TMDX - Q3 Results

TMDX reported earnings today for Q3 of $25.7 million. This included a $1.4 million one time benefit from previous clinical trials. Excluding the one-time benefit, the Q3 revenue was $24.3 million which was a 349% increase compared to the 3rd quarter of 2021. As a reminder, Q3 2021 was a light quarter from a revenue standpoint because TMDX was at a point where they were waiting for FDA approvals before fully launching some of their commercial products.

The YoY increases from the last 4 quarters have been 27%, 123%, 151%, 352%.
The QoQ increases from the last 4 quarters have been 80%, 64%, 29%, 18%.

The company raised their full-year 2022 guidance from previous $67 - $75 million to the new range of $80 - $85 million.

The National OCS Program continues to expand and now accounts for 90% of all revenue. I have described this program previously, but in summary this is where TMDX teams go out and recovers donated organs and then delivers them to transplant hospitals. There are huge benefits with this program which I have described in detail previously. This program also creates an enormous moat for anyone else that wants to try to compete with TMDX with a different organ perfusion product. The CEO said that NOP is becoming an integral part of many transplant centers workflow. Once TMDX is firmly established in this role, it’s going to be nearly impossible for someone else to come in and take volume from them if anyone does try to qualify a competing product. The CEO said he has received feedback from several transplant centers stating that at some points in the past the centers would get so busy with surgeries that they had to turn down some donated organs because they just didn’t have time or manpower to go retrieve them and keep up with everything else that was going on in the hospital. TMDX eliminates this problem by going and recovering the organs for the hospital so they don’t have to. In addition, the OCS product increases the amount of time that an organ can be stored prior to transplant which further enables busy transplant centers to schedule the work at a time that is more convenient for them.

Other miscellaneous notes or highlights:
• CEO stated they are in the early innings of a significant growth curve. The incredible growth in the last year is just the start. He said they are at the tip of the iceberg in a greenfield opportunity. There is literally no competition right now, and there is a significant FDA testing and approval moat for anyone that would want to try to develop a competing product.
• TMDX is being prudent and conservative in their Q4 guidance. I mentioned this in my summary from Q2, but I think they are overly conservative due to everything they went through during COVID. They repeatedly give very low-ball estimates and then beat them.
• Pretty much all the growth in 2022 has been from heart and liver. TMDX is making a concerted effort to increase penetration in lung transplants moving forward. The good news to me in this is that they grew 350% based only on growth in 2 out of 3 organs.
• They were in a backorder situation in Q3 and had trouble keeping up with the incredible demand growth. The backorder situation is still an issue heading into Q4, but they recently added capacity and they are adding more which should come online in late Q4.
• They are negotiating with potential partners on a dedicated transport network - think private jets. They commented previously that this could be a bottleneck in the future as their business expands. They said this will not be a problem in Q4, but they are planning for continued growth in future years and want to stay ahead of things on the transportation side.
• They do not have any issues with raw materials or OCS hardware for the foreseeable future. The capacity limitation has to do with their clean room facility where they assemble the consumable portions of the OCS product.
• They have high focus on making sure that the quality is perfect on the capacity expansions. They are not cutting any corners or taking any risks to try to increase capacity to quickly.
• They continue working on “next generation” OCS devices. I have not seen much detail around exactly what this entails, but I’m assuming it’s an incremental improvement over the current OCS device. They said that more information would be available in first half of 2023.
• They said that kidney OCS would probably not become significantly active until late 2023. I assume it will have to go through trials like the other 3 organs before it becomes commercially approved.
• They continue to have very little business outside of the US. I see this as a good thing. They are growing like crazy in just one market. Admittedly, it’s the biggest market in the world – but there is a good amount of global growth available in future years IMO.

That’s pretty much it. This is really a pretty straightforward business now that they have FDA approval for all 3 organs. The transplant community is supportive and moving quickly with adopting this new paradigm. Insurance companies are on board paying for both the OCS and NOP. TMDX just needs to execute on capacity expansion and continued buildout of the NOP network.
If you need something to diversify from SaaS, I encourage you to do your research on this company. If we have a recession, people are still going to need transplants.

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Analogkid

Thanks very much for your TMDX updates. I read them all and took a position yesterday after listening to their conf call.

TMDX seems to tick a large number of boxes:

  • Rapid growth
  • High gross margins
  • High and increasing NRR for each organ
  • Limited customer concentration
  • They have the ability to, in future, add organs using their existing facilities, with lung the first which they are trying to scale up and kidney in future being potentially added-similar to adding modules in software. So customers could start with just heart, then add liver, then lung and then kidney
  • Strong barriers to entry (moat)
  • Massive runway left in US with rest of world to follow
  • they are still small: <$2bn company and the valuation looks doable

They solve the supply side of organ transplants-which their customers do not want to do; they want to do the transplants and not the logistics.

And the stock has been going up in this environment vs all of mine going down, and regulatory risk is now greatly reduced since they got approval for all three organs. It all sounds very compelling.

I was wondering what your thoughts were about the CEO?

I was also wondering if you had any idea about the US TAM per organ and how far they are penetrated in same? I couldn’t find that. It sounds like their product is also TAM expanding, and their NOP system is like a “toll-gate” and their customers are repeat users of the product.

Any doctors out there have a look at this one yet? Saul or @jonwayne235 maybe?

Thanks!

WSM

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Let me start by saying that I am not a medical person, and I don’t have any inside scoop on this company - but I’ll try to answer your questions. I first heard about this company on an old Motley Fool podcast and it struck a cord because my dad was a lung transplant recipient. I have been following them closely for around 3 years now, but it’s just as a regular investor.

Thoughts on the CEO - he is not a typical smooth talking CEO. He is a straight shooter and I trust him. If anything, he is probably too honest. I have listened to every ER in the last 3 years and he has consistently been honest and forthright. I have not personally noticed him embellishing anything and he usually gives very direct responses. Is he the best CEO in the world? No. But I like the fact that this is HIS company. He founded it and has stuck with it through 20+ years of development. Some people have questioned his presentation capabilities, but you need to remember that English is not his native language. Conclusion - I like him.

US TAM per organ - I’m rounding off, but there are roughly 2000 lung transplants and 4000 heart transplants per year in the US. I don’t know what the total $ amount is that TMDX receives per organ, but I think it’s probably in the range of $100k for the combined OCS consumable and the NOP service. That would put the TAM at $600M if OCS becomes the Standard Of Care in the future for those organs. Liver is around 8,000 transplants per year in the US. I think liver OCS is cheaper than heart and lung, but if we assume $70k total for each liver, then the TAM is $560MM. This does not include growth in number of yearly transplants - the OCS makes many more organs per year usable, so I expect the “market” to grow each year. The numbers above also do not include kidney OCS or international sales. They also do not include transportation - TMDX has hinted that they might eventually buy a private jet transport network in future years. TMDX could eventually take more of a role in managing the allocation of organs on a national scale - replacing the organization that currently does it. This also does not include inflation - which I expect to continue to be high for years. There may be additional treatment modalities developed for organs on the OCS to keep them more healthy during storage. Much of this is speculation, but it gives a rough idea. FWIW TMDX used to have (last year) an estimated TAM in their presentations of $8B.

The NOP is like a toll-gate, and the OCS consumable is like a razor and blade model. Every new organ has to pay for both - NOP and OCS. We have an aging society with lots of health issues. Transplant hospitals can not keep up with demand - TMDX takes a load off their Doctors by retrieving the organs for them - and the organs are in better condition using the TMDX technology. TMDX has patents and years worth of head start over competitors.

I have not had any recent feedback from Doctors on the board. There were a couple Dr’s who chimed in a couple years ago when I first brought up the company, but much has changed since then. I too would be interested to hear if there are any medical people on this board who have opinions.

p.s. - I’m glad a couple of you are starting to take an interest. I’ve been hoping for more input and debate and collaboration, but not many have been interested until recently. I can understand why - it was a dog for a long time.

Peace

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This presentation is from May but provides more info on TMDX’s plans. As AnalogKid70 has stated, part of the thesis here is TMDX’s ability to greatly increase the transplant rate for organs that currently go unused. The rough numbers for that category are on slide 6.

https://investors.transmedics.com/static-files/c4f69c45-77b0-4981-a5a7-b404ab4aae95

I really liked the quarter and bought more shares after hours. It’s now up to a 4% position, and I could easily see it growing if hypergrowth continues into 2023. The next couple milestones to watch are an increase in supply capacity in 1Q23 and filing for a kidney trial sometime in late FY23. In the meantime, there should be plenty of existing runway with hearts, livers, and lungs while we wait. Thanks to Analog for all the work on it.

P.S. I always figured that was the AnalogKid reference before seeing the avatar. I hope you don’t mind, but I’m going to have to go with New World Man off that album. Peace.

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I picked AnalogKid as my computer nickname the first time I ever had to choose one - probably 25 years ago - and it just stuck. It’s one of their most underappreciated songs IMO. It’s a cranker.

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I don’t suppose you have any better idea about this than I, but just wondering if you have any notions about TMDX as an acquisition target. I forget when, but some time ago several of us invested in a small company called Abiomed (ABMD), a maker of heart pumps. J&J just bought them at a 50% premium.

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brittlerock - I don’t have any firm opinions about if they are a good takeover target at this time. I hope they stay on their own for at least a few more years though.

One more thing I thought about related to the CEO - I like the fact that he himself is/was a Dr. He completed two years of general surgery training at Georgetown University Medical Center. He then completed a three-year cardiac surgery research fellowship. So he knows the lingo - he can talk the talk with customers. He’s been directly involved in this field for 25+ years, so he has a lot of industry connections and relationships.

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I found the answer to my own question about the TAM in this presentation from 2020:

https://investors.transmedics.com/static-files/b1b19039-b9ac-4a70-a134-9880579ea44c

They estimated the TAM for OCS for transplants in the US, EU and Canada to be $8bn, split as follows (slide 12 of the presentation linked above):

  • Heart: $2,470m
  • Lung: $2,540m
  • Liver: $3,015m

The $8bn TAM excludes kidney transplants which they are planning on developing further next year.

In Q3 their revenue split, annualised run-rate revenue and as a % of the estimated TAM was:

Organ Q3 Revs $m Annualised $m TAM $m % penetrated
Lung 1.3 5.2 2,540 0.2%
Liver 12.4 49.6 3,015 1.6%
Heart 8.2 32.8 2,470 1.3%

So there is a very, very long runway left for these three organs. And the opportunity in kidney transplants could be even bigger.

-WSM

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