TransMedics Group, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 28, 2019 (52 weeks), including the quarter ended December 28, 2019. Comparative period is the fiscal year ended December 29, 2018. The company is a commercial-stage medical technology company; its principal platform, the Organ Care System (OCS), preserves and assesses donor organs for transplantation. The 10-K was filed March 17, 2020.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net revenue | $23.6 million | $13.0 million |
| Gross profit / gross margin | $13.9 million / 58.7% | $5.7 million / 44.0% |
| Operating expenses | $43.5 million | $26.0 million |
| Operating loss | $(29.6) million | $(20.2) million |
| Net loss | $(33.5) million | $(23.8) million |
| Net loss per share, basic and diluted | $(2.36) | $(17.48) |
| Cash used in operating activities | $32.3 million | $26.0 million |
FY 2019 net revenue grew 81%. Gross margin improved by approximately 15 percentage points, which management attributed mainly to higher U.S. disposable-set selling prices and increased sales reducing fixed manufacturing costs per unit. Research, development and clinical-trial expense rose to $19.9 million from $13.7 million; selling, general and administrative expense increased to $23.6 million from $12.3 million. The larger net loss reflected the expanded operating-cost base and higher interest expense.
Fourth quarter: Revenue was $6.1 million versus $3.5 million in Q4 2018; gross profit was $3.7 million versus $1.5 million. Operating loss was $8.7 million versus $6.4 million, and net loss was $9.2 million versus $7.6 million. Basic and diluted loss per share was $0.43 versus $5.48; per-share comparison is affected by the share-count changes following the 2019 IPO and reorganization. Q4 2019 gross margin was approximately 61.8%, compared with 42.3% in Q4 2018. Revenue declined from $7.2 million in Q3 2019 to $6.1 million in Q4.
Revenue mix: U.S. revenue was $16.3 million (69% of total), up from $6.5 million; non-U.S. revenue was $7.4 million, versus $6.5 million. By product, Lung generated $8.7 million, Heart $11.4 million and Liver $3.5 million. More than 90% of revenue came from single-use OCS disposable sets. U.S. growth included commercial Lung sales and Heart and Liver clinical-trial sales; therefore, total revenue growth should not be interpreted as entirely commercial growth.
Liquidity and debt: At year-end, cash and cash equivalents were $20.1 million and marketable securities were $60.6 million; restricted cash was $0.5 million. Current assets were $100.0 million and current liabilities $16.1 million. The company reported $35.0 million of debt principal, with a net carrying amount of $34.1 million, under an OrbiMed facility maturing June 2023. The loan bears variable-rate interest; the stated rate at year-end was 10.63%, with quarterly interest-only payments and principal due at maturity. It is secured by substantially all company and guarantor assets and includes a $3.0 million minimum-liquidity covenant. The company reported covenant compliance at year-end. Management said available cash, equivalents and securities were expected to fund operations and debt service for at least 12 months after filing, while noting estimates could prove inaccurate and further financing might be required.
Net cash provided by financing activities was $92.7 million, primarily reflecting the May 2019 IPO. Net IPO proceeds were $91.4 million. Investing activities used $60.5 million, largely due to purchases of marketable securities. Accumulated deficit was $369.5 million. The independent auditor issued an unqualified opinion on the financial statements.
Material changes and business developments
- Revenue increased substantially, led by higher disposable-set volumes and higher U.S. selling prices. U.S. disposable-set selling prices were approximately 17% higher year over year.
- The company received FDA PMA approvals for OCS Lung in March 2018 and May 2019, including use with donor lungs previously unutilized for transplantation. The OCS Heart PMA application was under FDA review; management expected an advisory committee meeting in Q2 2020 and FDA action within six months. Management expected to submit an OCS Liver PMA application in 2020.
- The 300-patient OCS Liver PROTECT pivotal trial completed enrollment in October 2019. The U.S. OCS Heart DCD trial began enrollment in December 2019.
- The IPO raised $91.4 million net, and preferred shares converted to common stock. The company had 21.2 million common shares outstanding at December 28, 2019.
- In January 2020, the company expanded and extended its Andover leases through December 2026; the landlord agreed to contribute $3.4 million toward improvements. In February 2020, the company changed its fiscal year-end to December 31.
Outlook, commentary and risks
The filing provides no formal numerical revenue or earnings guidance. Management expects continued losses while it expands commercialization, manufacturing, clinical development and regulatory efforts, and says profitability timing is uncertain. Its estimated addressable market of approximately $8 billion and donor-utilization estimates are management estimates, not forecasts of company revenue.
- Regulatory and clinical: Heart and Liver U.S. commercialization depends on FDA review and approval, which could be delayed, denied or limited, or require additional data. OCS Lung EXPAND did not meet its prespecified primary effectiveness endpoint, although it reported 87% donor-lung utilization and 98.7% 30-day patient survival. In a post-hoc 60-month analysis of PROCEED II, overall deaths were higher in the OCS group, although graft-related deaths were similar to standard care.
- Commercial and reimbursement: Adoption depends on surgeon and transplant-center acceptance, training, transplant capacity and continued reimbursement. International national healthcare systems did not reimburse OCS use at the time of filing. A limited customer base, procedure variability and reliance on disposable-set sales could cause uneven revenue.
- Funding and debt: The company expects continued cash use and may need additional capital. Debt carries variable interest, restrictive covenants and acceleration provisions; substantially all assets secure the facility.
- Operations and other risks: Manufacturing is concentrated at one Andover facility, with single- or sole-source suppliers, including Fresenius for Lung and Heart solutions. The filing also identifies regulatory compliance, product quality and recall, competition, intellectual property, cybersecurity, reimbursement reform and foreign-exchange risks.
- COVID-19: The filing warned that the emerging outbreak could disrupt supply, manufacturing, sales, clinical trials, transplant activity and FDA review timing, including the Heart PMA.
The filing reports no material legal proceedings. It disclosed prior voluntary product corrections and recalls, including console and component issues, and stated that those events could entail reputational, regulatory and operating risks.
Most important facts for investors to verify
- Whether revenue growth is translating into sustained commercial transplant adoption, particularly given the clinical-trial contribution to Heart and Liver revenue.
- FDA decisions and timing for the Heart and Liver products, and subsequent clinical or post-approval study results, including longer-term safety outcomes.
- Actual cash burn and runway relative to management’s 12-month estimate, and compliance with the OrbiMed liquidity and other covenants.
- Reimbursement continuity in the U.S. and progress toward international reimbursement, alongside customer concentration and disposable-set economics.
- COVID-19 effects on transplant procedure volumes, supply continuity, clinical studies and regulatory timelines.