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Small-Cap Confidential
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August 4, 2023

TransMedics (TMDX) has been busy. In addition to reporting after the close yesterday, the company has announced a slew of acquisitions. Let’s discuss those, then get to earnings.

TransMedics (TMDX) and Alphatec (ATEC) Report

TransMedics (TMDX) has been busy. In addition to reporting after the close yesterday, the company has announced a slew of acquisitions. Let’s discuss those, then get to earnings.

First, TransMedics is set to acquire Summit Aviation, a U.S. charter flight operator, with the deal expected to close by the end of September. This isn’t a surprise as management has talked about how logistics in the organ transplant market is a bottleneck that it needs to fix. This acquisition is intended to fix that, and while it carries significant uncertainty (capital spending, integration, operations, etc.) it also removes a growth ceiling that previously existed. Summit owns two jets and manages eight more. TransMedics will move to a jet ownership model and has already purchased two. With a target fleet size of 10 to 15, that means it needs 8 to 13 more, with each costing $10 to $12 million and costing about $800,000 in annual maintenance. You can see where the cost concerns creep in, though the company netted $387 million from the convertible note offering and the core business is almost profitable. Bottom line – yes there is risk, but also a TON of upside, and it looks like TransMedics can build out the aviation business without raising more capital. Hopefully.

Next, it acquired LifeCradle and EVOSS from Bridge to Life. EVOSS is a warm perfusion technology used for lung and heart transplantation while LifeCradle is a cold perfusion technology for heart. At first blush, it seems the LifeCradle acquisition is the more immediate positive as it fills a treatment gap that TransMedics can’t currently fulfill with current indications. The EVOSS one is a little different as it’s a negative pressure device (vs. positive pressure for TransMedics’ current solution) and has a smaller form factor. Sounds like the plan is to do a small trial to test positive vs. negative and integrate both into a new, smaller form factor unit, which will all take time.

Turning to the quarter, revenue grew 156% to $52.5 million, beating by $10 million. EPS of -$0.03 beat by $0.11. Heart sales of $16.6 million were a little light, which analysts on the call didn’t love, but management attributed this to “ebbs and flows” in the market and logistics challenges (i.e., proof that it needs to build an aviation business!). Liver sales of $32.7 million were stronger than expected while lung of $3.2 million was also a positive, though obviously still a small slice of the pie.

Management raised full-year guidance by $20 million to a range of $180 to $190 million (+93% to 103%) which sounds terrific, though looking deeper it implies the second half of the year will be slower than the past two quarters. Management explained this as conservatism due to summer travel, fall/winter holiday season and potential for some focus to shift to integrating the recent acquisitions. All makes sense, but still, the market always likes an unqualified beat and raise more than a somewhat complicated outlook.

Add it all up and we’re now in the transition period we’ve been waiting for. It’s go time for the TransMedics team and I think investors will give them a little rope in the next two quarters, but we’ll need evidence of positive progress on these major strategic initiatives for the stock to perform. And ultimately deliver the massive upside we’re looking for. HOLD

AlphaTec (ATEC) reported yesterday that revenue grew 39% to $117 million (beating by $7 million) while adjusted EPS came in at -$0.08. Adjusted EBITDA was positive $1.5 million, far better than the -$1.5 million expected. Management increased full-year guidance, saying they now see revenue at $462 million (+32%), a $12 million increase, and $2 million in adjusted EBITDA. This is all good and suggests the company could grow in the mid-20% range in 2024, with some upside potential. Looking out into 2025 we should see some contribution from the REMI acquisition if that is integrated on time. On the EOS acquisition front, management said it continues to bring new software upgrades to the system and boost margins. Big picture, there is nothing from the quarter that challenges the thesis that AlphaTec is becoming the pure-play spine company to beat. It’s still not a well-known name and, provided management continues to execute, more investors should come to the table over time. BUY

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.