TransMedics Group IPO: Transformation Of Organ Transplant Therapy

|
About: TransMedics Group, Inc. (TMDX)
by: Bilbao Asset Management
Summary

TransMedics Group, Inc. is a commercial-stage medical technology company focused on the transformation of organ transplant therapy for end-stage organ failure patients across multiple disease states.

The company has developed the Organ Care System, also named “OCS”. This technology is able to replicate the organ’s natural living and the functioning environment outside the human body.

With $20 million in cash, $42 million in assets and total liabilities worth $46.9 million, what should matter the most on this name is when the financial debt is due.

The company reports FCF of -$26 million and has not reached its break-even. It means that it should raise a substantial amount of money to continue its operations.

The potential annual addressable commercial opportunity for the OCS system should be equal to $8 billion.

With revenue growth of 69% y/y in 2018 and a long list of institutional investors financing TransMedics Group (TMDX), market participants should review the company’s technology. Having said this, with FCF of -$26 million and CFO of -$25.9 million, investors should understand that the company has not reached its break-even point. TransMedics Group, Inc. will need additional financing even after the IPO. Finally, TransMedics has to pay contractual obligations worth $41 million in four to five years. With this in mind, there is a financial risk on this name.

Source: Prospectus

Source: Prospectus

Business

Founded in 1998, TransMedics Group, Inc. is a commercial-stage medical technology company focused on the transformation of organ transplant therapy for end-stage organ failure patients across multiple disease states.

The company has developed the Organ Care System, also named “OCS”. This technology is able to replicate the organ’s natural living and the functioning environment outside the human body. The lines below provide further details on how the system operates:

“The OCS represents a paradigm shift that transforms organ preservation for transplantation from a static state to a dynamic environment that enables new capabilities, including organ optimization and assessment. We believe our substantial body of clinical evidence has demonstrated the potential for the OCS to significantly increase the number of organ transplants and improve post-transplant outcomes.” Source: Prospectus

More than 12 million Americans are diagnosed every year with lungs failure. In addition, approximately 0.650 million patients are diagnosed with heart failure in the United States every year. Finally, 2.8 million new patients are diagnosed with liver cirrhosis each year. Taking into account these figures, the market opportunity is massive. As shown in the image below, the company has designed three types of systems: OCS Lung, OCS heart, and OCS Liver. The company believes that the potential annual addressable commercial opportunity for the OCS system should be equal to $8 billion.

Source: Company’s Website

The system developed by TransMedics Group has pleased doctors and patients and has been reviewed by the FDA. OCS products have been used with over 1,200 human organ transplants and have been commercialized outside the United States. In addition, in 2018, the FDA granted first premarket approval for the use, in the United States, of the OCS Lung for donor lungs currently utilized for transplantation. The lines below provide further details on the response to the FDA regarding the OCS Lung system:

“We submitted a PMA application to the FDA in August 2018 for the use of the OCS Lung for donor lungs currently unutilized for transplantation based on the results of our OCS Lung EXPAND Trial. As is typical for a PMA review process, in November 2018, we received a major deficiency letter, or MDL, for our PMA supplement to this PMA application. In March 2019, we submitted responses to each of the questions raised by the FDA in the MDL, including clarification analyses for subgroups, submission of the outcome data for longer time frames and other analyses.” Source: Prospectus

With regards to other systems, TransMedics Group submitted a PMA application to the FDA in December 2018 for the use of the OCS Heart. The response from the FDA arrived in March 2019. Read the lines below for further details about the response received:

“As is typical for a PMA review process, we received an MDL for this PMA application in March 2019, which requested clarifications and additional analyses of, and reports from, the clinical data, including subgroup analyses, outcome data at one year post-transplantation for all patients and other clarifications and explanations of the clinical findings.” Source: Prospectus

Regarding the right to sell the product in other territories, TransMedics has the right to affix a CE Mark for its systems. The lines below provide further details on this matter:

“In the European Union, we have the right to affix a CE Mark for the sale of the OCS Lung, OCS Heart and OCS Liver for lung, heart and liver transplants, respectively.” Source: Prospectus

Balance Sheet

The amount of inventory increased by 16% in the last two years and property increased by 41% in the same time period. It means that management is positive about the future of the business. Keep in mind that declining businesses usually decrease their inventory and properties.

With $20 million in cash, $42 million in assets and total liabilities worth $46.9 million, what should matter the most on this name is when the financial debt is due. If the company is not able to pay its contractual obligations, the equity value should decrease. The image below provides the list of assets:

Source: Prospectus

With respect to the liabilities, long-term debt is equal to $33.6 million. In addition, it is not ideal that the total amount of contractual obligations is worth $58 million. As of April 12, 2019, the company does not have cash in hand to make these payments. With that, the company should pay $41 million in four to five years, which is appealing. Note that the company should have time to look for additional financing. The list of contractual obligations is shown in the image below:

Source: Prospectus

The image below provides the list of liabilities:

Source: Prospectus

With regards to the interest rates being paid by TransMedics Group, the lines below should interest market participants. The company is paying more than 9.5% interest rate, which certain investors may perceive expensive:

“Borrowings under the Credit Agreement bear interest at an annual rate equal to the London Interbank Offered Rate (“LIBOR”), subject to a minimum of 1.0% and a maximum of 4.0%, plus 8.5% (the “Applicable Margin”), subject in the aggregate to a maximum interest rate of 11.5%.” Source: Prospectus

Income Statement And Cash Flow Statement

Revenue growth should interest investors. It was equal to 69% y/y and 23% y/y in 2018 and 2017 respectively. In addition, the gross profit margin is also appealing. It amounted to 43% and 27% in 2018 and 2017 respectively. The image below provides further details about the top of the P&L:

Source: Prospectus

With regards to the cash flow statement, the free cash flow in 2018 was equal to less than -$26 million with a CFO of -$25.9 million. The cash flow statement is shown in the image below:

Source: Prospectus

With $20 million in cash and FCF of -$26 million, if the cash burn rate continues, TransMedics Group should burn all its cash in 2019. Market participants should study the amount of cash after the IPO closely. That’s what the market should follow closely to explain the valuation of the equity. Keep in mind that without cash in hand, more sale of equity should be expected, which should lead to share price depreciation.

Customer Concentration

Regarding the list of customers, market participants should get to know that there are certain companies that accounted for more than 10% of the company’s net revenue. The images below provide further details on this matter:

Source: Prospectus

With this being said, market participants should not worry about this feature. Customer concentrations are very usual in the pharmaceutical industry. Keep in mind that only a few hospitals and institutions are ready to pay for the type of equipment sold by TransMedics Group.

Use Of Proceeds

The use of proceeds is beneficial as TransMedics does not expect to use the money from the IPO to pay the debt or to acquire equity from existing shareholders. The company expects to use the money to finance the commercialization of the OCS Lung, finance further research of OCS technology and other clinical trial expenses. The lines below provide further details on this matter:

Source: Prospectus

Stockholders And Conversion Of Convertible Preferred Stock

The list of shareholders is appealing. The company was able to sell stakes to many institutional investors. This feature should be appreciated by other institutional investors. It is a feature that should increase the demand for the stock. The image below provides a list of stockholders:

Source: Prospectus

With respect to the convertible securities that the company sold prior to the IPO, a remark should be done. Note that certain investors may not appreciate these securities as they may create stock dilution. The convertible preferred stock is expected to be converted after the IPO, which is very beneficial. The lines below provide further details on this matter:

“The accompanying unaudited pro forma consolidated balance sheet as of December 29, 2018, has been prepared to give effect to the Corporate Reorganization, including the conversion of all outstanding shares of convertible preferred stock of the Company into an aggregate of shares of common stock of TransMedics Group” Source: Prospectus

Regarding the preferred stock sold, market participants should be interested in the amount of money paid for these positions. A large number of stakeholders did not buy shares of the company, but the convertible preferred stock at $4.99. The image below provides further details on this matter:

Source: Prospectus

Conclusion

With new technology that can be sold in Europe and may be sold in the United States in the future, TransMedics Group reports revenue growth of 69% y/y in 2018 and many institutional investors. These are beneficial features that should attract the attention of market participants. Having said this, the company reports FCF of -$26 million and has not reached its break-even. It means that it should raise a substantial amount of money to continue its operations. Finally, TransMedics should be paying contractual obligations worth $41 million in four to five years. With all this in mind, the technology is promising, but the company’s financial risk is not small.

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.