-18 15:25:36 ET
Summary
- Today, we put the focus on TransMedics Group, Inc., a healthcare company focused on transforming the organ transport and transplant industry.
- The company recently acquired Summit Aviation, a charter flight operator, to enhance its logistical capabilities for organ transplantation.
- TransMedics reported strong second quarter results, with revenues exceeding expectations and an improved net loss compared to the previous year.
- Despite this, the stock has been cut in half since the announcement of the Summit Aviation purchase.
- Are the shares oversold or will TransMedics Group stock continue to be a "falling knife"? An analysis follows in the paragraphs below.
Be kind, for everyone you meet is fighting a harder battle .”? Plato.
Today, we put TransMedics Group, Inc. ( TMDX ) in the spotlight for the first time. The company has a unique and growing niche in the healthcare industry. It also recently made a purchase that will change the logistical part of its business model significantly. As you can see below, the stock has been under considerable pressure in recent months. Has the stock dipped into the " buy zone" yet? An analysis follows below.
Company Overview:
March Company Presentation
TransMedics Group, Inc. is based just outside of Boston in Andover, MA. The company's vision is to transform the organ transport and implant industry. Towards that end it offers its Organ Care System ((OCS)) platform. The stock currently trades just below $45 a share and sports an approximate market capitalization of $1.4 billion.
March Company Presentation
The OCS platform is a portable organ perfusion, optimization, and monitoring system. This FDA approved system utilizes its proprietary and customized technology to replicate near-physiologic conditions for donor organs outside of the human body. It can be used to transport heart, liver, and lungs and greatly improves the overall organ transplant process.
March Company Presentation
March Company Presentation
The OCS platform operates on a razor and razor blade business model. Medical facilities lease or buy the OCS console and then pay for the consumables used for each organ transport and transplant procedure.
The Acquisition
On August 1st, the company announced that it was purchasing privately held Summit Aviation, a charter flight operator. The cost of the acquisition was not provided and the purchase closed two weeks later. The deal should establish TransMedics as the first national provider of air logistics dedicated to organ transplantation in the U.S.
March Company Presentation
It will reduce the variability of each organ flight, as the company will no longer have to use charter flights, while adding the fixed costs of operating and maintaining a fleet of 10-15 aircraft and adding a dispatcher/logistical hub in MA. The integration of Spirit should also enhance the efficiency and control of the National OCS Program. Over 90% of overall OCS revenues come from this channel.
March Company Presentation
Second Quarter Results:
The company reported second quarter numbers on August 3rd. TransMedics had a GAAP loss of just three cents a share, more than a dime a share above expectations. TransMedics had a net loss of $1 million in the quarter, a commendable improvement from the net loss of $11.5 million in Q2 2022.
Revenues rose just over 52% on a year-over-year basis to nearly $52.5 million, which was some $10 million over the consensus. Sales primarily surged due to the increased utilization of the company's NOP across all three OCS products. Gross margins of 70% were exactly in line with the same period a year ago.
During the quarter, TransMedics received the CE mark for OCS Liver. This will now enable commercial sales of OCS Liver in Europe. Revenue breakdown for the quarter was the following: $32.7 million from OCS liver, $13.5 million from OCS heart and $2.8 million from OCS lung. 19% of overall sales came from services while 81% consisted of product revenues. Only $3.5 million worth of sales came from outside the U.S.
Management bumped full year 2023 sales guidance by $20 million, which is now expected to be in the range of $180 million to $190 million.
Analyst Commentary & Balance Sheet:
Since the recent acquisition was announced TD Cowen reissued its Buy rating and bumped its price target up $15 a share to $110 while Oppenheimer maintained its own Buy rating and $92 price target. Last week, Morgan Stanley reissued its Equal Weight rating on TMDX but chopped its price target to $50 a share, from $81 previously. So far, the market agrees with Morgan's more pessimistic take on the stock as the stock has been cut in half since the purchase was announced.
Approximately one out of every six shares outstanding are currently held short. The fall in the stock has not brought out the buyers in the C-suite. Numerous insiders have been selling shares frequently and consistently throughout 2023, including disposing of nearly $2 million collectively in September.
Moving to the company's balance sheet . According to the company's second quarter 10-Q , TransMedics ended the year with just over $580 million of cash and marketable securities on its balance sheet. Depending on the price for Summit Aviation, that balance should reflect lower when third quarter results are posted. TransMedics also has just under $60 million in long-term debt as well as some $445 in senior convertible notes. The company netted approximately $393 million from this transaction.
The latter was raised in May of this year and has a maturity date of June 1st, 2028. The notes bear a cash interest at a rate of just 1.50% per year. They are payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1 of this year. The notes are convertible at $94.00 a share. Interest expense jumped to $2.5 million in the second quarter from just under $1 million in the same period a year ago.
Verdict:
TransMedics lost a $1.23 a share on just over $93 million worth of revenues in FY2022. The current analyst firm consensus is losses will be pared to 44 cents a share in FY2023 as revenues more than double to $194 million. In FY2024, they see sales growing to some $285 million and losses dropping further to 16 cents a share.
March Company Presentation
TransMedics is seeing impressive sales growth as it helps transform the organ transport and transplant process here. In retrospect, the company picked a good time to raise capital in May given the subsequent collapse in its stock price and the rise in interest rates since then.
That said, obviously the market does not like the Summit Aviation purchase based on trading activity in the shares since the deal was announced. The continued selling of shares by insiders also is not encouraging. An article earlier today also raised concerns about the growth in stock-based compensation at the firm.
In addition, small caps with a slug of debt are not exactly highly valued by investors in this " higher for longer" market environment. This is one reason the Magnificent Seven-driven Nasdaq (COMP.IND) has outperformed the small cap Russell 2000 Index (RTY) by some 25% since monetary tightening began in March of last year.
The acquisition of Summit will allow TransMedics to directly manage all NOP transplant volume in the U.S. by the second half of 2024, but will require an initial fleet of 10-15 planes (cost approximately $12 million a plane) operational by the first half of 2024.
The company will also have to establish a digital and dispatch center in MA with the deployment of the TransMedics Aviation fleet. These planes will be deployed from eight dedicated aviation hubs capable of covering 100% of the Continental U.S.
March Company Presentation
There certainly is a lot to digest here for investors. Given the potential long-term growth of TransMedics Group, Inc., there is enough here to merit a very small "w atch item" position for aggressive investors. Management plans to grow NOP transplant volume to reach 10,000 transplants per year over the next 5 years. This is a story I plan to keep an eye on, but probably won't pull the trigger on establishing a small holding until we get a new set of data points from when TransMedics reports quarterly earnings early in November.
Compassion is the basis of morality. ”? Arthur Schopenhauer.
For further details see:
TransMedics Group: A Company In Flux