TransMedics (Nasdaq:TMDX), A catalyst upcoming

Summary: Transmedics is the maker of organ preservation systems to extend the life of organs for transplants. Organ transplantation has suffered with low usage rates due to a lack of effective preservation techniques, but Transmedics' organ care system solves this issue and effectively expands the market for organs. With an upcoming FDA panel for their OCS heart system on October 7, I believe the stock is undervalued at current levels and has a positive catalyst coming soon.

Product

The current standard of care for organ transportation cold storage, effectively a cooler for organs. Under this method, only 2-3 organs thoracic organs are used out of every 10 donated and there is a 30-35% post-transplant complication rate. Their organ care system (OCS) has shown a significant increase in organ utilization to ~8/10 organs and an improvement in the post-transplant complication rate to 14%(source: company presentation). While typically organs are thrown into a cooler, TMDX used warm perfusion as a way to keep organs alive, a technique where fluid is pumped through the organ to keep it functioning. This allows organs to be transported over thousands of miles and could even preserve organs after circulatory death (discussed in the catalyst section). The system itself uses a razor and blade model where the OCS system sells disposables along with the main system in thus generating a recurring revenue stream.

Competitive Advantage

While there are some other competitors using cold perfusion techniques for organ preservation (OrganOx and XVIVO Perfusion), Transmedics holds some key competitive advantages. 1) Their system encompasses all three major thoracic organs: lungs, hearts, and kidneys while their competitors only have products for livers and lungs respectively. This helps them sell to hospitals as a system and become a facilitator of organ transplantation. 2) They are the 'First mover' is the space and have established key relationships and are far ahead in the clinical trial process, thus lending them more credibility in hospitals.

Total Addressable Market

The largest source of their potential market stems from the opportunity in DCD organs (donation after circulatory death). Donation after Brain Death(DBD) and Donation after Circulatory Death (DCD) are the two sources of organs and while there are low utilization rates for DBD organs, the utilization rate for DCD organs is zero using current techniques. See the chart below for a good summary

Using the demonstrated 80% utilization rates from their DCD/DBD trials, we can get the following annual opportunity

The key aspect of this TAM is the opportunity from the DCD organs. This leads into the upcoming FDA panel meeting and the impact it has on the business. 

FDA Panel October 7

https://www.fda.gov/advisory-committees/advisory-committee-calendar/october-7-2020-circulatory-system-devices-panel-medical-devices-advisory-committee-meeting

The FDA is meeting on October 7th to review the OCS for DBD Heart Organ preservation. The preliminary results have been extremely encouraging and I expect an approval for the system in the USA thus unlocking a 2.0 billion$ annual opportunity(Source 1, Video 2). A good FDA Panel meeting would set the stage for explosive growth. 

Valuation

TMDX has a market Cap of 390 million and LTM revenue of 24.87 million which represents 5% YoY growth(a number hugely affected by Covid-19). When transplants are being done again, their revenue growth rate will return tot eh >70% levels it was at pre-pandemic, thus a 15x Sales multiple is not unreasonable. Looking forward 5 years, If we assume they receive approval for OCS Heart in early 2021, and Lung/Kidney in 2022-2023(as laid out by management), we can expect revenue to continue to grow at astonishing rates until they achieve 90+ market penetration. Their technology is the best in the market and they have a stranglehold on the organ transplantation market, thus such high market penetration is not unreasonable. Remember, they are not only entering the market, but creating a new market. With no one to disrupt, their path is clearer than most. Giving them sales growth of 70% for each year from now and assuming a Covid-19 bounce back of 120% for this year (not unreasonable with OCS heart approval) and a P/S ratio of 5, we get sales of 459 million in 2025 and a market cap of 2.295 billion representing a CAGR of 42%.

The stock is undervalued at current levels and has a catalyst in the FDA panel meeting. With high sales growth and a sales multiple of 5x in 2025, we have an extremely high CAGR. Looking forward, the effective technology, 'first-mover' advantage, and all-in-one platform makes TMDX poised to capture and create new markets in the organ transplantation market. 

RISKS

Risk to me is defined as consequence vs probability and though the upside is fantastic, there still does exist a risk of non-approval for their device, thus delaying their product launch and slowing revenue growth. Their stock price, is highly dependent on the October 7th meeting and though shares have taken a tumble in recent weeks, their shares could sell-off on bas news. However, it is much more likely shares just continue on their downward trend and trade approximately where it is at now until further steps are taken with the FDA approval process. 

Another eye-popping number are their EBITDA margins which were a stunning -125% and a cash burn of 29 million per year. However, they have $140 million in cash, thus setting them up well to operate for the next few years. Their EBITDA margin should improve because of the disposables segments of their OCS which provides a recurring revenue stream.