It may surprise you to learn that many donated organs never get used. Less than a third of donated hearts and less than a quarter of donated lungs end up making their way to a recipient. But a company called TransMedics (TMDX 2.72%) hopes to change that, looking to disrupt the way organs are transplanted by transforming the way donated organs are procured and stored for delivery.
Improving the process
Currently in the U.S., after organs are harvested from a donor, they are stored in cold temperatures for transport. During transport, which can often take several hours, organs can deteriorate until they are no longer usable. But with TransMedics' Organ Care System (OCS), each organ can be continuously monitored and optimized for a successful donation during transport. With the TransMedics OCS, post-transplant complication rates are significantly decreased for heart and lung transplants, from a range of 30% to 35% to just 10%-14%.
Not only that, but the percentage of hearts that can be utilized for transplantation increases from 32% to 81% with OCS, and the percentage of lungs that can be utilized for transplant increases from 23% to 87%. For liver transplants, the numbers are similar, with a 98% utilization rate and a 43% reduction of severe post-transplant complications. All in all, that is a lot of patients with hopes and dreams answered.
TransMedics sells a separate single-use OCS for each organ; so far, the FDA has only approved the system for lungs, but there is hope for heart and liver OCS approval in 2021. The company also sells the reagents needed to run the OCS system. With gross margins of about 63%, this could be a profitable option for healthcare investors.
Future drivers of growth
COVID-19 put a damper on transplants last year, with a 25% decrease in organ recovery from February to April of 2020. Despite this, for the full year 2020 (ending Dec. 31), TransMedics reported net revenue of $25.6 million, representing 9% growth over 2019. Likewise, even with what was likely a decrease in organ procurement due to the pandemic, 4Q 2020 net revenue was up 26% year over year at $7.6 million.
The company started 2020 with one active region utilizing OCS (the Chicago area) and closed out the year with four, adding New England, Atlanta, and Dallas. Management plans to continue increasing regional coverage in the U.S., aiming for at least 10 regions by the end of 2021. I think we can continue to expect significant revenue growth -- likely north of 26% going forward.
A nudge from Uncle Sam
In November, the Centers for Medicare & Medicaid Services (CMS) finalized a rule that was designed to increase the supply of organs available for transplant. With over 113,000 Americans on a transplant list, CMS acted by requiring organizations responsible for organ procurement to be transparent in performance reporting -- and requiring these organizations to compete on their ability to successfully facilitate transplants.
This opens the door for TransMedics to push to become a national provider for all OCS-related organ retrieval and clinical management activities for transplant centers in the U.S. In this scenario, TransMedics would not only sell the OCS and its consumables for transport, but would also be the transporter and the medical team providing surgical retrieval of the organs. This is a huge wild card that may not necessarily materialize, but it does provide another potential avenue of growth for the company -- though the size of the addressable market remains unclear. Management seems incredibly excited about the possibilities, though, mentioning the issue at least 10 times on its most recent earnings call.
How big are these markets?
Annually in the U.S., there are about 2,000 lung transplants, 2,000 heart transplants, and 8,000 liver transplants. If each OCS costs roughly $50,000 per patient, for all three indications, that is a $600 million total addressable market. And that's just for the consumables, without even counting the transport or organ procurement reimbursement that management is so excited about. Given the company's current market cap of roughly $800 million, that leaves a lot of room for stock appreciation.
A feel-good story
With a large total addressable market and potential to expand its reach into organ procurement and transportation, there is a lot to like about TransMedics. I can easily envision accelerated growth due to increased geographic expansion, the easing of the COVID-19 pandemic, and a greater number of transplants happening thanks to the OCS. Healthcare investors may not only reap financial rewards from this holding, they can also feel good knowing the company is helping to save lives.