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TransMedics Group, Inc. (TMDX)

Q1 2024 Earnings Call· Tue, Apr 30, 2024

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Transcript

Operator

Operator

Good afternoon, and welcome to TransMedics First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Laine Morgan from the Gilmartin Group for a few introductory comments.

Dorothy Morgan

Analyst

Thank you, operator. Earlier today, TransMedics released financial results for the quarter ended March 31, 2024. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call, including during the question-and-answer portion of the call, that include forward-looking statements within the meaning of federal securities laws. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, our examination of operating trends, the potential commercial opportunity for our products and timing of new clinical programs and our future financial expectations, which include expectations for growth in our organization and guidance and/or expectations for revenue, gross margins and operating expenses in 2024 and beyond are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. Additional information regarding these risks and uncertainties appears under the heading Risk Factors of our Form 10-K filed with the Securities and Exchange Commission on February 27, 2024, our subsequent form -- and our subsequent Form 10-Q filings and the forward-looking statements included in today's earnings press release, which are available at www.sec.gov and on our website at www.transmedics.com. TransMedics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, April 30, 2024. And with that, I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Waleed Hassanein

Analyst

Thank you, Laine. Good afternoon, everyone, and welcome to TransMedics First Quarter 2024 Earnings Call. As always, joining me today is Stephen Gordon, our Chief Financial Officer. For the past 2 years, TransMedics has delivered exceptional revenue growth while making transformational investments in our business. 2024 represents another crucial year not only for exceptional growth, but also for broadening our infrastructure and product pipeline to drive further growth, profitability and importantly, increased transplant volumes. Specifically, we are focused on 3 verticals: first, completing the initial build-out phase of our TransMedics aviation fleet and transplant logistics infrastructure; second, preparing for the launch of 3 major new clinical programs to accelerate OCS Lung and OCS Heart adoption and expand our clinical indications for OCS Heart in the U.S.; and finally, growing the overall national transplant volumes even further through our one-of-a-kind NOP program. On every front, we have started the year with very strong momentum towards achieving these goals. With 1Q results representing a new high watermark for our business, let me review the key highlights for the first quarter performance. Total revenue for Q1 grew to $96.9 million, representing 133% growth over Q1 2023 and a 19% sequential growth from Q4 2023. This growth was achieved through increased utilization of both OCS product across lung, heart and liver as well as TransMedics transplant logistics service. I want to highlight the diversified nature of our growth to dispel any potential misperception that our growth is only driven overwhelmingly by transplant logistics revenue growth. Said differently, we fully expect -- I repeat, we fully expect our future growth to be driven by both increased product and transplant logistics adoption. TransMedics transplant logistics service revenue for Q1 was $14.5 million, up from $9.2 million in Q4 of last year, representing approximately 58% growth quarter-over-quarter.…

Stephen Gordon

Analyst

Thank you, Waleed. I will now provide some additional detail on the Q1 results and other financial information for the quarter. So starting with revenue. For the first quarter of 2024, our total revenue was $96.9 million. This is an increase of 133% from the first quarter of 2023 and a 19% sequential increase from last quarter. The $96.9 million included $0.9 million related to our flight school. We have now exited all of the Summit Legacy Charter business. So other than this $900,000 from the flight school, all revenue is transplant-related. In the U.S., transplant revenue was $91.9 million. U.S. revenue increased 145% from the first quarter of 2023 and 22% sequentially from last quarter. And as Waleed said, Q1 2024 revenue included $14.5 million of logistics revenue. The organ breakdown on U.S. revenue was $67 million of liver, $20.2 million of heart and $4.7 million of lung, all organs growing substantially over Q1 2023 and sequentially from Q4 2023. Ex U.S. revenue was $4.1 million, a 1% increase from Q1 of 2023 and a 16% sequential increase from last quarter. The ex U.S. breakdown was $3.1 million of heart and $1 million of lung. Next, on the product and service revenue. As a reminder, our service revenue includes the added amounts we charge for the NOP clinical service of surgical procurement and organ management and also includes the logistics revenue. The flight school is also included in service revenue. In Q1, product revenue was $61.3 million, and service revenue was $35.5 million. So the service portion was 36.7% of the total. Gross margin for the first quarter of 2024 was 62%. This is down from 69% in the first quarter of 2023 and up from 59% last quarter. In comparison to Q1 last year, this reflects the higher…

Waleed Hassanein

Analyst

Thank you, Stephen. Overall, we are humbled and proud of our Q1 results as we simultaneously drove continued revenue growth, expanded our infrastructure and achieved profitability while advancing our clinical and R&D pipelines. We're looking forward to continuing to execute on all the major initiatives throughout 2024 to drive broader adoption of OCS NOP and growth of the overall transplant volumes to help patients in need of an organ transplant. With that, I will now turn the call to the operator for Q&A. Operator?

Operator

Operator

[Operator Instructions] Today's first question comes from Allen Gong with JPMorgan.

K. Gong

Analyst

Congratulations on a really strong quarter out of the gate. I understand that aviation likely helps support the beat in the services, but I think it was the beat in disposables that might be a little bit more surprising given the fact it kind of to be on a dollar basis, at least relative to my forecast growth more of the upside. So I guess other than pull-through of some of the NOP cases that you were maybe previously losing due to the limitations of outside logistics, what else kind of went right in the quarter for you to drive these additional volumes?

Waleed Hassanein

Analyst

Thank you, Allen, for the question. A lot of things went right in the first quarter, and we hope to continue to execute in the same tone going forward. The most important thing is the outcomes. The outcomes that are being achieved across the board are now more transparent to the clinical users. Specifically, the liver continues to grow. But specifically for heart and lungs, there was -- the lung outcomes are getting better. Our team has been working very hard at educating the market, demonstrating the better outcomes achieved with our newer use model, and it's resonated in the quarter. Also, we're seeing the outcomes in heart is really helping growing the heart market. And certainly, the discouraging results we heard at the ISHLT from the cold perfusion study may have fueled that. But it's really the outcomes that is driving our growth, and we plan to continue to lean on outcomes and that's why we are investing in these 3 major cardiothoracic programs. The liver is already there and continues to grow, and we will continue to add centers and go deeper within existing center. So everything went right. Also, the growth in the logistics business was important to help us get access to the cases that we couldn't get access to that also helped. But the fundamental growth from product is basically based on clinical outcomes.

K. Gong

Analyst

Got it. And then a follow up just kind of on seasonality and how should we think about that strength carrying forward. If we kind of take the quarter you just put up, back it out of your updated guide, it really looks like you're setting what should hopefully be a very achievable bar for the balance of the year, especially as you're adding more planes, you're going to be starting the quarter with more planes than you had on average in first quarter. So why is this kind of the right target to go with? And how should we think about the seasonal cadence implied by that guidance? Should it be relatively flat? I guess like while that'd be the case, I shouldn't view the growth sequentially.

Waleed Hassanein

Analyst

Thanks, Allen. I think there's many layers to answering that question, Allen, and Stephen, please comment as well from your perspective. I think we always are cognizant of what potential operational challenges in front of us. For example, we are very proud to have operating 14 planes hopefully in Q2. But we know that in the second half of the year, we have some of these planes are due for some annual service. So they're not going to be accessible to us. So we factored that into the guidance. We also factored in some of the -- any potential seasonality from summer vacations coming up for the holidays. So we always are prudent. When it comes to guidance, we want to -- when we issue guidance, we take it very seriously. So that's layered into our expectations here. Stephen?

Stephen Gordon

Analyst

And Allen, I would just say, look, we don't expect a down quarter sequentially. We expect modest growth quarter-over-quarter. And that's the way we've modeled it, and I would expect that's the way we'll come in.

Waleed Hassanein

Analyst

Yes. Also, finally, Allen, to put a bracket around that, we're operating from a much bigger starting point now. So we have to be cognizant of that.

Operator

Operator

And our next question today comes from Josh Jennings with TD Cowen.

Joshua Jennings

Analyst

It's great to see such impressive start to the year. I was hoping that it'll lead to -- to circle back on the discussion we had earlier in the quarter, just about you have a lot of -- you announced a lot of pipeline initiatives both on the technology front and on the clinical development front. But just how should we be thinking about the OCS system potentially reducing the percentage of DCO donors -- DCD donors that do not progress in heart, liver and lung? And is that something that could happen in the next 12 to 24 months?

Waleed Hassanein

Analyst

Josh, that's exactly our goal. As we discussed, this is the only system that we're aware of that exists out there that could help that picture is the OCS. So that's something we're planning to leverage over the next 12 to 24 months for sure. And we're hoping that once we launch these clinical programs, that becomes an opening to the next program being focused on specifically growing the DCD utilization.

Joshua Jennings

Analyst

Excellent. And another topic, just with ILTS kicking off this week, I wanted to just ask about -- just get a better understanding on the benefits and advantages of using OCS warm normothermic perfusion in fatty livers and just the percentage of donors that have fatty livers and how dramatic a difference there is in preservation for OCS versus cold storage or even cold hyper oxygenated perfusion.

Waleed Hassanein

Analyst

Thank you. Thank you, Josh. Thank you for asking the question. It's a very important question. Without running the risk of burning some of the key plenary session presentations at the upcoming ILTS, the community should be expecting that we will reveal data that shows clinical superiority of fatty livers using warm perfusion compared to any other modality. And I'll leave it at that. It doesn't make sense to put fatty livers on ice, whether for perfusion or controlled or noncontrolled static cold storage. It just doesn't make any sense because fat cells with cold storage or any cold form of preservation congeals and then the liver becomes more of a foreign object than a physiologic body. So we're looking forward to our investigators and lead users to be presenting this data at the plenary session on Saturday.

Joshua Jennings

Analyst

And sorry to sneak a follow-up then, but just any help just thinking about the percentage of donor livers that are fatty. I imagine it's a sizable chunk of the donor pool.

Waleed Hassanein

Analyst

It's a very sizable chunk. And again, the definition of fatty, it's varied. Some people consider fatty liver anything greater than 15%. We'll be presenting data on fatty liver greater than 25% or 30% even. So we experienced the full gamut. And again, there's a tremendous evidence supporting warm perfusion on the OCS platform having superior outcomes to any other modality for preservation of fatty livers. And I'll leave it at that, Josh.

Operator

Operator

And our next question comes from William Plovanic with Canaccord.

John Young

Analyst · Canaccord.

It's John on for Bill tonight. I just wanted to first touch on aviation. You said 80% is probably the terminal rate of U.S. cases that to be supported by you. What services and what level of jets are needed to reach that 80%? And when could we see that?

Waleed Hassanein

Analyst · Canaccord.

Thank you. Thank you, John. We think that -- at the current estimates, we think somewhere between 25 and 30 planes will get us there. But we fully expect to increase those estimates beyond 10,000. So that's our expectation. And the key for us is to build enough in this phase to continue to demonstrate the growth. And as we need more, we will have more planes. But right now, we're hoping to end this year around 20, between 15 and 20 planes, and hopefully, by end of next year to be between 25 and 30. And then we'll assess from there.

John Young

Analyst · Canaccord.

Great. Maybe more for Stephen, but any operating profit, cadence or guidance for the remainder of this year?

Stephen Gordon

Analyst · Canaccord.

John, this is Stephen. I have -- I'm not prepared to give any guidance other than we're pleased with where we came out in Q1. And we hope we're on path to having sustainable profit going forward because we're a little bit ahead of where we thought we'd be. So -- but that's about all I can say at this point.

John Young

Analyst · Canaccord.

Great. And maybe to just squeeze one more in here. But while we [indiscernible] cold option perfusion for heart for only 6 hours, especially with the competitor cases that are notably going much longer than that.

Waleed Hassanein

Analyst · Canaccord.

Thank you, John. John, you heard the outcomes with me. They failed a trial in Europe. So why would I subject us to bad outcomes? And we are more sensible where we want to protect the outcome for the patient. So -- and we're providing this as a lower-cost solution for this small segment of the market that is below 6 hours. For longer hours, we hope to prove it based on the new heart program that warm perfusion is a better solution than cold perfusion. That's the rationale for why we're limiting it, at least based on an indication standpoint. And remember, all of the data that we heard at the ISHLT is not an FDA-level data. They're all few centers, a handful of cases, except for the European multicenter trial that failed the primary effectiveness end point.

Operator

Operator

And the next question comes from Suraj Kalia with Oppenheimer.

Suraj Kalia

Analyst · Oppenheimer.

Gentlemen, congrats again on a blockbuster quarter. So Waleed, I just want to go back on one of the points that you made at our conference a month or so ago. And even on this call, you were talking about the next generation trial. So Waleed, stratify for us the standard criteria DBD hearts that are technically off-label for you all today, just so that people can compare and contrast as to what the denominator should be in terms of market penetration. Also, Waleed, the trial that you mentioned, that would be beginning, I believe, you said next year -- early next year, that is cold perfusion, but would it also have physiologic beats?

Waleed Hassanein

Analyst · Oppenheimer.

Thank you, Suraj, for the question. So let me address this in multiple points. First, right now, our FDA-approved indication does not cover standard criteria DBD hearts. Our plan is to have a new indication to cover that. Is it 4 hours? Is it 6 hours? The market segment of between -- the less than 4 hours is about 900. If you go down to -- up to 6 hours, about maybe 1,200 transplants, plus or minus. At least that's based on last year's number. The reality is we want to access this segment of the market, no matter how big or how small it is. We want to be, 2 years from now, every heart transplanted in this country should be preserved on a TransMedics technology. Whether cold perfusion or warm perfusion, it will be a TransMedics technology. And we want to have the full gamut of FDA indications like we have it for lung and we have it for liver. So that's number one. Number two, we have 2 heart programs, 1 warm focusing on therapeutic and optimization modalities for DBD donors; and 1 cold. The warm we expect to start before year-end this year. The cold, because it requires a full-blown new system and full new circuitry, will start in the first half or beginning of 2025. And that is the one that is focused in the new FDA clinical indication. I hope I addressed the question.

Suraj Kalia

Analyst · Oppenheimer.

Yes. Fair enough. And...

Waleed Hassanein

Analyst · Oppenheimer.

And there was one segment -- I apologize, Suraj. Yes, it will be pulsatile. The cold perfusion will be pulsatile, which is a distinguishing factor that we have that nobody else has.

Suraj Kalia

Analyst · Oppenheimer.

Fair point. Okay. Stephen, one question for you, and I'll hop back in queue. One of the questions that frequently comes up in investor discussions is -- and maybe you can quantify this a little better for everyone's consumption. And the question that comes up is, "Hey, how does TransMedics depreciate its planes? What are its all-in cost per hour for aviation? How are the margins where they are?" I would love for you to take all of these and wrap it up into some numeric or numbers that people can slice and dice. Gentleman, congrats again.

Stephen Gordon

Analyst · Oppenheimer.

Thanks, Suraj. Well, the question I can answer is how we depreciate. So we depreciate the planes over 10 years with a 50% residual value. So that has been -- we've been clear from day 1. That's in our Qs and Ks. We haven't talked about the margin of aviation versus the margin of the service. But all in, we're at that 36%, and we expect some improvement. Certainly, I can say the aviation is a bit on the lower side versus the service, which is a bit on the higher than that side, but we haven't talked about anything more details on that. So that's what I can answer to that question.

Operator

Operator

And our next question today comes from Ryan Daniels with William Blair.

Jack Senft

Analyst

Yes. This is Jack Senft for Ryan Daniels. Congrats on the strong start to the year. Can you share any general feedback from customers that have used TransMedics aviation? And maybe if or how that feedback has changed since you began integrating the aviation segment?

Waleed Hassanein

Analyst

Thank you for the question. I think the only thing that I can share publicly is just -- is I point out to the results. I point out to the -- their rapid pace by which we went from 0 to 105 customers using our TransMedics logistical services. And we expect to go deeper within these accounts. I'll leave it at that. I think centers are beginning -- or are actually witnessing the better structure, the more efficient cost structure and the availability that is afforded by TransMedics logistics. And again, I point to the results.

Jack Senft

Analyst

Understood. Can you just provide an update here on what you're seeing in the international markets and kind of what the expectations are there? And just as a quick follow-up then to, are there any like encouraging opportunities following the ISHLT meetings that took place?

Waleed Hassanein

Analyst

Excellent question, and thank you for asking it. There is a tremendous focus on the success of NOP in the United States. There are many major European countries are coming to TransMedics and offering to collaborate on establishing NOPs across Europe. We're seeing similar behavior in the Middle East, specifically in Saudi Arabia. We had several discussions at the ISHLT. The way I want to characterize it is, absolutely, we're focusing on replicating the success of the NOP because we believe the problem that the NOP solves for in the U.S. is exactly the same problem ex U.S. However, we want to prioritize securing reimbursement first to make sure that our services will get reimbursed. And one final qualifier. When I talk about NOP ex U.S., we're talking only on the clinical support service, no logistics and no surgical procurement, just for clarification purposes. So yes, there's a huge momentum around NOP replication OUS, and TransMedics fully expects to be ready to implement those once we are confident that our services will be reimbursed.

Jack Senft

Analyst

Congrats again.

Waleed Hassanein

Analyst

Thank you.

Operator

Operator

[Operator Instructions] Our next question comes from Matthew O'Brien with Piper Sandler.

Samantha Munoz

Analyst

This is Samantha on for Matt. I guess just to start off, if you could talk a little bit more about guidance -- your guidance for the rest of the year and kind of what's baked into the low end and the high end of that range?

Stephen Gordon

Analyst

Samantha, this is Stephen. Yes. I mean we think there's opportunity to continue to kind of grow sequentially, as I mentioned in an answer to the earlier call. And if we're able to add or go deeper in a few of our centers, we should be able to get to that high end. I mean some of these things will come to fruition. And so the low end is just being a little bit more conservative about the pace of how we do that. So it's a pretty narrow range, and we feel confident that we'll be able to meet it.

Samantha Munoz

Analyst

Great. And then just one more from us. I know you've talked a little bit in the past about the expected product-service mix. And how can we expect that to change throughout the year particularly [Audio Gap] do more, yes, your costs throughout the year?

Stephen Gordon

Analyst

Yes. So it's a good question. We've been kind of keeping an eye on the product and service mix. It ended up 36.7% service. I think it's going to get a little bit more than that. It might be between -- say, between 37% to potentially 39%. I think that's probably the top end. So it's a little higher than I had given a view earlier in the year based on the outcomes we're seeing. But we still think we're going to see overall gross margin continue to improve.

Operator

Operator

And this concludes our question-and-answer session. I'd like to turn the conference back over to Waleed Hassanein for closing remarks.

Waleed Hassanein

Analyst

Thank you so much, operator. Thank you so much, everybody, for joining us on this call this evening, and we're looking forward to our next call. Have a wonderful evening, everyone.

Operator

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.