TransMedics Deep Dive Part 2

Valuation, Financials, Opportunities

Hi all 👋

Company: TransMedics

Ticker: TMDX

Stock Price Today: $118.73

Stock Price High: $175.66

Market Cap: $4.02B

Headquarters: Andover, MA

Outline

1. Introduction (Part 1)

2. Business Overview (Part 1)

3. Q1 Estimates (Part 1)

4. Competitive Advantage (Part 1)

5. Risks (Part 1)

6. Financials (Part 2)

7. Opportunities (Part 2)

8. Valuation (Part 2)

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Financials📊

TMDX had an extremely good Q1 earnings report:

• Sales were $144M (Est. $123M)

• EPS was $0.70 (Est. $0.24)

• FY25 guidance increased $575M (Est. $541M)

The bar was high as there was a lot of hype around TMDX. Most investors knew that the numbers would be good because flight data was strong, so for TMDX to report earnings and still explode +20% shows just how strong the numbers were.

Demand

TMDX reported $144M in the quarter of which ~97% came from US. In terms of product sales vs service sales, the majority still comes from product revenue but service revenue is growing at 55% YoY whilst product revenue is growing at 44% YoY. Service revenue basically includes surgical procurement, and flight school revenue. For a more specific breakdown of total revenue we had:

• $4.0 million in lung

• $29.9 million in heart

• $108.8 million in liver

All in all, this led to a QoQ gain of 18%.

Profitability

Gross margin for the quarter came in at 61%, which is a slight drop from 62% in Q1 2024 mainly driven by an increase in service revenue which has far lower margins than product revenue. Product gross margins increased 448 basis points over the year, whilst service gross margins fell 632 basis points. We’ll continue to see margin fluctuation, and perhaps a struggle to really grow margins materially and stably for the next couple of years because TMDX is still continuing to build the foundation of the business with a larger aviation fleet, more aviation maintenance, and new design centers like the one opened up Mirandola, Italy.

Margins should therefore not be an ultimate deciding factor just yet of whether you decide to invest into TMDX, though of course seeing more and more stability is needed over time and that will come with scale in 2026-2027 I would assume.

As a tell of how uncertain the TMDX margins still are, estimates for EPS were $0.24 but EPS came in at $0.70 as net margins improved far more than analysts expected. This allowed the hit a net income of $25.7 million marking the 6th straight quarter of net income profitability, and 3rd sequential quarter of net income improvements. My models suggest ~20% net income margins which is much larger than I expected at such a soon time. Hopefully we start to stabilize in that region or higher in the next 3-5 years.

TMDX did report a negative FCF quarter this year, but it’s still a 37% improvement on Q1 2024 so nothing for me to worry about here at the moment.

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Opportunities📈

Organ Transplantation TAM

The organ transplantation market has a finite TAM. TMDX can’t control how many patients need a transplantation per year, but they can control the utilization rate of organs which indirectly increases the TAM, and at the moment demand for transplants is far outpacing the supply of transplants. As more and more organs get utilized and the procedures result in better outcomes (because of technologies like TMDX), then medical providers will start to have the data to evidence even more benefits of transplants vs other procedures. And it’s inevitable that this will eventually happen because TMDX’s utilization rate is 97.5% using OCS. For heart trials, the use of cold storage led to utilization rates of 32%. Data wins and the data shows TMDX is the winner.

Over a lifetime, transplants are more cost effective than treatments like dialysis, recurrent ICU visits, and various mechanical aids. Further, better technology like TMDX may limit patients exposure to post-surgical complications, longer stays, and repeated hospital visits. So that’s how TMDX can increase the TAM and that’s why Medicare is so fond of transplants vs other treatments because it makes more sense from an economic point of view. That tends to be a bearish argument that I see floating around that TMDX will plateau very quickly because the TAM is finite, but when you’ve got international expansion, huge inroads to be made in US, and other organs, you’ll realize that TMDX are nowhere near the top of their TAM.

The other factor growing the organ transplant TAM, though less material, is the general unhealthy habits of the population. Currently, there’s 103,000 people on the US national organ transplant list with new patients being added every 8 minutes, and this figure isn’t slowing down at all. With an aging population in the US, an increase in the amount of chronic diseases such as heart disease, diabetes, or high blood pressure, and a general nation wide quite clear trend towards more cases of these issues, organ failure cases aren’t decreasing. Currently, we’re at a stage where ~13 people die every day whilst waiting for a transplant. This figure was 16 in 2021, so organ utilization rates are improving (with part thanks to TMDX) but despite these advancements, there’s still a huge mismatch in demand vs supply.

So yes the market is somewhat finite, but also there’s an extremely long way to go until TMDX’s growth starts to get affected by the finite nature of the market.

Here’s just a little snippet from Mayo Clinic on organ perfusion systems. They’re a quite well respected medical center for those who don’t know.

Kidney

People are underestimating the potential that kidney has. Kidney will add ~25,000 potential transplants to TMDX and 30,000 outside of the US showing us exactly why the 10,000 publicly stated transplant (per year) goal for TMDX is completely feasible and on the very low end of what they will eventually achieve. In fact, this 10,000 target per year will likely be met without kidney which is by far the biggest opportunity for TMDX in terms of numbers of transplants per year.

And the reason TMDX’s opportunity in the kidney transplant market is so high is because most of the companies today (mainly cold storage) simply can’t address the limitations that TMDX can solve with their technology, though admittedly far more expensive (one of the risks I discussed prior).

Aviation / Logistics

Before TMDX invested in their end-to-end logistics network utilizing their own airplane fleet, they used private jet brokers which of course come with higher costs, much less flexibility, and far less scalability. When timelines are very thin to get organs to recipients, and there’s 20-30 flights per day, it seems a very obvious move to invest heavily into logistics, but no other competitor is doing anything like this.

TMDX have 21 planes today which is likely what that they will have for the entirety of FY25 as that will allow them to gauge the fleet size they need moving forward and find the sweet spot for the maximum efficiency.

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International

Currently, the US is by far the biggest organ transplant market internationally. Why? Because reimbursement policies are a bit more advanced. For instance, in 2024, the US had ~48,000 transplants whilst Europe had 42,000 transplants. Maybe this doesn’t sound like a huge difference but when you consider the US population is about 44% the size of Europe, and Europe does less transplants, you realize the biggest opportunity is in the US.

However, non-US revenue currently only accounts for ~3% of TMDX’s total revenue and growth has been very minimal. The reason isn’t because of a lack of marketing, or technology, or even effort. It’s because TMDX offers an expensive product and the way reimbursements work in Europe isn’t as beneficial to TMDX as no national health systems like the NHS in the UK reimburse transplant centers for the use of TMDX’s OCS technology. This will eventually change as TMDX work around the required clinical trials for national healthcare systems to start reimbursing for the TMDX technology but it’s of course a lot more difficult in Europe with so many different countries, and therefore so many different processes. But it’s worth the work because of the lack of competition and the huge opportunity.

You’ve also got Asia Pacific which is experiencing huge growth driven by a rising awareness for organ donations and improving medical technology there. The market is only valued at $3.7 billion (vs the US at ~$6 billion), but the Asia Pacific market is growing at 11% CAGR vs US at 8.5% CAGR.

So to put it simply, TMDX is experiencing a huge amount of demand in the US currently, especially with kidney coming up in the next 2 years. But, internationally, there’s also a ton of opportunities for TMDX to expand with some areas that will naturally be a bit harder to penetrate but the market is there to be won.

Valuation⬇️

The most important bit of any investment is the valuation.

As a tribute to Buffett, here’s a great quote from him:

“For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments”

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