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

[Audio Gap] have to get here.

And on the heels of the panel meeting last spring, we're expecting approval with somewhat of a restricted label, the label you ultimately received is very broad. Can you just talk about the label relative to what you were expecting and walk through areas of upside for OCS utilization based on the broad label versus your expectations?

Sure. Thank you, Cecilia. The label final language was not a surprise for us. We've always stated post panel that we were fairly confident that after the final label has to reflect the patient population that were studied at the -- in the EXPAND trial. So the final label wasn't too much of a surprise for us. We just had to wait for it to be formalized and announced. The beauty about this label, we believe, in our opinion, it's even broader than the label that we originally proposed to FDA. And that really is a reflection of the depth of understanding of the division of cardiovascular and FDA about the potential value of those that has to expand the donor pool. So when you look at the label, a label gives us, in our view, in our interpretation of the label, clear access to all the expanded criteria donor hearts, which in the United States, we know they range anywhere between 6,500 to 7,000 hearts a year. But over and above that, in one of the examples, the FDA specifically cites a cross-clamp time of 4 hours or greater. So that not only gives us access to those 6,500 to 7,000 hearts, but also gives us up to about 24% -- between 23% and 25% access to standard criteria hearts that are long a cross-clamp time. And we're seeing that percentage increase year-over-year because of the national allocation law in the United States that were mandated approximately 2 years ago. So we're very excited about the label. It wasn't too surprising for us, but we're glad that it's finally publicized, and we're roaring to go to get the OCS back to helping patients in the United States broadly.

No, and -- makes perfect sense. And from a physician standpoint, just based on physician feedback as well, on what criteria and situations do you view OCS, DBD gaining the greatest traction over time?

I think the OCS will have a role in every criteria. Obviously, this is the criteria for -- this is the extended criteria. But we are -- clinically speaking, that delineation between standard, extended criteria is becoming more and more fuzzy because donors are getting older. They're much more complicated health status. Recipients are getting more complex and more sicker. So for us, we see the OCS adding value in all 3 segments of the heart market, the standard criteria, extend criteria and DCD. Obviously, for us, the huge opportunity is in extended criteria in DCD. That's 5x or 4.5x the current market. So that's the area that excites us the most, and that's why it was our first indication to seek FDA approval for, because, as I said, extended criteria represents a -- even conservatively 6,500 hearts a year. Standard criteria heart is only -- we're only transplanting 3,300 to 3,500 parts. So that's an order of magnitude bigger.

And then I wanted to ask too, just as you're kicking off commercialization, the post-approval study, you're planning to commence the OCS Heart perfusion OHP registry, how did the ultimate registry design compare to your proposal at the time of the panel meeting in the spring?

It was very, very similar. And what we've done is we proposed a very flexible but robust design that enables us rapid deployment and rapid access to the patient enrolling into the registry. We've learned from the old complicated registry structure from top for the lung. And we designed the OHP registry or OCS Heart perfusion registry as -- in a complete opposite. This is a more flexible registry that leverages the existing database from UNOS. It's -- the specific data collection that the centers will be collecting and each patient are very, very limited to the OCS parameters that's already existing in the system plus a couple of other clinical endpoints that are not routinely captured. There's flexibility and the timing of data collection consent. So it's very, very flexible. And now that it's been approved by the agency. We're using the same design, and we're trying to work with the liver PMA staff to try to replicate that design for the liver registry as well.

And can you just walk through your commercialization strategy, either leveraging the registry to accelerate that? Then also just your eventual plans to include OCS Heart and your national service model. And as -- what you think about the rate of commercialization ramp through the balance of 2021? Is there something that can really act as a catalyst to growth beginning in 2022? Or do you see a steadier rate of adoption and utilization building over time?

I think, Cecilia, that's an excellent question. we look at commercialization strategy for the heart that would follow 3 parallel paths. The low-hanging fruit, first and foremost, is the initial 25 institutions that have been using the OCS up until end of Q2 in the DCD program. These are 25 large U.S. heart transplant programs that have OCS on the shelf. They've trained on the use of OCS. They've used the OCS up until a few months ago. So that's our first low-hanging targets, followed by another 10 or 12 centers that have been -- have expressed strong interest in joining the OCS program, and they've been waiting on the sideline, awaiting this approval. So that's next. And then third is the OCS National Service Program. That -- for us, that's the long-term goal. For every organ platform we are commercializing that it will be a part of the national program. From a sequencing standpoint, it goes exactly as that. So for the remainder of 2021, we see direct acquisition being the lion's share of our revenue in the heart starting with the 25 active centers, maybe organically growing that base single-digit new centers really with the full some growth happening in the beginning of 2022. We just want to be realistic and we want to make sure that we don't compromise the quality. And then we see the national program kicking in, in the first half of 2022 for the heart and for liver once the liver is approved as well.

Okay. And turning really to your next catalyst and heart DCD. You're expecting to be in a position to announce top line results either by the end of this quarter or shortly thereafter. But can you walk through your current path forward with the FDA expected tailwinds around submission and when we could see the full data readout as well?

Sure. So let me start with the last point first. We are planning on submitting the full DCD heart trial results and with a 1-year follow-up as a late-breaking plenary session presentation at the upcoming [indiscernible]. That will be in April 2022 here in Boston. So that's when the full results will be announced with 1-year follow-up. However, what we're planning to announce at the end of Q3, beginning of Q4 is the top line results for that exciting program. And just a quick reminder. This is a very important program, but more importantly, it has a very high hurdle to meet success because this is the first and only randomized controlled trial in the history of heart transplant that is targeting DCD donors. So simply stated, we took DCD donors, donor hearts, hearts that have stopped beating for 30 minutes, and we revived them in the OCS, and we're comparing the results to patients who are transplanted with standard criteria hearts and preserved in ice. So that's -- it's a very high bar to compare ourselves to. But we're excited to announce the top line results soon. As far as the timeline to PMA supplement, we are actively discussing that with FDA, and we have been for the last couple of weeks. Now that the PMA is approved, we're working very closely with the review team to time the final submission, the formal submission, it will be in Q4. And we're hopeful that this is a breakthrough designation with the results supporting that, we're hopeful that this will be a streamlined review process.

And Waleed, once you obtain DCD approval, how does that change the outlook for OCS adoption in your view? And how do you alter your messaging to physicians around OCS' role in the transplant field broadly?

I think, Cecilia, it is becoming more and more clear, at least in our domain in the field of organ transplant. The OCS and TransMedics are not just a new game in town or a new technology in the field. We are the field. We are setting the standards for the next standard of care. -- we can do that in something our chest type of process. We have to be humble. We have to understand that this is a field that has not seen innovation for 40 years, 40-plus years. And it is becoming obvious to every transplant field center or expert that the OCS is the next standard of care. The approval of the DCD will do nothing but to solidify that. Because all of a sudden, the OCS will be the only technology on planet Earth approved for both DBD and DCD heart transplants. No other technology even remotely close to that. And for us, the importance is to stay humble, to stay focused on clinical outcomes, stay focused on making sure the adoption is there. And we believe very strongly that the momentum, that the results of the DCD trial will generate, will drive its own momentum into adoption into the DCD field. For us, we will have to play a key role of making sure that controlled deployment in the DCD, so we don't end up ruining these results and ensuring top clinical outcomes. I hope that makes sense.

It does, Waleed. And taking into account to DBD's broad label, how do you, at this point, envision the long-term breakdown between DCD and DBD, OCS utilization?

I think the lion's share and less -- in the near term -- again, just sheer numbers, I think the lion's share will be DBD. But the DCD could have the potential to increase heart transplants in the U.S. anywhere between 50% and 100%. So it's still -- it's not a small impact. Again, we see, potentially, the number of DCDs that become publicize, growing organically as more and more technology like the OCS become available or approved in the U.S. that we can procure and successfully transplant DCD organs. So right now, UNOS reports anywhere between 1,200 to 1,500 DCDs. But that number is driven primarily by how many kidneys they took from those DCDs. Now all of a sudden, when we start applying lung, the heart and livers, you might see that number actually go over time. That's going to take a couple of years. So near term, DBD is the lion's share, but the impact of DCD still is significant and meaningful. And it does nothing but increase confidence in the OCS technology's ability to grow a number of heart transplants in the U.S. and around the world.

Okay. And Waleed, I did want to turn back to near-term outlook. 2021 with DBD and liver approvals outstanding in the time of your last print, you withheld an issuing guidance. But just from an underlying transplant market dynamic, can you comment on recent trends, what you've seen from either regional COVID impact on transplant volumes? Or are lung transplant still failing outsized pressures? Have you seen centers at this point that are more able manage normal transplant practices and volumes?

Sure. I think lung transplant, unfortunately, is the most negatively impacted by COVID because COVID impact both the donor and the recipient. So in the south right now, which -- actually the majority of our lung transplant centers are in Texas, Florida, Arizona, Atlanta, COVID is really taking hold of these institutions, and not just the institution's ability to perform lung transplant but also the donation process is now negatively impacted because nobody is even considering patients even if they're COVID negative, but they have history of COVID earlier in the year or earlier in the pandemic. So that's a negative impact near term. However, the flip side of that is we're seeing more and more patients added to the lung transplant waiting list that are -- from a profile of a younger type population that normally would not -- we wouldn't see them added to the waiting list. What I'm referring to here are the patients who suffered from COVID and their lung function was compromised that now they are coming to be transplanted. So near term, what I'm trying to say is the only negative impact we're seeing today is primarily lung because of the delta peak. So far, the heart and liver have been more resilient than the lung, and we expect them to continue to do that, again, barring another significant outbreak somewhere that can cause disruption to the overall transplant. I think the infrastructure now has processes in place to enable transplant to happen. The lung is a different story because the lung is impacted both by the donor and the recipient. But longer term, next year, hopefully, as this pandemic kind of eases off, we don't see any long-term sustained impact -- negative impact of COVID on transplantation. I think transplant will be with us for many decades to come and it will actually grow as we -- as I described, with the patients being added to the waiting list for lung transplant.

For Lung, just what you're seeing in the field today, I guess as a percentage of normal, have you seen any type of positive shift kind of back toward normalized rates? And as you think kind of sequentially, kind of how can this improve through the balance of this year? And then really, as you think to 2022 with the increased donor or recipient lists, just really, how we can think about lung transplant volumes versus kind of what you we're seeing on a pre-COVID normalized basis?

I think we will reach pre-COVID normalized basis and even a little bit higher in Q2. We've discussed that. We had a banner quarter for lung activities in Q2. But then Q3 now is negatively impacted by the delta outbreak mainly in the south. And the national program is playing a small role in trying to get every potential lung that it may not be able to be transplanted in the south to be transplanted somewhere else. For example, we had a couple of donors from the south that the centers wouldn't accept them in the South because of the ICU capacity for lung transplant, and we were able to transport them. One was transplanted in San Francisco and one was transplanted in Chicago. So we -- the national program played a small role in kind of facilitating more lung transplant. I think in Q4, we're hoping that this peak -- we will be normalizing back again, when it's going to normalize, again, we are at the mercy of the pandemic. So I can't really judge. But as far as 2022, again, none of what we're seeing right now in this quarter-to-quarter variation due to Delta has a long-term impact in our view. If anything, the long-term impact will be more patients added to the waiting list for transplant, specifically on the lungs, maybe even we see negative impact on heart function and liver function and that will increase the number of patients in need for a liver and a heart transplant, which that, for us, will be long-term potential growth for the OCS use.

Your comments on the national service model, just enabling the transplant of some of these lungs where you're seeing ICU capacity limitations. But as you think forward, how much of a kind of benefit in an odd way, but benefit can this kind of knowledge or utilization in this kind of environment really helped to drive the national service model in 2022 and going forward? I'm just curious kind of like how much of this has really driven increased awareness as people see the value of this model going forward?

I think you raised a very important question, Cecilia. This is why I said earlier in the pandemic. I said, we're leaning forward into this crisis not leaning back because of exactly the same reason you just outlined. We are now fully integrated in 9 OPO regions. Everybody knows -- it's a small community and everybody sees and everybody knows with every successful transplant that we manage, everybody is aware of it. We're still in the early innings. So as we do more and more successful missions through -- in the environment of COVID, that gives us huge credibility. And not only with the OPOs. Frankly, what we're focusing on is the transplant programs. We -- because the transplant programs are sitting there watching lungs being shifted from, as I said, Dallas to San Francisco, Connecticut to California. So they're watching this and seeing this and now we're starting getting some inbound saying, can you do that for the liver? Can you do that for the heart? So we certainly think this experience that our team -- these growing pains that we're experiencing right now in the pandemic is going to pay significant dividend next year and into the future because it gives us the credibility that we need to convince any transplant program that we can move organs across the United States and deliver them -- deliver these organs with the highest quality possible to their doorsteps.

As we think about too -- as you continue to scale this program, what are the key areas for further investment? How should we think about it? Just throughout 2022, as we think about it either it's OpEx or just really the areas right now that you're looking to further augment to really drive this model toward a greater percentage of your business?

I think the biggest area that we are investing in for this program is really staffing, clinical staffing, both from the surgical expertise and clinical perfusion expertise. Remember, we are deploying a full team into the regions that we're covering to be able to pick up and go and get organs from anywhere in the region. That's the biggest area. Stephen, do you want to comment on OpEx?

Yes, sure. I mean we've been growing OpEx steadily over the last -- since the pandemic began. In particular on the national program, I would say other areas of investment for us are the infrastructure, not just of the natural program but of our production as well because now with heart approved and liver coming soon, we're prepared for that as well as in new technology innovation over the next several years as well.

Okay. And I did want to turn back again to dynamics going on today. You called out OUS recovery trending back to pre-COVID levels. On your 2Q call. But -- do you see it sustaining from here? And is there any additional dynamics you'd call out just from a regional standpoint that you're seeing in the field today?

I think the dynamic that we are familiar with and we know is the reality is that it's going to be quarter-to-quarter variability with very little impact on the long term. At least that's our position. So Q3, we saw the delta peaks in the South is negatively impacting the lungs again. So that's going to happen. As long as we get a peak, it will negatively impact the lung more disproportionately than liver and heart. But we expect, hopefully, as this peak kind of subsides that the lung would recover again. So we're going to see quarter-to-quarter variability depending on the COVID variant [indiscernible]. And with very little impact in the long term other than -- we're going to -- we're almost convinced now that there will be more patients added to the waiting list specifically in the lung and potentially even for heart and liver in need of organ transplant because they suffered from COVID in the early days of the pandemic.

And on liver, Waleed, the approval pathway and post-approval study, can you provide any updates around either recent discussions with the agency, specifically, just the label or else, how you're talking with them about the post-approval study design and you talked about leveraging what you're rolling out in heart, but just kind of any other commentary you could provide and really how you're thinking about approval time lines at this point today?

Sure. So there are 2 different divisions. When you're working in FDA, doesn't mean that we had a design with the cardiovascular division that we're going to have the same design with the gastrorenal division. But we're hopeful. We're hopeful, and we're doing everything in our power to convince them with the simplicity of the design approved for the heart. We hope to be successful or we will see. That will remain to be seen. As far as timeline is concerned, I mean, we're holding to the original timeline. Discussions are ongoing on a weekly and daily basis. We're hoping that within the next 30 to 60 days or so, maybe 45 to 60 days, we would get a decision on this PMA -- on the liver PMA.

And post decision, how do you view liver -- if you look back to lung, that initial commercial launch hampered for many reasons. But with the commercial presence with lung, with heart rolling out, how do you envision liver being able to really capture and see adoption right off of the bat post approval?

Sure. As I stated publicly before, Cecilia, we see the heart and liver -- we're hoping that the heart and liver would be categorically different than the lung. The first and foremost important factor is the fact that we had clinical activities in heart and liver up to last quarter in the form of CAP programs and in the DCD in the case of the heart. So that is huge because people are familiar with those. Yes, they still have devices in the shelf. So that is a huge first step. Again, I don't wanna go too far ahead of my skis. Let us finish the design of the registry. If we can get a similar registry design like the one we're getting with the heart, I think we'd be extremely bullish that it's going to look like the heart and it's going to be moving fast. If we end up with something closer to the lung, it just -- what it does, it will add time to go through certain IRBs and stuff like that, that we can't control the timing of that. It usually takes anywhere between 90 and 120 days, to get through these IRBs. But let us do the work and we're hopeful but until it's decided and it's finalized, we really can't comment further than that. But no matter where we end up with the registry design for the liver, the fact that we have 20 centers using the device up until a couple of months ago is huge, and it's a huge advantage over the lung. And we're hoping that with the registry design being similar to the heart that we will hit the ground running like we're hoping to hit the ground running with the heart.

Okay. And in the last minute here, just wanted to ask on your pipeline, kidney, kind of how you're thinking about initial communication timelines there and really beginning the clinical work on that organ side?

Sure. Cecilia, I want in this minute to remind the listeners that we are -- we have 3 thorough bred markets that horses running here right now, hopefully, 2 right now and the third coming in the form of the liver. Our primary focus is to drive as hard as we can to establish the growth trajectory that we are envisioning for this business using heart, lung and liver. The kidney is going to be 2022 event. And we're staffing up specific expertise for the kidney. But for us, that is an R&D project right now. We're going to communicate it sometime in 2022, and it will take the time it takes through R&D and clinical trial. It's going to be a large clinical trial. And we are excited about that program. It's definitely in our pipeline, but it's going to be a '22 event.

Okay. Sounds good, and we'll be looking forward to it. Waleed, Stephen, I wanted to thank you both for the time today. And just looking forward as we look forward to seeing the heart rollout. But again, thank you both for the time today.

Thank you, Cecilia.

Thank you so much, Cecilia. We appreciate the invite.