Analysis of TransMedics' Short-Seller Report and my Perspective

I have reviewed the 340+ pages, so you don't have to

Last Friday, activist short-seller Scorpion Capital released a report on TransMedics. The stock initially dropped about 13% but ended the day down 7%. The report's title is particularly striking.

Walk Like An Egyptian: A “Mafia-Style” Extortion, Racketeering, And Organ Trafficking Scheme Masquerading As A Medical Device Company – Fueled By Kickbacks, Billing Fraud, Unreported Device Failures, And Off-Label Misuse On A Vast Scale; Precipitating A Customer Exodus And Rapidly Unfolding Death Spiral. Target Price: $0.

But what does the report reveal? Let’s find out together!

The report

The report comprises 342 pages and is divided into 15 sections, each focusing on a different aspect.

Within each section, the pages follow a consistent structure.

At the top is the allegation, and at the bottom is the “evidence” supporting it.

Most of the “evidence” consists of quotes from anonymous sources - 30 people interviewed.

The different allegations

I will follow the structure of the report and summarize the main allegations. Just to understand, Transmdics offers 2 main products/services:

• The OCS - Organ Care System. It is a medical device designed to maintain in good conditions different organs.

• The National OCS Program or NOP. It is the service division of the company offering logistics services for organ transportation.

Introduction to the real Transmedics

The introduction of the report levels multiple allegations against TransMedics, ranging from moral judgments to operational critiques. Key points include accusations of predatory practices exploiting vulnerable patients and Medicare by inflating fees and leveraging a bundled service model that forces hospitals to use its expensive logistics offerings. Critics argue the company’s shift to in-house aviation is designed to inflate costs and profits at the expense of transplant centers and taxpayers. Allegations of nepotism, with the CEO’s sister employed by the company, and speculative claims of ties to organ trafficking, add a sensational layer but lack substantive evidence. Concerns about competition and the product’s cost compared to traditional cold storage highlight risks typical of innovative early-stage companies.

On the financial side, the report questions the sustainability of TransMedics' high valuation given its lack of free cash flow, debt, and ongoing losses. Critics point to a potential revenue slowdown, referencing a Q3 miss and emphasizing high operational costs associated with its aviation expansion. Despite these allegations, some criticisms, like the claim that the device primarily benefits surgeons by offering more flexibility, appear more like competitive advantages than liabilities. The report combines valid concerns with speculative and hyperbolic claims, requiring careful scrutiny to separate meaningful risks from rhetoric.

The 15 main allegations

• 1. Anti-competitive and unsustainable practices. The NOP is alleged to employ coercive tying, price extortion, and retaliation tactics to maintain its position, creating a scheme critics consider unsustainable.

• 2. Fraudulent billing and overcharging. The program allegedly relies on unnecessary flights to inflate costs for hospitals, raising concerns of fraudulent billing.

• 3. Dependence on high-volume users. Revenue is said to depend on a few transplant surgeons and centers accused of receiving kickbacks and inducements, raising ethical and legal questions.

• 4. Regulatory and investigative risks. High-volume users and the company itself are reportedly under investigation by federal and state authorities, as well as media outlets, indicating potential legal vulnerabilities.

• 5. Organ trafficking allegations. The company is accused of steering rejected organs to its top users in exchange for using its devices and services.

• 6. Off-label usage risks. The majority of device usage is claimed to be off-label, allegedly managed by TransMedics technicians, putting the company at existential regulatory risk.

• 7. Unlicensed surgeons and safety concerns. The NOP service reportedly employs unlicensed surgeons on H1B visas from high-risk regions, allegedly leading to organ loss or damage.

• 8. Unsafe organs and concealed issues. Critics allege the company pushes damaged, rejected organs to avoid losing device and logistics fees, concealing adverse organ information from users.

• 9. Inadequate training. Organ management is said to be conducted by undertrained technicians, raising safety concerns for organ recipients.

• 10. Customer backlash. The company’s practices, including alleged threats and withholding organs, have reportedly antagonized the transplant community, leading to declining usage.

• 11. Customer exodus. Prominent transplant centers are reducing or eliminating their use of TransMedics products, signaling an accelerating loss of trust.

• 12. Lack of clinical value. The device is alleged to provide no clinical benefit, being used off-label for surgeon convenience or in exchange for organ steering.

• 13. Growing competition. New competitors like OrganOx and Paragonix are reportedly offering superior, cost-effective alternatives, gaining traction among transplant centers.

• 14. Disruption by NRP. Normothermic regional perfusion (NRP), a widely adopted and inexpensive technique in Europe, is said to be spreading rapidly in the U.S., threatening TransMedics' revenue.

• 15. Device failures and recall risk. The device is reportedly plagued by failures, resulting in organ loss and quality issues, with allegations of a cover-up by management.

The evidences

Some evidence lacks consistency, such as quotes from interviews with undisclosed individuals, competitors, and dissatisfied customers, which diminishes their relevance. Others can not be checked.

However, other points are more compelling and deserve further examination.

Kickbacks and inducements

Payments of exactly $50k to several doctors with the label “consulting fees” is a good evidence. Those doctors, according to the report, are high-volume customers.

Though it may be unethical, these kickbacks are a common practice in the healthcare sector. We often observe pharmacies, doctors, or hospitals receiving incentives such as gifts, discounts, or year-end payments when their business volume reaches a significant level.

The primary risk of engaging in such practices is the potential for fines or the implementation of regulations prohibiting this type of commercial incentive.

Management failure

Among the different allegations, the personality of the CEO is often quoted. Most of the evidences are interviews. However, it is compliant with the low Glassdoor (2.8/5.0) note where employees and ex-employees give a low approbation rate to the CEO (40%).

Lack of experience from employees

Given the size and the growth of Transmedics, it is likely that this allegation is true. Of course, this is an issue, as it can damage the reputation and operations of the company.

But it is not so surprising in this very niche and specific field.

Commercial struggle

Highlighting the risks posed by competition is a valid point in this report, though it is presented with a notable sense of drama.

The main risks that are presented and that I find interesting are:

• Cheaper options from competitors like LifePort of XVivo. Interestingly, this argument inherently implies that the market is expanding and that this type of equipment holds value—an implication that contradicts many of the allegations presented elsewhere in the report

• Aggressive sales tactics by overzealous sellers can backfire. For example, it is mentioned that some sellers assured customers that Medicare would cover the costs, which may have been only partially accurate, potentially leaving customers with unexpectedly higher bills and negatively impacting their margins

• Overcharging may be a common practice but whether it is already decreasing or this report will help to stop/limit it

• Regulatory risk might slow down the market expansion

• Some customers (like Massachusetts General Hospital or UC San Francisco Medical Center) indicated that their usage has already dropped off

Potential disruption

NRP (normothermic regional perfusion), an inexpensive way to retrieve organs, could cause a potential threat to Transmedics.

---

Let me know what you think of this report in the comments!

---

The limits of the report

The report has several limitations:

• Moral judgments. Many arguments rely on moral judgments about the industry or the CEO's personality, rather than objective analysis.

• Anonymous sources. The evidence primarily consists of interviews with individuals outside the company, whose identities remain undisclosed.

• Used vocabulary. As for most short seller reports, the langage used is made to provoke fear.

• Lack of concrete evidence. Much of the report is based on interpretations, moral judgments, and hypotheses rather than solid, verifiable evidence.

• Poor organization and synthesis. The content lacks synthesis, with an overwhelming quantity of information that sacrifices quality and coherence.

• Extrapolation. Many arguments rely on distorted facts that are exaggerated to support a specific agenda.

• Lack of a comprehensive perspective. While the report includes many detailed facts, it lacks an overarching analysis. For instance, regarding the commercial struggles, there is no broader context to determine whether these are significant trends or isolated incidents. This issue is prevalent across many other arguments, where small, isolated elements are unjustifiably generalized.

My analysis

I will not focus on sensational headlines designed to create buzz and instill fear among investors. Instead, I will strive to remain focused on the reasonable aspects of the report.

Time will likely provide answers to many of the questions raised in the report. For example, if there are issues with the medical device, the FDA will eventually investigate. If competition intensifies, growth will slow, and the company may lose market share. If the products and services prove ineffective, customer attrition will follow, leading to a decline in growth.

While such a report certainly raises concerns and might cause investors to become cautious, we can consider several potential scenarios:

• Scenario 1: not an issue. Despite rising competition, the company's value proposition remains strong, and it manages to grow. It is common for early-stage companies to face challenges, make mistakes, and experience both successes and failures. In this scenario, the company will improve while continuing to grow and future reports will likely be positive.

• Scenario 2: bad news. Some aspects of the report are accurate (especially the rising competition and market share potential loss). Future reports may increasingly disappoint, and competition could ultimately outpace TransMedics.

• Scenario 3: worst case scenario. Most of the claims are true, in which case the company could collapse quickly. However, this seems unlikely based on the evidence provided in the report.

Scenario 1 appears to be the most plausible. However, the report does raise concerns and create questions. The wisest approach is to be patient for now. First, to await the company's response and any regulatory findings from bodies like the FDA, and second, to observe future earnings. The most concerning allegations are the potential customer exodus and intensifying competition. These issues would be evident in metrics during earnings reports. A bad earnings report would validate scenario 2. In that case selling will become the wisest approach.

---

If you enjoyed this article and like Quality Stocks, please give it a like and spread the word!

While this newsletter provides valuable content for free subscribers, becoming a paid subscriber unlocks even greater benefits to help you gain an edge in the market.

Here is why upgrading to a paid subscription is worth it:

• Access exclusive content. Dive deeper with detailed analyses, advanced insights, and premium research not available to free subscribers

• Follow my portfolio. Gain exclusive access to my portfolio, including monthly updates, tracking my moves, and watchlists

• Discover more stock ideas. Explore in-depth stock ideas, technical analyses, and strategies tailored to uncover hidden opportunities

• Support this newsletter. Your subscription directly supports the creation of high-quality, valuable content to help you achieve your investment goals

Upgrade today and take your investing knowledge and performance to the next level!