Transmedics is now offering stomach transplants to investors

What happened

Transmedics delivered Q3 earnings in line with their expectation but below market expectations.

Revenue grew 64% year-over-year to $108.8 million, with U.S. sales up 76%. However, sequential revenue fell 5%, and margins dropped from 61% to 56%, impacted by logistics and temporary reliance on third-party services during aircraft maintenance. TransMedics Group is expanding its logistics infrastructure, including a new Dallas maintenance hub and fleet additions. These moves are intended to boost growth and efficiency heading into 2025, despite increased costs this quarter.  

Despite Q3 hurdles, TransMedics Group reaffirmed its full-year revenue guidance of $425-445 million, representing 76-84% growth.

Impact on our Investment Case

Transmedics is a "strong conviction" in the Bionics strategy 

Our point of view, as expressed in our article on Transmedics last May, remains unchanged:

Since May 2022, the company has been the only provider in the U.S. market capable of extending the viability of livers, hearts, and lungs outside the donor.

Transmedics plans to achieve 10k transplants annually, translating at the current price to $1.2bn in revenue by CY2027 (vs. a forecast of ~$760mn). Assuming they reach a 15% net income margin based on current trends (the consensus for 2027 is currently at 14%), this would result in an EPS of $5.1, i.e., far above today's consensus, which forecasts an EPS of $2.7 for 2027.

In 2022, Transmedics completed approximately 1k transplants, doubling that number in 2023. This year, they are on track for a 3.5-4k transplant. On top of that, reaching 10k transplants annually would represent about 20% of all U.S. transplants yearly, which is still a considerable runway.

Why the drop?

First, Transmedics was trading at x11.8 P/S CY2025 before the earning call. While not flirting with the most expensive stocks like Procept (part of the strong conviction, too), which trades at x20 P/S CY2025, the stock sported around >~20% QoQ growth over the last 10 quarters. A decline of 5% warrants some questions about whether the premium is justified: Were there fewer organs to deliver? Was the service pricing lowered? Is competition eating market shares?

Second, Transmedic's margins also dropped from 61% to 56% due to the acquisition of 3 more planes and higher-than-expected maintenance and training costs. Management is expected to buy more jets: "We will probably add a few more over the next two quarters." Is the investment justified? Is the utilization rate high enough to justify more planes?

Zero red flags during the call 

Three key elements we are focusing our attention on during calls that could turn into red flags and explain revenue drop and margin compression:

• Competition up
• Market share loss
• Margin contraction for future quarters

Our takeaway from the calls are:

• No competition from any new tech has been observed or commented.
• They are not losing market share. In Q3, overall U.S. national liver and heart transplant volumes declined sequentially by approximately 5%, while total lung volumes declined by approximately 3% in the U.S. Both figures are in line with the miss on revenue by Transmedics.
• Margin compression is driven by one-offs related to future investments in logistics, as the pricing stayed the same this quarter. It is also a tough comparison as there was no logistics revenue last year.

So, to answer our first set of questions, there was a little less organ to deliver, but pricing stayed the same, and competition did not eat market share.

The aircraft story probably gets too much attention

For our second set of questions, the central point is around the aviation fleet. To put a bit of context, when Transmedics acquired Summit Aviation in 2023, expectations were that the company would remain unprofitable for two more years. Yet, in early 2024, they defied those projections by turning profitable ahead of schedule. The logistics expansion isn't over - this quarter, they grew their fleet from 15 to 18 aircraft, with plans to reach 20-22, boosting utilization and potentially adding more if needed. Margins took a temporary hit due to dual maintenance costs and reliance on third-party logistics.

The utilization rate of the aircraft is 10/18, and they have spent ~$2mn as a one-time investment into pilot training, the new aviation maintenance hub, and National Organ Care System Program hubs to boost the utilization rate. However, we view this as a "desirable problem". Transmedics is strengthening its moat by becoming a fully integrated service provider, managing everything from organ procurement to delivery - a significant competitive advantage.

Risk and volatility are monitored

Within our process for risk management, top convictions have an extra layer of monitoring.

Transmedics' annualized volatility is 70.2%, the second-highest in the Bionics portfolio. Therefore, since May 2022, we have closely monitored Transmedics' contribution to the portfolio's volatility, which is 11.9%, while its contribution to the portfolio's performance is 11.2%—a positioning we were comfortable with.

This summer, after excellent Q2 results, Transmedics spiked 25%, reached almost 10% of the portfolio, and contributed alone to 19% of the portfolio's volatility since YE 2022. We reduced the position to account for both 5/10/40 UCITS and reequilibrate risk in the Bionics portfolio by adding to positions with a lower risk contribution.

Following this drop, monitoring will continue to size the position adequately. Nonetheless, the stock is still up +15% compared to the Ishares U.S. Medical ETF, which is up +9.7%.

Our Takeaway

Rarely do investors encounter a life-saving technology growing at high double digits like Transmedics. While the stock is volatile, a risk premium is still justified. With significant revenue expansion on the horizon in 2025, driven by increased delivery capabilities and access to more organ sources, this presents a unique opportunity for those ready to capitalize on the growth potential. 

At Atonra, we view this dip as a "buy" opportunity.