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

Thank you, everybody, for joining us. Patrick Wood, I run the U.S. med tech team here. I get an exciting disclosure to you before we start, which is, please see Morgan Stanley Research disclosures website, morganstanley.com, research disclosures. I'm sure all of you will be going there. Any questions, feel free to reach out to your sales rep. And with that, very excited to have Waleed Hassanein and Stephen Gordon, CEO and CFO of TransMedics, respectively, for what should be a really fun discussion for outside chat. I'm sure you're all familiar with TransMedics. And for those of you who on, it's a super interesting story.

And so maybe if we kick it off, I think the 2023 guidance and '24, it implies a slight slowdown in the second half of the year. I mean is it realistic to say that some of that's maybe a little bit of conservatism or are you seeing something in the market that may come.

Yes. Well, Patrick, thank you for the kind invitation to be here. Let me clarify, we never gave guidance for '24. We only gave guidance for the second half of this year, and it is -- we beat by $10 million, and we raised the guidance by another $10 million. So we're conservative in guidance. We highlighted some operational challenges that we're facing. And one of our main goal is to signify that with these operational challenges we're dealing with, nobody should expect 20% to 30% quarter-to-quarter growth. That's really what the purpose of the guidance was. But -- and we expect a significant growth for our business in '24, and we will issue guidance for '24 at the Q1 call.

And midterm, you've given a sort of vision for 10,000 or so transplants. And I know you guys demand has been passed expected you've been a lower capacity constraints. Can you help people understand how quickly you can bring capacity online in short bridge.

From a -- so capacity for us is a continuum. It's not a one point. So from a supply capacity of our product, I think we're already at the 10,000, and that's assuming median level staffing and median level efficiency. The next level of capacity is really clinical staffing that supports these cases as we see more and more NOP cases going out 24 hours and the centers are liking what they're seeing. And it's positively impacting the work life balance, which is one of the huge value proposition of NOP. We need to beef up our clinical staffing. And then the last capacity question is about logistics, and that's where our big investments are focusing on right now is standing up TransMedics logistics, air and ground logistics because that's going to be a huge -- one is going to be a huge bottleneck or lever near term, but also it's going to be a huge catalyst for the growth of NOP in '24 and beyond.

And that seems like a good segue in to that. It feels like the next evolution of the business. Maybe for those who are less familiar with the expansion of aviation, that sort of things, paint the picture of how you see TransMedics long term as a business.

Sure. As we stated before, publicly, every heart lung and liver transplant, I would say, 95% to 97% of heart, lung and liver transplant, they fly from donor to recipient. And when they fly, they fly a charter flight. The historical model for charter flight was geared towards limitations of cold storage. It was never harmonized. It's operating under sort of mom-and-pop fragmented operators across the country that are regionally focused with 30 old aircraft that can only fly somewhere between $250 to 700 nautical miles out the range. Today, between the NOP, OCS and national allocation of organs, 90% of the organs are flying out longer distance we're covering 3,500 nautical miles going to anchor Alaska, Hawaii, Honolulu what have you. So it's not scalable. But more importantly, the NOP growth rates have clearly highlighted the huge inefficiency that exists in the system and the capacity constraints that existed in the historical transplant logistics. So for us, we saw this as a huge bottleneck for our growth to get to that 10,000 and beyond number. And that's why we're taking control of it. So if I fast forward 2 or 3 years from now, TransMedics not only will be in charge of the surgical procurement and management of the organ on OCS and the LCS technology, but we are also be in charge of and billing for all the logistics involved with that organ. So we see this as a huge revenue implication, significant margin improvement in the service line as well as a significant catalyst for the growth of the NOP in the United States.

Do you think having access to that kind of a network because the transplant market is relatively concentrated specifically. How does that change the discussion that you have with some of the larger centers.

It -- Patrick, we wouldn't invest in this if we don't believe in what I'm going to say right now. For us, we get the aviation and the logistics business set up, right. From our perspective, it's game set and match because every transplant program does not want to be dealing with 17 vendors around aviation. They do not want to be dealing with multiple calls about different quotes from different operators. They do not want to deal with 3 to 4 margin stack up on top of the actual cost of the case. They know who TransMedics is. They trust what TransMedics is doing. They trust the quality of care and the quality of service we provide. And for us to provide the aviation services and the logistics, it would be -- again, we're no longer competing in the market with organ preservation technologies. We are in a league of our own called organ supply and that nobody else is in that space. So for us, it's a very exciting time. And frankly, we believe that, as I stated publicly that the logistics will be one of the biggest catalysts for NOP utilization in this country since the invention of the NOP. We're looking forward to it.

And then maybe shifting to DCD. It seems like a very big opportunity in many. But for those who are less familiar, can you maybe just highlight DCD and how that works and the state of play today and how you, I guess, fix the issue that exists in that way?

Sure. So DCD is a big deal. The DC is the DCD -- definition of DCD is donor after cardiac or circulatory death. Historically, BTD were a small fraction of the donor pool, they never were utilized for organ transplantation. Today, it's the fastest-growing segment of the donor pool and utilization of organs. The biggest growth in heart transplant in this country is driven by DCD, and it's driven by the OCS being FDA approved for -- as the only FDA-approved device for DCD preservation. So for us, DCD is here to stay. It's going to -- it's one of the biggest catalyst for the overall growth of the market in the U.S. and around the world that do DCD. We are extremely fortunate to be the lion's share of these DCDs are done on our platform, and they're done in NOP. The nuance, I think that Patrick was referring to is this issue about dry run. And this is important to understand that DCD legally, a donor doesn't become a donor until the heart stops beating. Today, in the early days of DCD donation, different organs except different windows of time for the hard to stop beating. The shortest is the heart and liver groups. They really start panicking if that time, the window of time from discontinuation of life support until the heart-stopping beating is between 30 and 40 minutes. They usually aboard the case around that time. Long, we could stay until 9 minutes. Kidneys, we could stay to 120 to 180 minutes. So we see higher rate of donors not progressing to become a donor in heart and liver DCD. We call them dry runs at a range of between 40% and 50%, but that's early. We expect that number to go down over time. So -- and to summarize, DCD is here to stay. It's a huge contributor to the overall volume growth of the national transplant numbers. It's a great thing for OCS because the lion's share of DCD transplants are done in LCS with NOP. So this is why we're not scaring the centers about the rate of iron. We're telling them call us. Every time you have a DCD, call us, we'll go. We will put our resources behind you because we are building the market. It's early days. 2 or 3 years out, we expect that number to go down, the dry numbers to go down. And we expect that the overall balance between DC and DBD to go back to around 50-50 or so.

And maybe, obviously, hot live long, will have different dynamics in terms of business with long term and different requirements. I'm not asking me to pick your favorite job, but like, from your perspective, is there one that you're a little more excited about than the other and if so why?

No. We're excited about all 3 of them. They all have their own challenges. Obviously, liver is growing the fastest, but also that is somewhat expected by us because it's the largest procedure of volume of the 3 organs. It's nearly double the hot and lung combined. But OCS has huge value in all 3 organs. Lung got negatively impacted by COVID, and we're focusing on reviving that over the next 12 to 18 months. And hard again, the value proposition is clear. DCD hearts cannot be done without OCS. In fact, DCD heart did not exist before OCS. So there -- we love all our children equally.

Ex-Vivo is co-perfusion trial. Just curious if you have any thoughts on that.

Sure. Thank you for asking. We are very excited about that trial because, obviously, any new trial in the field is an important advancement. We actually think it's going to further solidify our value proposition for the OCS and NOP because we will -- we hope it will show that you cannot do DCD without those risk. Why do we say that? Because we have data that we will be sharing at the next IT that will hopefully address that question unequivocally showing that the hearts that were done with OCS directly with warm perfusion performed better compared to NRP. Also, it will add additional cost to NRP, which is a welcome addition for us because everybody complains about the cost of OCS. Now the NRP will be more expensive than OCS. But definitely, it's an important trial. We think there's room in the market for cold perfusion because that's why we acquired the LifeCradle cold perfusion technology from BTL, but we see it differently. We see cold perfusion to be the low-cost solution for standard criteria hearts that are 10% to 15% of the heart market that we currently don't have access to that are currently being done with cold storage. So we would have a co-perfusion trial with the OCS device in the next year or 2, but it will be focused on a different segment. But we welcome a trial, the Ex-Vivo trial. We think it's an important part of the business. The important part of the market specific.

On the topic of technology innovation, obviously, you said First Life, you acquired that side of things. What do you see? Is there still room to go for in terms of technology [indiscernible]

No, there's significant room. It's really one of our biggest area of focus right now after NOP and the logistics aspect of our business. We see next-gen OCS as one of the key catalysts to getting to 10,000 cases and beyond in the U.S. We see automation. We see cloud-based communication. We see remote control to minimize the impact of human interaction with the technology. So it's all to facilitate more NOP cases without the bottleneck of human interaction. So we're very excited about what's coming built in biological sensors. So we don't need to do blood sampling for every test that we do in organ. Communicating all these results to transplant program through the cloud doesn't require human interaction in the middle to, again, streamline the process, streamline the NOP and hopefully get us to be scalable business to go 10,000 beyond and beyond in the U.S.

I appreciate you haven't given a sort of long-term view on this necessarily, but thinking about 10,000 organs and long term, you've got a number of moving parts of the business. You've got the transportation side, various to entry and, let's say, a dense customer base, but how do we think about the margin structure for the business there for long term? I'm thinking about like relative price negotiations but also barriers to entry? Do you have a vision for like where you see possibility of the business long term?

I think I'll address the barriers to entry and let Stephen talk specifically about the margin perspective. We see barriers to entry in our market as a multilayered approach or strategy. The NOP is a big moat. We always said that. But with adding the logistics control over that, that gives us a bigger, wider, deeper moat around the business that nobody in the industry can access. Again, that puts us in a very unique situation. However, given how we are integral part of this market, we also have to be good corporate citizens within our transplant community and don't use that unique position to gauge the market. I think we're going to be a very profitable business and let Stephen address this specific.

Yes. I mean, obviously, we expect this to be a profitable business. We're running it to be a profitable business. We -- as a device business, we were getting pretty close to profitability now. And with the change in our business model is probably going to be another year before we're profitable, but it's not 10 years, right? It's another year out. The margin structure does change. We now have service as a bigger part of our overall business. but it's really all in support of driving more product revenue, right? And so maybe the overall gross margin, where I used to think it was in the mid-70s, maybe 10 in '60s, but it's on a much higher revenue base because we have an additional, say, $30,000 per case.

If you think of like the NOP is offering anything of the customer base, how should we think about the penetration within the biggest transplant centers because some of them have some logistics networks already set up. And so in a way, you're displacing some of that. Those are the case of they try it a bit and then you see a sudden adoption curve? Like how do you think about that breakthrough with the customers?

For the NOP and the OCS, that's pretty predictable. We -- our track record points to the following trajectory. They start using the OCS and NOP in the most challenging cases, DCD, longer transport time, older donors. And they do a handful of cases very quickly, very rapidly and then they kind of take a hiatus for a couple of weeks, trying to make sure that they understand the billing mechanisms for those cases. And then from there, they come back. And once we get them over that billing pump, they continue to grow. And right now, if we look at the centers that used NOP for the first time last year, we are between 70% and 80% of their total volume, but the overall volume is growing. And the early adopters that really adopted the NOP early and continued they've nearly doubled the volume year-over-year. So for us, it's still early. We're only 18 months into our commercial launch, and we're already at a $200 million run rate. So it's early. But what we're seeing -- all the signs we're seeing so far extremely encouraging that this is -- when we say this is a long-term growth business, it's really proven to be the case, and we expect to see early centers go from like low single-digit penetration to the high 80s, maybe even 90% penetration over a 2-year period and growing their overall volume. So that's what we expect. As far as the logistics piece, some of our competitors have talked publicly that a they have contracts with the transplant program and TransMedics one be able to move us. That's why, guys. We're only 3 weeks into [indiscernible]. We've already displaced them from every account that we did at NOP. Transplant is not based on contracts. It's based on can you deliver an organ at a reasonable price in the middle of the night. If you can deliver that and you're there 100% service availability, no contract will stand. And that's what we're doing. And that's where we want to be doing when we have full scale operation. I'm not concerned about any operator having a contract with a [indiscernible] because what we've announced to all transplant programs is once TransMedics aviation is fully operational, any [indiscernible] will not be done except from TransMedics aviation business. And when we give them our quotes, they know that it's better than any other competitor out there, and we're already 3 weeks into it. We're seeing many of the contracts completely dissolved. So we expect that to continue to be the case, and we expect that at scale, that even won't be an issue. So that's the least where we see it right now.

Some will go to sometimes the surgeon can be a little funny about wanting to see it themselves ahead of time. How does that fit into the business model.

It's very important. We know that given our clinical background, we know that. And from day 1, we mapped out the NOP workflow to ensure that the surgeon has full visibility of how the organ is behaving. Starting when our surgeon is in the operating room with the donor, there is a face time call relaying the information of the donor. And now more and more centers, they get comfortable that they only need a regular call after the organ has already been assessed. And then enroute, today, there's multiple communication through our HIPAA controlled app to show them pictures. Test results on OCS. Our goal is with the next-generation OCS that -- if that won't even need to happen, there will be a cloud-based repository where the surgeon can log down with the individual ID, which is they need to identify for the organ and they could see the results themselves without even communicating with our team. So that's the next step. That's a very important step though.

And you're quite early in the commercialization journey. We've kind of really at the start. So volatility is kind of expected. And cardiac heart grew nice sequentially last quarter, but there's a little bit of volatility on the year-on-year number. How should we think about hard adoption of the growth curve for half in the back half of the year and as we look at.

I think -- listen, it's -- I know that the heart dynamic caught some attention after the last call. We're not concerned. This is the ebbs and flows of organ transplant. There's -- we are not concerned. This is early. We got very quickly to 13%, 14% of the national volume on heart even faster than the liver. And now it's just normalizing and then we expect to see growth again in 2024. We're not concerned about the heart. Again, there are data readouts coming out in the IHOP early next year. We are communicating some of the results to the users now, and we expect to see another growth in the heart in 2024. We're not concerned about the heart at all. We are still doing 70%, 72% of all DCD hearts in this country on OCS. That's the lion's share of the DCD heart. Once we announce the data at DXP, I don't think it's going to be a close call because the data is very, very binary. So we just need to be patient and get the data out there in the proper venues. And I think we'll see that heart growth accelerating again in '24.

How do you think about the interplay between half and NRP? I mean the latter there's quite a lot of extra labor and service and petition specialist. But like how do we think about those 2 relative technologies?

It's very important. It's a very important question. Again, I don't want to burn the data too much, but we are going to be not showing only clinical outcomes, OCS versus NRP, but also we're going to be showing charge data, OCS versus NRP and this -- this fallacy that OCS is more expensive than NRP is going to be proven wrong. And now if, in fact, Ex-Vivo starts a trial and adds another layer of cost on top of the NRP, again, it's going to be a game match for us because it will add more cost to the NRP where we know that their utilization rate is less than 40%. So it's not going to be a close call. But again, we need to wait till [indiscernible] and we'll see the action to that.

And obviously, there are other organs in the body. How are you thinking about the possibility longer term to potentially expand into other organ.

We are going to expand into kidneys. But for me, the priority right now is to solidify the logistics and solidify the lung, getting the lung to contribute to our growth trajectory at least close to the heart. And then from there, we're going to move into kidneys, but it's definitely our next frontier.

And when we're thinking about all the organs and the growth rate over time, I mean there's obviously potentially you can work down the waiting list point where imagine scenario is 0. Do you have a sense of what like gross organ adds in a year are like just complete the maximum you could ever do is 10,000, how much of that is 10,000?

10,000 is 70% of what we're doing today of heart, lung and liver. So that number was selective, intentionally conservative because of that. We -- again, I've stated this publicly, we feel very strongly that we could double the heart and lung volume in the United States with the OCS and with room to spare. With a big room to spare. Again, the numbers don't lie. We have 15,000 donors in the United States. We only get 2,500 longer than 3,500 hearts. There's a lot room for growth beyond that. The 10,000 number is, again, it's 70% of today's heart-lung and liver volume. So we are definitely gearing up to do a lot more than that. And if DCG continues to grow, that will add a significant layer. There are opinions out there that we are going to see growth in DCD market because now as we utilize more and more DCD, there are more and more DCD being reported that historically were not being reported in the U.S. because nobody was using their organ. So nobody who's reporting them. Now it's contributing to a higher rate of DCD reporting, which a welcome addition for us.

And obviously, now it's been a public company a little while, but being public, you see you have your own internal agenda and debates and discussions, but then there's a whole other external discussions, and those don't wish match. So I guess -- are you like where is the focus internally that you don't see externally in the discussion or vice versa, like where is the loads of attention externally though.

Yes, yes. We focus -- obviously, we have to balance both. But for us, we're focusing on building the fundamentals of our business. We believe that we have a tremendous business here with huge growth potential near, mid and long term. We believe we're in the early innings of that growth trajectory. We are focusing on is building a solid foundation to capitalize fully on this opportunity. That's our internal focus. Our external focus is to address all the confusion that might exist as we continue to grow and also to manage expectations properly to make sure that whisper numbers don't get out of control. And it's a balancing act, but we love it, and it's exciting. I don't know if Steve...

Yes. No. I think look, we're focused on executing and creating what we know to be true. So sometimes, like NRP is a great example. Like yes, there's a lot of talk about NRP in the meantime, we way of doing 2,000 transplants this year, and there's a handful of -- not a handful, more than a handful of NRPs, but it's not a huge concern for us that we're focused on something much bigger.

Yes. I guess to summarize, we're very good at deciphering what's noise and what's real. And we're very good and we're very accustomed to dealing with lots of data points, internal and external market dynamic, competitive dynamic. And I guess, I hope our execution speaks for itself. That's our track record.

I think with that, we're almost perfectly at the 10 minutes past mark. So thank you so much I appreciate it.

Thank you so much. We appreciate it.