Summary
- TransMedics reported its Q4 earnings highlighted by accelerating growth.
- The company's organ care system platform is gaining market adoption as a superior alternative to traditional cold storage methods.
- An expanding national network of devices supports a positive long-term outlook.
TransMedics Group, Inc. ( TMDX ) has caught our attention with a spectacular stock market performance, climbing more than 330% over the past year. The company has established a leadership position in the business of organ preservation with the only FDA-approved device for lung, heart & liver transplantation in the United States.
Compared to traditional "cold storage" where body parts are simply packaged on ice, the TransMedics system keeps the donor organ in a human-like metabolically active state, increasing its transplant viability.
Indeed, the company's latest quarterly result capped off a record year with accelerating growth driven by an expanding network of partner transplant centers and awareness of the system advantage.
We sense that the opportunity remains in the early stages, with continued operating and financial momentum supporting a positive long-term outlook. Recognizing that a repeat of the recent gains in the stock is unlikely, we still see room to remain bullish and expect more upside going forward.
source: company IR
TMDX Earnings Recap
TMDX reported Q4 revenue of $31.4 million, an increase of 225% year-over-year. Management considers 2022 a transformative year for the company driven by the increased production and market adoption of Organ Care System ((OCS)) devices. While the company is not currently profitable, the top-line momentum helped the Q4 net loss of -$6.7 million narrow from -$12.7 million last year.
For the full-year 2022 , total revenue of $93.5 million climbed by 209% y/y, with the gross margin steady at 70%. The net loss in 2022 of -$36.2 million declined from -$44.2 million last year. Favorably, the level of expenses as a percentage of revenue is moving in the right direction, from 200% of sales in 2001 to 103% this past year which is a trend that is expected to improve further as the operation scales.
source: company IR
The company ended the quarter with $202 million in cash against $68 million in total debt. During the earnings conference call , management suggested the liquidity position was sufficient to support the ongoing commercialization strategy and ramp-up in manufacturing.
In terms of guidance, the company is targeting 2023 revenue between $138 million and $145 million. Notably, this was above the prior consensus estimates for the year looking for a figure closer to $134 million.
What's Next for TMDX?
TransMedics is addressing the problem where a significant number of potential organs from deceased donors placed in cold storage go unused. This happens because of the logistical challenges of both maintaining the tissue viable and transporting the organ to a recipient that may be across the country.
The company is working with transplant stakeholders including healthcare and insurance companies in conjunction with the non-profit United Network for Organ Sharing ((UNOS)), which manages the national transplant database, to expand access to fill these gaps in the system.
The understanding is that there are upwards of 100,000 people currently waiting for an organ transplant that could benefit if the system was improved. TMDX is building a program network that leverages its technological advancements to strategically position the devices across the country, working to eliminate historical time and distance limitations of organ transplant logistics.
source: company IR
Clinical data and real-use applications demonstrate that the OCS significantly expands the utilization of donor organs, alongside improved post-transplant outcomes. As it relates to the commercial strategy, the expectation is that the growing awareness of the system among healthcare professionals turns the product into the standard of care.
Beyond the initial sale of the OCS console, there is a recurring element as each transplant performed requires a single-use organ-specific disposable set. These procedures are recognized as being covered by Medicare & Medicaid Services, along with private insurers for the patients.
source: company IR
Naturally, hospitals offering the service can increase the number of transplant procedures while healthcare companies capture from the cost-effectiveness relative to end-stage organ failure requiring costlier long-term mechanical support or recurring therapy.
So when we look at the current consensus estimates with a forecast for sales to climb by 58% this year, and nearly triple from 2022 levels to $277 million by 2025, we believe these targets are reasonable. The market currently expects TMDX to reach profitability by 2025, with an EPS estimate of $0.42 that year.
Longer-term, the strategy is to expand internationally, which will be facilitated through ongoing trials in the regulatory process from key European countries. Headlines demonstrating some progress on that effort can also work as a catalyst for the stock over the near term.
All that being said, the caution when digging into TMDX comes down to its current valuation. With a market cap of $2.2 billion, trading at 17x 2023 sales, it's clear there is already a good layer of optimism toward the growth story based on the lofty premium. That multiple improves down to 12x into 2024 and 9x by 2025 based on the current consensus, but the uncertainty with those targets also grows over the period.
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Final Thoughts
Our takeaway is that TransMedics has a disruptive and life-changing product that should sell itself. We won't claim to be early in identifying the opportunity, but we believe there is a good chance TMDX can be trading higher by this time next year.
A scenario where the next couple of quarters deliver stronger-than-expected sales trends can lead to revisions in growth estimates higher and pull forward a path to profitability as the bullish case for the stock.
On the other hand, it will be critical for the company to both continue its operating and financial momentum, while the key risk would be any setback in the commercialization strategy that undermines the outlook. Given the lack of profitability and currently negative operating cash flows, TMDX remains speculative and prone to large swings of volatility.
source: company IR
For further details see:
TransMedics: Organ Care System Momentum Keeps Us Bullish