Business context and reporting period
TransMedics Group, Inc. is a commercial-stage medical technology company developing and selling its Organ Care System (OCS) for lung, heart and liver transplantation. This unaudited Form 10-Q covers the fiscal quarter ended September 28, 2019, and the first nine months of fiscal 2019; comparisons are with the periods ended September 29, 2018.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $7.2m | $4.0m | $17.5m | $9.5m |
| Gross profit | $4.2m | $2.1m | $10.1m | $4.2m |
| Gross margin | 59% | 53% | 58% | 45% |
| Operating expenses | $11.5m | $6.1m | $31.0m | $18.1m |
| Operating loss | $(7.2)m | $(3.9)m | $(20.9)m | $(13.9)m |
| Net loss | $(8.3)m | $(5.1)m | $(24.4)m | $(16.1)m |
| Basic and diluted loss per share | $(0.39) | $(3.73) | $(2.05) | $(11.97) |
At September 28, 2019, cash and cash equivalents were $20.4m and marketable securities were $67.9m, or $88.3m combined; restricted cash was $0.5m. Total current assets were $107.4m and current liabilities $14.6m. Stockholders’ equity was $63.5m, compared with a deficit of $192.2m at year-end 2018, reflecting the IPO and preferred-stock conversion.
For the first nine months, operating activities used $25.0m of cash. Investing activities used $67.9m, primarily for marketable securities purchases, while financing activities provided $93.0m, principally from the IPO. Long-term debt had a $35.0m principal balance and a $34.0m net carrying value. The applicable interest rate was 11.3%; the debt matures in June 2023 and is generally interest-only until maturity.
Material changes versus the prior comparable periods
- Q3 revenue rose 78% year over year; nine-month revenue rose 85%. Growth reflected more OCS disposable sets sold, including U.S. OCS Lung commercial sales and clinical-trial activity for heart and liver products. Q3 U.S. revenue was $4.3m and non-U.S. revenue $2.9m.
- Gross margin improved to 59% for Q3 and 58% for the first nine months. Management attributed the improvement to higher U.S. OCS Lung commercial pricing, increased sales volume and lower fixed manufacturing cost per unit.
- Losses widened: nine-month operating expenses increased $12.9m, led by higher selling, general and administrative costs and increased clinical, development and testing activity. Net loss grew by $8.2m.
- Per-share loss comparisons are affected by the IPO and conversion of preferred stock into common stock; the much smaller 2019 per-share loss does not indicate lower total losses. The filing also reports a non-material correction to 2018 interim weighted-average shares and loss per share in the previously filed second-quarter report.
Outlook, management commentary and risks
Management expects continued losses and increased spending as it expands sales and clinical adoption, scales manufacturing, pursues research and trials, and seeks regulatory clearances for products and indications. It stated that cash, cash equivalents and marketable securities should fund operations, capital expenditures and debt service for at least 12 months after the report filing. No specific revenue or earnings guidance was provided.
Key risks include uncertain OCS adoption and reimbursement, dependence on OCS success and a limited customer base, regulatory and clinical-trial outcomes, competition, reliance on some sole- or limited-source suppliers, foreign-market exposure, and the need for additional financing. The OrbiMed credit agreement is secured by substantially all assets, including intellectual property, and includes a $3.0m minimum-liquidity covenant and other restrictions; the company reported compliance with the liquidity covenant at quarter-end. The company disclosed no material legal proceedings and no material change to previously disclosed risk factors.
Unusual and relevant items include the May 2019 IPO, which raised $91.4m net of underwriting discounts and offering costs, and conversion of preferred shares and warrants in connection with the IPO. The company had used approximately $9.1m of IPO proceeds by September 28, 2019. A VA-licensed U.S. patent had an interim extension through September 23, 2020; final extension approval had not been received as of the report date.
Important facts for investors to verify
- Whether commercial OCS Lung sales and adoption are growing sustainably, and how much reported revenue depends on clinical-trial sales, pricing and customer reimbursements.
- Progress and timing of OCS Heart and Liver trials and regulatory approvals, and the effect of reimbursement decisions on customer use.
- Cash consumption relative to management’s 12-month liquidity estimate, planned spending and potential financing needs.
- Debt service costs, covenant compliance and the consequences of the secured-credit terms, including restrictions and maturity obligations.
- Customer concentration, supply continuity, and the final status and scope of the VA patent-term extension.