TransMedics Group, Inc. TMDX investors are continuing to encounter losses from the stock of late. Shares of the Andover, MA-based commercial-stage medical technology company providing organ transplant therapy for end-stage organ failure patients have plunged 49.2% in the past three months, underperforming the industry’s 6.8% rise. In the same time frame, the stock underperformed the sector and S&P 500’s 7.9% loss and 5.7% growth, respectively.
Two major developments from TMDX in recent months include the announcement of its third-quarter 2024 results (October 2024) and the appointment of Mr. Gerardo Hernandez as the company's chief financial officer, effective Dec. 2, 2024. The company also narrowed its 2024 financial outlook.
During the third quarter of 2024, TransMedics’ total revenues declined 5% sequentially. Per management, this decline was driven by a 3% sequential drop in U.S. revenues and a 45% sequential drop in international revenues (OUS). Per management’s expectations, the gross margin in the third quarter of 2024 also declined on a sequential basis due to continued investment in TMDX’s logistics network, clinical resources and next-generation Organ Care System (OCS) technologies.
TransMedics now expects revenues for the full year to be in the range of $428 million-$432 million (representing growth of 77-79% from the comparable 2023 period). This compares to the prior outlook of revenues of $425 million to $445 million (representing growth of 76-84% from the comparable 2023 period). The Zacks Consensus Estimate is currently pegged at $430.3 million, indicating a 78.1% improvement from the comparable 2023 period.
TMDX Three Months Price Comparison
Image Source: Zacks Investment Research
Over the past three months, the stock’s performance has remained bleak, unlike its peers, like Medtronic plc MDT, GE HealthCare Technologies Inc. GEHC and Abbott Laboratories ABT. MDT and GEHC shares have plunged 3.5% and 1.8%, respectively, while ABT’s shares gained 1.1% in the same time frame.
Despite the potential within the organ transplant therapy market driven by a growing addressable market, the downward estimates indicate that the company might not be able to overcome the negative market momentum any time soon.
During the third quarter of 2024, TMDX’s OUS revenues declined 40% year over year and 45% sequentially. Per management, this was largely due to the lumpiness of international orders and the lack of broad national reimbursement outside of the United States.
Macroeconomic Impacts Behind TransMedics' Tailspin
The Federal Reserve's aggressive interest rate hikes have increased the cost of capital for businesses. For TransMedics, which relies on heavy infrastructure and research and development investments, this environment raises the cost of financing and pressures profitability. Higher interest rates also reduce the present value of future cash flows, particularly for growth-oriented companies like TransMedics that are investing heavily for long-term expansion.
In the current macroeconomic climate, characterized by high-interest rates and economic uncertainty, growth-oriented stocks like TransMedics face valuation compressions. Investors are prioritizing profitability over growth, which is challenging for TMDX as it continues to invest heavily in expanding its logistics infrastructure and developing next-generation OCS technology.
A strong dollar makes U.S.-based exports more expensive for international customers, which could partly explain the sharp decline in OUS revenues. TransMedics has acknowledged the lumpy nature of its international revenues due to the lack of broad reimbursement in these markets, but currency fluctuations might also exacerbate these challenges.
Rising costs of fuel, parts and maintenance due to inflation directly impact TransMedics’ growing logistics and aviation infrastructure. Additionally, inflation-induced wage increases could have raised costs for hiring and training pilots and other staff for the National OCS Program (NOP).
Lastly, there has been a recent news by activist short-selling firm, Scorpion Capital, where it alleged that TransMedics was involved in kickbacks, billing fraud and unreported device failures. The report also accused the company of steering damaged or rejected organs to select transplant centers, engaging in off-label use of its OCS and overcharging hospitals through its NOP. Although TMDX refuted Scorpion Capital’s claims as inaccurate and misleading, it raises doubt about its operations in investors’ minds.
Can TMDX's Focus on Product Development Counter the Downfall?
To receive FDA approval for TMDX’s pre-market approval products, the company had to conduct many clinical trials with large numbers of patient participants, the results of which were published in leading medical journals. The company also continues to collect clinical data through post-market registries for all its products and plans to continue to provide the scientific results of these registries to the clinical user community.
Per management, TransMedics has a long history and broad experience in the development of warm machine perfusion for organ preservation. During the life of its OCS technology platform, the company has continued to add technological and usability enhancements to its devices. Management also intends to develop newer versions of the technology in the future that will continue to improve the ease of use, portability and capability of the products.
The OCS has been reimbursed by the Centers for Medicare & Medicaid Services and private insurers during TransMedics’ clinical trials and continues to be reimbursed in the commercial setting. As its customers have been billing for reimbursement for many years, TMDX has been able to develop expertise in the area of transplant reimbursement and appropriate billing of insurers.
TransMedics' Stock Valuation
TransMedics’ forward 12-month P/S of 3.9X is lower than the industry’s average of 4.7X and its five-year median of 9.9X.
Image Source: Zacks Investment Research
TMDX’s Estimate Movement
Estimates for TransMedics’ 2024 earnings have remained flat at $1.00 in the past 60 days.
Image Source: Zacks Investment Research
Our Final Take
TransMedics’ recent performance highlights both the operational and macroeconomic challenges. The macroeconomic environment creates a dual challenge for the Zacks Rank #5 (Strong Sell) stock — higher operational costs due to inflation and a high-interest rate environment, coupled with market dynamics that disfavor growth-oriented businesses prioritizing long-term investments. These factors, alongside a sequential revenue decline and OUS revenue challenges, have amplified concerns about the company's near-term performance and profitability despite its core business strength, earnings prowess and global opportunities.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The valuation indicates superior performance expectations compared with its industry peers. It is still valued lower than the industry, which suggests potential room for growth if it can align more closely with overall market performance. The favorable Zacks Style Score with a Growth Score of B suggests continued uptrend potential for TMDX. However, if investors intend to add it to their portfolio, it would be prudent to avoid it at present due to the challenges faced by the company.
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