1 Hot Medical Technology Stock Up 100% In 2024 -- Too Late to Buy? TMDX Analysis
Kasey, what are your thoughts on a business like this? Because I have a terrible track record, with the exception of Intuitive Surgical of picking anything healthcare related as far as investments go. Instantly, my mind goes to those semiconductor and chip testing machines, that are out there. Yeah, unfortunately it is not. So that's why this method that, TransMedics has developed is so important. Hey, everyone. Welcome back to Chip Stock Investor.
Today, we're going to be talking about TransMedics, a biotech company that has definitely gained some momentum over the past couple of months. And before we jump into that, make sure you check out our Semiconductor Insider membership. It's just 5 dollars a month gets you exclusive content.
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Let's talk about TransMedics, TransMedics, ticker symbol, T M D X. Kasey I'm going to rely heavily on you today to explain what this is, especially given that you have a number of years as a registered nurse in surgery. Why don't you tell us about TransMedics? Well, Nick, full disclosure here to all of our viewers.
I have never worked in the organ donation area in the healthcare field. That is not my area of expertise. So Please don't put too much pressure on me here. Okay, so Let's talk about this slide. This is the problem that TransMedics is trying to solve.
There are a huge amount of people that need transplants, heart transplants, liver transplants, and lung transplants. Those are three areas of massive need in the world. There is also an under utilization of donor organs for transplant. On the very left side of the chart, you can see the total number of deceased donors. That's all the folks out there who have decided to donate their organs after death. So you can see there is a very large bar there on the left, but the actual utilization of those organs is much, much lower.
You can see lung transplants is the lowest part and then liver on the very right. So there's an opportunity to grow that number and utilize the organs that have been donated. And maybe before we continue to the next slides, what is dcd, donor versus dbd donor? So dcd is a donor after circulatory death and dbd is a donor after clinical brain death.
And that becomes a little bit more important as we go along here with understanding what exactly TransMedics is trying to do. I guess you've teed this up by introducing the problem that there's underutilization in the United States, That's where basically let's just say all of Transmedics business comes from, is in the US. You teed this up as a problem under utilization of organs, heart, liver and lungs. What's the problem? So to understand this a little bit further, I have this graphic here, a very crude graphic, and unfortunately it is a very crude way that traditionally organs are transported.
After being removed from the body, they're placed in a bag and placed in ice. That is a very high level overview of what happens. Of course, there is a lot more involved in this.
But the method of transportation is just that, it's placed in a cooler with ice. and so let's talk about what TransMedics makes. So you've been studying this business. you chuckled and said, it reminded you of Newman from Seinfeld, in the movie Rat Race, transporting an organ across the desert and an ice chest. And you said, it's actually not that far off from reality. Yeah, unfortunately it is not.
So that's why this method that, TransMedics has developed is so important. Here's the picture of the machines they make. And instantly, my mind goes to those semiconductor and chip testing machines, that are out there. Like we've done some research on companies like Keysight Technologies, for instance. You put the chip in the module and then you subject the chip to a very controlled environment and get readings on what it's doing.
Okay. Am I like way, way far off here because this machine was awfully similar. Yeah, it really does.
And I think you were telling me yesterday, an article said that you put the organ in what looks like a Tupperware container. And then that Tupperware container goes on top of that machine. And then the organ is animated the entire time during transportation. The lungs are still breathing, the heart is still beating, and the liver is still producing bile.
It's kept at a warm temperature, our body temperature, around 37 degrees Celsius, and it still functions. And the other benefit of this machine is when the organ is removed from the body, during transport, you have no idea what's happening. There could be damage to the organ because of lack of blood flow, lack of oxygen, the ice, all of these things. But during transport with this organ care system, you can analyze exactly what is happening with the organ and keep it going. So that it has more success when it gets to the recipient.
Really interesting. And I'm going to automatically assume very high level overview of how the technology works. But obviously an important potential solution that can help save many, many lives of people that need heart, liver, lungs. In addition to the actual machine, there is more to this business that just, developing the technology, building machine and selling it. It's not exactly that type of business model, right? TransMedics has 2 channels under the business model, the first is that direct acquisition. That's where transplant centers have their own teams for retrieval and organ management, but they use this machine, the OCS machine.
The hospital system itself keeps the machine and TransMedics gets revenue from new cartridges, essentially for that machine. Okay, so that makes sense. So That's sort of like, uh, our favorite healthcare technology stock, Intuitive Surgical. They sell the machine, the DaVinci robot, and then they have this ongoing revenue stream by selling disposables, disposable parts and pieces and instruments from the ongoing use of the machine.
So similar business model then? Partially. However, the difference with Transmedics is that portion of the business is primarily outside of the U. S., which is a very small part of the business. We'll talk about that in just a moment when we go over the revenue breakdown, but the primary model for business at this point within the United States, especially is the N.
O. P. model, which is the national ocs program and that taken from the 10 K. It says it enables the transplant centers to outsource the retrieval organ management and transportation logistics to the TransMedics trained organ procurement surgeons, specialists, and transplant and logistics coordinators, using the OCS products. Put simply, they manage all of the procurement and transportation of the organ using their system, and that is the vast majority of business for TransMedics, especially in the United States.
Okay, so that's interesting. It's a technology business, but it's also a logistics business. To simplify it, perhaps crudely, shipping and handling. Except that the product in this case isn't Amazon boxes, it's organs, hearts, livers, lungs. What do we need logistics for with this? You have a map that you pulled from the presentation.
What's up with this? What does this mean? The truth of the matter is that recipients and donors are basically never in the same place. Donors can be absolutely anywhere. As you can see on the right side of this chart, their donors themselves are less concentrated around 80 percent of donor volume is across about 20 states. But the recipients, on the other hand, or around 80 percent residing within only 9 states in very densely populated, highly concentrated areas, where there are transplant centers of excellence. Okay, that makes sense.
So you've got to get the organ from the donor to the recipient. I guess that brings us to this next part of the business. There was an interesting acquisition, maybe odd at 1st glance when we saw this last summer. Transmedics purchased a small aviation business. Why did they do that? Really, trying to vertically integrate, their capabilities in getting these, organs moved around ultimately.
Especially with the NOP business model, they want to be able to take the organ and get it where it needs to be as quickly as possible. The system itself extends the amount of time that an organ is viable for transplantation, but getting those organs to the recipient in the most time efficient and cost efficient manner is very, very important, which is why they purchased Summit Aviation in August of last year. They have private planes that were used as charter planes and for a aviation training school. They have those available for use now to transport the organs via that OCS system and they plan to continue adding, 30 planes by 2025. Okay. This also makes sense.
I think we're going to come back to this in the financials as well. The purchase of Summit Aviation explains what's going on with the company's, free cash flow. But again, I think this makes sense.
So they have these planes. They're outfitting them with the OCS technology so that they can then transport the organs much more quickly from one place to another. Right? Exactly.
Fun fact, Summit Aviation, you mentioned, had a flight school. What did Transmedics do with that flight school after they made the acquisition last summer? They're still running it. It's a little bit of revenue. I think in the first quarter 2024 quarterly filing, I saw it mentioned that the Summit flight school generated about $900, 000 in revenue. So I can only assume that means it's, at least a slightly profitable segment that helps offset some of the costs of outfitting the planes with the OCS system. Yeah, exactly.
And, if you're looking to learn how to fly, you can check out, Summit Aviation in Bozeman, Montana, apparently. Hopefully not with organs aboard. No. No trainees with organs aboard.
Now let's pivot to the actual financials. This is a small business, but a very fast growing business the last few years. That probably speaks volumes to the fact that the Transmedics technology must work. Lots of new customers, picking up the technology and utilizing the logistics service. Are there any competitors, especially larger health care systems or health care conglomerate businesses that do something similar to what TransMedics is doing? The short answer is that TransMedics has the only FDA approved multi organ transportation system. Their competitors are the cold storage and cold perfusion technologies.
That's the traditional method of transporting organs. The ice chest method, the ice chest method. Exactly. There's a lot of companies that provide the solutions that are infused into those organs before they're placed in the ice chest, but as far as this normal thermic transportation method, there are two competitors, Organ OX Limited, which is a private company in Oxford, and they have a normal thermic machine profusion for donated livers.
And then there's XVIVO perfusion in Sweden, and that's a publicly listed company in Sweden, and it has a few products, but they do have one that's similar to TransMedics used for lungs. For all intents and purposes, excluding the ice chest method, TransMedics is something of a, maybe not a total market monopolist, but a technology monopolist at this particular stage. Basically, yeah. I noticed in the last quarterly earnings, there was a lot of conversation about those 2 competitors in Europe presented some clinical trials that maybe didn't go quite so well. The data wasn't quite so promising.
So, it sounds like TransMedics is looking to launch some of its own clinical trials here over the next year to 2 years to increase its use cases for especially lungs. As you had pointed out, that was an underutilized use case for the technology. Take away, the small business.
It is, turning profitable now, you can see in the last quarter, just shy of $97 million in revenue, $0.4 million in GAAP operating income, and all while generating over 130 percent year over year growth. That said, I had mentioned the free cash flow being negative. So GAAP profit is now in positive territory. Free cash flow has actually gotten a whole lot worse. In the last year, what's the reason for that? It's that acquisition of Summit Aviation.
It sounds like they're hoping to have upwards of 20 planes commissioned with the OCS technology by the end of this year. Obviously, that costs money. This is a capital expense. Property plant and equipment or capital expenditures includes planes. And outfitting the planes with.
Equipment. So that's the reason for the steep losses in free cash flow in capex. Still in more than $44 million expense in Q1, 2024, which led to a nearly $48 million negative free reading. This is pretty typical for a business that's building, and especially if we boil this down to this being essentially a type of logistics business, they need to build the fleet necessary to handle the logistics.
And this capex spend is obviously going to continue over the next couple of years as they build out that fleet. Yeah, that's right. It sounds like at least through 2025, they're hoping to be able to handle about 80 percent of their own logistics within the United States. And again, worth mentioning that Summit Aviation only for the U. S.
business. This has done some things with the balance sheet that I think we need to call out and say is worth mentioning. Historically, TransMedics, had more cash and short term investments on balance than it did debt. That has changed in the last couple of quarters. As they spend money on capital expenditures, that comes off of the balance sheet.
And so as of the end of March, 2024 Q1 of this year, $507 million in long term debt, $ 350 million in cash and short term investments. That cash balance could continue to come down over the course of the next year or two and might need to be replenished, perhaps via issuing of new stock, selling new stock on the market. I wouldn't think that a company like this would want to raise more debt at this particular stage of its life. So something I think that probably needs to be monitored for potential shareholders. Okay, let's circle back to the revenue by product. I see these things get mentioned as products from time to time, or organ type.
What's the potential for transmedics? As we mentioned earlier, you can see that the liver is far and away the biggest use case for these OCS machines. The revenue for the liver was three times that of the second, leading organ, which is the heart at $20, 000, 000 and then at the lung all the way down at the bottom, there are only $4. 7Million in revenue.
And there is a big, opportunity for not only the lung, Which is the smallest of the 3 segments and as you mentioned, Nick, they're increasing their amount of clinical trials, trying to get more approval for use cases for the lung, but also the heart. We mentioned that dcd and dbd, at the beginning of this episode. That donor after brain death is, in general, what we think about when we think about organ donation and transplantation, but donor after circulatory death could potentially be a growing part of especially heart transplants. Yeah, this is interesting because there's a lot of ethical debate that comes in with this, especially when it comes to the heart, maybe just to come back to this one more time, because it acts as a type of risk for TransMedics, future growth.
What is the difference between brain death and circulatory death, exactly? Is this like the Princess Bride where someone can be like, mostly dead versus all dead? Or is it not like that at all? You can tell Nick has been married to a nurse for way too long, and we have some really dark humor around here to try to keep us laughing. Brain death is a clinical diagnosis. Someone can have no function whatsoever in the brain, but the body continues to function, often with the aid of medications and therapies in order to await donation of organs, if that person is a organ donor. Versus circulatory death, that's when the blood stops pumping through your heart permanently. And the reason for that could have happened in various ways, trauma, a oxygen deprived states.
Lots of reasons for this, but ultimately death is inevitable. Let's just go back to this slide one more time about the underutilization of organs. After circulatory death, that would require organs to be harvested and then reanimated in the OCS machine. Okay. So again, lots of controversy with this.
There's some ethical concerns about this, about how to harvest organs from someone who's been declared either deceased by brain death or circulatory death. I bring that up because it seems like an important point. I know it's controversial.
Hopefully hasn't hit too close to home for anybody. But I think the point here is controversy aside, the solution solves for a problem that could help save many, many more lives that maybe don't get the organ that they need. That's why I wanted to ask that question. Ultimately, as an investment, this means growth opportunity if TransMedics can help continue solving more of these problems. One more question because there's one pink bar here, the smallest bar in this chart. This is outside of the United States that just OCS revenue.
What's the hurdle for TransMedics getting the OCS system outside of the US? Yeah, currently national health care systems are not reimbursing for OCS. International hospitals do use the OCS, that's why there is that pink bar there, there is some revenue from that. But they're making payment through their own hospital budget or other charitable funds versus in the United States, where large insurance companies do reimburse for the system. So we often talk about the gatekeeper problem in the US health system, the big insurance conglomerates that, kind of act as the barrier to all of those health care funds for patients.
The international market, it's a very, very different type of system. It sounds like the company management is optimistic that this segment will grow, but, it's just going to take some time. It's a very different problem to solve than the US health care access problem.
Let's talk about the financial outlook then. So they raised their full year 2024 guidance to be in the range of $390Million to $400Million, which would be a 61 percent to 66 percent growth year over year. That's an impressive growth rate.
However, just showed you the slide for Q1 2024. They grew at 131 percent year over year. So, in my mind, financial P brain, not involved with actual saving of lives and all of the intricacies of health care. This simply means that by the end of the year, revenue is going to be growing perhaps far less than 50%. There's a really, really steep fall off in growth trajectory coming for TransMedics. Everybody that got into the stock and bet on it early when it was a micro cap, congratulations.
You've had an epic run. Is the stock price rise going to continue? It could, long term over time, but it doesn't appear that it's going to continue at the same pace as it has the last few years, does it? No, it certainly doesn't. At the current stock price of around $154 dollars, that means it would be valued at 175 X, in 2024 expected earnings per share. And valued at 116 times 2025 expected earnings per share. Yeah, and that's based on Wall Street consensus, estimates, which to be completely fair are very, very wide ranging.
The company is still very small, and it's just a wild guess at this point, given how young the business is, at where those GAAP profit margins are going to wind up over the course of the next 2 years. Again, scaling very nicely on a GAAP basis, this metric looks like it could head higher from here. But there is going to be that temporary headwind still for the integration of the Summit Aviation business as they outfit more of those planes and try to get to 30 total planes by the end of 2025. So I think the short story is the profitability is going to be a bit bumpy.
There's going to be some, some turbulence, sorry for another pun. I guess our final takeaway on this really, really incredible, very promising technology. This company has done a fantastic job of getting itself into sustainable positions so that it can continue to increase the number of use cases for that OCS and for its logistics service to help with the management of organ transplantation in the U.
S. Kasey, what are your thoughts on a business like this? Because I have a terrible track record, with the exception of Intuitive Surgical of picking anything healthcare related as far as investments go. Intuitive Surgical was a huge win your healthcare pick. Yeah, and I guess the key to that was, buying it early on, even though the market opportunity at the time was small. And the stock was expensive in air quotes, buying it and holding it for the longterm.
Is Transmedics something that could possibly turn into something like that? It's certainly possible. As you said, amazing technology, they are definitely showing how effective this method is, and ultimately, this is about how many more lives could potentially be saved by using this system, so I think there is a lot of potential for growth. I like the business.
I like their idea of integrating their logistics. I think that's a gamble, but I think it's an important one to make. I'd be happy to start a very small position.
So one of our small cap basket stocks where we have usually no less than a couple dozen small bets that could potentially one day turn into big core positions if they continue to execute well on their growth opportunities. Yeah, I think that would be a good position for our portfolio. Okay.
I guess at this point, that doesn't necessarily mean we are taking a position right here. And right now in TransMedics, we felt like this was an appropriate time to take a look at this business, and share some thoughts on it publicly. Remember if you want our show notes and the ongoing conversation on this and other businesses that we cover, check out the semi insider here on YouTube or over on our Ko-Fi shop. It's just five bucks a month. Not only is that a cheap price, we think it will probably generate some value in your investing and hopefully just your life in general. Check it out.
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2024-07-10 16:13
