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

Okay. Hello, everyone. Welcome to the last session of Wednesday here at the JPMorgan Healthcare Conference. My name is Allen Gong. I'm on the medical supplies and devices team here at JPMorgan. It's my pleasure to introduce Waleed Hassanein and some of the other management team from TransMedics. We're going to start with some prepared remarks and then move into Q&A.

Thanks, Allen, and thanks to JPMorgan for the kind invite, and thank you all for being here. I guess the med tech team left the best for last. So I promise to be light and don't spend too much time to delay your cocktail hour after this, so. I'm Waleed Hassanein. I'm the Founder, President and CEO of TransMedics and I have the privilege to be accompanied here today by Stephen Gordon, my CFO; and Dr. Tamer Khayal, our Chief Commercial Officer who will be happy to address any of your questions after the presentation. Just a standard forward-looking statement cautionary note. And just for a reminder, we never pre-announced, so we're looking forward to announcing our Q4 results in sometime in February. So let's just dive right in. Transplant is a very, very important area of medicine that is highly, highly underserved by this big problem called shortage or perceived shortage of donors. In the United States, this is all public figures available on their OPTN website. In 2021, we had nearly 14,000 donors. Despite that, we only utilize 2,500 lungs for transplant, 3,800 hearts and 8,600 livers. What that means is there is a significant underutilization of the donor pool that exists today. That unutilized donor pool could have doubling or tripling the number of organ transplant in heart and lung and nearly 50% increase of liver transplantation in the U.S. So what does TransMedics do? TransMedics has developed a very unique and integrated approach to overcoming these limitations through 3 mechanisms. One, through our first and best of its kind technology called the Organ Care System technology platform that covers heart, lung and liver transplant. We built significant clinical evidence that I will summarize for you in the next few slides. And finally, we developed the largest, widest and deepest moat to surround everything we're going to talk about today by developing our integrated logistical infrastructure to maximize utilization in the United States of organ transplants. So first, the technology. We have the only FDA multi-organ platform perfusion technology that is portable. No other technology on planet Earth has multi-organ platform, meaning catering lung, heart and liver transplant. No other technology on planet Earth has the portability aspect that exists in our technology. And no other technology is even FDA approved for more than one organ at a time, and it's only limited to 2 companies, and we've already displaced them from the United States. So that's number one. Two, what is the OCS does? Simply stated that OCS replicates human physiology outside of the human body. We keep hearts, lungs and livers in a normal, functioning living state outside of the human body. The heart is beating, the lung is breathing, the liver is producing bile, the kidney is making urine. Why is that important? Why am I spending few seconds to articulate that? Because that is the main reason why the OCS is unique to be able to increase the utilization of organs that historically have not been used because of limitation of the historical platform of cold storage, because we could not assess organs outside of the human body, because we could not protect organs from damage on ice. The OCS has the complete opposite effect of that. But you don't have to believe me, you have to look at the data. We have sponsored -- we, TransMedics sponsored the largest number and the larger size trials in the history of organ transplant. No other technology or company or entity has that kind of level of evidence. And when you look at our level of evidence, we didn't target the routine organ transplant, the 2,500 lungs and 3,800 hearts. We targeted the entire column. The gray and the red to show that could we have an impact on increasing utilization of these organs that are currently being wasted on an annual basis. And we did this systematically through 3 verticals: lung transplant, heart transplant and liver transplant. So what are the results? What is the impact? So we've done all that, we spent all this time, all this money. What is the impact? The impact is very clear. It's very binary. The OCS is associated with the highest rate of organ utilization of solid organ in the history of organ transplant. We moved lung utilization from 23% to nearly 90%. We moved heart utilization from 30% to 80%. And we created an entire de novo new transplant category called heart transplant from DCD donors. Meaning, heart that stopped beating for 30 to 35 minutes, we were able to revive them, resuscitate them and make 9 out of every 10 hearts successfully transplanted with excellent post-transplant results. 3 years ago, there was no such thing as DCD heart transplant. Today, DCD heart transplant is the fastest-growing sector of the market in heart transplantation in the U.S. and around the world, and it's only thanks to the OCS and the TransMedics platform. Now, could we double lung and heart transplant? The answer is absolutely yes, based on these results, not my prediction. But how are the outcomes? How are the clinical outcomes of these additional organs that we're adding to the pool? That's what this slide shows. We -- throughout the same studies that I shared with you earlier, we not only looked at the impact of utilization, but we also looked at the impact of post-transplant complications. Severe complications, complications that would add cost to the therapy would add length of stay, et cetera. We've demonstrated that using the OCS, we were able to reduce these complications in the range of anywhere between 50% to 84% across all 3 disease categories. For lung, it was 50% reduction, for heart, it was 65% reduction for liver reduced short term complication and long term complication by 43% and 84%. So that -- this is huge. So now you say, okay, we developed a technology, we FDA approved it. We demonstrated significant clinical value, but we didn't stop here, and this is very important for us and near and dear to us. We didn't stop here because we recognized very quickly with the commercialization of our first organ, which was the lung that the system doesn't have enough resources to be able to double the organ transplant market with the current way or the historical way of doing organ transplant. So TransMedics jumped in as we always do and created a whole new paradigm. Think of what I'm going to talk about now, which we're calling the NOP or the National OCS program. Simply stated, TransMedics is creating the Amazon Prime model for organ transplant under the NOP, that is what we are doing. And we will show you the results. So what is NOP? Think of the NOP as a combination, technology, clinical surgical services and logistical coordination of everything that takes place from the minute a donor is identified to procuring that organ, placing it on our technology, managing that organ, organizing logistics, private air and ground transport from donor to recipient. Anywhere in the United States to any center -- transplant center in the United States. The benefits are 3 things: maximize transplant volume for that center, enhance their clinical outcome and reduce the learning curve that happens when you're using a very sophisticated technology in the hands of a very busy transplant program. The ultimate outcome is this transplant program sees significant revenue and volume growth without the historical limitations that existed in transplantation, time, distance, infrastructure barriers, resource barriers. And 1 very unique and very distinguished factor is maximizing work-life balance. We're taking transplant to the 21st century. It's no longer just about the clinical indication. It's a clinical indication and doing it in a humanly hour with a much more scalable business model for the transplant center city. You don't have to do transplants in the middle of the night. We can maximize the efficiency of the human capital of these transplant program. So again, where does TransMedics play a role? Right there. This is the Amazon Prime of organ transplant. TransMedics is working hand in hand with major transplant programs across the United and major organ procurement organizations across the United States. We get -- we have a 1-800 number man 24/7 by a team of dedicated coordinators. We get a call, we mobilize 3 things. We mobilize a surgeon, a clinical specialist technology and organize all logistics, air and ground. We go to Anchorage, Alaska to procure heart, lungs and liver, bring them all the way to Tampa -- in Tampa General in Tampa or Mass General in Massachusetts. We take care of the entire process [indiscernible]. And then at the end, from a business model perspective, we charge for our technology costs. In addition, we have a premium for the service cost. The logistics cost air and ground is a pass-through to the transplant program as they do today. All the costs associated with the NOP technology and service are all reimbursed 100% by both CMS and commercial payers. There are reimbursement mechanisms in place. We don't have to create a new DRG or a new CPT or anything like that. Organ transplant is very unique because of the huge economical benefit of an organ transplant, and everything we talked about is fully reimbursed. So how do we run the program? How do we cover the entire United States? How do we create the Amazon Prime out of Andover, Massachusetts? Well, we don't run it out of Andover, Massachusetts. We're the headquartered in Andover, Massachusetts, but we have 16 hubs across the United States, where each 1 of these hubs have technology, surgeons, clinical specialists who are on call 24/7 to respond to the 800 call that we get from a transplant program. So it gives us broad geographical coverage on literally accessing any potential donor not just across the Continental U.S., but Puerto Rico, Hawaii and Alaska. So this is some example of missions -- transplant missions that TransMedics fully supported through the NOP up until end of Q2. You can see times and distances here that are -- can never be achieved with historical ways of doing organ transplant, long distances, long hours across the United States. But we're not keeping that a secret. We have championed the education to old members of the transplant stakeholdership from government, CMS, HHS, UNOS, but also all commercial payers that are involved in organ transplant to increase awareness of the NOP, increase awareness of the importance of NOP, to increase organ supply. Why is that important? Because these payers, whether CMS or commercial payers pay hundreds of millions of dollars in annual basis to keep patients alive waiting for an organ transplant, they're highly motivated to do more transplant. And CMS issued that guidance early last year, asking to double the number of organ transplant in the United States. But again, we like to point to our track record. This is -- the NOP has been the major catalyst for our growth in 2022. These are the public numbers for the sequential growth. And in February, we will reveal the number for Q4 and the total year. You can see significant growth year-over-year. Our cash position has been buttressed with the raise we did in August. So we feel in very good shape. And our gross margins, at least as the final reported in Q3, we're in the low 70s. We expect fully operating growth -- mature gross margins would be in the mid-70s. So, you see the growth. You say, okay, TransMedics is this it? Did you reach the pinnacle? We think absolutely not. We're just getting started. This performance that I just shared with you represent less than 5% penetration of the existing market. And we have a long runway to even double that market. To give you an example, the current market is about 15,000 transplants between lung, heart and liver. We're going to probably end 2022 with 1,000 or 1,100 transplant. That gives you the magnitude. We have a long runway of growth. How are we going to capitalize on that near term and long term? Near term, there are 3 major laser focused initiatives: one, expanding the capabilities of NOP, both manpower, clinical power and logistics; two, expanding the number of centers that are using NOP; and three, expanding adoption or increasing the utilization within the existing centers and growing the overall number of transplant within these centers. Long term, we're going to add additional clinical indication. For example, kidney transplant. We are in the process of securing European individual geography reimbursement coverage. And we're developing our next-gen platform that will take the OCS into another decade worth of growth and pioneering that important area of medicine. Now I'm sure many of you who follow TransMedics also have seen some of the potential competitors out there. We are here to share with you our view is there are no competitors to TransMedics when you apply the big, large, deep mode, cold NOP. No other platform that exists today or even in development is portable enough to be able to compete with us in NOP. More importantly, any company that has the dream to compete with us in a technological basis, they better have the resources to do NOP. It's not easy. It's highly cash intense, and it's built on relationships. It's built on trust, it's built on quality of care. We've delivered all that evidenced by our growth in 2022, and I'm hoping to replicate that in '23 and '24. Finally, the message I want to leave with all of you is TransMedics is a significant growth opportunity. We're extremely humbled and excited by our growth in '22, but we don't think this is the be-all and end-all. We think this is just the first step in the right direction. Why do we believe that? Because we believe we're well underway to transform the standard of care. Based on a disruptive technology, it's first and best of its kind, unique, integrated NOP solution that nobody can replicate easily. We have established U.S. reimbursement. We have a robust FDA of PMA approved indication and a pipeline of new clinical indication and the NOP doesn't move TransMedics from a supplier of technology to a more an integral -- integrated partner to transplant program as a part of the workflow. All fueled with a multibillion-dollar market opportunity that is in the niche of organ transplant and TransMedics have created that by creating this class of technology and class of service called the NOP. And we're very, very humbled by the growth, but we think this is just the beginning of a multiyear long runway of growth for TransMedics and for the transplant community in the U.S. Again, thank you for your time, and look forward to taking your questions.

So thank you for that, Waleed. And I know you made it very clear that you weren't preannouncing -- it was very clear that there was no number on that graph. But if we could just talk qualitatively, right, about the quarter about what you're seeing heading into January, you clearly had quite a good amount of momentum heading into the third quarter, but you also highlighted that you wanted to be a little bit cautious around the state of your capacity and actually supply all of the demand you were seeing. So on a qualitative basis, relative to some of the concerns that you had, relative to the momentum that you had, how did your performance progress into fourth quarter? And what are you seeing in the first week of January?

Again, without -- Allen is -- yes, without revealing anything, we're very confident in our ability to execute, and I would leave it at that. And the other cautionary statement I would put out there, I know some of our coverage analysts published monthly transplant numbers. Don't get distracted by the monthly transplant numbers. They mean nothing. Organ transplant, monthly numbers go do like this, look at the quarter-to-quarter numbers. That's number one. Number two, I highly recommend to look at the OPTN and UNOS web page and see that the heart and liver transplant overall national numbers have grown this year being '22 over 2021. We played a key role in that through the OCS, DCD and the NOP. I'll leave it at that.

I guess -- sorry, I'm going to poke at it a little bit more. When it comes specifically to, I guess, the supply and capacity, right, you were making efforts to really enhance your manufacturing to see that you could really generate the amount of product to meet demand. How have those efforts gone?

Efforts are -- we started these efforts, as you know, Allen, in Q3. We continue to put a full court press. This is obviously 1 of the biggest area that the entire team has been focusing on for the last 2 quarters, and we'll be focusing on it for another 2 quarters. So I segment it into 3 areas. One, we added 3x the production floor capacity that we originally had. Two, we've more than doubled our assembly staff. Our issue is not about raw material or access to semiconductors. Our problem is the demand in the field far outstripped our ability to have finished goods inventory in the shelf. So we need to produce more of the disposable that generates the revenue per transplant. So we've quadrupled our entire footprint for production, we've doubled our manufacturing staff, kept them onto 2 shifts because we're still not leveraging the new clean room yet. It's going through the FDA qualification process. now. And hopefully, by end of Q1, beginning of Q2, we'll have that qualification process behind us and Q2 will be staffing that new space from the second shift that we've been implementing in Q3 and Q4. That second shift really is the secret of why we suffered from back-order situation, but we continued to perform. We continued to support our centers in Q3 and Q4 because of that second shift. And if we hadn't moved quickly to build that second shift, probably our performance would have been impacted, but we were on top of it. Our goal is by summertime 2023, this supply constraint is going to be a thing of the past, and then we'll be looking at the next frontier of building additional manufacturing capacity, fixing the logistical problems of air and ground transport which, again, we're focusing on the next wave of growth, how are we going to mitigate against that risk. The last vertical that we've been doing is we've added leadership -- new leadership, new middle management to the operations team at TransMedics to focus on scalability, adding new automated processes, forecasting to make sure that we are never surprised by increased demand in the future.

Question in the audience?

On NOP, could you help us understand the marginal economics? So how do you -- so a couple of things, sir. How do you charge for that? And what does it cost you? And if you think about your NOP capacity, like how many organs could you potentially procure per quarter? Or how do you quantify that?

That's a lot of details. So I mean, certainly, the service component of our NOP has a lower margin than the device. And really, we've installed this NOP as a method to increase the sale of our devices. So our -- as well each of our blended margin is 72%, the product margin is quite a bit higher than that. The service margin is lower than that. But there's still a reasonable margin on the NOP. As far as the capacity. Also, those 15 hubs are outfitted with a cardiothoracic surgeon and abdominal surgeon. We have about 13 cardiothoracic surgeons on staff. We have about 7 abdominal surgeons. We supplement that with about 20 to 30 contracted surgeons. So we still have quite a lot of capacity in those surgical resources and clinical resources. But we're not stopping where we are. We're going to continue to grow those throughout 2023. And we probably need at least 20 cardiothoracic and 20 abdominal surgeons.

And sorry, the attachment rate of your NOP programs to your existing customers, what is that? And if we think about just the incremental growth you're seeing quarter-over-quarter, is most of this coming because you have NOP? Or once you implant that NOP throughout the hospital stake?

Yes, I would say pretty much today, NOP is the business model. It's really approaching 90% across each organ. Some of them ramped a little faster. But at this point, this is the business model going forward.

And Tamer, can you comment on the stickiness of the NOP customers?

Yes. Most of the customers that use NOP are repeat customers. That's why the NOP grow. That's why our business grow. We believe, and we've shown data that without it, we would have been stagnant like the clinical trial rates. But commercially speaking, now everybody using our product through NOP is continuing to use it. We've never had a customer that...

It's 100%.

[indiscernible].

90%.

90%.

And all new customers are NOP. We no longer offer a direct acquisition. Direct acquisition is limited to literally less than a handful of historical centers, small volume centers in the Midwest that have been a part of our trial and had acquired the technology as a part of the trial, and they're just still at that model. But all new centers are NOP 100%. We don't allow direct acquisition model anymore.

So it's -- sorry, so it's 100% of your revenue now, I guess, close to that, it's NOP.

About 95%.

Can you talk about, I guess, the recurring part of that revenue stream, if any? I'm assuming there's some recurring revenue. And what percentage of that revenue is recurring?

100%. 100%. So whatever we make in Q3, we need to generate more transplant to make that and grow it to grow that revenue. So all of our revenue is a procedure-based revenue. So we charge $70,000 to $80,000 per transplant. So whatever you see, Jim, is all recurring revenue coming from either new centers or existing centers doing more transplant, either within the existing volume or growing the overall volume. The vintage of that account dictates that they're growing their overall volume, meaning centers that adopted NOP earlier in the year, they are finishing '22 with higher volume than last year. Centers that adopted, say, in Q3 here you can see an incremental, but it's really within their existing volume still. So it just -- it's only a matter of time. We just started this a year ago. So we expect to see that same aggregation happening in '23 and '24.

I guess maybe if I can ask it a bit differently. It's a service model. And so is there a service component to it? I mean I'm just trying to understand how you charge.

Yes. So we think about...