What's with Transmedics (TMDX)

Investment Analysis Clubs Saul’s Investing Discussions
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I lost interest in TMDX when they started buying airplanes, but then, influenced by all the smart people on the board who really liked it, I took a position roughly four or five months ago at about $143.50 and added bits and pieces in the following weeks.

It rose in about two months to about $177, but then suddenly it went into a nose dive. There was no actual bad news that I saw. but day after day, all my other companies were up, but TMDX was down. I sold about a third of my position about three weeks ago at $143, another third the next week at about $136, and exited the last third about a week ago at $130. It’s now about $123.

(If I was a BUY-when-CHEAP person I probably would have actually bought when it fell from $177 to $160 or $155).

It announces earnings on the 28th and I may be proved totally wrong.

Best,

Saul

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I still have Transmedics at a top holding and have been wondering the same. It doesn’t look like there are any significant news stories.

Baird started coverage on them with a $200 price target on September 24 when the price was at $163. They also got added to the S&P small cap 600 that week. Piper Sandler maintained an outperform rating on them on October 7 with a target of $180. Other than that there’s a few click bait articles saying investors are concerned about valuation.

Their numbers from the last quarter came in quite strong,

FY revenue guide went from 390-400M → 425-445
Revenue was 114.3M up 118% yoy and 18% qoq (vs analyst estimates of 98.9M)
Net income of 12.2M (vs analyst estimates of 7.1M)

My other top three holdings have been up nearly every day too which is in big contrast. On that side of the coin I am worried those companies are getting overheated as they are heading into earnings. I have been trimming there slightly and added small amounts to Transmedics. I’m cautiously optimistic going into this earnings for Transmedics, and hope I am not compounding a mistake.

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@SaulR80683 may I ask you if you only sold because the stock price went down? They executed flawlessly in the last quarters - business wise and also with regards to managing expectations on their earnings calls. No guarantees going forward that it will stay that way but I’m a little surprised? If you liked the company at a higher price and nothing has changed with the company, why sell?

I read through all your topics some while ago and that doesn’t seem to be part of your strategy in the past…

Best Hannes

Edit: ah we were posting simultaneously - ok, so general concerns about the scalability/tam of the business combined with uninspiring price action - understood :+1:

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Another worry I had with this company is that my other companies had sort of no upper limit to how long and far they could grow, Transmedics could only grow to the “limit” of the transplant market, which although it was considerably bigger than what they had now, it would slow rapidly. Think of it this way: If they were growing at 100% from an eighth of the active market to a quarter, and again the next year at 100% from a quarter to a half of the total active market, growing the third year at 100% would be ALL the rest of that active market and just wouldn’t happen. The slowdown would be precipitous when it happened. Even if the market grew a little, what the heck would happen the year after that? Like how many years in a row can they keep doubling the number of airplanes???

When I think about it like that I even feel safer with companies like Monday and Sentinel, growing at 30% or 35%.

Again, there is a reasonable chance that I am totally wrong.

Saul

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I don’t disagree with any of the above. At some point, we have to question just how big this TAM can get unless and until TMDX can expand internationally, but for now there seems to be plenty of room for it to increase volumes and corner this market in the US.

For what it’s worth, the stock has drifted steadily downward since being added to the S&P 600 and the CEO reiterating the flat second half guide at an investor conference. The “prudence” is due to potential pressure on second half volumes as summer and holiday vacations affect scheduling. However, this is the EXACT same language and guidance math TMDX used each of the past two years before continuing its blowout pace.

Will it do the same this quarter? It will obviously get harder as the numbers get larger, but TMDX did stay on track in beating its usual prudent guidance in Q2. At the same time, we’ve seen nothing concrete to suggest any weakness in the business including the purchase of another plane to get to 18 (I’d view a slowdown in plane purchases as bearish).

I’ve been a net adder this month in the $130’s with the intent of cutting those shares back off if/when it goes back up. I do think this S-curve is going to slow. I just don’t think it’s going to slow as much this quarter as the market seems to be suggesting. I guess we’ll find out next week. Good luck to all holders.

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Hi Saul,

“I lost interest in TMDX when they started buying airplanes”

I had been buying and selling small positions in $TMDX since August 2021 and couldn’t build the confidence I needed to take a significant position. I sold all my shares when they announced they’d be buying airplanes, because it seems like anathema to the high-margin models preferred here.

Then I took a closer look and I became interested in $TMDX because of their airplane purchases; here’s why:

Part of their mission is to preserve organs for transplantation; that’s what OCS does; it’s just/only a “better mousetrap” which is great, but imo better mousetraps are quickly assigned a value by the market, so it’s hard for me to build conviction based off of just a better mousetrap, especially once the market has already had a chance to assess it.

My initial conviction was only based on the better mousetrap; in hindsight I think that’s why my conviction was weak and easily shaken when they started buying airplanes. If you only consider OCS, the scope of how they define themselves is limited to “medical technology company”; a very limited scope.

But to really understand $TMDX I think you have to consider not just their technology to “preserve organs for transplant” but you have to consider all of their mission statement, which includes:

  1. increase the number of organ transplants
  2. Increase organ utilization
  3. Reduce transplant costs

They didn’t anticipate it at first, but they discovered the hard way that the status quo of a disorganized, inefficient organ transportation network was inhibiting their ability to achieve 1…3, above.

I got back in, this time with more conviction because my new assessment was that they are willing/able to pivot and respond to unexpected conditions, and that they have the courage and conviction to expand and redine their corporate identity and transform an obstacle into an opportunity.

As a matter of fact, the planes are now just one component of an ecosystem they have built that includes OCS, transportation, logistics/co-ordination/training with hospitals and surgeons, and I think they have done an amazing job executing it all in a very short time.

And now their scope is no longer limited to a “medical technology company” that increases the number of organ transplants and organ utilization and reduces costs; they now:

  • A “Trusted partner to transplant stakeholders” (…ALL stakeholders: patients, surgeons, hospitals) that
  • “Improves patient outcomes”

IMO they have surprised to the upside; they realized that to really improve patient outcomes, they’d have to become much more than just med-tech company, and they did it.

I’m impressed with their business acumen to achieve it all despite obsacles that were outside of their original scope of “medical tech company.” I think it’s unlikely that they are done surprising us. As long as they keep executing and surprising, I’m keeping my position.

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On Monday October 1st, Morgan Stanley hosted an expert call with a Doctor from a “leading transplant hospital in the US”

“The expert is a proponent of normothermic regional profusion (NRP), a procedure where organs from a DCD patient are perfused in-vivo until they can be transferred to a recipient.”

Me – Competes with the TMDX OCS

“In absolute terms, OCS volumes have decreased by ~50% for heart cases and slightly less than 50% for liver cases at his major center, even when accounting for the increased utilization of transplants, which frankly is a surprise to us and a bit of an outlier from most of our checks in terms of magnitude.”

Me – Uh oh. 50% drop? Ouch

“While the OCS system expands the potential donor pool and allows for surgeries to be delayed until the morning, our expert highlights that the NRP protocol offers his hospital greater flexibility (i.e. no third party dependence) and is significantly more cost-effective ($15k transport with NRP vs. $60k+ with OCS). It’s worth noting that NRP is almost exclusively used for donors that are within 1-2 hour radius (OCS used for longer travel time), but given the center’s location in a densely populated city, the doc thinks about 50% of their organs are within that 1-2 window. In general, the doc was of the view that use of NRP was likely to continue to expand over time, given the relative advantages.”

Me – You get the idea. This guy likes the other way.

On Wednesday October 3rd, MS published a response from Transmedics

“Center size / materiality: Firstly, the company noted that while the expert’s center (University of Pittsburgh Medical Center) is a good customer of TMDX, it is not influential enough to be a material driver of the business. Although the center has historically had substantial volumes, publicly available data from the Organ Procurement & Transplantation Network (OPTN) indicates that recent transplant volumes are lower. The center was ranked #69 in deceased liver transplant volume in 2023 and #75 in 2024 YTD (#32 and #60, respectively, for heart transplants). Among all liver transplant procedures, the center’s volume ranks #26 in 2023 and #31 in 2024 YTD, but the issue is that a sizeable portion of these are actually living donors (which obviously is a different market than that served by TMDX).”

“Centre OCS volumes: During the call, the expert reported that OCS heart volumes are down ~50% Y/Y in 2024 at his center and down slightly less than 50% for liver transplants, with OCS losing share to normothermic regional profusion (NRP). TMDX has indicated to us the center is on the same pace in 2024 as 2023 for OCS heart and is actually tracking ahead of 2023 for OCS liver. Specifically, TMDX noted to us that the expert’s center has used OCS liver more in the first three quarters of 2024 than it did in all of 2023 and that the company is gaining significant share at the center.”

MS went to neutral. On October 7th, Piper Sandler rated TMDX a buy with a $180 target.

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I’m with @stocknovice on this one. I’ve trimmed a handful of times as the position got too big, but increased my position yesterday as we approach earnings, where TMDX has proven itself time after time.

One theory I have is that it falls into a category of companies that just don’t have a constant stream of news, and doubts begin to creep into the market as they imagine the what could go wrong, vs. right (TAM must be running out, which is the constant bear argument/discussion with them). This batch of companies seem to always suffer some atrophy in between earnings (in my very limited experience compared to others on the board). Other companies in other industries can launch new AMAZING features every month, or win bogus/meaningless awards that blind us from the numbers and give us a sense of hope.

What I see is a company continuing to prove the market wrong, quarter after quarter, with management reiterating their confidence in their TAM runway, and as Stocknovice points out, putting their money where their mouth is in terms of plane purchases. They proved EVERYONE wrong on that one, and I’m inclined to trust management and am confident going into earnings.

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Hi again everyone. What I keep hearing is that everyone agrees that the TAM is limited and that TMDX will hit the wall sometime soon, and the music will stop playing and the ax will fall… but that you are guessing that it probably won’t be this quarter… or maybe not the next one, or maybe not even the quarter after that, but that you feel that you will be agile enough to beat everyone else out through the closing door when it happens. You may be, but that’s not an investing style I’m comfortable with.

What if a drop in four or five weeks from $178 to $123, when all my other stocks were rising, was because people who are in the transplant field, and have a better view than we have, are seeing it happening??? And seeing the TAM leveling off.

Again, I may be totally wrong about this, and for all the people who are staying in, I hope that TMDX bounces back strongly, and I hope that when the music stops you get out the door before it gets too crowded.

Best,

Saul

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I read that part of the conservative guidance this quarter is from planned airplane maintenance and that 2025 is going to be gangbusters. Piper Jifray had a report that mentioned difficult comparables, but most of what I’ve read is very very positive about TMDX’s prospects and how they are making a real difference in the transplant market. I sold out after the plane purchases at $40 or so, and jumped back in before the last earnings at about $139. Sweating it here, but feel very good about the future of this company.

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From my perspective :

TMDX revenue growth metrics are deteriorating slightly but still remain near the top of the list of community tickers
Last qtr avg 18%
Last 2 qtrs avg 20%
Last 4 qtr avg 34%
Proj for next yr 60%

On the negative side, however, TMDX ranks among the most expensive
EV/BITA 12761%,
EV/Sales 1523%,
Price/Cash Flow 224
FCF margin -59%.

These suggest there may be better alternatives in the list of community active tickers.

Gray

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With regards to overall TAM, I see some potential catalysts that can help them,

  • Transmedics heart section is a small percentage of the market and growing, makes up only ~30% of current revenue
  • Lung exposure is a tiny percentage of the lung market and makes up single percentage of revenue
  • Kidney does not have a solution but they plan to enter this market, and kidney makes up more overall transplants than liver, heart, and lung combined
  • Overall need for transplants is trending up due to environmental factors like more processed foods, microplastics, etc.
  • Transmedics is expanding the overall transplant category by being able to rescue more organs that were previously unrecoverable
  • There solution is almost exclusively sold in the USA and they aren’t even thinking about expanding internationally yet although there is interest from Europe and the Middle East
  • The company has pricing power and leverage both on the transport and on transplants, but they are choosing not to use it yet

Just a thought on how I am using thinking about TAM or potential for a company. I imagine if the company can triple in the near term, and then triple again from that point in the more longer term.

For example, I’ll judge if I think the company can be a 3-bagger in the next year or two, and then if they could be a 10-bagger in the next three to five years. I look at this in terms of market cap so for Transmedics this would mean going from a 4B company to a 12B company and then to a 40B company. I see it as not unreasonable that if Transmedics takes over the majority of the transplant space in the USA that a 40B market cap could be warranted in the years down the road.

When I think about this same scenario for TAM of Nvidia and where they are, this would mean going from a 3T → 9T → 30T company. I can see Nvidia possibly going to a 9T years down the road, but to go to 30T would mean a radically different future than we understand of machines today. I don’t see it as impossible, it’s just harder to envision Nvidia being a 30T company than Transmedics being a 40B company.

That thesis for the Morgan Stanley report does sound concerning if that is true that doctors are opting for a different procedure altogether of normothermic regional profusion (NRP). In laymen’s terms I believe this means the organ collection is done live side by side with the transplant operation. Just from a high level it seems clear that transporting an organ is going to preferable to transporting a body.

Morgan Stanley had to issue a follow up commentary on October 3, to their original call report after talking with Transmedics. According to an “expert” (one person?), that University of Pittsburg Medical Center has volumes way down, with the doctors preferring NRP. However, Transmedics disputes this saying this center is on the same pace for heart in 2024 and in 2023, and liver in 2024 is tracking ahead of 2023 for OCS operations.

Morgan Stanley is the only company which is neutral on Transmedics out of ten analysts. Four are strong buy and the others five are Buy.

Additionally, this is not the first time I’ve seen Morgan Stanley put out subpar research often citing a single individual or speculative theories. They were equal weight on Astera Labs too because of concern on content in Blackwell chip designs, even though Astera said they will have more content on Blackwell. Since that report Astera is up well over 60% is a short time frame.

I would rather wait for Transmedics to disappoint me on actual results before coming up with theories about competitors. It is not impossible a new technology or new transplant methodology disrupts Transmedics, but I’d want to see that actually play out in the financials before selling my shares.

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I’m adding to TMDX. Based on revenue and EPS forecasts, these prices seem very reasonable, and their valuation looks more attractive to me than other medtechs. On an EV / EBITDA basis it’s the cheapest it’s ever been, according to the data on Koyfin:

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To my knowledge, the story hasn’t changed in the last few months. If the story hasn’t changed, I feel I should not have owned it a few months earlier if I’m not adding at these prices. Now, the key is whether the story has changed. I keep scouring the news to see if there is a reason for the drop. The only thing I can find is a Seeking Alpha analyst note that talks about normothermic regional perfusion [NRP] emerging as a “cost-effective alternative in donation.” This method involves restoring circulation to donor organs within the body by maintaining blood flow at physiological temperatures at death. This reduces the need for expensive external devices and consumables like those required by the TMDX’s Organ Care System.

This could be a potential threat and change the story and cause me to sell but I’m not willing to sell until I see their earning update next week and I’m hoping to hear managment talk about it or hopefully it will come up in the Q&A.

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Boy am I on the fence on this one. I reduced and am in “wait and see” mode for earnings. So many positives and negatives as others have brought up.

Since nobody pointed this out, however, I wanted to point out what NRP (normothermic regional perfusion) entails.

It entails keeping a dead person alive-ish (ok not really but…) by circulating blood so that the organs stay refreshed. They clamp the brain so there is no way they can “wake up” the brain.

But people, you can imagine the ethical concerns about this. It’s one thing to be an organ donor but it’s another thing for your loved ones to be told that we are circulating the blood in your loved ones body so we can wait for a transplant.

Some people will be ok with that, others won’t.

My completely uninformed guess is that this “expert” who quotes NRP has skin in the game for NRP. It is better but oy, the ethics…will we get past this? Maybe…maybe not.

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Here’s why I’m adding to Transmedics ahead of earnings this afternoon.
I’ll list the reasons why I think the stock is down and why I think the market has this wrong. There is significant short interest in the name so if they beat and raise, the stock could surge (already up 5%).

1.) The company guided a slow down sequentially from Q2 to Q3. This is a market condition There are not as many transplants conducted in the summertime (vacation, etc). They made the decision that, if needed, they would take aircraft out of service to complete maintenance to prepare for a big push in 2025. They stated this specifically on the Q2 earnings call, the Q&A on the earnings call and at the MS conference on September 4th. “We take our guidance very seriously.” Is a quote from the CEO on the earnings call. Message received and priced into the stock.

2.) If you listen to the CEO, he talks about “Igloo coolers” as the primary competition. The Morgan Stanley expert interview on 10/1 introduced ‘new’ competition. Listening to the MS conference transcript on 9/4, this NEVER came up. So, either the TMDX CEO doesn’t “get” the market (he started the company in 1998) or the NRP is a very small part of the overall transplant market (the expert even said the donor has to come from 1-2 hours away). Take a look at the stock price from 9/4 (the last time management spoke) and the stock price from 10/1 to 10/25. The market got spooked by the expert call and the algorithms took over. A couple of analysts have stepped in front of this. Based on the deference shown on the call, the Oppenheimer analyst seems to understand the market the best (note – that’s my take). He’s at $200, on 9/3.

3.) TAM has come up on this thread a couple of times. Maybe in the future, but we’re not close yet. The CEO described the journey from ~60% to ~80% as more than 4X the number of transplants. These guys have been working on this for 25 years. Think about it. If a transplant is needed in Boston and the donor is in Topeka, there is only one way to make it happen. So, you may say that there is a smaller need for organs? Walk down the street. Look at the population. Ain’t happening soon. Perhaps there will be less donors? (there’s a bet on autonomous vehincles……people don’t perish in car accidents….not a trade I’m making right now).

4.) I’m going to combine a TAM piece with a profitability piece. Why isn’t TMDX in Europe? Reimbursement! They aren’t doing this for free and they haven’t solved the European system yet. Hopefully, they will. The market is the same size as the US. This isn’t tradeable now because we don’t know, but worth watching.

Many thanks to those that have helped me think through this. (Saul, wpr01, mizzmonika, stewaj1, graydrake, fallingwallenda, prust04, intjudo, stocknovice, HannesRS).

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TMDX reported and got crushed. Their growth rate was down to 60% range but they reaffirmed full year growth rate. I didn’t see anything majorly wrong other than the revenue coming in softer.

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Yes they just reported and it unfortunately does not look great to me. They are currently down 28% after the release.

Recent Highlights

  • Total revenue of $108.8 million in the third quarter of 2024, a 64% increase compared to the third quarter of 2023
  • Generated net income of $4.2 million or $0.12 per diluted share in the third quarter of 2024
  • Owned 18 total aircraft as of September 30, 2024

This represents a QoQ decline in terms of revenue and Net Income, and they also only reiterated their FY Guide, meaning that 4Q guide is only for 115M at the midpoint which would represent two straight quarters of flat/declining revenue.

Very surprised. Pretty big hit to my portfolio as they were my #2 holding. I’m going to listen to the call before making decisions, but this doesn’t look great to me, and I might be selling tomorrow.

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They made large investments in R&D - a maintenance hub for their planes and new pilot training, for example, that are one time expenses. They also had to utilize a higher % of outside vendor planes at higher expense levels.
They claim no competitive reason for the decline in heart - they are saying that it’s due only to declines in donors which they cannot influence.

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There is a service-related contribution for transplants related to miles covered between retrieval and delivery. Geography does make a difference and appears to be a contributing factor for heart (-) and Liver (+) for this quarter.

Capacity =/= delivered value. Earlier in the year, there was discussion about missing out on available organs because of service related concerns. They have solved this by internalizing this portion of their service.

They have purchased (planes) about 200% of their current capacity. They also have not optimized their operations for these aircraft.

What you now have in TMDX is an airline with a medical technology division.

Delivered value is primarily derived from demand. Demand was lower this quarter (no reason given).

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