TransMedics Group, Inc. (TMDX) Earnings Call Transcript & Summary

Well, good morning, and welcome to Day 4 of the Morgan Stanley Healthcare Conference 2020. My name is David Lewis, medical device analyst at Morgan Stanley. We appreciate your attendance throughout these last four days. We've got another very exciting day here on Day 4, really focusing on some mid-cap emerging technology companies, and I'm delighted to have with us here to start the day, one of those -- such companies, TransMedics. We've got their CEO, Waleed Hassanein; and Stephen Gordon, their CFO. We're going to dispense with the preamble. We're going to get straight into Q&A.

And now, Waleed, it's interesting. Transplantation is a bit of a -- every company has reacted to COVID recovery differently. I think initially, people said, "Hey, transplantation is something that cannot be deferred, but yet these patients are immunocompromised. So COVID has impacted your business in particularly unique ways." Help us understand how COVID has impacted your business? And then more specifically, how you've seen recovery here month-over-month as you came out of this summer?

Yes, David, thank you for having us today. Like many other companies, COVID impacted transplantation in a few different ways. First, in -- during the peak in April, early May, really, we saw transplantation stop almost completely in the hot zones, and it was sporadic in areas that did not have peaks at the time. Also, COVID resulted in this sense of fear or, in some instance, concerns about sending out retrieval teams to procure organs. We did not see necessarily that the donor numbers declining significantly, but we saw donor retrieval declining precipitously through April and May. The good news is, as we continue throughout the year and where we are here today, we've seen recovery continues. We're continuing to see recoveries through Q2 and Q3. And we hope that barring any second wave of -- of a second peak here that transplant will be back to full normal by the end of the year. That's the case where we -- that's what we see -- where we sit. The other thing that was interesting from COVID is because of that dip in organ transplant numbers, it put a lot of pressures on institutions from a number of procedure standpoint. So we're hoping to see a push in the second half of the year really into Q4 for some of these major institutions to try to recover or recoup some of their organ transplant numbers that they lost in Q2. But it's yet to be determined. And again, this is all barring a second peak in Q4.

Okay. That's very helpful, Waleed. So right now, where would you say we are from kind of a percent of [ normal ] perspective? I feel like most medical device companies ended June, I don't know, somewhere around 85% to 90% of normal, some were saying as high as 95% of normal. Our model for you was a little behind that, just based on these immunocompromising dynamics that you referred to these care factors, it probably was more like 65%-ish at the end of -- maybe at the end of the second quarter. Where do you think you sit now kind of from a call it percent of normal perspective?

I think we're in the 80% to 90% range from a U.S. transplant volumes. We're not yet at 100%, but we're definitely making our way up there.

Okay. And when you said towards end of the year, large academic centers trying to recoup transplant volumes. Obviously, there's a lot of subsectors of medicine where people are trying to recoup lost income. In transplantation, it is no different. And transplantation, it's a little interesting. I feel like in classic medical devices, you can see sort of a backlog. I mean, can there be a backlog effect in transplantation, even though these patients are acutely ill?

There is a significant backlog. And in the case of transplant, it's actually a formalized backlog. It's called the national waiting list. And the waiting list continued to grow throughout COVID. And when the numbers went down precipitously, what many institutions did is they temporarily delisted their stable patients, so the list doesn't get out of control. Most, if not all of these patients, are back in the waiting list, and that waiting list continues to grow. So there's a significant backlog, and it's a more formal backlog and these patients need an organ transplant. So we expect that backlog or that waiting list to continue to grow.

Okay. So the concern that these are, unfortunately, critically ill patients that could have expired over the last three to six months, your point is there's still a very substantial backlog with dramatic number of relatively stable patients in that system where this backlog still is relatively fruitful?

Right.

Okay. Understood. Okay. There are a couple of things when we think about -- well, before I get to that. I know it's early, Stephen, but like here we've had some companies sort of comment relatively on '21. I wonder maybe just help us on a couple of things, maybe quantitatively or qualitatively as we think about next year? I mean, obviously, you're an emerging growth company. So I've got numbers, '21 over '20 more than doubling and certainly over '19, kind of dramatic improvement. Generally though, the sell-side has numbers more than doubling here in '21. How are you feeling about those numbers as you kind of approach normalcy and think about the momentum in the business? That was number one. And number two, just thinking about your margin progression here, a pretty significant improvement in margin progression '18 to '19. As we see an improvement in revenue, is there any reason to believe you won't see kind of a subsequent significant improvement in GM expansion in '21?

Sure. And maybe, Waleed, if you want to comment on the revenue, I'll comment on the margin. How does that sound?

That sounds great. So from a revenue perspective, David, we're focusing in the next 12 to 24 months on the key fundamentals that really will catapult our ability to grow the revenue. We have several catalysts over the next 12 to 18 months that all of our attention is focused on those. We have a hard approval, which will position the company as the only platform with a cardiothoracic approval obtained in hand for heart and lung transplant in the U.S. We have the liver approval process that is underway with superiority outcomes. We have -- we're setting up what we believe is going to be the next national gold standard for how organs are retrieved and preserved going forward with these -- with our national OCS perfusion model and across all the FDA-approved devices. We have the kidney indication, hopefully, going into the clinic second half of next year. So that's our focus. And we believe that once we get those under our belt, really, we are in a great position to catapult our growth in revenue. We're not going to comment is it going to double, is it going to be 80%, 90%, 100%, 150%. We need to go through Q4, see where we are. We need to be very cognizant of the COVID dynamic because we know it's going to impact us if a second peak materializes. Our focus is to -- is on things we can control. These are the initiatives and the catalysts that I just described. Once we have that, the ability to grow our revenue exponentially, it becomes a lot more attainable than just trying to sit here and predict when is the FDA approvals going to be in hand, when is liver approvals going to be in hand, and all that has significant material positive impact on our ability to grow our revenue. So Stephen, do you want to take it from there on gross margin?

Yes. I think from a margin perspective, Q1 is really a very good reference point where we had just over $7 million of revenue. We had 65% margin -- gross margin. And I think it's going to track. And so if the revenue is there, I expect gross margin to improve from there. And so as Waleed said, assuming the revenue is growing, we should be meeting our objectives for our gross margin and increasing.

Okay. Well, there are a couple of business or commercial dynamics that probably were lost within COVID, right? The focus prior to COVID was the lung commercialization and lung expansion. I know it's challenging given the impact of COVID, there were some definite signs of life here first quarter lung improvement post the fourth quarter. Any sense of how you feel like lung commercial traction is going, even though it's been a little murky because of the pandemic?

It's very murky because of the pandemic. And as I said in the 2Q call, lung has been the most negatively impacted given the COVID focus on lung, given the requirements for ventilators, et cetera. I think it's going to continue to be murky until we have -- for another quarter or two until we have this national service program, that's going to clarify the lung commercial dynamic. That's why we have the next two quarters focusing on that and launching that across major areas in the United States. That's what's going to normalize and kind of put the lung commercial traction back on a more predictable path. And then we get -- that's what we're focusing on is getting that national program kick-started and really start driving lung commercialization from there. We think this is also going to be the foundation for heart commercialization. Once the FDA approves the heart indication, this becomes sort of the platform where we're going to commercialize going forward. I'll give you one example, David. In Q3, we were approached with a handful of new lung centers that we didn't have before. We're no longer asking them to purchase the technology upfront, but we're kind of teeing them up with the service model as the entry way to them being a commercial customer for our lung platform. So that's what we're focusing on throughout Q3, Q4 and into early 2021.

Okay.

To get the lung traction back on track and really starting to get back to Q1 and grow that number even from Q1 level.

Okay. Just two questions here, and we'll move on to some other topics. But Stephen, for you in third quarter, I know it's hard to give guidance, but you've -- if that number reflects kind of flattish trends year-over-year, which feels aggressive for the average medical device company, no one else was guiding kind of flat to growing in the third quarter, but again, you're an emerging growth company and you had some very challenging comparables. Anything you could tell us to kind of help us put third quarter in context here? Because it's almost back to first quarter, it's flat year-on-year. But as you know, there were some -- that third quarter of 2019 had some onetime dynamics?

Yes. I mean, I would -- there's not much I can say. I can say we -- as Waleed mentioned, the uptick has happened from Q2 to Q3, and we feel like we're in the right direction. I don't think there's anything unique about Q3 specifically as far as a seasonal perspective, but we're in this kind of strange kind of reengagement in Q3, and we think we're on the right path. I think it's all I can say.

Okay. And Waleed, you touched on this commercial service infrastructure. And just update us on where you are? I think that number is sort of 40, 45 people in that commercial organization now. And why that's -- I don't think it's a subtlety to kind of develop kind of right around the IPO, right after the IPO, which may be lost on people in terms of its critical importance, in terms of how you're going to take greater control of helping centers work on their transplantation programs and transition them to OCS? So maybe flesh that out a little bit for people?

Sure. So I think number 45 is -- I'm not sure that's quite accurate. For us -- let me say differently. For us, our focus and our commercial organization's focus is primarily on signing up and taking over major metropolitan areas for organ preservation, retrieval and perfusion management, it's specifically major organ procurement organizations. I think there is a significant number of those initiatives will be announced publicly over the next quarter or two. And from there, we will grow our headcount to support these initiatives as needed. Right now, we have a core group of about 37 people. And these are the ones we're starting with, and we will add only as we see needed. And we're encouraged and frankly, bullish on this initiative because it gives TransMedics fairly high level of leverage on our ability to perform the vast majority or a significant portion of the transplant volume in the U.S., but more importantly, to increase the organ utilization in the U.S., not relying on a specific center, idiosyncratic behavior or infrastructure or limitation of the infrastructure but we turn it into a more national sharing of organ that could only be delivered on our platform. As you know, at the time of the IPO, this has always been in our commercialization strategy. At the time of the IPO, we felt it's going to be two years out. We pulled it in because we saw that potential. And we're beginning to experience that potential, and we will talk about it at the 3Q call. There's some -- we're beginning to see some tangible evidence of that vision. And we're very excited about where we are and where we're heading with this program. I believe this program is going to be a key driver for our growth catalyst going forward over the next 12 to 18 months.

Okay. And just to revisit the numbers, I may have missed, but I think it was 35 people at the second quarter, but the target for the end of the year was 45 people or something?

Yes. We were saying roughly speaking, between 40 and 45. But given the COVID dynamic, David, and given we're being cautious, and we're saying, "Listen, we have a pipeline of perfect candidates." And we dropped them in, in the geographies as we open them up rather than bringing them all in and not finding much to do. So we could be at 40, 41. For me, the number doesn't mean much because I know Tamer has a very robust pipeline of these types of individuals. Once we need them, he'll deploy them, and the rest is going to be to execution.

But you're a multi-working company, lung, liver and heart. What is the number of people that you're going to need to sort of service 80% of the transplant world in the U.S.?

On all three organs?