TransMedics Group, Inc. — Q3 2021 Form 10-Q
Business context and period. Commercial-stage medical technology company developing and selling its Organ Care System (OCS) for organ transplantation. This unaudited filing covers the three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $5.37 million | $7.09 million | $20.59 million | $18.01 million |
| Gross profit / margin | $3.77 million / 70% | $5.04 million / 71% | $14.17 million / 69% | $11.81 million / 66% |
| Operating expenses | $15.50 million | $9.65 million | $42.27 million | $32.30 million |
| Operating loss | $(11.73) million | $(4.61) million | $(28.10) million | $(20.49) million |
| Net loss | $(12.96) million | $(5.09) million | $(31.55) million | $(22.44) million |
| Net loss per share | $(0.47) | $(0.19) | $(1.14) | $(0.94) |
Cash flow and liquidity: Nine-month operating cash use was $22.22 million, versus $23.13 million in 2020. Investing activities provided $19.28 million, mainly reflecting net maturities and sales of marketable securities; financing provided $1.35 million. At September 30, cash and cash equivalents were $22.50 million, marketable securities were $80.36 million, and restricted cash was $0.50 million. Management said cash, cash equivalents and marketable securities of about $102.9 million should fund operations, capital expenditures and debt service for at least 12 months following filing, while noting estimates could prove wrong.
Debt: $35.0 million principal under the OrbiMed credit agreement, maturing in June 2023, with quarterly interest-only payments and principal and accrued interest due at maturity. The applicable rate was 9.5% at quarter-end; the nine-month weighted-average effective rate was about 11.2%. Debt is secured by substantially all company and guarantor assets, including intellectual property. The company reported covenant compliance and a $3.0 million minimum-liquidity covenant.
Material changes versus the prior comparable periods
- Q3 revenue fell $1.72 million year over year. U.S. revenue declined $2.81 million, mainly as heart and liver trial-related sales decreased; Lung revenue increased. International revenue rose $1.09 million.
- For the first nine months, revenue increased $2.58 million. Lung revenue rose $5.42 million, offset in part by lower liver revenue of $2.69 million and slightly lower heart revenue. Gross margin improved to 69% from 66%, attributed to sales mix, volume and production efficiency.
- Operating expenses rose $5.85 million in Q3 and $9.98 million year to date. SG&A growth reflected commercial-team expansion, higher stock-based compensation, public-company compliance costs and increased commercial activity.
- Net loss widened by $7.87 million in Q3 and $9.11 million year to date. At September 30, accumulated deficit was $429.8 million.
- Cash and marketable securities together declined from $125.6 million at December 31, 2020 to $102.9 million at September 30, 2021. The company had no public-offering proceeds in the 2021 nine-month period, compared with $75.7 million net proceeds from its 2020 follow-on offering.
Outlook, commentary and risks
- The FDA approved OCS Heart for use with donors after brain death on September 3, 2021, and OCS Liver for donors after brain death and circulatory death on September 28, 2021. Management expected U.S. commercial sales of both products to begin in Q4 2021. No specific revenue or earnings guidance was provided.
- Management expects operating losses to continue in the foreseeable future as it expands commercialization, manufacturing, research and development, and clinical and regulatory work. Additional financing may be needed; it may not be available on acceptable terms or at all.
- COVID-19, particularly the Delta variant, reduced transplant volumes in Q3 versus Q2, with lung transplants more affected than heart and liver. Management expected pandemic-related pressure on OCS sales to continue through 2021 and into 2022. The filing cites possible disruption to transplant procedures, supply chains, staffing, clinical studies and regulatory timelines.
- Revenue is exposed to customer concentration: two customers represented 16% and 12% of Q3 revenue; two customers represented 20% and 11% of accounts receivable at quarter-end. Some product components have sole, single or limited-source suppliers.
- Other considerations include the secured debt and its covenants, reimbursement and market-adoption uncertainty, competition, regulatory and clinical risks, and foreign-currency exposure. The company had a non-cancellable $9.5 million purchase commitment for goods through December 2029. It reported no material legal proceedings.
- The company expected to become a large accelerated filer and cease to qualify as an emerging growth company beginning January 1, 2022, increasing compliance requirements and costs. Management reported disclosure controls were effective as of September 30, 2021.
Most important facts for investors to verify
- Whether Q4 commercial launches of OCS Heart and OCS Liver occurred as expected and translated into recurring sales.
- Whether transplant volumes, particularly lung procedures, recovered from COVID-19-related disruption and how that affected procedure volumes and OCS sales.
- Whether revenue growth and gross-margin improvement continued, and whether Q3’s lower revenue was primarily timing-related trial activity or reflected broader demand trends.
- Cash-burn trajectory, liquidity runway and financing needs relative to management’s stated 12-month funding estimate.
- Debt repayment and covenant capacity, including the June 2023 maturity and the impact of secured obligations.
- Customer concentration, reimbursement progress, supplier availability and execution of commercialization and manufacturing expansion.