udra
TransMedics Group (NASDAQ:TMDX) is a long-term revenue growth story in the medical technology space. I expect the company’s revenue will grow at a CAGR of around 20% in the next five years driven by secular growth and consistent adoption of its organ transplantation technology. The technology has the potential to completely change the landscape of retrieving donated organs. Long-term growth-oriented investors can buy the company’s shares around the current price to maximize their gain.
TransMedics is a commercial-stage medical technology company. Its OCS (organ care system) platform is a new technology in organ transplant therapy for end-stage organ failure patients. The technology is replacing the decades-old standard of care in organ transplantation which is limiting access to life-saving transplant therapy. OCS is capable of maintaining donated organs’ natural living and functioning environment.
Growth Driver
The company’s OCS platform is its current growth driver. OCS is a portable organ perfusion, optimization and monitoring system. The system replicates near-physiologic conditions for donor organs outside of the human body. With OCS donor organs are perfused with warm, oxygenated and nutrient-enriched blood, which keeps the organs in a living and functioning state. OCS has three variants, one for each of lung, heart and liver transplantations.
Cold storage is the standard of care for solid organ transplantation, which has many limitations. Cold storage sends organs to significant injury due to lack of oxygenated blood supply, which leads to ischemia. Time-dependent ischemic injury leads to short-term and long-term post-transplant clinical complications. OCS, on the other hand, protects organs from ischemia.
Incidence of end-stage organ failure has been rapidly increasing worldwide, and with the use of cold storage, the majority of organs donated after brain death go unutilized. Therefore, OCS has significant chance to become the standard of care for organ transplantation in future, which will result in meaningful revenue expansion for TransMedics in the next five years.
Competition
The area in which TransMedics operates is highly competitive. Apart from cold storage and cold organ perfusion techniques, the company receives significant competition from warm perfusion players, such as XVIVO Perfusion AB (OTCPK:XVIPF), and OrganOx Limited. TransMedics competes with these players on the basis of superior technology, product ease of use, and advanced platform capabilities.
TransMedics’ primary competitive advantage is that its OCS products can lead to significant decrease of current time and distance limitations on organ transport. In addition, use of OCS results in increasing the currently limited time period for organ retrieval and transplantation during which high quality transplant outcomes can be obtained. The company’s another competitive advantage is that OCS allows therapeutic optimization of donor organs from the damaging conditions of brain and circulatory death, which leads to improved post-transplant outcomes. Both the competitive advantages help the company boost long-term revenue growth in a sustainable manner.
Second Quarter 2022 Results
TransMedics reported second quarter 2022 net revenue of $20.5 million, a year-over-year increase of 151%. The company’s net loss for the second quarter of 2022 was $11.5 million, compared to $10.7 million in the year-ago period. The company’s GAAP EPS came in at -$0.41. Since the company remains at a very early stage of growth trajectory, its negative EPS is not an issue.
The company reported excellent second quarter 2022 results. The company’s National OCS Program (NOP) was used by transplant centers countrywide, which drove 84% of the company’s total US revenue. NOP remains to be a critical catalyst for driving the company’s expected growth in the foreseeable future. The company is planning to broaden its NOP infrastructure and resources. Its aim is maximizing its coverage capacity for driving growth in transplant procedures worldwide. I believe warm perfusion will become the new standard of care for organ transplantation, replacing the cold perfusion technique in the next three to five years, and OCS will play the most vital role in the process. This will result in significant revenue growth for TransMedics in the long term.
The company is developing OCS for kidney transplant as well. This will result in significant revenue growth for the company in the longer term. Liver is the largest of its three current addressable markets, apart from heart and lung. In the second quarter, the company’s revenue came from a fairly modest number of transplant centers, between 6 to 12 in each organ category, which indicates the company’s technology is very much under-penetrated and there exists huge scope of revenue growth for the company’s technology.
Valuation
TransMedics’ peer group companies include Treace Medical Concepts (TMCI), Nevro Corp. (NVRO), LeMaitre Vascular (LMAT), Alphatec Holdings (ATEC), and AtriCure (ATRC).
|
TMDX |
TMCI |
NVRO |
LMAT |
ATEC |
ATRC |
|
|
Price/Sales (TTM) |
22.02 |
10.96 |
3.64 |
6.71 |
3.25 |
5.43 |
|
EV/Sales (FWD) |
16.01 |
9.15 |
3.11 |
5.94 |
3.72 |
4.60 |
|
Price to Book (TTM) |
22.38 |
17.83 |
6.20 |
4.17 |
93.62 |
3.68 |
(Data Source: Seeking Alpha)
TransMedics is expensively valued compared to its peer group companies. The company has a balance sheet consisting of cash and equivalents of $30.4 million and total debt of $45.0 million. The company’s high cash burn rate is a cause for concern. However, the company’s strong growth prospects support higher valuation. The reason of the company’s higher valuation is that cold organ perfusion techniques are gradually being replaced by warm organ perfusion techniques, and TransMedics is playing an important role here. Since a new technology is replacing an old technology, I believe TransMedics will continue to enjoy higher valuation compared to its peers. Despite having expensive valuation, I expect the company’s shares will rise significantly in the long term driven by steep revenue growth potential in the next three to five years.
In the last five years, TransMedics’ revenue has grown at a CAGR of 46%, and I expect in the next five years the company’s revenue will grow at a CAGR of around 20%. Now I will find out the company’s long-term (five-year) share price. The company’s trailing 12-month revenue is $51.4 million, and at a CAGR of 20% the company’s end-2027 revenue will be $127.92 million, or $4.02 per share. In the last three years, the company’s shares have traded between the price to sales multiples of 12x and 32x. I expect in the next five years the company’s price to sales multiple will touch a high of around 20x. Applying a price to sales multiple of 20x on TransMedics’ end-2027 revenue per share, I get $80.40 as the company’s end-2027 share price.
Risks
The company depends heavily on successful commercialization of OCS and its market acceptance. The cost of the using OCS is significantly higher than the cost of cold storage preservation, which is a key problem regarding smooth adoption of OCS. For successful commercialization of OCS, the company needs to demonstrate to surgeons, transplant center program directors, and organ procurement organizations that OCS results in significant improvements in post-transplant clinical outcomes and leads to significant increases in the utilization of donor organs. If the company fails to do this in a consistent way, its revenue growth may be negatively impacted, and profitability may be delayed.
The company’s long-term growth depends on its ability to further improve OCS and expand its usage for additional organs. However, doing this consistently is expensive and time-consuming. In addition, developing new and modified products may result in diversion of management’s attention away from current operations. If the company fails to improve OCS, and expands its usage, its revenue growth may be negatively impacted, and profitability may get delayed.
Conclusion
TransMedics could be a great investment for the long term since its technology is a game changer in organ transplant procedures. I believe the company will develop many other OCS variants in the coming years, which will boost its long-term revenue growth. Long-term investors can buy the company’s shares around the current price.
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