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

Thanks, everyone, for being here. My name is Allen Gong. I'm on the medical supplies and devices team here at JPMorgan. It's my pleasure to introduce the management team at TransMedics. We're going to be starting off with some prepared remarks from CEO, Waleed Hassanein, and then we'll be joined by CFO, Gerardo, for the Q&A. So if you want to kick us off.

Great. Thanks, Al. Good afternoon, everyone. As a quick announcement, we have not released anything and we usually don't create a release for JPMorgan, but we're very excited to be here with you this afternoon. Let me start by showing everybody, this is our new home in Summerville. We hopefully will be relocating to this building over the next 12 to 18 months or so. This is our forward-looking statement. As many of you know, we're in a very unique and exciting field of organ transplantation. Organ transplant happens to be the gold standard of treating a very complex, very expensive disease condition called end-stage organ failure. It is the gold standard of treatment because it is the most cost-effective treatment for these very complex, very expensive disease condition. It also affords the patient who gets a transplant, the best quality of life and the longest life expectancy. So what's missing? That sounds all exciting. What's missing is for the last 20 to 40 years, there has been limited utilization of existing donors for organ transplants, which limits the total number that this life-saving procedure could be used in every year. And even in the ones that are being transplanted, there is a good room for improvement for post-transplant clinical outcomes. What is behind these limitations or challenges? It's organ preservation techniques. For the last 4 decades, cold static storage or cold storage has been the Achilles heel of organ preservation for transplant. Cold storage has 3 main limitations that really directly correlates with every bad outcome and every bad thing that happened in organ transplant. First, once you take an organ from the physiologic environment of being in a human body, oxygenated, functioning and put it on ice or cold, you subject the organ to a decay curve. The slope of that decay curve is unknown. It's called ischemic damage. Right off the bat, that puts a time and distance limitation of how far you can go from an organ from point A to point B from donor to recipient, which significantly limit the utilization of available donors or donor organs. But more importantly, once you take an organ from the physiologic environment of the body and put it on ice or cold storage, there is no way you can optimize or enhance or recondition that organ for transplantation. And more importantly, because the organ is not functioning at all. It's not living. It's not doing much. It's just sitting on ice like a 6-pack or a piece of steak. There's no way you can assess organ viability for transplant. These 2 combined leads to the most critical reasons why most organs don't get used. If any transplant surgeon on call at night and get a call and if there's any blemish, any concern, any theoretical issue with the organ, the surgeon will immediately turn down the organ because of these limitations knowing that, that organ will be coming to them on ice with another injury layered upon the condition of the organ. TransMedics has changed all that. But before I get to what TransMedics developed, so let me show you some starking statistics of what these limitations result in, in organ transplant. This is the national transplant numbers from the United States, from the OPTN National Registry from last year, 2024 results. There were nearly 17,000 transplants -- 17,000 donors in the U.S., split between DBD donors and DCD donors. Of those, we only utilized 20% of lungs, 24% of heart and 61% of livers. That's really a huge untapped opportunity to try to get that utilization rate higher. But more importantly, I told you it's also correlated to post-transplant complications. This is a very famous graph where everybody in the field of organ transplant is very familiar with. The probability of patients transplanted with organs, specifically hearts or lungs that are above 3 to 4 hours, the probability of mortality of this patient escalates with every additional minute beyond the 180 to 200 minutes. We see this complication called PGD, Primary Graft Dysfunction or early allograft dysfunction or primary non-function or in the kidney, it's called delayed graft function. All of these complications add significant cost to the organ transplant procedure. It could require a patient to get a second transplant, which would add $1 million plus of cost and subject the patients to significant comorbidities and mortality. All these complications are directly related to the time the organ spends on ice, meaning if the organ is in cold condition for longer, the higher the probability of these bad outcomes to happen, the higher the probability of these organ transplants to be costing more and the patient could be at risk of losing their lives. So what did TransMedics do? We looked at these 3 challenges of cold preservation, and we developed technology that hopefully comprehensively overcome these limitations. We decided to do -- take organ preservation and replicate human physiology in a medical technology. We wanted to minimize ischemic damage from donor to recipient. So how did we do it? We developed the only truly portable perfusion system that perfuses organs with oxygenated nutrient-rich blood. So the organ does not believe it left the human body. In addition, because the organ is being maintained in a physiologic condition, we could enhance, optimize, treat that organ outside of the body of the donor to -- by maintaining active metabolisms. In addition, we can assess organ viability, organ function with standard tests that we use in every donor environment to test the viability of these organs for transplants. We believe that these 3 or 4 characteristics comprehensively overcome the limitations of cold preservation. This is our platform, the Organ Care System, or OCS. We have 3 FDA-approved platforms in the United States, OCS Lung, OCS Heart and OCS Liver. And this year -- end of this year, beginning of next, we're introducing our newest kidney block, OCS Kidney. We are thrilled and excited about the introduction of the OCS Kidney coming into the market. We'll start obviously with a clinical program, clinical trial because of the following reasons. The OCS Kidney represents the front end of our Gen-3 technology. It's the most advanced technology ever developed in the history of organ preservation. And certainly, as you would expect, it's led by TransMedics. It's smaller, it's fully automated. It's remotely monitored and controlled. It has built-in sensors that doesn't require a human to be doing blood samples and blood tests in route from donor to recipient. And it maintains the kidney in physiologic condition, so we can maintain the kidney on the system for an extended period of time, and we can truly assess kidney viability up to the minute it's ready for transplantation. I can't tell you how excited I am about this introduction of our new platform. And this will be the front end of the Gen-3 technology. The heart, lung and liver will be upgraded to Gen-3 technology after the kidney is in the clinical program. And I want to give a shout out to our Kidney team and our R&D team in Andover that's working tirelessly to get this technology into the clinic by the end of this year, beginning of next. So how does the OCS differ from cold storage? This is how it differs. In OCS, there is no ischemia. There's no decay. It's living preservation. Lung is breathing, the heart is beating, the liver is producing bile and the kidney is making urine. We can assess lung, heart, liver and kidney viability up to the minute the organ is ready to be transplanted. We can enhance organ viability or organ function on the technology, on the OCS to move away from just preserving it. We can enhance it, we can improve it, we can make it better and function better. So everything I'm going to talk about, I wanted to set the record straight. Everything we talk about, every claim we make has been supported by the largest body of clinical evidence that were Level 1 FDA pivotal trials. We've tested the capabilities of OCS in both DBD organs, DCD organs, extended criteria organs, standard criteria organs across heart, lung and liver. We didn't stop here. We are now in the beginning of Gen-2 technologies for heart and lung by adding to that evidence base by OCS Heart ENHANCE, which the trial started in Q4. We have close to 18 patients already transplanted. And I'll tell you it's early. We understand we have long ways to go for our ENHANCE heart, but we are very excited about the early results and the early feedback we're getting from centers that are transplanting these hearts into their patients. 20 minutes ago, literally 20 minutes ago, the OCS Lung DENOVO trial had received unconditional FDA approval. So our team is rushing to get the DENOVO trial initiated. We stated that we expected that approval to happen in Q1. We're thrilled that the FDA granted us unconditional approval for the OCS Lung DENOVO that early in the year, and we can't wait to get these trials started. So you should ask me, Waleed, why are you doing these trials? You've already got approval for heart and lung. We're doing these trials, again, to go beyond preservation to deliver to the clinical community prospective Level 1 evidence that we can improve heart function and lung function outside of the human body. That's number one. Number two, we wanted to deliver the same type of catalyst to clinical adoption that is actually fueling the adoption of our liver program, which is the ability of the transplant team to operate in normal working hours between 7 in the morning and 7 at night instead of 2 in the morning to 6 in the morning by allowing safe, reproducible preservation and perfusion of these organs in OCS using the NOP staff and giving them better quality of the surgical procedure, but also significant improvement in the human resource management and the financial resource management. And finally, we are no longer interested in a me-too type comparison. We are going for a superiority claim with these types of trials. Why are we doing this? Because as we have been building the platform, as we've been building all the market dynamic that I will talk about, there has been a lot of newcomers to the field that have never conducted a clinical trial in their existence. And they're saying, oh, we can do, we can do, we can do, we can do. So we're going to hold them to these unsubstantiated claims and we're going to compare ourselves to any cold preservation technology out there, and we are aiming to prove superiority of our platform compared to this cold preservation technique. 2.5 years ago, we didn't stop at just delivering or selling medical technology, but we developed a first-of-its-kind business model called the NOP or the National OCS Program, which is a turnkey solution that pretty much manages organ preservation and procurement nationally across the United States. Today, we're operating out of 18 hubs across the U.S. We have 50 full-time transplant, fully trained transplant surgeons, cardiothoracic and abdominal and 200-plus clinical specialists across those 18 hubs. We also vertically integrated our logistics network into TransMedics aviation, where we have 22 operational aircraft with more than 130 pilots with dedicated maintenance hub and a very advanced command center. We selected Phenom 300E made by Embraer, not because it's pretty, but it's because it is the most efficient, environmentally friendly, fastest light jet as well as it's the longest range. We did this so we can go as far as we can go to get organs and make more organs available for transplant. This is our command center in Andover, which we're building the new command center in our new facility in Summerville to be at least 4x the size and it's highly sophisticated operation for many of you who visited us can attest to that. That command center is manned 24/7 with dedicated logistics and clinical expertise, 24/7, 365, and we could not achieve the success we've achieved without the dedication of that team that is operating around the clock to make every organ transplant available or every donor available for organ transplantation for patients in need across the United States. We didn't stop here. We -- you heard me talk about in our Investor Day last December in 2024 about how excited we are about our digital ecosystem. Today, as you can see, that digital ecosystem is becoming very, very sophisticated. It's becoming an area of pride for TransMedics because it is fully transparent. It allows centers across the United States and soon in Europe to launch an NOP case and have full visibility to the status of their organ, to the viability of their organ, to the distance, to the GPS locator, to the time where the organ is going to arrive to them using a proprietary app. This app is HIPAA compliant and fully secure. It also gives them full visibility to the economics, the finance aspect of the case and gives TransMedics full capability to manage the deployment, manage the logistics, manage the resources. And obviously, we have a Power BI layer in there, so we can monitor every moving piece for every mission on NOP. It's very, very sophisticated. We're very, very proud of that. And we think this is going to be one of the critical element of our success in the immediate and long-term future, not just in the U.S. but also in Europe. So this is all great. Let me show you evidence of what did that all translate to in U.S. ecosystem of organ transplant. So this is the U.S. transplant national volume for heart, lung and liver for the last 3 years that includes the NOP volume or NOP case volume. We resulted in mid-20% year-over-year growth over this 3-year period for heart, lung and liver national volumes. This is then same national volume if you remove the OCS NOP, which means that OCS and NOP were directly related to driving the increased volume in the national basis, which has always been our vision that using OCS could significantly improve organ utilization in the United States. Next is, again, right out of the SRTR Transplant System Explorer. This is the DCD organ utilization for transplant in the U.S. It's one of the primary reasons why we were able to gain more organs to be transplanted. You can see it's grown significantly from the COVID era or pre-COVID era till last year. You need to understand that what's behind that is this is the results of the OCS being approved by FDA for both liver, lung and heart to use DCD organs safely in the United States. And since then, there has been more than 500% increase in DCD utilization for organ transplant, which is driving that national growth in the U.S. Next is the utilization rate. I showed you utilization rate in the 20% to 60%. This is our utilization rate coming out of the real-world experience with the OCS NOP; for liver, 98%; heart, 97%; lung is 96%. This is as of 2024 year-end. We are going to announce our utilization rate at our next earnings call, we usually announce it at year-end because of the variability during the year. But it's the highest rate of organ utilization reported in the history of organ transplant. So we're very, very proud of this. Now many have asked, is this it for TransMedics? If TransMedics reached a plateau in our growth curve, the answer is absolutely not. We're just getting warmed up. We see significant growth opportunities in front of us. We stated publicly that 10,000 U.S. transplant is our target for 2028. We've stated publicly that 20,000 U.S. transplant is our target for 2030 and reaching 30,000 transplant by 2032 globally. How are we going to get there? First, in '26, we are focusing on really accelerating the heart and lung adoption using the Next-Gen ENHANCE and DENOVO. We're launching our EU NOP model starting in Italy, but we have our sights on several other European countries to hopefully contribute towards the tail end of this year into 2027. 2027 is going to be the year of the kidney. That is when we're going to launch a large clinical program of kidney -- for the kidney device, and that will generate significant momentum, significant adoption in the largest market of organ transplant, which is kidney. Also continue to expand NOP internationally in Europe, Middle East, maybe Australia. Now what's after that is really expansion into Gen-3, liver, heart and lung technology, launching the OCS kidney internationally and FDA approval of the OCS kidney in the U.S., which will get us into the 30-plus thousand transplants a year in the U.S. and around the world. So this is our plan for Italy. We are targeting 4 hubs in Italy, 2 in the North, 2 in the South. We are already establishing a command center. We're building a transportation network, both ground and air. And we are very excited about launching this program. We've already started 2 missions already this year, and we can't wait to update the community at this program. We expect this program to really generate meaningful results second half of this year into early next year. Our financial performance has been very strong. We've been extremely fortunate that the NOP and everything we talked about despite the fact that we own aircraft and people thought that we've lost it when we announced that. It's really -- we couldn't achieve this strong financial performance without having going full in on the NOP and vertically integrating logistics. Our revenue growth speaks for itself. Our operating growth is also palpable. We are focusing on profitability, but definitely, there is a time over the next 12 to 18 months where we cannot starve the development in Gen-3, but we will maintain a profitable profile for the business going forward, and we're sitting on a very strong balance sheet that we are hoping to hold or opportunistically deploy to expand the reach of TransMedics across transplantation or other adjacent markets. With that, let me leave you with why are we excited about TransMedics. We believe we're in a very unique position where we have a Trident or at least that's what we codename it internally of end-to-end service technology that is unparalleled in the field and vertical integration of logistics and digital ecosystem, delivering superior clinical outcomes, the highest rate of organ utilization for transplantation. We have a team that is fully dedicated with excellent track record of execution. And we're not just basking in our glory, we have a very strong pipeline of technical innovation that we cannot wait to deploy into the market. With that, I thank you very much for your attention, and I'm happy to address any of your questions.

So just to kick it off, we're coming off of another strong year for TransMedics. As you said, you haven't preannounced the quarter. But with the publicly available data, looking at UNOS, looking at the flight data, it looks like you had a strong close to the year in December for the broader DCD market at least, kind of talking around it a bit relative to expectations, relative to the seasonal slowdown that we saw in third quarter, how did the fourth quarter play out?

Yes. As we expected, we said we should expect slowdown in Q3, and we should expect recovery in Q4. That exactly happened. And we can't wait to announce the quarter results, and we're excited about how the year is actually starting. So -- and we expect that we will report some -- not just good results for the quarter, but we -- I can't wait to see the full year results from a penetration and market adoption standpoint across the 3 organs.

I think one of the main dynamics we're really going to be keeping an eye on over the coming year plus is probably going to be the clinical trials for heart and lung. Heart, correct me if I'm wrong, it was still under a limited approval up until -- is it still under limited approval?

It's still under limited approval.

So you were enrolling patients in the trial because they allowed you to enroll up to a specific cap. And then lung, you just got the approval today, and it sounds like you're going to start enrolling soon. So what has the pace of enrollment, I guess, for heart been like? And when we think about your ability to enroll both of those studies, how quickly do you think you can get those enrolled and finished?

We've always stated that, Allen, we expect 12 to 18 months for a full enrollment to happen, and we are going to stay with that conservative assumption until we get the uncondition -- the conditions removed for the heart, and we see how the pace continues for the year. But the early pace on the heart is very, very encouraging. The early results or feedback, I shouldn't say results, the feedback we're getting from the centers that transplanted these hearts was exactly matching our expectations and hope. So we're thrilled to be at this stage. We expect the heart conditions to be removed here within the next 30 or 45 days, and we can't wait to get the lung initiated. That's really where I'm holding my breath and because for us, this is a very important program to really resurrect that sleeping giant.

So I imagine heart probably started off a little bit faster than lung might because you've been able to maintain that commercial relationship, while with lung, you've obviously had to kind of roll that back a little bit, and you might have to reestablish that relationship a bit. So relative to the 12 to 18 months, is it just that lung will be closer to the 18-month time frame as you have to turn on the centers, get the protocol in place and then start actually enrolling patients, so that's the way to think about it; heart may be a little faster, lung may be a little slower.

Yes, I think that's fair, Allen. Also, there's nothing more important or more strong to catalyze a trial and accrual more than results. So we hope that once the lung gets started, that the results will be encouraging to drive more adoption. We think that's what's catalyzing the heart right now. And again, it's early, but the early signals have been proven to match our expectations so far.

Liver, even though I think heart and lung are having their time in the spotlight, liver has kind of been the main driver that's gotten you here, and it's going to continue to be a strong growth driver for you going forward. It's -- of the 3 that you're currently playing in, it's the largest market. So naturally, it has been able to drive a lot of your growth. When we think about the outlook for 2026, right, there aren't obvious catalysts like there are for heart and lung trial enrollment. So how should we think about lung adoption progressing through 2026? Where are the opportunities for you to continue driving growth? What are the untapped future opportunities for you to kind of sustain that going forward?

You mean liver. Liver adoption.

Yes, liver.

What's not obvious is we're sitting on a gold mine of more than 9,000 liver transplant data, very granular data collected in our OLP registry. The first publication reporting on the first 6,000 liver transplants will be hopefully out in the top impact journal, U.S. journal, hopefully in Q1 or early Q2. The other catalyst -- and that will be a huge catalyst for the liver adoption. There are several other publications in the pipeline that will articulate the significant value of liver, not just in DCD, but also in DBD. And there are other couple of smaller catalysts that our team is working on that we will be discussing in the second half of the year. So we're still halfway through in the liver. We're not done yet. There is a significant portion of the DCD liver is not being utilized because of failure to progress. We -- our team is thinking about creative clinical ways that we can launch a program to hopefully make many of those livers transplantable using the OCS. So there's a lot of catalysts that's still ahead of us in the liver, but we're obviously proud and excited about where we are with the liver today.

The competitive landscape is definitely an interesting point. You kind of addressed it during your presentation that there -- it is pretty noisy out there. You had a competitor in liver that got acquired. You have a player in lung that's been there for a while with a slightly different offering, and you also have entrants potentially for heart as well. So have you seen any -- let's start with like the easy one, with liver, right? Have you seen any strategic changes since the main competitor was acquired? Are you seeing any inroads being made? Anything new on that front?

Not to our knowledge. But it's early, and we welcome competition and -- but we have not seen any major dynamic or shifts in the market since that announcement was made.

Thinking about broader liver, you talked about how you're trying to expand access to the organs that currently aren't being used. But let's say there's organs that are being used just not on OCS, right? I'm a liver doc for some reason, I don't want to use OCS. What are my reasons?

I think poor understanding of the outcomes that could be -- that will -- should be fixed with the broad publication of the data, so that's number one. Number two is a lack of understanding of the economic benefit of the OCS, just looking at the sticker price and saying, oh, it's too expensive, yet they're paying probably double the cost of OCS by using the competing technology plus NRP. All that, our team -- our commercial team is doing a great job, and they continue to be creative at overcoming that. And again, the results will speak for themselves. We are making significant progress in adoption and market utilization in liver in the U.S. So -- and we still have ways to go. So...

On the heart side, for that study, you have the 2 arms. One is evaluating the system in the patient population that you're indicated for already treating and then the other is to expand you into shorter travel time, DBD patients. So when we think about your strategy there, you've talked to kind of an interesting strategy where you may submit for the approval for the OCS system before you finish the enrollment of the second arm. So I was just curious if you could kind of expand on the strategy there and your thought process.

Sure. Well, the protocol is in clinicaltrials.gov so it's not a may. The protocol is written prospectively to say when Part A is finished, the FDA allowed us to submit the results of Part A for PMA supplement to get that indication approved. So that's by design. The reason why that's very important for us is if we continue to prove the thesis that the new Next-Gen OCS heart could truly enable morning hour heart transplant safely, effectively and reproducibly. This historical notion of 3 hours or 4 hours transport and the heart has to be transplanted, which was developed by ice, by cold storage will go out of the window. So -- and the FDA fully recognizes that. So again, our focus right now is to execute the trial to the best of our ability, get the data cleaned and submitted for Part A, while we're initiating Part B and doing a head-to-head comparison so we can quiet any potential competitor in the cold preservation arena that never conducted a clinical trial of that magnitude, and we will put the technology to the test. But if we finish Part A and show the results, the FDA gave us the ability to do that, to go and file for the PMA supplement for them to approve that indication. And then we have a decision to make depending on the progress of Part B, whether we continue, whether we stop it. So we have maximum flexibility there. But that was all by design. That's not -- that was not kind of an afterthought.

One more question before you move on to financials and rope in Gerardo here. The 10,000 target, you established that quite a while ago now, and there's been a lot of changes to the story since then. Clinical trials have begun. You've started talking about kidney, you started talking about Italy and a bigger presence OUS. So what is included in that 10,000? What is upside to that 10,000? And then kind of the next step, what is included in the 20,000?

Sure. 10,000 was established at JPMorgan in 2021 or -- yes, I think -- 2022. And it was U.S. number, heart, lung and liver only and period. It doesn't include Gen-2. It doesn't include international or Europe. So that's what the 10,000 is, and we feel very confident that we will achieve that goal. What the Gen-2 heart and lung could enable us to do is to potentially get there a little bit sooner, not too much sooner, a little bit sooner or maybe in 2028, do a little bit more than 10,000. That's what Next-Gen could catalyze. What's on top of that, how to get from 10,000 to 20,000 is just purely kidney in the U.S., and that's 20,000 is a U.S. number as well. Today, as we sit here today in the beginning of 2026, last year, there was approximately 25,000 diseased kidney transplanted in the U.S. On top of that, you need to know that there was approximately 10,000 kidneys that were rejected for transplantation for one clinical reason and one clinical reason only, prolonged ischemic time on cold storage. If we just target that low-hanging fruit, that will be -- that will get us -- that will get us to the 20,000 in the U.S. The 30,000 is a conservative estimate when you add on top of that the European impact in 2032 and whatever mature U.S. market at that time with kidney fully contributing to our growth.

Got it. And then talking about the P&L, the other side of the story for TransMedics has been a tremendous growth in profitability over the last few years as you've introduced aviation as the disposal business has continued to grow alongside that. It's added a little bit of complication, I guess, to the gross margin profile, right, before you only had the disposable. Now you also have the service piece built into it. Now you're moving internationally. So how do we think about the gross margin outlook? What is a stable gross margin 5 years down the line, let's say, like with international factored in as well?

What I have been seeing [indiscernible] is our gross margin in the long term would be around the 60%, it can be slightly above, slightly below, but 60% is what we are targeting. We have a number of initiatives that will be margin enhancements. However, we have other ones like you said International, where the margin may not be the one compared to the one that we have in the U.S. just because the volumes are different. So the economies of scale will be different. All in all, when you take all of those in the balance, we expect the margin to remain at around the 60%. However, what we're really focusing on improving is the operating margin. That's where in 2025, our operating model proved to be able to scale in a very efficient way, right? There, we're expecting to be at or approaching the 30% operating margin by 2028.

What does that target assume in 2028, that 30% when it comes to moving beyond Italy, right? Because right now, you're just starting off in Italy. I know you have plans to eventually expand that, build up the aviation capability to service more Europe, all of Europe at some point. What is that 30% assume for the balance of investment into that initiative and revenue from that initiative?

That's a good question. We -- because it's not only Italy. Italy is -- it's our beachhead, right? But in order to make Europe meaningful, we need to go into multiple different countries. So it's -- you got to bring together the different puzzle. And that's why what we're mentioning is in 2032, that's where we're adding to the number, the OUS getting to the 30,000 transplants. That's what we currently have. There could be upside, yes, we believe that the 30% is the floor, but it's too early to mention exactly what kind of upside can we have. There are so many variables just yet still there.

Got it. Unfortunately, I do think we're out of time. There's so much more we could talk about. Thank you, Waleed. Thank you, Gerardo, for your time today.

Thank you. Appreciate it.

Thank you.