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

Okay. Thanks, everyone, for joining us today. My name is Allen Gong. I am on the Medical Supplies and Devices team here at J.P. Morgan. It's my pleasure to introduce some members of the TransMedics management team. We're going to start off with prepared remarks from Waleed Hassanein, CEO; and then will be joined by Stephen Gordon, CFO, for the Q&A. Waleed?

Thanks, Allen. Thank you all for being here. It's exciting to be here at J.P. Morgan to talk to you about a great company called TransMedics, where we're transforming a very important area of medicine called organ transplant. This is my -- our cautionary statement. But let's dive in. Transplantation is the gold standard of treatment of end-stage organ failure. It's also the most cost-effective treatment of a very complicated, very expensive end-of-life disease condition called end-stage organ failure. But what are the problems? Problems in the most straight limiting factor of the expansion of this therapy has always been donor organ utilization for transplant. So, this is data from 2022 in the United States. We had 10,000 donor after brain death in red, all the way to the far right of the slide. And we have nearly 5,000 DCD donors or donor after cardiac death. So you'd say, well, there's about 15,000 donors, that's a pretty healthy number. What is the problem? The problem is we utilized only 2,300 DBD lungs, 3,200 DBD hearts and 7,400 DVD livers, leaving the vast majority of the donor pool in the DBD side unutilized. More importantly, we barely utilized any of the DCD organs or donor after cardiac death for lungs, heart and livers. The vast majority of the nearly 5,000 donors went unutilized. That leaves a huge significant opportunity to grow organ transplant numbers and transplant volumes in the United States that's been untapped. So, why this amount of these organs have been used. It's been because it's -- the main reason is due to historical ways of preserving organs using very rudimentary technology, basically an igloo box filled with ice, where organs used to sit in and that limits the distance between donor and recipients to get those organs from a donor to a recipient. But more importantly, these organs sitting on ice have no way of being viable or allowing a physician to evaluate organ viability for transplant. That's why we lose on annual basis the vast majority of the donor pool completely not used for organ transplant and leaves a huge, huge gap. TransMedics was developed from day 1 to address these limitations in a comprehensive fashion. We've done 3 very transformative things in our life as a company. First, we developed the first and the only portable FDA-approved breakthrough technology called the Organ Care System or OCS. It's the only system that is portable, that is capable of keeping human organs alive. Heart is beating, lung is breathing, liver is making bile kidney making urine from donor to recipient. And we did this for 3 major market segments; heart, lung and liver, is fully FDA approved to overcome all these historical limitations of cold storage that we talked about. Second, 18 months ago or literally 6 months after or less than 6 months after -- well, before we get there, to get FDA approval, we had to build the largest body of global clinical evidence to support the notion that using the OCS can in fact, grow the number of organ transplants and improve post-transplant clinical outcomes. And we did that using global large volume, large scale trials that led us to get the FDA approval. Second -- or third, we developed first-in-class -- 6 months after FDA approval, we shifted our business model completely from selling medical technology to selling medical technology, service and more recently, added logistics into this integrated model of business model called National OCS Program or NOP for short, which is designed to drive significant growth of our utilization of our core business, which is medical technology and OCS. So, let's share with you some of the evidence of why are we excited about this opportunity. First, this is our core business. This is the technology that without it, we couldn't do anything else that we're going to talk about for the rest of the presentation. This technology is the only portable technology and I keep stressing portability because without portability, you cannot do NOP. Without portability, you cannot be engaged in logistics. You cannot maximize logistics for organ transplant. You cannot increase the supply of organ transplants. You cannot reduce the injury that the organ gets subjected to using cold storage. And we did it not just for one organ, we did it for 3 organs, i.e., 3 markets; heart, lung and liver. This is just an example of the number of trials that we were engaged with to get FDA approval. We've done the largest number and the larger-sized clinical trials in the history of organ transplant to support all the claims that you heard from me and will hear from me for the rest of this presentation. So, let me share with you the evidence that we've created. And this is obviously -- this evidence has been published in several major high-impact peer-reviewed journal. So, I'm trying to condense it into one slide. So, what you will see per organ and this is older data, this is the data that helped us get FDA approval that for each organ, we have proven 2 critical things. We've proven that we can dramatically increase the utilization of organs that are currently not being utilized for organ transplant from both DBD and DCD organs, which is huge. This means we could double heart and lung transplant. We could increase liver transplant by nearly 50% in this country, which will be a huge, huge impact on the therapy. But we did this with outcomes that are far superior to the cold storage technique. And that's in the lower half of these categories where we reduced significant complications in lung transplant by 50%. We've reduced significant complications in heart transplant by 65%. We developed a whole new therapy called DCD heart transplant where you took -- where we took hearts that have died that stopped beating for 30 to 35 minutes and we revive them in the OCS and we preserve them in OCS and we transplanted them in healthy recipient and had outcomes at 1 and 2 years better than a standard heart transplant therapy in the United States. So that's a huge impact. To give you an example of that. 3 years ago, there was no -- there were 0 heart transplants in the United States from DCD donors. Today, it's the fastest-growing segment of heart transplant and it's single-handedly responsible of growing heart transplant double digits for the last 2 years. And TransMedics has the lion's share of these organs. And for liver, we not only prove that we can reduce short-term complication by 43%, but also long-term complications by 84%. The long-term complications are the Achilles' heel of liver transplantation therapy, meaning those are the #1 reason why a patient that got a liver transplant requires a second liver transplant within the first year. It's really based on complications due to biliary strictures that kills the graft and require a second transplant, another $1 million higher risk to the recipient. So, this is the data that we build around the OCS to support our ability to move forward from there and we got the FDA approval. Now, let's talk about the most exciting thing that we did after FDA approval was to completely revamp the business model from selling medical technology to integrating a whole new business model for the business, which we call the NOP or the National OCS Program. What is the NOP? The NOP is the first in its class way to provide an integrated end-to-end technology, clinical, surgical solution to the transplant program by which TransMedics will be responsible for the entire chain of command of the organ from donor to recipient. The concept there is to, one, enable the program to grow their volume, transplant volume significantly without the historical limitations that are imposed in organ transplantation, time and distance is a primary one. Second, benefit for TransMedics is we reduce the learning curve, the burden of the learning curves used to cripple us. A transplant program that sends one of their junior surgeons to go out and get an organ and the organ doesn't do well, it's not -- they're not going to point to their junior surgeon that has 2 left hands to do the surgery. They're going to point at the technology. So that was a huge, huge thing for us to minimize learning curves and really deliver the highest standard of clinical care for that organ to maintain or improve the post-transplant clinical outcomes. But more importantly, we were hoping to demonstrate that using the NOP could remove or alleviate the burden on work-life balance on hospital resources, where the surgeons, nurses, anesthesiologists maximize their transplant volume. The concept is to use the NOP to increase the adoption of OCS technology. That is really the basic concept, while maintaining high clinical outcomes for the recipient. How do we run the National OCS program for the last 2 years? Through these 16 launch points across the United States, which gives us broad geographical coverage in areas where it heavily condense in transplant surgery and gives us coast-to-coast coverage. Every one of these launch points has surgeons, cardiothoracic and abdominal to do heart and lung procurement and liver procurement, has technologies, all 3 organs, heart lung and liver, in addition, have clinical specialists that do the entire management of the organ from the donor to recipient. We weren't satisfied with that. When we started this, we saw a significant growth of utilization, but also it brought us closer to becoming an integrated partner or an integral part of the workflow of organ transplant from donor to recipient. And we highlighted a major, major opportunity for the business, which is the logistics, managing the logistics around NOP. So, we didn't stop. We moved on. And last year, we launched TransMedics Aviation and Logistics, which is really is an air and ground logistics that is dedicated primarily to organ transplantation. One important piece of data that you may not be aware of, 100% of movement of organs, heart, lung and liver happens in a charter flight, 100%. You cannot fly an organ on a commercial airplane. You have to fly it in a charter flight. 80% to 85% of heart, lung and liver transplant require a charter flight. Today, there is no unified logistical network that is broad enough to get organ from San Francisco to Boston or from New York to Southern California. They rely heavily on these fragmented mom-and-pop operators with 30-year old airplanes and a couple of national brokers that add significant cost to the logistics cost of an organ transplant. When we analyze the first, say, 4,000 donor to recipient missions in NOP model, we came up with these facts that -- what transplants are highly concentrated, and we expected that because transplant is a very concentrated market. So, 80% of the U.S. transplant is performed around 9 states, which, as you may have guessed, that they are within the 16 areas that we are launching from. But donors are very fragmented. They're across the United States and that's why we're not only in 9 launching points, but we're in 16 to capture more and more donors. But in being an operating to NOP model in the early days, when we're relying on the current model or the fragmented model of organ logistics or transplant logistics, we found out there are some major challenges that we could help improve. First, plane availability. If you have a championship game like tonight or you're in the Kentucky Derby weekend or the March Madness, you cannot find a plane to go to get an organ. We lose cases and patients don't get transplanted because the charter operators are heavily involved in these national events. So, plane availability is a huge variable. And none of the 2 major brokers that do this for transplant own a single jet. So, they rely heavily on these very small mom-and-pop operators across the United States. Another thing because they don't control the logistics, pilots, they time out in the middle of the case. So, they take a team from Stanford, they go to Seattle and mid-flight, they say, oh, we need to scramble another jet with a whole new crew because the pilot is going to time out, which adds double the cost to the transplant program. And there's significant inefficiencies, multiple layers of margins. There's significant inefficiencies about charging the transplant program a round trip for a trip that should be only one way. So, we decided to do something about it in the way TransMedics does things about solving problems in organ transplant. So, we wanted to revamp the entire logistics around organ transplant. So first, we wanted to modernize the way transplant logistics work from donor to recipient to maximize efficiency. And everything I'm going to talk about here is to maximize efficiency for these NOP cases that now we're opening and facilitating hearts coming from Anchorage, Alaska to be transplanted to New York City or in Boston or in Florida. Historically, with the current model or the historical model of organ transplant logistics, you could not even envision doing that because you don't have the infrastructure, you don't have the planes, you don't have the time to do that. We can do that and we've been doing that quite routinely over the last 6 months. So that's number one, modernizing the entire way of thinking about organ transplant logistics. Second, we have to manage and control organ transplant logistics, air and ground. If we are going to be the standard of care in organ transplant management in the United States, we have to own the entire logistical piece and mainly for all NOP cases. From that, we developed or TransMedics Aviation was born. And the concept of what I'm talking about here is envision the Amazon delivery model in organ transplant, where you -- when you call TransMedics for a case, you know when is it going to come. How is it going to come. You have full visibility to the organ and route. So, you have high degree of predictability on the -- in this particular case. So, how are we operating it? How are we building it? We're building a dedicated fleet of modern jets. Our fleet right now has an average vintage of almost a little bit more than 2 years. This is the youngest fleet in the entire industry, all same type. So, it's easier to operate, easier to service and efficient from a margin standpoint. And the concept here is to cover only all NOP cases. We're not becoming a logistical company. We're a medical technology company that developed a great model to maximize the use of our technology called NOP. And now we are adding another opportunity for the business to grow our revenue, grow our -- improve our margin through logistics for NOP cases and gives us huge leverage on that entire business. We acquired a company, an operator, and we're maintaining that Part 135 license with the highest safety rating in the industry, which is Argus Platinum Elite. This is something that we feel very strongly about as we are focusing on the quality of everything we do in TransMedics and from a medical technology standpoint, we have to continue to keep that highest quality in mind even in our logistical arm. We have our own dedicated pilot crew. Our crew does nothing but organ transplant missions. And they're highly motivated by the mission and frankly, shout out to our entire logistical team. They believe in the mission and they -- many of our team and logistics were working New Year's Eve, Christmas Eve, Christmas Day and the way we positioned it is you guys are delivering Santa's best gifts to patients who are in need for organ transplant in the form of a new organ. And we couldn't be here without these guys. They're doing a phenomenal job. And ultimately, we're aiming to provide a 24/7 by 365 operational availability. We're not going to lose an organ transplant because we can't find a plane because the operator is in the Kentucky Derby. That's not going to happen for NOP. And this is an example of our active operating fleet. To date, we have acquired 11 jets, all same brain -- same plane type, Phenom 300E, and we've been operating this model since late August, early September. We didn't stop here. To manage these logistics movement efficiently, we also talked about developing a digital command and control center. And as you can see here, we just opened that center last week Andover, Massachusetts. And what you see there is our logistical team watching every movement, every organ. We have a status update on every organ, where is it going, where is it coming from, where the donor is, what's the ETA time that gets communicated to the transplant program. They have the same visibility we have and we're constantly updating the status. But we're also -- what you don't see, it's in fine -- it's not so visible as we -- our team, our dispatching team, our logistics team, can see where every resource we have in every hub. So, when we're mobilizing, we're mobilizing with maximum efficiency in place. If Stanford or UCSF wants to go get an organ from Seattle, doesn't make sense to fly a team from our hub in San Francisco. We have a team in Seattle. The team in Seattle will go procure the organ and we can ship it to San Francisco, maximum efficiency and maximum leverage. Just to give you an example of how successful the aviation and logistics model is for TransMedics. This is just an example of the missions completed since September. As you can see, there's a significant momentum and it's driving significant excitement in the field. Again, I cannot thank our logistics team and NOP team enough for the effort they do to make these visions reality. And I know they're listening to me when I'm talking. So, thank you, guys and kudos to you that you're able to achieve this success in such a short period of time. But let's move on and talk about the overall business from a financial highlight standpoint. As you can see, we've been able to deliver 7 quarters of growth with beat and raise results. As you can see, we ended Q3 with about a little bit north of $400 million in cash. So, we're fully funded and we're fully stocked to be able to deliver on our short- and long-term growth. Speaking of which, our near-term growth strategy, we're not stopping here. I mean this is a great result. But obviously, many of you know that I've stated publicly that our goal is to do 10,000 transplants by 2028 in the U.S. from heart, lung and liver alone, not including kidneys. 2022, we did about 1,000. '23, we did north of 2,000 transplants. So, we still have a long way of growth to go and we're planning to fully maximize on that. How are we going to do it? Here's how we're going to do it. Near term, we're expanding our TransMedics logistical business. So, we acquired 11 planes, of which 7 to 8 are operational right now. We're just in the process of getting the other planes active. We are targeting by the end of this year to be operational with 20 planes in the U.S. and a dedicated fleet of SUVs to support the car transport. We want to expand our NOP resources to make sure that as the demand is not slowing down, the demand is actually increasing that we are not going to be bottlenecked by availability of our clinical support staff. The lung program is a very important program for us and we know it's been lagging a little bit of the momentum behind liver and heart. We have plans for second half of this year to really put that lung program back on the map and have it contributing to our growth at least at the level of heart or very close to it. And that's going to significantly improve our financial performance for the near term. Long term, our growth strategy has been articulated many times. The key for us is to grow in the overall U.S. transplant volume. TransMedics is not here to cannibalize the old historical numbers. We're here to grow the transplant volume. And we know we have an opportunity to double lung transplant and double heart transplant and that's what we're going to be doing. In fact, I've already told this to the International Society of Heart and Lung Transplant meeting in front of 400 heart and lung transplant surgeons and we've got their attention. And that's exactly what we're planning to do. It's not going to happen overnight. It's going to happen over the next 4 to 5 years. And if you don't believe me, look at the annual growth of heart and lung transplant over the last 2 years, it's been growing high single -- double digits, almost close to 20%, 15% to 20%, and it's primarily due to NOP and OCS. So that is materializing in front of us. Next-gen OCS is very important for us because that is when we really move beyond the 10,000 transplants that we talked about. And gives us the ability to go from 10,000 to 15,000 or maybe even higher number of organ transplant per year. And of course, securing OUS reimbursement is a key driver to growing our OUS revenue and allowing us to drive additional revenue from OUS across all 3 organs. We're in a very unique competitive place. Historically, IP, technology and the FDA indication, PMA, the global presence, the clinical evidence is an important barriers to entry but with NOP and with the logistics integration, we have just added the biggest, the deepest, the widest moat around TransMedics business. There is nobody, and I mean nobody out there that can match TransMedics' ability to execute in that field in the United States, period, full stop. And we are planning to continue to maintain that leadership position. And it's not by words. It's by us doing more work, getting -- focusing on the quality, making sure that we have new clinical programs to expand indication. When you're transforming standard of care, when you're the pioneer in that area, you have to continue to be at the lead or you're going to be falling behind pretty quickly. And we don't like to be second in anything we do. Finally, we see TransMedics as a significant growth opportunity. I think the -- again, we like to lead with our results and track record. We see our justification for that is we have disruptive technology with significant clinical evidence. It's not just me here talking about it. It's -- we have the evidence to back it. It's a multibillion-dollar annual opportunity that we are just barely starting to penetrate and really take a hold of. We have already established U.S. reimbursement. We don't have any issues with CMS or commercial payers in the United States for organ transplant. It's one of the highest, most coveted therapy because of the cost efficiency for managing these very expensive patients. We have a robust FDA indication and a pipeline with a PMA barrier. The NOP and logistics integration just gives us a very unique position. And we're becoming -- ultimately, we're becoming an integral part of the workflow for transplant cases in the United States. So, we're very, very excited about where we are and I look forward to addressing your questions. Allen, thank you for the opportunity to be here today.

Thanks, Waleed. So, just to kick us off, you're coming off a year where you grew revenues or you haven't pre-announced. But based on your guidance, your set to grow revenues around 140%. So, really strong growth. And when we think about kind of the drivers you have going into 2024 with the aviation transition with continued momentum across your organs, how should we think about your ability to kind of continue to grow your underlying organ volumes at that same level? And how should we think about the progress you've made on building on aviation with the addition of more jets with the build-out of the Andover hub? How does it all factor into 2024?

Sure. So Allen, as you know, I can't address the question directly as much as I wish because we haven't pre-announced and we're looking forward to announcing year-end results. But as I stated earlier, our target goal is to do a minimum of 10,000 transplants by 2028. We have just done north of 2,000 in 2023. So, we have a long way to go and we are not planning to slow down. We don't see it slowing down. Our focus mainly is on executing. We're focusing on making sure that we have the resources to meet the demand. We're not concerned about the demand slowing down. We're concerned about our ability to meet the demand. We're concerned about our ability to stand up the logistics service and get the additional planes operational as soon as we can. We're focusing on making sure that we are opening up new hubs. We're focusing on getting the lung program on its feet because that program alone could add significant growth near term for us in the United States. We're focusing on making sure that we have enough clinical support staff to meet growing needs of the NOP. So, all of that is very exciting for us. It's what we -- that's what we do. But we -- I think I addressed that question. I can't talk about granularity until we announce the year-end results in end of February.

When we think about that 10,000 number that you're talking about, right, I think there's probably going to be an element of share capture away from kind of the ice boxes that are standard of care today, but also a bit of a market expansion, right, especially when we think about organs like heart where you've really developed this kind of DCD market. So, when we think about that 10,000 to the extent that you can talk about it, to the extent that you're kind of thinking about it, how should we think about the mix of share capture and market expansion to kind of get to that target?

I think for us, we think about it in 2 different dimensions. The first dimension is what kind of organ mix we think of those 10,000? First of all, 10,000, guys is, for us, you need to understand that 10,000 represents about 60%, 65% of the volume of heart and lung and liver transplant in the United States from 2022. That's when we established the 10,000. So, it's not like the full market opportunity. This is just what we set as a bogey. First is the case mix. We think that liver will always lead because just there's more liver cases done in the United States than heart and lung combined. So, we expect to see liver still in the lead, but we expect to see heart and lung equally represented in 2028. So that's what we expect. As far as the share -- the mix of what's existing market versus new market, the name of the game for us is to grow in the overall market. So, we're always going to be focusing on that. But definitely, there is obviously an organic growth of cannibalizing the existing market. We don't look at that as a weakness. We look at that as to become the standard of care. You need to be doing 80 -- in our humble opinion, 75% to 85% of the total volume, which will include existing organs plus additional organs.

So, kind of to loop you in a little bit here, Stephen. I think one of the dynamics of this -- the service and aviation build-out is that it is a bit lower gross margin. Right. So, I think that's something that I think some investors are worried about for the long-term outlook. But I think there's also some kind of interesting benefits, especially when it comes to things like dry runs, where you can leverage having that in-house. So, could you kind of explain the kind of leverage that ask of you.

Absolutely true that we have more service component of the business that's going to naturally bring down the mix. And so the overall margin of the company is going to be lower as an integrated business than it was, it's just as product business. But the revenue opportunity is much greater and the pace of revenue attainment is much faster by surrounding the device has with these services. So that's what we're really doing. And then you mentioned about efficiency, which is very true. So, the ability for us to use our own logistics network and not really on others means the clinical service business is going to have a higher margin than it did before because we were relying on others, not only were hospital -- the brokers were charging the hospitals directly, but if there was extra [ lays ] that we had to do, we had to eat that cost because we wanted to meet every transplant, but we don't have to do that anymore because we're using our planes in the most efficient way. So there's really a great opportunity, I think, in the service margin to really improve from what it was prior to the aviation addition.

Continuing on the cost discussion for a bit, I think some investors are pretty surprised in recent quarters where you kind of talked about what I think they kind of viewed as pretty ambitious targets for profitability, kind of flirting with profitability through 2024 and then kind of approaching what could be your end-stage profitability in 2025. So, given that you still have to build out aviation, you still want to be investing into growing the end market and the penetrating end market, while also developing your technology, what gives you the confidence that you can kind of balance growth and also leverage over the next 2 years?

No, it's a great question. I mean the real question is around like what level are we seeing maturity? And if we're on this pace to 10,000 in 5 years and we're halfway there in 2.5 years, like that really should be a business that can throw off mature margins. And that's really what I've addressed, I think, in those questions where, yes, 2024, for sure, we have still more investment to make, but as we get into '25 and exit '25 to '26, the revenue growth, it should be well ahead of any investment.