The 2019 IPO market has been red-hot, and a lot of stellar new companies have missed out on the headline buzz they deserve. In this episode of Industry Focus: Healthcare, host Shannon Jones and Fool.com contributor Brian Feroldi dig into two under-the-radar medtech IPOs that have some serious long-term potential: organ transport company TransMedics (NASDAQ:TMDX) and stroke surgery innovator Silk Road Medical (NASDAQ:SILK). Tune in to learn what each of these companies offers to their patients, how the businesses work, the biggest risks and trends to watch, their potential addressable markets, which one looks like the better buy today, and more.
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This video was recorded on Oct. 23, 2019.
Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, October the 23rd, and we're talking Healthcare. I'm your host, Shannon Jones, and I am joined by fool.com's health and tech specialist Brian Feroldi. Brian, how's it going?
Brian Feroldi: Hey, Shannon! Awesome to be back! This is my favorite time of year so I'm all smiles up here in Rhode Island. How are things down in D.C.?
Jones: Things are starting to get cold. I do like the fall, but I do not like the transitions, and my throat does not like the transitions. Usually my voice will go out right at the start. I'm already starting to feel it. But for the season, for the fall festivals, for Thanksgiving, this is probably one of my top seasons, I will say that.
Feroldi: Yeah. Awesome to have you in the show, thanks for braving it to be here!
Jones: Yes, just for you and just for our listeners. It was really about our show topic this week, because I'm excited, there's been so much focus and attention the IPOs space, for better or for worse. We've seen some awesome IPOs come on to the market, but we've also seen some explode. But in the healthcare space, there's actually two that have caught our attention. I'm thrilled to have you, Brian, on the show to help us dig into these, because these are two medtech IPOs that every listener out there, if you haven't heard of them, if you're not watching them, if they're not in your portfolio, you should seriously be considering it. But we're going to talk through those two and give you which one we think is the best of the two.
Brian, let's kick things off with the first stock. It's a company known as TransMedics, that's ticker symbol TMDX. Brian, let's start out, let's tell the listeners exactly what TransMedics does and the problem they're attempting to solve for.
Feroldi: As some of our listeners do know, 2019 has definitely been a big year for IPOs. But there's been so many headline-grabbing ones that it's very easy for smaller companies like the two we're going to talk about today to fly under the radar. These are definitely companies that, when I dug into them, fascinated me.
TransMedics is focused on the organ transportation market. Specifically, they deal with organ transportation between the donor and the recipient. This company was founded in the 1990s by a doctor named Waleed Hassanein, who was just a resident at the time when he observed his first heart transplant surgery. He was really excited to be in there with all the cool technology that was going on. But he was taken aback when the heart that was going to be transmitted into the patient was brought into the room in a beer cooler. He thought that was crazy. He knew that organs are supposed to be inside the human body at 98 degrees, with fresh blood coming to them constantly. That's the environment that they like. They do not like being on a pile of ice. As he grew in his career, he came to learn a very sad statistic -- which took me aback when I learned about it. As many as 80% of donated organs -- that would be hearts, lungs, and kidneys -- die before they make it into the patient, and they end up as medical waste. This is actually a very big problem that is preventing many, many people from getting the life-saving organs that they need. Dr. Hassanein was a bit of a rebel, a bit of an entrepreneur, and he started to tinker with ways, in his spare time, that he could keep these organs fresh and alive during the transition problem, because if he could solve that, then he could greatly increase the supply and availability of organs that were out there.
So, he founded a company called TransMedics. He's been at it for 20 years. Fast forward to today, and they now have a product on the market called the Organ Care System, which revolutionized how organs go from the donor to the recipient. Instead of being transported around in a cooler and flushed with all kinds of pharmaceutical products to try and keep them alive, they're put into this cart-like system with a clear plastic top on it. The organ is surrounded by warm, oxygenated, nutrient-enriched blood, and it's also at a constant temperature of 98 degrees. If you go to this company's website, you will literally see a heart that is outside the body beating, or a pair of lungs that are breathing outside the body. This company has the data to show that transporting organs via its method is vastly superior than using cold pharmaceuticals in an ice bucket.
Jones: Pretty much it is an ice bucket. It's amazing to me that this is new technology here in 2019. Granted, this company's been around for a little bit trying to perfect this technology, but to even think about having to carry around organs in coolers is remarkable to me. You mentioned that 80% statistic of organs that die. To give our listeners some context, when we're talking about lungs and lung transplants, 87% of lungs that are transplanted with this Organ Care System actually make it to the patient. That's much higher than the 23% that are kept in cold storage. So this is remarkable technology. I'd encourage anybody to go out and actually look at their website. Look at these videos. It almost looks like they transport this in an incubator of sorts, and it's absolutely fascinating. They are targeting heart, lung, liver also on the horizon.
But that's not at all. What I love about this company is that they have been going after these larger organ markets. You've got heart, you've got lung, liver, and then you've also got kidney transplants on the horizon. We're talking about kidneys, this was astounding as I was looking through the statistics, kidney patients that are waiting for a kidney, there's a waiting list over 80,000 patients long at any given time during the year. In terms of transplants, you're talking about 16,000 that actually happened. For context, you think about their heart transplants, the waiting list is about 6,000, and transplants are about 2,000 a year. So, they've been increasingly and strategically going after these larger and larger markets. At the heart of it all, Brian, is technology that actually works and saves lives.
Feroldi: Yeah. This is a company that is very easy to root for because they're taking organs that would otherwise be going to waste and they're making them viable. They're on a mission to get people the organs that they need and save lives. Their technology allows organs to last outside the body for up to 20 hours. That is a long enough time span to enable organs to be transported by plane or airplane. They're actually unlocking the ability to move organs across countries for the first time ever. That can really go a long way to open up the supply and make it easier to match donors and recipients, because you don't have to worry about the travel time being so compressed.
Opportunity here, very big. This is an easy company to root for. As you said, they are going after numerous markets. They are currently approved outside the U.S. for lung and heart. Within the U.S., they are FDA approved for lung transplants and they expect to have heart transportation with available within the next 18 months or so. They are currently enrolling for the liver in both the U.S. and international markets. That's a little bit farther out. But even within their current approvals, there's plenty of room for this company to grow, take market share, and make more organs available.
Jones: Yes. You mentioned a very good point. A lot of the major transplant centers tend to be concentrated in areas, which really does limit the available organ pool. Being able to increase the distance or the range that an organ can travel, in some cases up to 1,500 miles, is pretty remarkable. But it also leads to, I guess, safer surgeries for the transplant recipient as well. The surgeons don't have to be as hurried when they know they have a longer time because the organ is being basically kept alive. So you've got fewer mistakes, expanded pool, and if you can't get behind that type of technology, they also have a business model, Brian, that drives a predictable, reoccurring stream of revenue for this company as well.
Feroldi: Yeah. TransMedics is pursuing a razor and blade model. The razor is the OCS console, which is, again, the system that moves the organs around. But every time an organ is put in there, there's a number of single-use perfusion sets and solutions that are consumed with each move. It is a razor and blades model. They don't break out the split now, but they did say that their longer-term goal once they get to scale is for about 90% of revenue to come through the perfusion sets and the solutions, which means that this is going to be a recurring revenue model, which makes me smile as an investor.
These guys are still very early into the commercialization process. But the early numbers we've seen are very encouraging. Last quarter, this company posted revenue growth of 94%. That only clocked in at $5.7 million. That's quite small in the grand scheme of things. But there's plenty of upside to that number. A figure that impressed me was, despite only having $5.7 million in sales, gross margin is already 59%. That number is growing along with sales. If you look at the bottom line, as you'd expect, they are investing heavily into building out their capacity, their sales team. Their net loss was $9.2 million in the quarter. But after their IPO, they do have about $96 million in cash on the books. That does give them a few years of runway. Very, very early days here, but the early numbers I've seen are quite impressive.
Jones: Yes. So, you look at the tech that they're offering. Really the only ones doing what they're doing with this type of technology. Then you look at the business model for that predictable, reoccurring stream of revenue with the razor and blades model that you mentioned. But if you look from when the stock actually IPO-ed back in May, the stock is down. When I last checked, down about 18% as of this recording. Brian, is the stock still a buy?
Feroldi: That's obviously a question that every investor has to answer for themselves. This is still a high-risk company. The fact that the stock is down doesn't surprise me that much. We've seen lots of high-growth, money-losing companies get walloped over the last couple of weeks. That's included many stocks that we follow in the healthcare space. But one number we did not mention that is definitely worth throwing out there is, the company believes that its total addressable market opportunity is $8 billion. For context, the company expects to pull in about $24 million in revenue this year. Just starting to scratch the surface of what's possible. If you believe that this technology will grow more and more popular in time, and they can execute against that, the upside potential here is enormous. If you're interested, I think you can buy today knowing full well that it's going to be a very volatile stock.
Jones: Very volatile, and they've got a lockup expiration coming here, I believe at the end of the month. Wouldn't be surprised to see this stock even trade down lower going into that. But as you know as long-term investors, we're looking out over the next three, five, sometimes even 10 years. This is a company that I think is well positioned, not just in the market, but this is the type of technology I can get behind because it is changing lives.
Alright, our second IPO is none other than Silk Road Medical, that is ticker symbol SILK. Brian, this is another fascinating company. What can you tell us about what they do and ultimately what problem they are attempting to solve for?
Feroldi: Sure. Silk Road Medical is in the stroke prevention market. For listeners who are unacquainted, a stroke is most commonly caused when blood flow to the brain suddenly becomes blocked for some reason. The most common cause is carotid artery disease, which is when artery plaque that's in the neck breaks away, travels up to the brain, and causes blood flow to get cut off. That obviously is a big problem. To put some numbers around it, 800,000 Americans have a stroke each year. That leads to 140,000 deaths. This is actually one of the leading causes of deaths. The best way to treat a stroke is to prevent it from happening in the first place. There are a few treatment options that are currently available, but Silk Road Medical is pioneering a new way that fixes some of the things that have prevented the other two from being successful.
Jones: Yeah. Stroke is, I'll just say, Brian, the fifth most common cause of death. So it's definitely up there. But as you were saying, when it comes to preventing stroke, there are two treatment options, two common treatment options. But both, I guess, come with their own pros and cons.
Feroldi: Yes. The first treatment option that surgeons have for stroke prevention is an invasive surgical procedure called carotid endarterectomy. We're just going to call that CEA from here on out to make it easy on us.
Jones: Fair enough, Brian.
Feroldi: But this is when a surgeon makes a big incision into the patient's neck and manually scrapes away the plaque that is in the neck. If they can get the plaque out, it will prevent it from breaking away and going up to the brain. The good news about this procedure is that it's very effective. If a surgeon can go in there, remove the plaque, it does a great job at minimizing the chance that the patient will go on to have a stroke. The bad news is, this procedure is highly invasive and very risky. When the surgeon opens up the neck and is scraping away the plaque, that in itself can sometimes trigger a stroke or a heart attack, because the plaque is being loosened right then and there and it's going directly up into the brain. This is something that surgeons will do, but it is not a great option specifically because the procedure itself is so risky.
The second option was developed more recently, and it is a minimally invasive procedure called transfemoral carotid artery stenting, and we're just going to call that CAS. This is when a surgeon enters the body through the leg and snakes up into the neck, and they place a stent over the plaque. It goes in the artery, and the stent expands. That is designed to hold the plaque in place so that it doesn't break away. The upside of a CAS is that it's way less invasive than a CEA. You're going into the leg. It's minimally invasive. That's all good. The downside is that this procedure is not nearly as effective at preventing the stroke as the CEA is, and the reason is, the plaque is still in the body and it's being held in place, but you're not removing it from the body.
One option, been around for a long time, very invasive but very effective. Second option, more recent, much less invasive but much less effective.
Silk Road Medical has figured out a way to combine the best of these procedures, take the best parts of both and combine them together to make an option that's both safe and effective. They call this new procedure transcarotid artery revascularization. We're going to call that TCAR from here on out. A TCAR is when a surgeon makes a small incision into the patient's neck, and then a product called the ENROUTE neuroprotection system then taps into the artery's blood flow and actually reverses the blood flow away from the brain. It literally goes into the neck and almost sucks the blood backwards out of the body. The blood is then filtered through a mesh screen that collects any of the loose plaque. Then, the blood is reinserted into the patient's body through their leg. So, by pulling the blood away from the brain, then cleaning out this plaque, it minimizes the chance that any plaque will flow up into the brain. By filtering it, you can take all of that dangerous plaque, get it out of the body, and you can do so through a minimally invasive procedure.
This technology has proven to be both extremely safe for the surgery itself, and yet it's as effective as the highly invasive CEA. Very, very interesting technology.
Jones: You were talking a little bit about the risk. Pretty remarkable, the risk of having a stroke in the first 30 days after having this TCAR procedure is 1.4% vs. 2.3% for that first procedure, the CEA one that you mentioned, Brian. But really, the benefits don't necessarily stop there. This is a surgery that happens much faster, does reduce the actual length of time that the patient is in the hospital. You talked about the huge scar of the CEA. I'd encourage any of our listeners to check that out. It's essentially almost from your chin all the way down to your collarbone, a huge scar. But with TCAR, it's a very small incision. Much less invasive than the procedures that are out there. What we've seen, Brian, growth with this particular procedure and this particular technology is growing through the roof.
Feroldi: Yeah. This has been on the market for a couple of years. Surgeons performed 1,800 TCAR procedures last year. That number is going to grow to over 8,000 this year. This is definitely taking off for all the benefits that we talked about previously in the show. For perspective, about 168,000 carotid revascularization procedures are performed each year just in the U.S. That translates into about a $1 billion opportunity for just the stroke prevention procedure.
But Silk Road believes that this technology could also be used in other disease states down the road. They're currently researching how they could use it for diseases of the heart, for the aortic arch, and of the brain. But, a $1 billion market opportunity within the U.S. just within its current labeling. Massive room for growth.
Jones: Massive room for growth. Very exciting potential. But how are they doing financially right now, Brian?
Feroldi: Very similar to TransMedics, it's still very early stages for this company. Their revenue in 2017 for the full year was about $14 million. The current estimate for this year is $61 million, so about a 4X in two years. Last quarter, top line growth was 92%. Another impressive number financially about this company is that even though their sales are just getting started gross margin for their device is 75% and growing. Very fast sales growth, very high gross margin. I think listeners should know at this point that's a combination that we love to see as Fools. Net loss last quarter was $12 million. That's a completely acceptable number. This is a company with $300 million in cash after their IPO. They can fund themselves for many, many years, even if their cash burn doesn't move at all.
This is a very fascinating business. Wall Street is onto this growth story. They've priced it appropriately. It's more than 20X times sales. But the upside here, just like with TransMedics, could be enormous. The potential here is huge.
Jones: Alright, Brian, to close us out, I know I've got my top pick of the two, but which one would you say right now is the better buying opportunity?
Feroldi: I think both of these businesses definitely deserve a spot on an investor's radar. The risky thing here is that both of them are new IPOs. They're going through that weird transition where they were private, and now they're public, and how do they perform when having Wall Street's expectations over their heads? We don't have a lot of data to go on there. But based on what I've seen far, I am more interested in TransMedics, if for no other reason than it seems to have a competitive landscape that is much, much lower than it is for Silk Road. Silk Road is trying to displace two procedures that it has a superior method to, but you could see that some physicians might be resistant to that, whereas I would see much less resistance for TransMedics' technology personally. I could be wrong there. But between the two, I like that one a little bit better. How about you?
Jones: How did I know you were going to say that? I also think TransMedics is the better buy. They're completely in a field of their own, offering this innovative technology with a very large total addressable market. They're just getting started. I love that razor and blades model that they're building out with the consumables. As you know, as Fools, we love that predictable revenue stream. Really, given their current sales, I think the growth runway looks so much more impressive to me than Silk Road medical. But I think for any listener, you can't go wrong with either one. But if I had to choose, I would be putting my money into TransMedics.
With that, that'll do it for Brian and I for this week's Industry Focus: Healthcare show! We want to thank you so much for tuning in! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. The show is being mixed by Austin Morgan. For Brian Feroldi, I'm Shannon Jones. Thanks for listening and Fool on!