My Top Pick For 2023: TransMedics Group (NASDAQ:TMDX)

Thesis

TransMedics Group, Inc. (NASDAQ:TMDX) has a long runway of growth left ahead of it. Sitting at just under $2B market cap, TransMedics seems likely to have multi-bagger potential over the next few years. I believe 2023 will be the best year for the company yet. TransMedics has a $205M cash pile compared to $68M in debts, and net revenue of $25.7M for Q3 22, representing a 378% increase compared to Q3 21. This also represents a 25% increase compared to Q2 22.

That said, the OCS Kidney, the company’s fourth product, is set to begin clinical trials in early 2023. In my opinion, TransMedics little competition, growth, and upcoming opportunities serve as the reason for this company being my top pick for 2023.

Background

TransMedics Group is fast growing commercial-stage medical organ transplantation company that focuses on end-stage organ failure patients across multiple disease states. TransMedics Group developed its trademarked Organ Care System (OCS) to replace the known decades-old care standards used to conduct transplant therapy worldwide. innovative OCS technology replicates many aspects of the organ’s natural living and functioning environment outside of the human body. As such, the OCS technology represents a paradigm shift that transforms organ preservation for transplantation from a static state to a dynamic environment that enables new capabilities, including organ optimization and assessment. TransMedics believes the use of the OCS has the potential to increase the number of organ transplants and also improve the overall post-transplant outcomes.

• TransMedics designed the OCS to be a platform used for multiple organs. As of December 2022, they have developed three OCS products. One for Lung, Heart, and Liver transplants. Additionally, TransMedics has even begun to commercialize the OCS Lung and OCS Heart outside of the United States and hopefully will have liver in the future too. All three OCs products have received Pre-Market Approval, from the Food and Drug Administration (FDA) for the following:

  • OCS Lung is used for preserving donor lungs for double-lung transplantation.
  • OCS Lung is used for the preservation of a donor’s lungs when deemed unsuitable for cold storage due to limitations for double-lung transplantation.
  • OCS Heart is used for preserving heart donations after brain death (DBD) when deemed unsuitable due to limitations of cold storage.
  • OCS Heart for the ex vivo reanimation, functional monitoring, and beating-heart preservation of donation after circulatory death (DCD) hearts
  • OCS Liver for the preservation of DBD and DCD donor livers < 55 years old, macrosteatosis <15%, and with < 30 mins of warm ischemia time.

Third Quarter 2022

TransMedics’ Q3 2022 results displayed net revenue of $25.7M for Q3 22, a 378% increase compared to Q3 21. This revenue also represents a 25% increase compared to Q2 22. This accounts for and includes the $1.4 million favorable adjustment due to an updated estimate of accrued clinical trial contra revenue. It is worth noting that Transplant centers’ use of the National OCS Program drove roughly 90% of the total revenue within the United States. The increase in revenue was due primarily to the OCS Heart and OCS Liver sales.

The company is not yet profitable but is slowly moving in that direction. Net losses for Q3 22 came in at $7.4M, compared to $13M for Q3 21. Cash and cash equivalents came in at $204.5M as of September 30, 2022, including the proceeds from the offering and refinancing. Lastly, TransMedics updated the full-year 2022 revenue to a range of $80M to $85M, representing 164% to 181% growth when compared to a year-over-year period.

With the recent stock offering, TransMedics is expected to net approximately $121.4M to $139.7M depending on the underwriters of the offering purchasing additional shares. The company intends to take the proceeds from the offering to expand commercial organization, expand the national OCS program, aid in developing the next-generation OCS technology, and increase and expand manufacturing infrastructure. Furthermore, while the company does not have any current agreements in place, believes opportunities may exist to expand via acquisition. With management having broad discretion on how to apply the proceeds received, I do have faith it will be put to use in the right manner. Factors management said that will affect the way they spend will be based on cash flows from operations, regulatory approvals and clinical trials, growth of our business, and means to finance/fund growth.

As of September 30, 2022, the company had cash and cash equivalents totaling $204.5 million. Management believes this amount will be enough to fund operations expenses, capital expenses, and repay debts for at least 12 months. The following quote from Waleed Hassanein, MD, President, and Chief Executive Officer brings a lot of hope for the future.

We are very pleased with our third quarter and year-to-date performance and the strong clinical demand for our OCS technology and NOP integrated offering, we strongly believe that we are in the early stages of capitalizing on the significant greenfield opportunity that we have created.”

Valuation

TransMedics has slightly negative forward earnings per share and a price-to-sales ratio of just under 26, so by no means is this company cheap. The company also has a forward EV/Sales of 21 and trailing twelve-month EV/Sales of 25. With a forward price-to-book ratio of 18, this company has seen quite the run-up. However, high beta stocks like this one, over 1.6, can pay off for patient investors who can handle the volatility. As depicted in the company’s most recent 10Q the net revenue for The United States based on the three-month ending September 30th in one year is stellar. Up to $23.28M from $3.11M and the nine-month comparison ending on September 30th is up from $14.62M to $54.98M. When looking at revenues outside the United States, they are not growing nearly as fast but still growing. Using the same comparisons, the three-month is up to $2.39M from $2.25M, and the nine-month up to $7.1M from $5.96M.

My favorite metrics are how much growth the OCS Heart has netted, and how quickly the OCS Liver has generated revenue. For the OCS Heart, using the nine-month comparison ending September 30th, 2022, net revenue grew from $11.62M to 25.31M. More impressive is the adoption and revenue generation of the OCS Liver, coming in the same metric comparison at $30.03M up from $442K.

If the upcoming OCS Kidney can generate the same relative growth, we could see another $10M to $20M in net revenue by September 30th, 2023. This would provide another growth avenue and optionality. Additionally, if revenue outside the United States grows at the same pace, that would net another rough $1.5M in revenue. I believe that based on these numbers and the same growth pattern thus far in 2022, TransMedics could have roughly $11M to $22M just in the first nine months of the year.

Risks

While there are tons of risks for this company, I still believe those who can tolerate future volatility will be rewarded further in the end. First and foremost, unfavorable economic conditions have already and could potentially continue to pose a variety of risks to business operations. With inflation and a weaker economy, suppliers could be impacted which would result in potential supply chain issues. The COVID-19 pandemic, including efforts to contain the spread of the coronavirus, has impacted and may continue to impact, business operations, financial conditions, operating results, and cash flows. Disruptions to our manufacturing operations and supply chain; labor shortages; decreased productivity and unavailability of materials or components; limitations on our employees’ and customers’ ability to travel, and delays in product installations, training, or shipments to and from other affected countries and within the United States.

Another large risk is related to FDA approval for the OCS. Currently, the FDA regulates the design, development, testing, manufacturing, labeling, selling, promoting, distributing, importing, exporting, and shipping of the OCS for TransMedics. In the future, unknown or unforeseen delays in obtaining approval from the FDA could impact costs for the company. Further potential risks delay in regulatory reviews, which would ultimately result in disruptions that would have material effects on commercialization plans. In return, this would potentially negatively affect the business and operational results. One major risk that I see is with foreign sales. Failure in obtaining the appropriate clearance and approvals obtain clearance or approval in one jurisdiction may harm the ability to obtain clearance or approval elsewhere.

Final Thoughts

For my final thoughts, I believe that TransMedics will be one of the best-performing stocks in the coming year. Perhaps daunting with the stock already up 192% year-to-date, I believe the story is only beginning. Looking at the stock options granted on November 2, 2022, TransMedics granted 138,400 shares of its common stock to six employees. The stock options were granted with a per-share exercise price of $46.36. TransMedics could have roughly $11M to $22M just in the first nine months of the year with continued growth in the current segments and with the adoption of OCS Kidney. TransMedics Group, Inc. is bound to be volatile, continue to be expensive, and based on my prediction, beat the market in 2023.

Editor’s Note: This article was submitted as part of Seeking Alpha’s Top 2023 Pick competition, which runs through December 25. This competition is open to all users and contributors; click here to find out more and submit your article today!