This company is not really the type of company that this board targets. I’m providing this update because I have mentioned TMDX several times in the past, and I know a few people here own it. This is an early stage Med-Tech with lots of risk.
Before getting into the ER, I would like to acknowledge that 2020 has been a horrible year for the stock. I initially bought into this company around this time last year and I am currently negative on my investment (big opportunity cost holding this in the last year). I have learned a lot about some of the risks of the Med-Tech space over the last year. I wish that I had waited longer to invest, but I still believe in the longer-term potential for the company. I am still holding all of my shares, and I have recently added more at the lower prices.
Throughout this summary you will see the terms “DBD” and “DCD” used frequently. They represent “Donor after Brain Death” and “Donor after Circulatory Death”. I’ve explained this more fully in previous posts. Donated organs are classified in these 2 categories, and right now not many DCD organs can be used for transplant. One of the big advantages of the OCS device is that it enables use of DCD organs.
Here are my observations from the earnings report:
Business results
- Revenue is down 1.5% from last year. There are several contributing factors to this result.
o The only fully approved and commercial product that TMDX sells is the OCS for DBD and DCD lung transplants. COVID had a disproportionately large impact on lung transplants compared with other organ transplants. All transplants were negatively impacted in Q2, but lung was impacted the most and is still not back to where it should be. This had a huge impact on TMDX revenues this year. The company expected Lung OCS to form the basis of their revenue growth in 2020, so Covid really hurt them.
o They also said they expect the lung transplant slow down from COVID to continue as long as the illness is a major issue. Part of the reason is that COVID has a larger impact on lungs than on other organs.
o COVID also significantly hurt international sales and expansion in 2020. It presented international travel so TMDX was not able to go to the locations they had planned to expand into this year.
o COVID delayed the Heart OCS review that was supposed to happen in June. Based on the most recent delay, the FDA review that was scheduled for earlier in the year might have gotten delayed anyway, but it’s hard to know because we do not see all of the details that went into the second delay.
• The company has done a good job of reducing expenses and securing additional capital in order to make sure that they have plenty of liquidity. Loss from Opps was $5.1M – compared with a loss of $8.2M in 3Q19. They currently have $132M cash.
• Gross margin was 71% - up from 57% in 3Q19. During the discussion they indicated that this gross margin is higher than where it would normally be due to some of the cost savings measures they have put in place during the COVID slow down. Once things pick back up, they said the gross margin will go back down in the short term, but they expect it to be in the mid-70’s when they reach a stable run rate in the future.
• They expect 4Q20 to be slightly down in revenue compared with Q3 due to COVID flare-ups, plus the fact that they are losing some sales due to a couple trials that just finished.
Service Organization:
o I have written posts about this in the past, so I’m not going to go into deep detail to describe what it is. At a high level, they are creating a brand new organization to facilitate “turnkey” organ collection and distribution in the US (this type of service does not currently exist). This service organization will be enabled by the new TMDX OCS devices - the service and the device go hand in hand.
o Part of the slow adoption of the lung OCS device had to do with the delayed deployment of this service organization.
o Here is a quote from the CEO from the call – “To achieve this, we have developed a multi-faceted strategy designed to create a first of its kind national transplant ecosystem that leverages our OCS technology, establishes a new regional clinical OCS expertise that are strategically located across the United States, initiate a working relationship with leading organ procurement organizations. We do this to enable us to access the broadest number of potential donor organs for transplants in the U.S. In addition, we are creating a comprehensive new workflow that will enable us to clinically manage and transport donor organs from donor to potential recipients anywhere across the continental U.S.”
o The CEO made a couple of other comments during the call highlighting that all of the groundwork that has been done (and is still being done) to set up this service organization for the Lung OCS will greatly accelerate the deployment of the Heart and Liver OCS devices once they are commercially approved by the FDA. Basically, all of the people and systems and processes in the service organization will be almost directly transferable over to the Heart and Liver systems. So, those commercial deployments should ramp up much faster than Lung has.
o Here is a quote from the call specific to the service organization – “In Q3, our service program in one OPO enabled four lung transplant. What’s interesting is that three out of those four lung transplants were transplanted in new transplant centers that had never used the OCS before. We’re excited about this, because that shows the ability to grow our footprint within the U.S. using this national service program. Importantly, we have confirmed interest to expand to three new OPOs in Q4 and a robust pipeline of several OPOs to be initiated over the next several quarters.” This is obviously pretty small-scale at this point, but you have to start somewhere.
Regarding ongoing trials and approvals:
o Heart DBD (First Heart OCS trial) - this is the one that was scheduled for FDA review in October, but the review was postponed. They said they have provided all relevant material to the FDA review team and they are working to re-schedule a panel meeting in 1Q21. Quote from CEO – “Let me be crystal clear. Despite this unforeseen delay, we remain extremely confident in the robustness and quality of our clinical data from our – in the OCS Heart PMA. We remain extremely confident in our clinical positions and our ability to address FDA or panel questions relating to our OCS Heart PMA.”
o Heart DBD - Continued Access Protocol - this is basically just a continuation of the original DBD trial. When the initial trials are complete, TMDX typically applies for this CAP trial so that they can continue to sell the OCS devices (on a limited basis) until they get FDA approval for commercial deployment. They did not really say much about it, but some of the data from this CAP is what the FDA wanted to have included in the review. TMDX says they have now submitted that data to the FDA.
o Heart DCD - this trial recently finished enrollment. The CEO said that the trial extends out to 6 month post-surgery data point before it will conclude. So, final data for this one will not be available until mid-2021. It is notable that TMDX completed this trial very quickly even in the midst of the pandemic. There have been positive news articles about this particular trial and also some very positive tweets from one of the transplant directors at the Duke University Transplant Center where the largest number of heart DCD transplants were performed.
? Quote from CEO responding to a question about excitement for Heart DCD – “I mean, the momentum speaks for itself on the heart. The momentum in the DCD and the Heart indication in general speaks for itself. We finished a 172 patient randomized trial in less than nine months or about nine months. We have 25 centers that have signed up to be a part of this program, even before the first PMA indication is approved. We expect – when we see that level of momentum, clinically, we expect to see results that are in sync with that type of momentum.”
? The CEO also reminded people on the call that the Heart DCD is an FDA “breakthrough indication” and therefore will receive expedited review from the FDA once data is available.
o Heart DCD - Continued Access Protocol - as I noted above for Heart DBD, TMDX usually initiates one of these CAPs after the initial trial is complete and they are still waiting for FDA approval. They reported in the call that they just received FDA approval for this CAP and it will be starting enrollment in early 2021.
o Liver DBD - this trial concluded earlier this year and TMDX has submitted data to the FDA and they said they are confident that they remain on track for potential approval in second half of 2021.
o Liver DBD - Continued Access Protocol - this is ongoing, similar to the heart CAPs.
o Liver DCD - this trial is currently in process. No updates provided.
o Finally, the CEO stated that they expect there will be several major scientific and clinical publications reporting the clinical results of OCS programs throughout next year.
Conclusion - the business performance of the company was significantly impacted in 2020 by the COVID pandemic. However, even in the midst of that pandemic TMDX was able to keep all of their trials progressing, and even finished early in the case of the Heart DCD trial. I do not have access to any details related to the FDA delay of the first heart trial review, so it’s impossible for me to comment on whether or not that was and executional error on the part of TMDX. I have not seen any news or reports indicating that there are problems with the function of the OCS units, or with the results in patients receiving organs that were transported with OCS. All signs look positive as far as I can see for a very strong 2021 and 2022. Plus, comps vs. 2020 should be pretty easy for them to show great progress against.
Holding this stock for the last year has been painful and a big opportunity cost compared with other companies I could have invested in. However, this is one that I plan to hold for 5 – 10 years unless something significantly changes. I do not think anything has changed in the story - there were some delays, but everything looks intact and positive going forward.
Long TMDX 8.4% (I recently bought more shares at the currently lower prices, and plan to sell some shares for tax loss harvest after the 30 day wash-out rule period ends).