Most donated organs die before they make it to the patient. TransMedics (NASDAQ:TMDX), a newly public med-tech company, has invented a new organ transportation system that promises to bring the process into the 21st century. In this episode of Industry Focus: Healthcare, host Shannon Jones and Fool.com contributor Brian Feroldi talk about TransMedics' technology, financial statements, and the massive opportunity ahead.

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This video was recorded on Oct. 23, 2019.

Shannon Jones: 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.

Brian 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.