TransMedics Group: Founder Led Company With Solid Potential

Today, I’d like to discuss a small-cap company that is disrupting a much-needed sector of the healthcare industry.

This company has beaten the S&P 500 since its IPO date in 2019 as the stock is up over 250% in that time span. So far, in 2024 the company is beating the S&P 500, and the stock is also up over 10%.

This company is still led by its founder, has innovative technology and has a moat in a niche market. The company is TransMedics Group (NASDAQ:TMDX).

Let’s dig into the details of this organization, and I’ll share why long-term investors should consider adding this company to their portfolios.

The Company

TransMedics Group, Inc. was founded in 1998 by Waleed Hassanein. Under Hassanein’s leadership, TransMedics has reshaped the landscape when it comes to organ transplants.

Historically, the most common practice when it comes to preserving and transporting organs is through a method called static cold storage (‘SCS’). There are various issues with SCS, but I’d state the most notable is the organ has a severe time limitation due to the fact cold storage deprives the transplant organ of oxygen, which limits the time and distance the organ can travel from donor to recipient.

As you see from the below graphic from a recent TransMedics investor presentation, there is a clear under-utilization of donor organs:

TransMedics Group, Inc. created a new way to transport organs, which the company calls the Organ Care System (‘OCS’). In simplified terms, the OCS helps preserve the organ as if it were in a human body. In the OCS, by perfusing the donor’s organ with warm, nutrient-enriched blood, the organ replicates its typical functioning state (i.e. the heart is beating, the lung is breathing, etc…). This system allows the organ to be transported further distances, ultimately maximizing an organ’s utilization. TransMedics’ OCS is currently the only FDA approved multi-organ platform. The OCS platform supports lung, heart, and liver transplants.

Evidence from clinical trials illustrates the OCS has much better outcomes compared to SCS:

The company has also created a program called the National OCS Program (NOP) to help transplant centers utilize the OCS technology more efficiently. TransMedics’ NOP provides trained organ procurement surgeons, clinical specialists as well as transplant coordinators to help provide an end-to-end solution using the OCS technology. In Q4 2023, management noted, 37 clinical specialists and 4 procurement surgeons were added to the NOP staff due to demand.

However, after the creation of the NOP TransMedics faced numerous issues with using charter flight brokers. Hassanein mentioned the various problems on the company’s latest earnings call, issues which included older planes, fragmented operators, plane availability, and inefficient routes.

To combat this bottleneck in August of 2023, TransMedics acquired Summit Aviation, which is a charter flight operator based in Montana. Thus far, the results are promising as this acquisition is bolstering the company’s NOP and logistics services. As stated on the company’s Q4 2023 earnings call, Hassanein believes this acquisition will significantly help grow the business, “We fully expect our integrated NOP and logistics services to enable TransMedics to deliver an end-to-end, seamless, efficient and safe solution to transplant programs across the U.S. Simply stated, providing a world-class service through a highly cost-efficient model.”

Moat and Opportunity

As the only FDA-approved multi-organ warm perfusion platform, TransMedics has a very advantageous position within this niche market. Two other companies, OrganOx Limited and XVIVO Perfusion AB, have similar warm perfusion systems but again neither company has a multi-organ system approved by the FDA.

TransMedics also has a significant number of patents and pending applications, as the company on their most recent 10K filing noted, they hold roughly 400 worldwide.

This FDA approval, along with TransMedics’ NOP and logistics and aviation services, gives the company a large lead over their competitors.

In terms of opportunity, the company is hoping to reach 10,000 OCS transplants by 2028. TransMedics has made strides in getting closer to this figure, as the company completely roughly 2,300 OCS transplants within the United States in 2023. This is a 130% increase in year-over-year transplants compared to the 1,000 OCS transplants which occurred in 2022. As noted on the Q4 2023 earnings call for the year, OCS case volume represented 17% of the national liver transplants, 16% of the national heart transplants, and 4% of national lung transplants in the United States. All three of the OCS case volumes rose significantly compared to prior year as OCS lung volume grew 11%, OCS heart volume by 82% and OCS liver volume grew nearly 200%.

As noted earlier, TransMedics’ bottleneck was previously charter flight brokers. The company ended the year with 11 owned aircrafts. With these aircrafts TransMedics Aviation was only able to cover roughly 35% of the NOP flight needs in Q4 2023. TransMedics is hoping to have 15-20 aircrafts by the end of 2024 as the company’s goal is to cover 80% of the NOP cases using logistics services for air and ground transportation. With more company owned planes, it seems more than likely the company will continue to grow the OCS case volumes and get to 10,000 transplants.

Management

As I mentioned previously, Waleed Hassanein is the founder of TransMedics and is the company’s current President and CEO. Hassanein has an impressive background, earning an M.D. from Georgetown. He has been named as a top Global Thinker in Healthcare and won the Tribeca Disruptive Innovator Award in 2018.

However, despite Hassanein’s accolades, as you can see from these Glassdoor ratings, TransMedics Group might not be viewed as a great place to work and employees don’t seem to approve of Hassanein:

Several of the reviews cite “growing pains” which I would state are unsurprising given the amount of growth the company has seen and changes in the organization’s business model with the addition of planes and the company’s aviation and logistics systems. However, a few fairly recent reviews stated it is an allegedly “toxic” work environment.

As a positive, I do like it when the founder of a company has skin in the game and as stated in the organization’s most recent proxy filing, Hassanein holds 4% of TransMedics.

Financials

TransMedics’s revenue growth has certainly been impressive, as you can see below in the Income Statement from the company’s recent 10K filing:

TransMedics generated roughly $241 million revenue in the latest fiscal year, which is a 159% increase compared to fiscal year 2022. Also, for Q4 2023, the company generated roughly $81 million, which is another 159% increase compared to Q4 2022.

As you can see, the company still posted a net loss in fiscal year 2023, but the organization is inching closer to profitability.

Below is TransMedics’ most recent balance sheet:

I think the most notable year-over-year change is the addition of the convertible senior notes in 2023. Typically, I’m not a fan of companies with such levels of debt but I understand it was needed to grow the business. The cash from the convertible senior notes helped the company acquire Summit Aviation.

Risks

I think the most significant risks for TransMedics revolve around execution. The company has yet to generate net income on an annual basis. TransMedics logistics services is rather new to the organization and while I think the plan to create a streamlined solution is a good one, the company’s primary focus has been on medical technology and creating a program around that technology. TransMedics logistics and aviation are essentially an extension to make the NOP more efficient, yet that business is vastly different from one focused on creating organ transplant technology. I could easily see additional costs arising and missteps as the company works to create a more efficient end-to-end offering.

Additionally, as with any growing business, it is vital to attract and retain key personnel. The Glassdoor reviews are worrying, as it seems like many current employees are dissatisfied with Hassanein and the organization. If the organization is truly “toxic” as is stated in some reviews, the organization may have difficulty supporting their growth, or they’ll have more training and SG&A costs associated with higher employee turnover.

Valuation

Based on data I found, the average organ transplant cost is roughly $80,000 (Also if you take total net product revenue for 2023 and divide it by the total number of transplants for fiscal year 2023 you get near this number, $176M/2300 = $80,000 roughly). The company has stated their goal is to perform 10,000 transplants in the United States by 2028.

Assuming the bear case, the company only performs 7,000 transplants, that would mean revenues could reach $560 million in 2027. Assuming a profit margin of 18% TransMedics would have a net income of $100 million. Now assuming a P/E ratio of 30, you’d get a market value of over $3 billion, which is higher than the company’s current market value of over $2.8 billion.

To get the net margin percentage and P/E ratio, I compared a subset of medical device industry leaders (including SWAV, SMLR, SYK, MDT, BSX, and ISRG). I took the median values rather than the averages, which I thought was more appropriate to come to 18% for net margin and 30 for the P/E ratio.

I think that’s quite the bearish scenario as if you include the service revenue (inclusion of service revenue brings the 2023 fiscal year revenue up to $221M in the US) the average cost of the 2300 transplants is over $96,000.

See math below from figures pulled from the company’s 10K:

Using the same number of transplants, net margin, and P/E ratio, the company’s market value would be over $3.6 billion.

Furthermore, if international usage of the OCS can grow or the OCS platform can expand to perhaps support additional organs, these areas could bring additional revenues to an already fast growing company.

Conclusion

TransMedics’ OCS is a disruptive technology platform that is helping more individuals receive organ transplants. The company’s NOP coupled with the recent Summit acquisition will allow TransMedics to provide a streamlined, efficient, transplant process which has never been seen before in the United States.

TransMedics also currently has the only FDA-approved multi-organ warm perfusion platform, which gives the company a leg up on the competition. The company’s innovative founder is still at the helm, holding a sizeable stake in the company, which I like to see.

The employee reviews on Glassdoor do concern me, but I’m hopeful Hassanein and the leadership team can make improvements to create an environment that can attract and retain employees.

I think TransMedics appears undervalued. With a long runaway and a competitive advantage, TransMedics seems like a potentially great investment for those with a long-term focus.