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

Okay. And talk a little bit about Pat aviation. What is the deal -- if you just give a little bit of flavor for people to level set and then talk us about kind of future investment needed beyond that to build out this overall vision, which Europe

Sure. So Pat Aviation is a very important acquisition for us because it gives us the opportunity to set what is going to become the first European transplant logistics network. It's a different deal structure than what we've done in the U.S. because, again, it's early days in Europe. So the deal itself was a mid-single digit from an acquisition standpoint. But the plan is not to invest heavily in aircraft because they currently have six leased aircraft. We are planning to use those first to build the demand, build the case volume, build the infrastructure and as we grow the case volume, we will gradually replace those leased aircraft with owned aircraft and start expanding the fleet based on expansion across Europe. It is critical to have access to pad aviation because it gives us the ability to compete for transplant logistics tenders on a national level in Italy or throughout the European Union. And we love everything about the team in pad. They share the same vision. They love the mission and they're very passionate about what they do. So we felt it's a perfect match for TransMedics.

Okay. Perfect. I'd like to talk a little bit about pipeline. And you guys are always busy between clinical trials, pipeline development, whether it's OCS Gen 3, kidney down the road, maybe we can talk about kind of each of those in lockstep. On the clinical trial front, are there updates and milestones that you'd like investors to keep their eyes on for the next 12, 18 months?

Sure. I think in the next 12 to 18 months, there's a lot to pay attention to. First and sort of from near term to longer term of that horizon. First is the enhanced Part B heart program in the U.S. That will give us immediate access to 600 heart transplants in the U.S. that we currently are not servicing, which is DBD hearts 4 hours or less of preservation. Second is the de novo program, which is the -- our vision of redirecting the lung market. for machine perfusion. That will give us access to 450 lung transplants that today, again, we don't access. We envision that we will have the IDE supplement to allow us to initiate these programs with crops in late Q3, beginning of Q4. Hopefully, by the next earnings call, we'll have we have that announcement public. But we expect that to start generating significant catalysts for our growth in the early part of 2027. From there, we move our vision towards chops. When I say CHOPS as in after the clinical program because we plan as we stated publicly before, we plan to gain 510(k) approval for chops as an individual medical technology that is owned and marketed by TransMedics to give us access to that pool of DBD hearts and lungs that are not accessed by OCS today. From there, we set our sight to the big prize, the kidney program, which we hope to come online second half of next year. And for that, as you said, we're very busy, but we're very, very excited about what's coming.

Yes. Okay. I think it might be worth spending a bit of time around kidney, why, and we spoke about this a lot during the IPO, why was it the last 1 that you went after what are the learnings from liver, heart and lung that you're going to utilize to help make kidney successful? I think a little of that color would be helpful given how big of a TAM it is.

Sure. Kidney is the largest segment of the transplant market, not just in the U.S. but around the world. In fact, I would argue when people say, well, lead why you're up next and say, well, kidney, there's more diseased kidney transplants in Europe than actually in the U.S. So this is a very important market segment for us. From a clinical perspective, kidney has two major limitations that the OCS comprehensively address. First, we lose a lot of kidneys. In the U.S. alone, 10,000 kidneys last year were thrown away last year because of prolonged ischemic injury or prolonged time on ice. OCS eliminates ischemia during preservation. So you get access to -- you can increase the supply of kidneys by 10,000 a year. That's a huge win. Who wins at the end? Obviously, the patient. But you need to remember that CMS Medicare covers a waiting list for kidney transplant and all end-stage renal disease. But the waiting list cost alone for CMS is estimated to be $10.5 billion annually, so that's a huge economic value to CMS in addition to life-saving for patients. So next, what are the next major hurdle in kidney transplant? It's the development of a major complication after kidney transplant called DGF or delayed function, which means the kidney doesn't function well and the patient is back on dialysis and sometimes requiring a second kidney transplant within the first year. That happens at a rate of 35% to 50%, sometimes even higher in DCD donors. The primary driver for is ischemic engine. OCS eliminates ischemic injury during kidney preservation, which we believe will significantly reduce the form of DGF. So another huge clinical advantage for the recipient, but also another $0.5 billion cost saving to Medicare, CMS who covers the cost of DGF. So that's the clinical value. So now let's talk about what Neha was asking about is the complexity of kidney transplant? And why did we wait until now to access this very important and very critical market segment. It was by design because kidney because of the way the kidney is matched between donor and recipient there's a significant time lag between identifying the kidney, identifying the donor and actually matching that with a recipient. So historically, that this whole time is managed by organ procurement organizations. Historically, when you wanted to introduce the OCS organ or ops says, how does TransMedics come and salvage the kidneys before we know where is it going? That's TransMedics of the past. Today, TransMedics is sitting on the only national organ procurement infrastructure and logistic infrastructure that makes that problem go away. So the plan is we will access every kidney that in the trial, and hopefully, once approved from time zero, from the minute the kidney leaves the donor is going to be on our OCS system. It's going to be managed by the NOP staff and remotely monitored and controlled and then transported to the recipient that the kidney would match to ultimately. So that sequence of event didn't exist until now. Now we have the critical mass, the infrastructure and the logistics that will allow us to make this happen today.

Yes, because I'm sure the question on investors' mind is the NOP infrastructure as it exists today, now set up for kidney or are there going to be changes that are required, given the differences in kidney. But I think what you explained that this is purpose-built.

Exactly. the only way we would be able to tackle the kidney is with the NOP infrastructure.

Yes. And you mentioned the OPO, there's been a lot of button noise in D.C. I don't know if you've been involved in some of those conversations. Could you just give a little bit of a flavor for where you see the OPO going changes, anything that people should be aware of just on the landscape front?

I think OPOs are a critical partner in the journey of organ transplantation. There's no doubt about it. The noise is really stemming from HHS, Hera and CMS initiatives to modernize the transplant system in the U.S. and reduce the number of organ procurement organizations in the U.S. We don't know what that reduction is going to look like. We're waiting to hear from CMS. And we're waiting also to hear if that's going to happen, when is it going to happen? What's the final number would be? And if they will be able or open to the idea of having outside entities becoming an organ procurement organization to potentially drive more efficiency. That's all in the hands of CMS. We expect to know a lot of answers to this. We hope to know a lot of the answers to this sometime later this year. But that's all we know about this particular topic.

Okay. What can you share about OCS Gen 3? You mentioned automation. You mentioned remote monitoring. What can you share about it?

That's an excellent question, Neha. GEN03.0 is not just a new technology innovation. It's a fundamental repurpose purpose-built infrastructure or technology platform that is designed to gain significant, and I repeat, significant operating leverage by design, lower part count up to maybe 50% reduction of part count, more automated assembly to increase reliability and increased overhead remotely controlled, remotely monitored and with more mature technologies like heart, like liver, we will have built in algorithms to manage the organ. The whole concept is to scale and scale efficiently and with significant operating leverage. That's really what Gen 3.0 is designed to achieve.

Okay. And you mentioned you described TransMedics as a high growth, highly profitable, and you mentioned scaling, et cetera. I think for high-growth companies and for the way investors think about high-growth companies, there's a little bit of attention between delivering on growth and focusing on margins and profitability. You guys have done and demonstrated well the ability to do both -- this year is a big year of investment, right, as we think about international expansion, et cetera. How do you guys think about that balance between growth and profitability?

We think both are critical. We think growth, first, profitability very close second because you can just think about profitability and starve the growth -- this is a growth-first business. We need to capitalize on the opportunity in front of us, but we have to be disciplined in the way we grow and disciplined in managing the growth. So that's how we are thinking it right now it's we're still in the early to mid-innings of our growth cycle. We cannot starve the business. We have to be focused on driving growth, growth, growth and also being disciplined in deploying our capital and making sure that we're keeping an eye on our profitability. Yes, we could do a better job in communication and articulating the different kind of peaks and troughs in the spending. No doubt about it, as I indicated that previously, but it is definitely growth first profitability second. And it's not too distant. And it's a significant profitability as we demonstrated in the past.

Yes. I mean I think that's what's so unique is that you've taken an industry which literally was an ice box, right? And you have completely transformed it, and yet there's still so much opportunity and so much runway ahead of you all that it would be a shame for folks to not get the full access to the technology. There has been a lot of misconceptions about the story. It's taken time for people to fully understand it, revolutionize the standard of care that, like I said, it was a ice box. Then you went after airplanes. If you could dispel just one misconception that investors have about TransMedics today, what would it be? I'm going to ask you to pick one.

I think, listen, there's a lot of -- there has been a lot of confusion about TransMedics. That doesn't bother us. It doesn't bother us at all. We -- for us, it's all about execution and putting points on the board. And it's also good because competitors need to understand that this is a very difficult environment. You need to be able to demonstrate ability to execute. Otherwise, it's the NFL, not for long, if you can't demonstrate the ability to execute. So we love it. We love it. So I would say we need -- we TransMedics need to continue to deliver on our promises. We need to deliver on our execution metrics and goals, and we'll let the execution speak for itself.

Okay. I think that all makes sense. And look, I think we've seen your guys' ability to do that, right? When people discount, you would come up and then a quarter is phenomenal. So no question. I guess if the there's Three to 5 things you want investors to look out for as I think about pipeline, you've so much ahead of you, what KPIs or pipeline events over the next 12, 18 months, would you say people should really keep a focus on as big chunky drivers of the story going forward.

Very straightforward. Enhance Part B 50 hearts that we don't have access to today, followed by CHOPS 510(k), give us access to the delta between 650 hearts and 2,300 hearts, which is as a bridge gap to the full approval of the OCS and that a new indication of DBD hearts of 4 hours or less, de novo 2 shots ago. One is through OCS if we can galvanize the market to focus on the benefit of NOP and machine perfusion that's OCS if we -- if the market is -- really doesn't see the value and they want to stick to cold, we're delivering the best cold technology in chops, controlled temperature, so we will resurrect the lung market come hell or high water. We're going to do it either with OCS or chops or with both. All of those are happening in 2027. Then Europe. We hope to see Italy start generating some meaningful uplift throughout sort of mid-next year, and then end the year strong with the kidney program. That's going to be huge. And as I stated publicly before, watch out for the kidney. If you think TransMedics achieved significant success with the liver adoption and that trajectory of the liver adoption you have something else coming with the kidney. The kidney will be faster adopting than the liver. That's my bet based on the value that we've seen so far preclinically. So we're very, very excited about where we are. We think the next 12 to 18, 24 months is going to be hugely transformative in TransMedics. And yes, we're taking our lumps in '26because of the investments we're making, but we're not looking back. These are critical investments to be able to harness that growth that we outlined.

So perfect. Well, look very helpful. was great to level set with you guys, business transforms continuously. I feel like every time we chat, I've learned something new about the new direction you guys are heading in. So I'm sure investors found this very helpful, and we're looking forward to seeing what you guys see next.

Great. Thank you, Neha. I appreciate the opportunity. Thank you all.