TransMedics Group, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. TransMedics is a commercial-stage medical technology company developing and selling its Organ Care System (OCS), a platform for preserving and perfusing donor organs. This filing covers the three and nine months ended September 30, 2020; comparatives are the periods ended September 28, 2019. The company sells OCS Lung, Heart, and Liver products, primarily disposable sets used with OCS consoles.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $7.1 million | $7.2 million | $18.0 million | $17.5 million |
| Gross profit | $5.0 million | $4.2 million | $11.8 million | $10.1 million |
| Gross margin | 71% | 59% | 66% | 58% |
| Operating loss | $(4.6) million | $(7.2) million | $(20.5) million | $(20.9) million |
| Net loss | $(5.1) million | $(8.3) million | $(22.4) million | $(24.4) million |
| Basic and diluted loss per share | $(0.19) | $(0.39) | $(0.94) | $(2.05) |
Q3 revenue was nearly unchanged year over year, while nine-month revenue rose about 3%. Higher U.S. OCS Heart clinical-trial sales and pricing were offset by lower Lung and Liver sales and weaker international activity. Q3 operating expenses fell $1.8 million year over year, largely reflecting lower consulting, conference, and other costs; nine-month operating expenses increased $1.3 million. The company remains loss-making, with an accumulated deficit of $391.9 million at September 30.
Cash, liquidity, and debt
- At September 30, cash and cash equivalents were $21.4 million, marketable securities were $111.3 million, and restricted cash was $0.5 million. Cash, cash equivalents, and marketable securities totaled $132.7 million.
- For the first nine months, operating activities used $23.1 million; investing activities used $51.5 million, primarily for net purchases of marketable securities; financing activities provided $75.5 million, mainly from the May 2020 equity offering. Cash, cash equivalents, and restricted cash ended the period at $21.9 million.
- Debt principal was $35.0 million, with a carrying value of $34.5 million net of discount and accretion. The OrbiMed facility is interest-only until its June 2023 maturity, when principal and accrued interest are due. The stated rate was 9.5% at quarter-end; the nine-month weighted-average effective rate was approximately 11.2%. The debt is secured by substantially all company and guarantor assets and includes financial and operating covenants. The company reported covenant compliance.
- Management stated that available cash, cash equivalents, and marketable securities were expected to fund operations, capital expenditures, and debt service for at least 12 months after filing. The company nevertheless said it may need additional financing.
Material changes, outlook, and risks
- Product and geographic mix: Q3 OCS Heart revenue increased to $5.4 million from $3.7 million, while Lung revenue declined to $0.7 million from $2.1 million and Liver revenue fell to $1.0 million from $1.4 million. U.S. revenue increased to $5.9 million; revenue outside the U.S. declined to $1.2 million from $2.9 million. The company attributed lower transplant activity, especially in Europe, to COVID-19.
- COVID-19: The pandemic disrupted transplant procedures, clinical activity, travel, and customer access, and affected supply-chain and manufacturing operations. Manufacturing and distribution had returned to pre-pandemic levels starting in May, but management expected OCS sales to remain negatively affected for the rest of 2020. Transplant activity had recovered from its disruption but had not returned to pre-pandemic levels; management cautioned that renewed outbreaks could cause further disruption.
- Regulatory and clinical matters: The OCS Lung has FDA PMA approval, including an additional indication approved in May 2019. The OCS Heart PMA review was delayed: an advisory committee meeting was postponed, and the FDA had not set a new date while reviewing additional trial and follow-up data. OCS Heart DCD Trial enrollment was completed in September 2020; the Heart DCD continued-access protocol was expected to begin enrollment by year-end 2020 or early 2021. The Liver PROTECT continued-access protocol was enrolling.
- Management outlook: The company expects continued losses and long-term investment in commercial expansion, manufacturing, research and development, clinical trials, and regulatory approvals. It expects revenue to decrease in the short term because of COVID-19, but provided no specific numerical earnings or revenue guidance in the supplied filing text.
- Other exposures: Two customers represented 12% and 14% of Q3 revenue; two customers each represented 14% of receivables at quarter-end. Certain product components depend on sole, single, or limited-source suppliers. The company reported no material legal proceedings and no off-balance-sheet arrangements. It had $14.8 million of operating-lease commitments and reported no material inflation impact.
Important facts for investors to verify
- Whether transplant volumes, particularly in Europe and for OCS Lung, recover from pandemic-related declines, and how that affects revenue and margins.
- The timing and outcome of FDA review of the OCS Heart PMA, including the advisory committee process and additional data review.
- Cash burn, the stated 12-month liquidity runway, and the potential need for additional capital while the company continues to incur losses.
- Debt terms, covenants, secured-asset exposure, and the 2023 maturity obligation.
- Customer concentration, dependence on limited-source suppliers, and the extent to which clinical-trial sales and pricing changes affect reported revenue and gross margin.