Transmedics 3Q23 Results

[5thhorseman]

Good results reported by TMDX after market close today. After-hours responding positively with the stock up 20.9% as I write.

3Q Revenue of $66.4M is up 26.5% QoQ (compared with 26.2% last Q) and 158.4% YoY (compared with 156.1% last Q). Continued high growth stabilising in the 150-160% range for the last 3Qs.

My guess is the biggest factor in the AH reaction is the raise in the FY guide by 21.1% from $190M to $230M, the biggest raise in the last two years (TMDX only provides FY guides, no quarterly guides).

Disclosure: TMDX is my largest holding with most purchases in the $70 range. Added at around $40 recently to keep it as my top position.

[AnalogKid70]

The CEO has to be the biggest sand-bagger ever. Q3 results are phenomenal. They said during the call that their core business would have been profitable this Q if you back out all the aviation stuff.

I was driving when I listened to the call, so I could not take notes, but here are a few notable things I think I heard:

They hired 45 technicians and 10 more surgeons in Q3. I don’t know what their current staffing levels are, but that seems like a lot of additions.

They are already up and running with the aviation side of the business and it contributed ~ $2M revenue.

Liver revenue was up significantly QoQ. I think heart revenue was up ~ 10 - 15%. Lung revenue was up percentage wise, but not a ton dollar wise.

Lung remains my biggest concern. The CEO made a statement that he did not expect them to expand too much in lung until they initiate another clinical trial - if I heard him correctly. I need to listen to that part again. I think the technology they purchased last Q is targeted at re-launching their lung product, and it will require some testing/trials to relaunch (I’m making an assumption here and reading between the lines a little). If my assessment is correct, it could be years before lung OCS starts to pick up more volume.

I am holding my shares, but I have not decided if I’m going to buy more now or keep watching and waiting. I could see the stock rising more based on these positive results, but I can also envision the CEO giving a sand-bagged 2024 forward estimate next ER and that tanking the stock again.

You can not deny that they are executing well and delivering amazing growth numbers.

Peace

[stocknovice]

I know @AnalogKid70 and I have spent the most time recently on TMDX. I wrote last week I viewed this report as a binary event. Either the numbers and comments would be strong enough to claw back part of the recent decline or the market will have been right all along. Fortunately (for me anyway), the claw back has begun. Fingers crossed it continues.

Below are some of the expectations I held into the quarter (in bold italics) along with thoughts coming out of the report.

• Last quarter I estimated $45M in revenue with a FY raise to $180-$185M. We got $52.7M and $180-$190M, which is a big reason why I’ve stuck around. I’m pretty strict in what I expect from our holdings, and TMDX met those expectations. Assuming (biiiiig assumption) TMDX has been able to put its plane purchases to almost immediate use and the CEO wasn’t soft selling the “prudent” FY guide, I’m hoping we see at least another $52.5M or so for Q3 with a FY bump to $200M+. We got $66.4M with a bump all the way to $230M. Even backing out one-time revenue from Summit Aviation’s legacy business leaves the organic number at $64M this quarter. That’s excellent.

• Continued momentum in the number of clinics adopting TransMedics’ end-to-end service. Q2 saw transplants grow across all three organs “for the first time in many quarters.” Liver and hearts increased for the sixth straight quarter while lung volume was the highest in eight. Heart volume admittedly increased less than expected, but the CEO implied a blip caused by an unusually high number of heart calls which failed to produce transferrable organs. If he’s correct, we should hopefully see a smoothing out this quarter. Management announced it will no longer report the number of clinics as it feels 1) it has reached enough mass to support the business and 2) individual organ trends are a more accurate gauge of the business. In that respect, TMDX posted a 7th consecutive quarter of growth in liver (+26% QoQ) and hearts (+12%) with lung (+21%) revenue up strongly as well.

• Confirmation the company’s increased manufacturing capacity is meeting demand for units and supply kits. There was very little mention of this, so I assume it is basically a non-issue. That being said, kudos to management in ramping this capacity so quickly with no apparent hitch.

• An update that staffing plans are on track as TMDX builds out its national network. CEO Waleed Hassanein was excited about the progress here with 45 clinical specialists and 10 surgeons added during the quarter. He was also very complementary of the job existing staff has done in handling increased volume. Everything seems to be in order.

• A positive first glimpse at projected costs and margins for the transportation network. With eight planes now under control, management should be able to paint a fairly detailed picture of initial costs, margins, and the potential to increase case volumes. Being honest, this could make or break the quarter. This was luckily a make. The new planes are being quickly integrated and contributed $2.1M in logistics revenue that in the past would have gone to third-party charter companies. Management noted some early inefficiencies knocked gross margins from 70% last quarter to 61%. However, Hassanein emphatically stated this would be temporary with the CFO targeting a rebound to the mid to high-60’s the next few quarters.

• Continued confidence TMDX is positioning itself to be the go-to option for clinics seeking a transplant partner with national scale. A poor rollout could not only break the thesis but once again prove the adage it’s better to sell a quarter too early than a quarter too late. No pressure anyone… After showing slight defensiveness on last quarter’s call, Hassanein was back to confidently restating the company goal of being the market leader for long-range transplants by the second half of 2024. That includes a goal of facilitating 2,000 transplants, which would double this year’s caseload. Analysts were glowing to the point you could almost hear a begrudging fascination this aviation thing just might just work out. In fact, one even asked what management planned to do with all the cash still on the books after this initial foray. All in all, it was a welcome and enthusiastic change from last quarter’s uncertain vibe.

[5thhorseman]

Thanks for the notes AK70! I agree with you on the notable items you mentioned, and yes, they are extreme sandbaggers. The revised FY forecast infers flat growth in Q4, which one of the analysts asked about and was basically brushed off.

Just look at the sandbagging last year:

Quarter, FY forecast
Q4 21 $55M
Q1 22 $65M
Q2 22 $75M
Q3 22 $85M … actual at end Q4 = $93.50

… and this year …

Q4 22 $145M
Q1 23 $170M
Q2 23 $190M
Q3 23 $230M … actual at end Q4 = $250M??? ($1B annually!)

Back of the envelope calculation for share price growth:

They are on track to do 2000 NOP transplants this year and are aiming for 10K by 2028. Given the tendency to sandbag, let’s assume that’s achievable and also that there’s a linear relationship with revenue. So 5x growth to a $5B revenue run-rate by end-2028.

A measly operating margin of 5% would be $250M in earnings. Share growth of 10% pa would be 52.5M o/s, and EPS of $19.04. Assuming a moderate PE of 15 gives a share price of $285.58 for a CAGR of 35% over the next 5 years. Not too shabby.

I think I’ve built a large margin of safety into the calculation in the preceding paragraph, so it’s just a question of executing to the 10K target. Eager to hear others’ opinions here.

[fish13]

You may want to re-check your numbers at the end. $5 billion in revenue would be 20x more than 2023’s expected revenue.

To get to $5 billion in revenue, 10k transplants would be $500k per transplant. I would assume more like $1 billion in revenue by 2028 ($100k/transplant). Still a reasonable CAGR if margins come in higher but not quite as optimistic.

[ZoroSGInvesting]

230M is the full year guidance given in Q3 ER, not quarterly revenue.

Having said that, I do believe they would deliver 240M+ for this year and maybe guide another 50% for next FY.

Zoro

[5thhorseman]

Yes, thanks Fish and Zoro for pointing out my brain fart there

Revising my calculations for a $1B run-rate doesn’t come near to the same rosy end-result. One can play around with the share count, target Operating Margin, and assumed PE, to get a similar CAGR, but then there’s much less of a margin of safety.

It’s the expected Operating Margin that is the weakest part of the projection, but with the company being “profitable” if one excludes the aviation component, perhaps in a few quarters we’ll have a better idea of what that margin end up being. For now the growth looks solid and I’m happy to continue to hold, though I’ll probably trim my position as it’s gone well above 20% now.

[AnalogKid70]

I finally had time to read the transcript and have a few more thoughts.

I did confirm that the CEO said he did not expect much expansion for Lung OCS in the near term. Here is his exact quote - “The lung, until we have a new clinical program in lung, it’s going to be few centers doing the lung.” If it is a new clinical trial, it will probably take months or years to set it up, and I think they are changing their technology prior to starting that hypothetical trial. Then the trial itself will take months or a year. So, that is going to limit growth for a while.

Competition from DCD donations using Normothermic Regional Perfusion (NRP). This is going to get a little nerdy, so skip if you are not interested.

DBD = donation after brain death.
This is the way most organs have been taken for transplants. A patient is brain-dead, but is kept artificially alive until transplant teams can arrive to procure the organs. The patient is taken off life support, the patient is already pronounced dead, and the organs are then quickly removed.

DCD = donation after circulatory death. This has not been used as much historically. In this case, a patient’s brain is still functioning correctly, however it has been determined that they will not be able to survive on their own after life-support is removed and there is no hope for survival. In this case, the life-support is removed, and the patient is allowed to die naturally – which can take some amount of time. If the death occurs within 27 minutes from the time that life-support is removed, then the organs can be utilized. If the death occurs after 27 minutes, then the organs are not taken. On some of the TMDX calls they refer to this as a “dry run”. The TMDX NOP team is alerted that there is a patient in this condition, the NOP team travels to the hospital to be present so that they can procure the organs if the patient meets the criteria, but if the patient does not pass away within the time limit then TMDX does not obtain any organs from that trip. It is basically wasted time.

TMDX OCS vs NRP
With the OCS system, when a DCD patient passes away within the 27 minute window, the organs are immediately removed from the patient and placed in the OCS system where they are resuscitated outside of the body and checked for proper function. The OCS system enables much higher utilization of DCD organs for this reason.
NRP is a process where the organ is kept in the patient’s body after they have passed away and the organ is resuscitated within the patient’s body using machinery to pump blood. After the organ is resuscitated, there are tests that are done to evaluate the function of the organ while it is still in the donor’s body, then if it is acceptable is removed and put in cold storage for transport to the transplant hospital. There are some obvious ethical concerns with doing this.

For DCD hearts, the TMDX CEO stated that NRP has around 30% of the market and OCS has 70%. He said that many transplant centers that were using NRP are now returning to TMDX because of the ethical issues associated with the NRP process. He also said that people erroneously thought that NRP was cheaper than OCS, but that TMDX has evidence to the contrary.
So, based on all this I would expect TMDX to increase the number of DCD heart transplants over time. There is a competitor in trials for a system similar to the OCS, so that could be a source of competition at some point in the future.

Other thoughts:

• There was nothing said about Kidney OCS. I have not heard anything said about it in a while, so I assume it’s on hold.
• There has been almost no increase in international sales. That is discouraging, but it could be a positive for future growth potential if it eventually picks up. I have no idea why it is not used more internationally - but I assume it is the extremely high price of the OCS system.

I am keeping all the shares I still have, but I am not buying more at this time. While this quarter, and really all of 2023, have been stellar, I personally think the stock will fall further. I think the CEO will give a very sand-bagged 2024 forecast at the next ER and I think the stock will drop after that and that will be lead to investor capitulation in Q1. There are other reasons I think the stock will go lower, but I’m not allowed to discuss them here. I could be wrong, and that is why I’m keeping the shares I do own.

I believe this will be a great company for 10 or 20 years and I plan to keep owning it. I’m just trying to be selective in when I scale back up. Time will tell if I’m right or wrong.

Peace

[wsm007]

@AnalogKid70

There has been almost no increase in international sales.

I actually thought the opposite. International sales was $4.3m in q3, up 79% yoy vs 46% yoy growth in q2. So an acceleration vs prior q’s and up very nicely on a yoy basis.

It was the highest absolute international $ revenue number in their history.

Also curious about your worry with US lung. That was also the highest $ revenue in their history at $3.4m, a significant acceleration vs a quarter ago, and up 161% yoy and 21% qoq.

This is the history:

Revenue $m	Q	US Liver	US Heart	US Lung	Non-US	Total
2021	Q4	1.5	4	1.8	2.5	9.8
2022	Q1	7.9	3.7	2	2.3	15.9
2022	Q2	9.6	5.9	2.6	2.4	20.5
2022	Q3	12.4	8.2	1.3	2.4	24.3
2022	Q4	16.1	11	1.9	2.3	31.3
2023	Q1	23.1	13	1.4	4.1	41.6
2023	Q2	32.7	13.5	2.8	3.5	52.5
2023	Q3	41.2	15.1	3.4	4.3	64.0
YoY	yoy q2	240.6%	128.8%	7.7%	45.8%	156.1%
YoY	yoy q3	232.3%	84.1%	161.5%	79.2%	163.4%
QoQ	qoq q2	41.6%	3.8%	100.0%	-14.6%	26.2%
QoQ	qoq q3	26.0%	11.9%	21.4%	22.9%	21.9%

Why were you disappointed in international and worried about lung? They seem to be making great progress on both fronts?

-wsm

[AnalogKid70]

wsm - you are correct on a % basis.

On lung, the CEO is the one that said he does not expect much expansion in lung in the near future. Also, the lung numbers have gone nowhere since the IPO. The quarterly lung revenue numbers since IPO have been:

Yes, it is up this Q, but the absolute # (not the %) is anemic IMO. This is especially true when you look at the total number of lung transplants being done. (See the chart below). There are a lot more lung transplants being done, and TMDX is not the one providing them. Where are all those lungs coming from? I don’t know, but it makes me concerned because there must be something that is enabling this higher utilization. If whatever that thing is gets a foothold, then it’s going to be harder for TMDX when they do eventually get their new upgrade trialed and approved.

International is a similar answer. Last year the CEO said he expected to get approvals from more international countries, but I have heard nothing on that recently. I will grant that it is trending in a good direction, but the only meaningful international growth since IPO is in heart OCS - and that is not significant on an absolute # basis. I did say that this “could” be a good source of future growth, and it is trending up, but I have been underwhelmed by the international numbers especially when compared to US liver or US heart.

One final thing I forgot to mention in my last message. The CEO has said in previous years that Q4 transplant volumes are typically less than other quarters because of holidays and vacations. So, it’s possible they may not beat by as much in Q4. I’m sure the CEO is sandbagging (based on his history), but it’s possible the beat won’t be as large as we have gotten used to.

Thanks