OK, here are my thoughts on this. I had to put this together fairly quickly, but I did the best I could in the time available.
2023 Q2 – Thoughts from ER and Canacord Presentation
Disclaimer - I am not a medical professional, I don’t work in this industry, and it’s very possible I could have gotten something wrong in my conclusions. I’m sharing my observations to the best of my ability.
Let me start by reiterating that I still have some shares and I still believe in this company for the long-term. However, my personal opinion is that the share price could suffer in the short term due to a potential temporary reduction in revenue growth numbers. For that reason, I have reduced my % allocation.
My biggest concerns fall into two broad categories:
- Short-term - capacity issues due to
a. aviation and
b. internal perfusionist staffing
- Long term - lack of adoption of Lung OCS
In the last couple of quarters, the main capacity constraint was due to lack of TMDX’s internal production capacity to produce the OCS consumables. That no longer seems to be an issue and they have qualified their expansion on schedule. Great job by them to get this done quickly so that it is no longer an impediment to growth.
Aviation - The company has reported that they have missed out on potential organ donations because they did not have rental planes available for all of the potential organs offered to them in Q2. They had to turn down opportunities for over 30 organs in Q2 which would have contributed another $3M in revenue. TMDX plans to address this by purchasing an aviation company and creating their own nationwide network of planes and pilots to be dedicated to TMDX organ retrieval. This is great longer term, but it is going to take them 6-12 months to get this implemented and this could significantly limit their growth during that time. Long-term I am sure they can pull this off and I do agree that it is going to dramatically improve their moat as a business, but if it causes a short term drop in revenue growth, my concern is that the stock is going to be punished in the short term while the market waits for TMDX to implement this and prove that it can be successful. There is no way to know for sure how the market will react and what the stock price will do, but I am concerned that this could contribute to lower growth numbers and at least a temporary drop in the stock for a couple of quarters (or longer).
Another unknown is - can they get enough pilots. In the ER they stated that they are going to maintain the flight school in Bozeman, Montana (this was part of the aviation acquisition) - to funnel pilots into TMDX aviation. Will those pilots be willing to move to various parts of the US? If TMDX plans to have 15 total planes operational by the middle of next year, they need to probably hire at least 30 pilots - maybe double that amount if they want to have the planes available seven days per week 24 hours per day. I have no idea how easy or difficult it is to find that many pilots for this specific aircraft, but it’s one more risk.
Perfusionist staffing – In both the earnings report and the Canacord presentation, the CEO made comments regarding how much longer perfusionists are having to care for the organs compared with last year. He gave an example stating that in 2022 the average support time for a donated liver was 6-8 hours. In 2023 he said it was up to 24 hours. He stated that this “saps capacity” of their overall system because if somebody is on a mission for 24 hours straight they then need to be off for 24 hours before they can be redeployed. He did not go into specifics but he alluded to needing time to staff up in order to be able to handle the longer durations of caring for each individual organ. I’m sure this is a very solvable problem, but (again) it’s just one more risk and another thing that makes me concerned about the next few quarters of growth.
Lack of growth in Lung OCS
This is my bigger area of concern because this has been a lingering issue for years. The company consistently says they are working on it and it’s going to get better, but so far it’s not happening.
I have tracked revenue from lung OCS since 2Q2019. At that time, the lung product was fully approved by the FDA and commercially available. The revenue numbers for each quarter were as follows:
2.2, 2.1, 3, 2, 0.4*, 0.6*, 2.5, 2.4, 3.6, 3.3, 2.2, 2.3, 2.8, 1.5, 2.1, 1.6, 3.2
The number of lung transplants has barely moved in four years.
- The 0.4 and 0.6 were the worst COVID quarters.
At the same time, the number of lung transplants made a significant jump in 2023 compared to the last few years. The chart below shows the total number of lung transplants for the last two years plus what has been completed so far in 2023. There have been 200 more lung transplants so far in 2023 than there were at the same time in either of the last two years. When I saw these numbers prior to the earnings report, I was expecting TMDX to have significantly improved results in lung revenue. I don’t know how else all of these lungs could be made available if not through the TMDX technology. I don’t have an explanation for this, but it made me start to really question if I am missing something else that is happening in the lung market that I am just not aware of.
In addition, the total number of lung transplants completed so far in 2023 is around 1500. Based on US lung revenue, TMDX has only provided about 40 of these – after 4 years of being commercial with Lung OCS.
Questions about lung OCS technology. I apologize that I don’t have the exact reference/wording for this, but I didn’t want to keep delaying writing something. I believe that in the earnings report there were a few comments made related to the new technology IP that TMDX just purchased last week and how it might be integrated with the existing OCS system. I believe the comments had to do with positive ventilation versus negative ventilation. I’m not expert in this, but I think it might be possible that there is an existing non-portable lung perfusion system which might use negative ventilation where as TMDX uses positive ventilation. I think there might be disagreement about which is better, and that might be part of why TMDX is struggling to get traction in the lung transplant community. It’s possible that TMDX might have purchased the lung IP because they need to in order to meet what the market is asking for. I think the CEO said the integration of this IP would not be available until at least the end of 2024. This is a lot of extrapolation and guesswork from me, but the comments just raised some additional caution flags for me when combined with the fact that lung OCS has struggled so much.
Final observation about lung results - Canacord did not ask at all about lung results and/or plans. Maybe I’m reading too much into this, but I was kind of surprised that they did not dig into this more. TMDX can be very successful if they never really break into the lung portion of the market, but in my opinion they don’t deserve nearly as high of a multiple if there is significant risk in the lung portion of the TAM.
So that’s it. I don’t have anything more concrete. You could call it an uneasy feeling. I did not feel comfortable having as high of an allocation in this company until they prove some things. This is now a 1% position for me.
Few Random Thoughts:
- Their revenue growth for the last couple of years really has been tremendous. Aside from the issue with Lung OCS, I don’t think you could ask for much better execution from a company or leader. They are breaking down the barriers as they come, but the past results give confidence in the quality of the leadership.
- Maybe my interpretation of the yearly transplant numbers on the UNOS website is wrong, and maybe there are not as many additional lung transplants as I thought there were. I am going based on what is published on the site, but I can not prove the reliability of the data I’m referencing for the total yearly transplant numbers.
- Maybe there is another way that hospitals are obtaining more lung organs? If this is the case, then perhaps a competing process is taking share. Maybe Pargonix or EX Vivo or something else.
- The CEO is a sandbagger, so maybe he is just sandbagging again for forward guidance. The problem with sandbaggers is that you never know when they are done sandbagging and the current estimate they are giving you is real.
- The CEO said that they went on 53 “dry runs” during Q2 that did not result in obtaining an organ. He said that they will get better in the future at predicting which cases will not yield organs, but for now they are going on pretty much every case they are offered because they don’t want to turn anything down at this point.
- The CEO said that each transplant is $100k in revenue. I assume he was rounding off, but that statement reconfirms the rough amount they get for each transplant they facilitate.
- One interesting point he made that I had not heard before is that having an organ (specifically liver) on perfusion for a longer amount of time is actually better because the liver is functioning and producing bile and the physicians can measure the performance of the liver and have greater confidence in its viability the longer they see it function on the perfusion system. This is in contrast to cold storage which damages organs the longer they are stored prior to transplant.