TransMedics Group Files For U.S. IPO

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About: TransMedics Group, Inc. (TMDX)
by: Donovan Jones
Summary

TransMedics has filed to raise $86.25 million in an IPO, although the final figure may be different.

The company is commercializing an organ transplant care system in the U.S.

TMDX has grown top line revenue and gross profit from a small base but is burning through cash.

Quick Take

TransMedics Group (TMDX) intends to raise gross proceeds of $86.25 million from a U.S. IPO, according to an S-1 registration statement.

The firm has developed the Organ Care System [OCS], a portable device that maintains donor organs in a human-like state.

TMDX is growing revenue and gross profit from a small base but needs additional funding for working capital and further development purposes.

Company And Technology

Andover, Massachusetts-based TransMedics was founded in 1998 to develop new technology that improves clinical outcomes of organ transplantation procedures by overcoming the limitations that the traditional cold storage preservation practice presents.

Management is headed by Founder, CEO and Director Waleed Hassanein, who was previously Cardiothoracic Surgery Research Fellow at West Roxbury VA Medical Center.

TransMedics has developed the OCS for heart, lung and liver that represents an “organ perfusion, optimization and monitoring system that utilizes [TransMedics’ proprietary and customized technology to replicate near-physiologic conditions for donor organs outside of the human body.”

Below is a brief overview video of the OCS Heart system:

Source: TransMedics

The traditional cold storage method - flushing the organ with cold pharmaceutical solutions and transporting it in a plastic bag on top of ice - induces a major injury to the organ due to lack of oxygenated blood supply.

Management stated that “time-dependent ischemic damage potentially results in short- and long-term clinical complications after transplantation and, coupled with the incapability to assess or optimize organs, contributes to the severe underutilization of donor organ.”

The OCS technology is developed to “perfuse donor organs with warm, oxygenated, nutrient-enriched blood, while maintaining the organs in a living, functioning state; the lung is breathing, the heart is beating and the liver is producing bile.”

TransMedics’ key geographies are the United States, Canada, the European Union and Australia, which they believe account for 67,000 potential organ donors annually.

Investors in TransMedics included Fayerweather Fund, Abrams Capital, BioStar Ventures, Kleiner Perkins, Lung Biotechnology, Flagship Pioneering, Inbio Ventures, and Pharmstandard.

Source: VentureDeal Venture Capital Database

Customer Acquisition

TransMedics has a sales and clinical adoption team that consisted of 27 sales and clinical professionals as of March 30th, 2019. Moreover, in the US, the OCS Lung technology is reimbursed by standard commercial transplant billing mechanisms.

The company’s OCS Lung and OCS Heart technologies are marketed outside of the US. In March 2018, TMDX received its first premarket approval from the US FDA of the OCS Lung for donor lungs currently utilized for transplantation.

Sales and marketing expenses as a percentage of revenue dropped somewhat in 2018, per the table below:

Selling, G&A

Expenses vs. Revenue

Period

Percentage

2018

94.6%

2017

99.0%

Sources: Company registration statement and IPO Edge

The sales efficiency rate, defined as how many dollars of additional gross profit are generated by each dollar of sales & marketing spend in the previous year, was a low 0.3x in the most recent year, as shown in the table below:

Selling, G&A

Efficiency Rate

Period

Multiple

2018

0.3

2017

Sources: Company registration statement and IPO Edge

Market And Competition

According to a 2017 market research report by Grand View Research, the global transplantation market is projected to reach $51 billion by 2025, representing a CAGR of 9.1% between 2014 and 2025.

The main factors driving market growth are technological advancements, the growing incidence of organ failure coupled with rising demand for transplant-related products, such as tissues, immunosuppressants, and organ preservation techniques.

Major competitors that provide or are developing organ warm perfusion systems include:

TMDX believes its technology is the first multi-organ warm perfusion system that protects the lung, heart and liver from ischemic stress that is commonly associated with traditional cold storage.

Financial Performance

TMDX’s recent financial results can be summarized as follows:

  • Strong growth in top line revenue
  • Sharply increased gross profit
  • Growing gross margin
  • Decreasing negative EBITDA
  • High and increasing cash used in operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2018

$13,017,000

69.4%

2017

$7,685,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

2018

$5,734,000

168.3%

2017

$2,137,000

Gross Margin

Period

Gross Margin

2018

44.05%

2017

27.81%

EBITDA

Period

EBITDA

EBITDA Margin

2018

-$20,237,000

-155.5%

2017

-$20,426,000

-265.8%

Cash Flow From Operations

Period

Cash Flow From Operations

2018

-$25,984,000

2017

-$23,098,000

Sources: Company registration statement and IPO Edge

As of December 29, 2018, the company had $20.2 million in cash and $47.0 million in total liabilities.

Free cash flow during the twelve months ended December 29, 2018 was a negative ($26.4 million).

IPO Details

TMDX intends to raise $86.25 million in gross proceeds from an IPO of its common stock, not including customary underwriter options, although the final amount may differ.

No entities have indicated an interest to purchase shares at the IPO price, although I would expect to see some support for the IPO.

Per the firm’s latest filing, it plans to use the net proceeds from the IPO as follows:

to support commercialization of the OCS Lung and, if approved, the OCS Heart in the United States;

to fund research and development to design and manufacture the next generation of OCS technology;

clinical trial expenditures, including those relating to our pre- and post-market clinical trials, including our TOP Registry, our OCS Liver PROTECT Trial and the use of the OCS Heart for DCD donor hearts; and

the balance for working capital and other general corporate purposes.

Management’s presentation of the company roadshow isn’t available yet.

Listed underwriters of the IPO are Morgan Stanley, J.P. Morgan, Cowen, and Canaccord Genuity.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.