TransMedics Write-Up

How this organ transplant company is becoming vertically integrated

Hope you all had a great week! We’ve held TransMedics for some time now but I wanted to take this week to do a deep dive on the company for subscribers. Enjoy!

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Background

TransMedics was started over 25 years ago but is just hitting its stride. At 29 years old, while doing a cardiac surgery research fellowship, Waleed Hassanein thought there must be a better way to preserve hearts for transplants. So he set out to find one. And he worked for two decades before receiving a premarket approval for the company’s first heart perfusion system. Talk about perseverance!

Business Overview

Before getting into the details of the business, we need to understand a few things. First, the typical way that organs are preserved for transplant is on-ice in a cooler. You think I’m joking when I say cooler, but it’s usually an Igloo – the brand most hospitals use. Second, organs don’t last that long on-ice so many transplant attempts result in failure.

Here is a ballpark of how long the main four transplanted organs last:

• Heart: 4-6 hours

• Lungs: 4-8 hours

• Liver: 8-12 hours

• Kidneys: 24-36 hours

The heart and lungs are most sensitive to blood flow, which is why they have the shortest shelf lives. TransMedics created a warm perfusion system to help organs last longer. In studies, some hearts have lasted 12 or more hours, leading to higher success rates. Very roughly, you can think of TransMedics’ Organ Care System (OCS) as enabling twice the shelf life for an organ. We don’t have to get into the nitty-gritty details of how the science works but you can crudely think of it as mechanically circulating blood to keep the organ alive longer.

Third, we need to understand the difference between DCD and DBD. DCD, or donor after circulatory death, is when an organ is taken after the heart stops. DBD, or donor after brain death, is when an organ is taken after there is no brain activity but the heart is still pumping. About 90% of organ transplants are DBD because the heart is still pumping. By the time a DCD transplant happens, the organ typically doesn’t have much time left. However, with a machine perfusion system, the organ can sometimes be saved.

Right now, TransMedics only has approvals for heart, lung, and liver as these are the real needle-movers since kidneys are more resilient and therefore, don’t have as much of a need for a warm perfusion system. TransMedics, historically, made money from selling the organ perfusion systems at a relatively low cost to hospitals and then selling the disposable boxes that the organs are contained in. The company found a good bit of success doing that but realized from talking to customers that things could be improved. So they started NOP (National OCS Program – yes, that’s an acronym within and acronym) to improve outcomes. NOP was where TransMedics offered a full-service program to transport the organs rather than just selling the system and the consumables. They would hire people to go get the organs, then obviously use a TransMedics OCS, then deal with the brokers to get access to small jets and deliver the organ for transplant. All in all, that would cost roughly $100,000 for hospitals. And hospitals loved it. They didn’t have to deal with all of that headache and TransMedics handled the whole thing for them.

But TransMedics realized that they were getting poor deals on last-minute chartered flights. And since they didn’t own the entire value chain, they were losing out on transplants that could’ve been successful. For instance, management has told stories about there being no available jets because a big event like the Super Bowl was happening. With that as the backdrop and the company’s mission statement of “saving more lives” management decided to make a huge strategic decision to actually own private jets. At first, they said their goal was 10 planes but that has now shifted to 15-20 planes as the full-scale logistics service has gone well so far. The company decided to standardize on the Embraer Phenom which runs between $12-15 million. To help with the process, TransMedics first bought a small flight charter outfit called Summit Aviation, in Wyoming. The founder of Summit agreed to stay on to help train pilots and teach TransMedics about the business of owning planes. 

While the stock was still near highs, the company did a huge convertible debt offering to raise over $400 million. Twenty planes at $12 million a pop would eat into a lot of that but the company would still have a bit of wiggle room to cushion some losses. In retrospect, it was amazing timing to do that convertible offering.

In Q1 of 2022, before NOP really started to take off (pun intended), TransMedics’ gross margins peaked at 76%. Now, they are likely to run in the mid-50% 's, especially as the aviation business ramps up.

Surprisingly, in Q4, the company was actually GAAP profitable for the first time ever, though cash burn was quite high for the year due to the plane purchases. 

Moving from a high-margin consumable medical device business to owning 20 private jets is a – for lack of a better word – ballsy move. But Hassanein isn’t a normal founder. He toiled in relative obscurity for 20 years before getting FDA approval. Now he decided to take on a bunch of debt to get into the aviation business! This is his life’s work – it’s not some game to juice ROIC to him. Now that could either be interpreted as scary or exciting. Very simply, he wants to own this market and creating a vertically integrated offering was the best way to satisfy hospital customers. Now, TransMedics can offer better prices and actually make a little bit more money without paying all of the middlemen associated with finding private jets at the last minute. 

How Big Could It Get?/Optionality

The biggest question mark around TransMedics is probably the market size. In 2023, there were nearly 47,000 organ transplants and kidneys made up roughly 60% of that. That total number grew about 9% though, mainly due to the advances in preservation technology (*cough* TransMedics *cough*). So there were 4,500 heart transplants (up 10%), 3,000 lung transplants (up 11%), and 10,700 liver transplants (up 13%).