Organ transplants save lives. As of today, there are 114,000 people in the US (0.03% of the total population) that are on the waiting list for a lifesaving organ transplant. Meanwhile, since 1988, the US has averaged approx. 21k transplants per year, which simply isn’t enough. This means that most people on the transplant waiting list will not receive a transplant in time and 17 of them die as a result, each day[1].
The demand for organ transplants continues to increase due to rapidly increasing populations and lifestyle choices, especially as more people move out from not having enough, to having too much (food, drink, drugs etc.). The global market for organ transplants is expected to reach $120bn by 2024 and is expected to grow at a CAGR of 8-10% over the next 4 years[2]. For context, this implies the organ transplantation market will be two thirds the size of the market for Cancer treatment ($180bn)[3], double the size of the Diabetes market ($60bn)[4], 10x the size of the Alzheimers market ($12bn)[5] and 20x the size of the Asthma market, globally.[6] This will rank organ transplantation as one of the largest healthcare segments in the world.
Demand for organs outpace available supply
Unsurprisingly, this market has a major supply issue as there are simply not enough organs available to meet demand.
This is because;
(1) there are not enough donors to start with (90% of us support transplants but only 60% of us sign up)
(2) the pool of suitable donors is small (80% of donor organs come from deceased patients)
(3) most donor organs are not suitable for transplant patients (only 30% of the available organs are fit for transplant use)[7].
Problems (1) and (2) are unsurprising to me; I think we are all sometimes guilty of believing in something but not having enough conviction to do anything about it. I’m not justifying it but I think signing up as an organ donor falls into that category. Second, I think it’s understandable that many potential donors are scared about the implications for being a living donor, so most organ donations end up coming from deceased patients.
I am however surprised (and disappointed) by Problem (3) – that only 30% of organs that are available (from an already limited pool of supply) end up being fit for transplant.
Why are organs unfit for transplant?
Organs begin to die as soon as they are disconnected from a living body due to a medical condition called Ischemia. This means that doctors have a limited amount of time (usually no more than a few hours) to transplant a donated organ before it becomes unusable. Unfortunately, this makes it effectively impossible to transport organs for long distances to get them to the patient most in need, and increases the chances that by the time the organ is ready for transplantation, that it is not in a useable state.
The solution? Transportation
Transmedics (‘TMDX’) is a company focused on revolutionizing the transportation of organs to increase their useability, so that more of the available organ supply reaches patients.
Traditionally, organs are transplanted in plastic bags, inside ice coolers, between sites. TMDX has created an Organ Care System (‘OCS’) which can transport organs in a condition which mimics the human body. The OCS system literally pumps in warm, oxygenated blood into these organs which means that they continue to perform their function as if they were in a human body (the heart pumps, the lungs breathe and the liver produces bile) and this ultimately means that there is no effective time limit for how long these organs can be transported outside of a human body. The company has over 200 patents worldwide for their technology and they remain the only viable alternative to cold storage organ transportation today.
Lungs, Heart, Liver OCS Systems
TMDX has three OCS systems built individually for Lung, Heart and Liver transportation. These are also the three segments in the US with the biggest shortfalls in donor supplies, which makes it more critical that more of the available organs are utilized.
Does it work?
The results across all three segments have shown remarkable improvements in organ utilization. For the Heart and Lung OCS systems, the EXPAND Trial (which is a Phase III clinical trial) has shown organ utilization increase to over 80% when using an OCS system (and a 3x improvement in utilization versus Cold Storage Utilization).
The OCS system does more than just increase organ utilization as it also allows surgeons to perform real time tests on the organ and to change operating conditions during transport, which can improve post clinical outcomes. The OCS system reduces post clinical complications by 60% compared to traditional cold storage transport (12% of post clinical complications using OCS vs average of 32% using cold storage).
FDA Approvals
The FDA has already approved the Lung OCS system and it is being used across the US today .
The Heart and Liver OCS systems are currently under FDA review process and TMDX expects to have approvals for these later this year (Heart OCS system approvals are expected to come first).
It is worth noting that OCS system for Heart transplants is already being used outside of the US even though it’s not currently FDA approved. Check out this Youtube video to see the system being used for a transplant in the UK[8].
Market & Business Strategy
The market for organ transplantation in the US is highly concentrated; 55 transplant centers in the US account for approx. 70% of Lung, Heart and Liver transplants. This gives TMDX a highly concentrated customer base. TMDX is currently focused on the biggest transplant centers in the US, where they have already managed to build out a commercial presence.
TMDX makes money by selling these centers the OCS systems and then providing the solutions/medical equipment required to maintain the system (and obtain recurring revenues).
Over time, TMDX wants to have a bigger role in organ transplantation. Currently, the burden of transportation is placed strictly on the Transplant Center receiving the organs, as they have to arrange for transportation and surgical retrieval themselves. TMDX seeks to take that that burden away by eventually becoming a more comprehensive service provider; managing the OCS system, transport and retrieval of organs themselves. This ultimately means that transplant centers/donor centers can focus strictly on the surgical procedure/patient care and it gives TMDX the ability to build out a more efficient organ transportation network. These two things should eventually mean higher transplant numbers (and more lives saved).
Financials
In sum, I think alot rests on TMDX obtaining FDA approval for it’s Heart and Lung systems. If this is achieved in 2021, I am very optimistic about the companys future.
- Rapid Revenue Growth
The average revenue estimate is calling for 90% top line growth between 2020 and 2021. (The one risk here is that we may see periods of rapid growth followed by stagnation, as TMDX sells it’s OCS systems for the first time to new customers).
- Strong Balance Sheet
TMDX has a strong balance sheet with a Current Ratio of 6.25x. With the bulk of their Current Assets in Cash and Marketable Securities, this will allow TMDX significant headroom to continue to build out its network over the coming years.
- Defendable Gross Margins
The company has 58% Gross Margins currently, and that’s with only one OCS system FDA approved. This is a very strong starting point, considering there are likely synergies as TMDX begins to scale their transportation network and have more OCS systems in the marketplace.
Valuation
TMDX is currently unprofitable but it is a high growth stock with huge potential so I will use an optimized margin model to generate a forecast for the stock over a 5 year time horizon.
To compile a Low/Mid/High valuation target for the stock, I will start with a range of analyst estimates for 2021 Revenues of between $36m – $62m (Yahoo Finance).
Based on investors valuing the business at (optimized) long-term Operating Margins of between 20-40% (in 2025) and a Revenue Growth rate of between 30-50% (2021-2024), this gives expected Earnings of between $15m-$94m in 2025.
Assuming that the stock trades at a PE ratio of between 20-30x, this gives a potential 189% upside to TMDX at it’s current valuation and a potential downside of 89% over the next four years.
The assumptions I used above are very conservative as I fully expect to see investors valuing the business at higher longer term optimized margins as this company has a strong moat around its patented technology. I also expect the stock to trade at a >30x Price/Earnings multiple in 2025 as TMDX cements its position as an organ transportation service provider (through it’s National Service Program).
Conclusion
I like the idea of investing in a company that is undoubtedly saving lives. TMDX has founded a technology which replaces a largely dated and inefficient way to transport organs and has proven that these technologies work. What’s even better is that the stock continues to trade at an attractive entry point for new investors with asymmetric upside over the next four years.
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