The market has soured on growth stocks that aren't generating profits yet and for good reason. Interest rates have gone from nearly zero to a target range above 5% in the span of less than two years.
Cash flows expected down the road are worth significantly less in the present. That said, the market pushed too hard regarding a spectacular business in the seldom-considered organ transplantation industry.
A market scorned for growth stocks has pushed shares of TransMedics Group (TMDX 3.17%) down more than 50% from a peak it reached in July. At recent prices, you can buy the stock for 9.3 times trailing-12-month sales.
We haven't seen a sales multiple this low for Transmedics Group stock since way before the U.S. Food and Drug Administration (FDA) granted premarket approval to use its portable storage device on organs donated after brain death in 2021. Sales since then, though, have soared.
Heart surgeons are pumped up for TransMedics Group
TransMedics Group has completed several big clinical trials, and it has plenty of real-world evidence that highlights the value of its organ care system (OCS). In the Expand trial, 81% of hearts placed in an OCS were utilized for transplant procedures compared to just 28% of hearts placed in cold storage.
Surgeons generally consider hearts donated after cardiac death (DCD) unusable, but this is changing fast. In a clinical trial, 89% of DCD hearts placed in an OCS were utilized compared to none that were packed in ice.
Busy hospitals and transplant centers seem more than eager to hire TransMedics Group to manage the retrieval, care, and transport of donated organs. In the second quarter of 2023, sales rocketed 156% higher year over year to $52.5 million.
TMDX PS Ratio data by YCharts.
Building a sustainable advantage
With plenty of patents, TransMedics could become the world's leading provider of organ storage devices, but it has bigger ambitions. The company is using its OCS system to corner the market for organ retrieval and transport services.
Standalone OCS sales are only a small part of TransMedics Group's business. TransMedics National OCS Program or NOP is an end-to-end solution for busy transplant centers, and it's taking off. An encouraging 93% of Q2 sales came from the NOP.
Unfortunately, the NOP is running into a logistical logjam. The OCS gives organs more time to travel longer distances, but there isn't a network of charter flight operators dedicated to long-distance organ transport.
To continue growing its business, TransMedics Group recently acquired a U.S. charter flight operator called Summit Aviation. In today's high-interest rate environment, investors don't want to hear a not-yet-profitable company talk about buying a bunch of private jets. Over the long run, though, bringing long-distance transportation in-house could cement its position as the go-to provider of organ transport services.
Looking way ahead
Owning its own jets will allow TransMedics to source organs from greater distances, which dramatically improves its odds of finding viable matches. This is a strong advantage its competitors can't match without their own portable, warm-perfusion technology and logistical capability.
Down the road, potential competitors could develop their own portable devices, and some might even buy a fleet of jets, but these two things won't be enough to compete with TransMedics in the future. Potential competitors will also need clinical-trial data that shows a clear advantage over TransMedics' OCS.
As more transplant centers learn to rely on TransMedics Group's National OCS Program, finding clinicians willing to run a trial with a competing system will get harder. There are no guarantees, but this company could tie up the organ care market for decades and earn heaps for investors in the process.
