Founded in 1998 by President and CEO Waleed Hassanein, TransMedics Group (TMDX 3.17%) has quickly become one of the easiest stocks to root for of our time by revolutionizing the organ donation and transplant process.
TransMedics held its initial public offering (IPO) in 2019 and saw its stock rise over 300% by 2023. However, in the last three months, its stock price has plummeted over 55% as the market wrestled with TransMedics' recent mergers and acquisitions (M&A) activity.
This has left investors at a crossroads. Is the company a falling knife, forced to rely upon M&A to grow? Or is TransMedics quietly transforming the organ transplant industry and actively building upon its first-mover advantage?
Here's why I'm thinking the latter.
TransMedics' magnificent Organ Care System
In 2021, nearly 15,000 admirable organ donors passed away in the United States. Thanks to these kind souls, 2021 was a record year for successful organ transplants in the U.S., totaling more than 41,000. However, as promising as this new record seems, the organ transplant industry is still marred by inefficiencies.
Of these nearly 15,000 donors, only 18% of the donors' lungs, 28% of their hearts, and 60% of their livers were successfully transplanted. With the current transplant process largely reliant upon outdated ice storage in coolers, most organs go unused due to the distance a donation has to be transported and whether or not it is still in good condition when it gets there.
That is where TransMedics and its Organ Care System (OCS) come into the equation. Providing warm, oxygenated, and nutrient-filled blood to newly donated organs, the OCS keeps hearts beating, lungs breathing, and livers producing bile -- replicating their natural living environment. This massive step-change improvement over traditional ice storage allows for a longer organ viability window, buying surgeons, hospitals, and TransMedics' National OCS Program (NOP) valuable time to coordinate a successful transplant.
Just how valuable, you may ask? Compared to the 18% lung utilization rate mentioned earlier for cold storage, the company's OCS success rate with lungs is nearly five times higher at 87%. Similarly, the OCS is almost three times as efficient when dealing with heart transplants, recording an 81% success rate versus 28% for cold storage.
Best yet, the OCS reported that post-transplant complications were reduced by 50% for lung, 61% for heart, and 43% for liver transplants.
Uncertainty surrounding its recent acquisition
As promising as TransMedics' efforts toward revolutionizing the transplant industry seem, its stock price has cratered over the last six months, dropping by over 50%. The primary culprit appears to be its recent acquisition of Summit Aviation, a U.S. charter flight operator that the company acquired for an undisclosed amount.
While the purchase allows the company to launch its TransMedics Aviation operations, it potentially comes with a hefty price tag that investors may not know the full ramifications of until the next quarter's earnings report on Nov. 8th. With TransMedics' market capitalization of just $1.4 billion, buying an entire charter flight company will undoubtedly take a significant bite out of its $582 million cash balance -- not to mention the $515 million in long-term debt already on its books.
Since announcing its acquisition, TransMedics has bought an additional eight fixed-wing aircraft for roughly $100 million, highlighting the immense capital needed to prepare its aviation unit to take flight.
Although these investments will require investors to take a financial "leap of faith" in a sense, a successful TransMedics Aviation unit would provide a coast-to-coast organ transplant logistical network. Revolutionizing the $14 billion organ donation industry, the company could quickly build upon its first-mover advantage if it can stick the landing with its venture into aviation.
Is now the time to buy TransMedics?
Growing revenue by a staggering 156% in its most recent quarter, TransMedics has delivered sequential sales growth for six consecutive quarters.
TMDX Revenue (Quarterly) data by YCharts.
Despite this blistering growth, the company's net profit margin has rapidly improved each quarter as well, nearly reaching breakeven in the second quarter of 2023. While TransMedics' purchase of Summit Aviation will undoubtedly delay profitability for a few quarters as it integrates its operations fully, the company's core OCS unit should be steadily profitable moving forward.
While pinning a valuation on an unstoppable-looking stock like TransMedics is virtually impossible, its price-to-sales (P/S) ratio of 8.9 is near all-time lows.
TMDX PS Ratio data by YCharts.
Thanks to this recent decline, TransMedics' dominant positioning in its $14 billion industry looks rather enticing, especially considering its mere $1.4 billion size. Although TransMedics may not be a perfect stock for the risk-averse, its transformational product results and first-mover advantage make it one of my favorite unstoppable growth stocks for prospecting investors to buy in 2023 and beyond.
