Transmedics: Organ transplant done right

What happened

Transmedics posted another exceptional quarter

The company reported its best quarter yet, with net revenue reaching $96.9mn (vs. consensus estimates of $83.8mn). All margins improved, leading to a significant earnings per share (EPS) beat of $0.35, compared to the expected -$0.02. Consequently, concerns about the financial burden of owning an aviation fleet have dissipated. Fast, reliable transportation is critical for time-sensitive organ transplants, and owning aircraft ensures efficient delivery to clinics.

In light of these results, TransMedics Group has raised its full-year revenue guidance to between $390-400mn, up from the previous forecast of $360-370mn and well above the consensus of $367mn, representing over 60% year-over-year growth.

Impact on our Investment Case

The organ transplant market is an overlooked market

Organ failure is both common and lethal accounting for 5.2% of all emergency department contacts, and one-year all-cause mortality is 29.8% among organ failure patients.

Often, the remedy is an organ transplant. However, in the U.S. and globally, the demand far exceeds supply, with waiting lists 5 to 10 times longer than the number of available donors. Complicating matters, 40 to 80% of organs, depending on the type, become non-viable within hours after the donor's death and must be discarded. This inefficiency represents a potential revenue loss of $6-8bn, given the $200'000 to $400'000 cost per transplant in the U.S.

It's no surprise then that the illegal organ trade thrives, generating an estimated $840mn to $1.7bn annually and comprising about 10% of all organ transplants worldwide.

Transmedics, a long-term conviction

We have been exposed to Transmedics - the only provider in the U.S. market capable of extending the viability of livers, hearts, and lungs outside the donor, since May 2022.

The company aims to transition from traditional cold storage on ice to an advanced warm perfusion system that replicates the human body environment. This innovation could extend organ survival time from approximately 4 hours to between 12 and 18 hours—sufficient to facilitate transport across the U.S. or even to Europe.

Supported by the "Securing the U.S. Organ Procurement and Transplantation Network Act," with three clinical trials underway and plans to enter the largest organ transplant market (kidneys), Transmedics is strategically positioned for significant growth.

A stellar performance far from the current consensus

If Transmedics achieves 10'000 transplants annually, it could generate over $1.2bn in revenue by CY2027. Assuming they reach a 20% net income margin based on current trends, this would result in an EPS of $7. This is far above today's consensus, which forecasts $800mn in revenue and an EPS of $2.4 for 2027.

Reaching 10,000 transplants annually would represent about 20% of all U.S. transplants each year. In 2022, Transmedics completed approximately 1,000 transplants, doubling that number in 2023. Furthermore, the use of Transmedics' solutions boosted national heart and liver transplant volumes by 12% in 2023.

Transmedics is not only pioneering but also has a high potential for surprise going forward. 

Very few competitors, now and tomorrow

In the short term, among warm-perfusion system competitors, Xvivo Perfusion AB stands out as the only listed direct and pure competitor to Transmedics. However, last year, XVIVO managed only a third of the volume handled by the Transmedics platform. Notably, in early July 2023, XVIVO announced a private jet partnership involving five planes, compared to Transmedics' fourteen, highlighting logistics as crucial for future growth. With just $18mn in cash on hand compared to Transmedics' approximately $390mn, XVIVO may need to raise significant capital to remain competitive.

Looking to the future, competition from xenografts and printed organs is unlikely within the next decade. Moreover, unless these are produced on-site at hospitals, they would require Transmedics' transportation services, making it a potentially advantageous arrangement for Transmedics. Other innovative techniques requiring warm perfusion for tissue addition, gene editing, or surgery would also rely on systems like those provided by Transmedics, further solidifying its position in the market.

Our Takeaway

Organ transplantation might seem like a medical field that was revolutionized decades ago, with donor availability seen as the primary constraint. However, a bigger challenge is the inability to keep organs viable for longer periods. Transmedics leads the field in extending organ longevity, addressing this critical issue. Additionally, as they fully own the logistics, have a series of clinical trials in the pipeline, and will enroll more transplant centers, their leading position will be strengthened.

Currently, Transmedics offers a unique combination of a massive total addressable market, minimal competition, and existing profitability. Unsurprisingly, it is at the top of our Bionics strategy.