Summary
- TransMedics has been blowing away expectations in 2022.
- After slowly delivering on its potential in recent years, last year has been spectacular.
- The stock has been unleashed ever since, as I remain a somewhat more cautious (at these levels) believer.
In May of last year, I concluded that TransMedics ( TMDX ) continued with an impressive transformation, which left me to continue to hold a long position, although I failed to have conviction to add at the time. Ever since, it has been clear that a real breakthrough has been delivered upon, unleashing the shares far higher.
A Game Changer
TransMedics went public in 2019, as the developer of the Organ Care System (OCS), designed to become the new standard in organ transplantation by replicating the natural living function of the organ outside the body. This represents a paradigm shift from the prevailing practice in which organs are kept in a static state.
The cold storage method comes with real timing issues and concerns to maintain optimal conditions. Unlike this approach, OCS aims to replicate body conditions to thereby tackle issues which relate to lack of oxygen and blood supply. This results in an easier transplantation and transportation process, as well as improved conditions of the organ itself, to thereby increase the odds of a successful transplantation and outcome in the aftermath of the actual procedures.
Around the time of the initial offering, OCS was used in 1,200 lung, heart and liver transportation procedures. On the back of the fundamental proposition of the business, I was impressed with the company and initiated relatively soon after the public offering.
A $25 stock in 2019 translated into a $430 million operating asset valuation, a big price for a company which generated $13 million in sales in 2018. Forwarding in time, sales rose 81% to $24 million in 2019, although losses widened. 2020 sales rose just 9% to $26 million, the result of the pandemic of course, as the revenue run rate in the second half of the year was meaningfully higher.
In 2021, the company obtained FDA pre-market approval for its liver and heart technology. Despite the upbeat fundamental improvements, TransMedics only reported an 18% increase in 2021 sales to $30 million, accompanied by a $39 million operating loss. The 2022 guidance was upbeat however, with sales seen up to $49-$55 million, as the growth acceleration (based on widening indications) would hopefully start to translate into some operating leverage.
First quarter sales for 2022 rose by a spectacular 125% to $15.9 million, prompting the company to hike the full year sales guidance to $59-$65 million. Disappointing is that operating losses still trended at nearly $40 million per year. Despite a ten million hike to the full year sales guidance, I believed this guidance was still conservative, as this is a much-needed solution, albeit that losses were still substantial (also in relation to dwindling cash balances).
Holding a speculative position at $27 in May, I have been too cautious to add more, as this lack of conviction has been really painful. Forwarding to today, shares have essentially tripled, now trading at a high around $80 per share.
Huge Momentum
In August, TransMedics posted very strong second quarter results with sales up 151% to $20.5 million. In fact, operating momentum only accelerated, although that operating losses of $9.7 million were pretty flat on a sequential basis. The company hiked the midpoint of the sales guidance to $71 million, which again looked quite conservative given the pace at which sales were reported.
Taking advantage of the momentum-induced rally in the shares, TransMedics sold 3.25 million shares in August at $40, raising $130 million in gross proceeds, sufficient to fund current losses for about three years. Third quarter sales rose as much as 378% to $25.7 million, with the rapid increase in percentage growth being the result of easy comparables, although the revenue number included a $1.4 million accrued revenue component.
While the company hiked the full year sales guidance to $80-$85 million, that implied a mere $20 million revenue number for the fourth quarter. Given the very conservative guiding practices, I am not placing too much weight on that soft guidance. Another promising factor was that operating losses for the quarter only came in at $5.5 million, marking real progress on that front.
In February, the company posted blowout fourth quarter results. Revenues rose an impressive 221% to $31.4 million, being a very strong result, now including a $6 million service revenue component as well. Operating losses ticked up to $6.8 million, but given the lower pace of losses and substantial net cash position following the equity raise over the past summer, that is not a major concern here. Moreover, this is attributed to new investments into ¨NOP¨, the net OCS generation platform.
Net cash is now reported in excess of $140 million as the 32 million shares outstanding now have risen to $80 per share, valuing shares at just north of $2.5 billion, for an enterprise value of $2.4 billion. This comes down to about 20 times earnings, at least based on the fourth quarter revenue results. The company guided for 2023 sales between $138 and $145 million, which looks very conservative, indicating an average revenue number around $35 million per quarter.
And Now?
Still holding a relatively small stake, which has grown more substantial following the huge share price appreciation, I think it is too late to chase the stock here. Nonetheless, the company is still relatively small, with a market cap of $2 billion and change, as the company has a long runway for growth with more types of organ transplantation to be targeted, overseas opportunities still available and penetration of organ transplants still lagging.
This might justify a high valuation at 20 time current sales, albeit that multiples collapse rapidly at this growth pace, with the actual market capitalization still being quite modest. Given all this, I remain upbeat on the name here, but feel no need to chase the shares here, as I am keeping my long position, seeing no reason to alter this stance.
For further details see:
TransMedics: Impressive Performance Continues