What happened

Before our latest investment committee meeting, we reviewed the market, the competition, and TransMedics Group' financial statements and decided to increase our Transmedics exposure.
 
Among key findings for a "Buy" greenlight:

• The use of Transmedics services continues to drive growth in the transplant market's total adressable market.
• The few competitors witnessed the same drop or even sharper in Q3 activity, meaning no market share was lost. Confirming CEO comment on market share intact.
• By tracking the flight activity of Transmedics jets, we saw the 7-day average flight jump amlost twofold from the end of September to early November. Confirming the CEO comments that activity is picking up.
• Now, Transmedics trades at a PEG 0.3x, with little debt. The projected EPS CAGR is 34.4% from 2024 to 2028, despite being based on consensus data that point to lower sales than management expects.

Impact on our Investment Case

Transmedics is the biggest player in a big underserved market

Our point of view, as expressed in our articles last May and most recently in early November, remains unchanged.
 
TransMedics has established itself as the key player in the U.S. organ transplantation market, offering advanced solutions that extend the viability of donor organs, including livers, hearts, and lungs.
 
Globally, approximately 160'000 organ transplants are performed each year. However, this figure pales in comparison to the estimated demand of 1.6mn, combining those on organ transplant waitlists and emergency cases of organ failure. In the U.S., an average of 17 people die each day while waiting for a new organ, and globally, around 700'000 people die annually before even making it onto a transplant waitlist.
 
The transplantation market, valued at approximately $10bn, is expanding at a robust CAGR of 8.5%, outpacing the broader MedTech industry. Among the fastest-growing segments within this market is organ preservation solutions, where TransMedics plays a leading role. This segment, worth roughly $300 million in 2023, is projected to grow at an impressive CAGR of 21% through 2030, highlighting its potential to revolutionize organ transplantation and address critical unmet needs.

A word on organ transplant seasonality

TransMedics faced a challenging comparison in Q3 2023 due to an unusual revenue boost driven by increased logistics revenue following the Summit Aviation acquisition. This additional logistics capacity offset the typical summer decline in global organ transplant volumes.
 
To understand seasonality in the market, it helps to look at a competitor with a longer track record and no revenue from logistics operations or proprietary jets. For example, XVIVO, which operates without integrated logistics, shows clear seasonal patterns. From 2019 to today, XVIVO's Q3 revenue has averaged 4% lower than the previous quarters, while Q4 typically sees a 26% increase compared to the Q1-Q3 average.

A quick rebound is coming

By November, transplant activity rebounded strongly, aligning with the CEO's optimistic outlook on recovery in transplant volumes. This recovery was evident in data from the Organ Procurement and Transport Networt, which reported a more than 10% and up to 16% increase in heart, liver, and lung transplant volumes. Additionally, TransMedics' jet flight activity surged, with the 7-day flight average nearly doubling compared to the slower months of August and September.
 
With only one jet under maintenance, Q4 is progressing well. Based on transplant volumes and maintaining Q2 market share estimates (21% for heart, 27% for liver, and 17% for lung), TransMedics likely performed approximately 326 transplants in October. The company would need around 1,100 transplants in Q4 to exceed the upper end of its revenue guidance. Since October is historically the slowest month of Q4, the performance so far suggests the company is well-positioned to exceed expectations.
 
Moreover, if TransMedics were to increase its per-transplant charge, currently $10k below the competition's $120k, it would further bolster the likelihood of a guidance beat. These dynamics underscore a strong outlook for Q4 performance, with room for potential upside in volume and pricing.

Quick review of the competition, with the two biggest underperforming Transmedics last quarter

TransMedics' proprietary Organ Care System (OCS) leverages warm perfusion technology to extend the viability of donor organs significantly. The company's competitive edge is further enhanced by its National OCS™ Program, which provides 24/7 logistics capabilities, enabling organ delivery anywhere in the U.S. This dual strength in logistics and technology sets TransMedics apart as a leader in the transplant market.
 
It stands out in the lung, heart, and liver markets, outperforming competitors both technologically and operationally:

• Xvivo Perfusion AB (Sweden): Altough Xvivo is a notable competitor and offers kidney solutions (a gap in TransMedics' portfolio), its liver support system provides only six hours of viability compared to OCS's 24 hours and lacks FDA approval. Xvivo's primary strength lies in its kidney solutions, but its liver capabilities remain limited.
• OrganOx (UK): The Metra platform supports warm perfusion of donated livers but lacks proprietary perfusion solutions. OrganOx is attempting to expand logistics by partnering with Blade Air Mobility, following TransMedics' lead in acquiring Summit Aviation for integrated logistics.
• Getinge (Sweden): Though its acquisition of Paragonix, Getinge offers cold storage solutions. However, these lag behind TransMedics' warm perfusion technology, particularly in Donation after Circulatory Death (DCD) transplants - a rapidly growing segment.
• Organ Recovery Systems (USA): ORS specializes in cold kidney perfusion (LifePort Kidney Transporter) and a liver perfusion system still awaiting regulatory approval before commercialization.
• Bridge to Life (USA): Their VitaSmart system enables cold perfusion for kidneys and livers. VitaSmart has CE marking, with ongoing U.S.trials for liver applications, but it falls short of TransMedics' warm perfusion capabilities.
• Institut Georges Lopez (France): Focused on fold perfusion for kidneys, IGL lacks machine perfusion solutions for broader organ applications.

Among competitors, Xvivo, the second-largest player after TransMedics, reported underwhelming Q3 2024 results, with sales at $18 million (below the $18.5 million consensus and -6% QoQ). Challenges in the abdominal segment (-16% QoQ) and service segment (-7% QoQ) contributed to the miss. In contrast, TransMedics showed resilience in Q3, with only a 5% revenue dip despite a 10% decline in transplant flight volumes.
 
Notably, TransMedics logistics revenue grew by 0.8% QoQ, even with 30-40% of its fleet under maintenance. This growth occurred as organ transplant volumes in the U.S. declined by 5% QoQ, further underscoring TransMedics' ability to capture market share. For comparison, Blade Air Mobility, a flight partner of OrganOx, posted a -5.9% QoQ decline, in line with industry trends.
 
TransMedics' ability to maintain growth, driven by superior logistics and technology, cements its leadership position in the rapidly expanding organ transplant and preservation market.

TransMedics' catalysts for 2025 and beyond are not in the models

TransMedics is poised to launch next-generation solutions for heart and lung transplants in Q3 2025, with preclinical data already showing the potential for up to 24 hours of organ viability using its OCS-perfused technology. These advancements mark a shift from cold perfusion to improved warm perfusion solutions for both heart and lung transplants. By enabling extended storage times, these innovations significantly improve operational efficiency for transplant centers.
 
Globally, the utilization rates of available organs between 2015 and 2022 remain low: 20% for lungs, 30% for hearts, and 65% for livers. TransMedics' advancements aim to increase these rates, expanding the total addressable market (TAM) for organ transplants. In the U.S. alone, every 1% increase in utilization for any organ translates into at least $10mn in additional annual revenue for the company. For example, a jump from 65% to 66% for liver utilization rate would increase total transplants for 2024 by about 162 transplantable livers, which, at $115k per transplant, would translate into ~$18mn (or ~7%) extra revenue for TransMedics.
 
Geographical expansion is also the next leg of growth. While TransMedics' financial analyst models currently exclude European market contributions, there are clear indicators of immminent expansion. Following a press conference in Italy involving patient advocacy groups and leading academic transplant experts, the company's CEO commented on LinkedIn: "The future looks promising for OCS, not just in Italy but also across Europe in the upcoming years. The collaborative efforts of various stakeholders pave the way for advancements in medical technology and patient care. OCS NOP in the EU will become a reality very soon!"

Valuation is undemanding

Based on current estimates, TransMedics's EPS CAGR is 34.4% from 2024 to 2028, which puts it among the fastest-growing medtech companies.
 
As TransMedics' earnings turn positive this year, it is perhaps more appropriate to use 2025 and 2026 consensus data: P/E of 46 and 30, with EPS growth of 55% and 50%, respectively, meaning TransMedics's PEG remains well under 1x. PEG is a valuable metric factoring in both profitability and growth. A PEG ratio below 1x is typically considered attractive.
 
With the broad MedTech Space trading currently at ~4x P/S FY2025, TransMedics should command a premium, given its growth profile and market dominance. Targeting a range of 6x to 8x would still be on the conservative side, noting that in August this year, it was trading at 11.8x P/S FY2025. The stock is currently at 4.8x.
 
Even applying the low end of the target range multiple to consensus data of $544mn revenue for next year, TransMedics trading well below $3bn of market cap is a clear buying opportunity for us.
 
Moreover, the market's base-case expectations for 2025 to 2028 appear conservative. Current projections do not account for TransMedics achieving its management's target of 10'000 transplants in 2028. Should the company reach this goal, revenue could range between $1.1bn and $1.2bn. At the current net profit margin, this would result in an EPS of ~$5, where market consensus hovers around $2.6, and push the 2024-2028 EPS CAGR to 46% (from the current 34.4%).

Our Takeaway

With its market leadership, groundbreaking technology, and strong growth trajectory, TransMedics is transforming the organ transplantation market. Temporary Q3 setbacks do not overshadow the company's long-term potential to capture a significant share of an underserved $10bn market.
 
For investors like us seeking exposure to a high-growth medtech stock with a clear competitive advantage, TransMedics is a strong buy and we bought.