TransMedics Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 26, 2024

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to the TransMedics 4th Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Brian Johnston from the Gilmartin Group for a few introductory comments.

Speaker 1

Thanks, operator. Earlier today, TransMedics released financial results for the Q4 full year ended December 31, 2023. 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 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.

Speaker 1

All forward looking statements, including without limitation, our examination of operating trends, the potential commercial opportunity for our products 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 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 on our Form 10 ks filed with the Securities and Exchange Commission on February 27, 2023. Our subsequent Form 10 Q filings and the forward looking statements included in today's earnings press release, all of which are available at www.sec.gov and on our website at www.

Speaker 1

Transmedix.com. TransMedix 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, February 26, 2020 4. With that, I will now turn the call over to Walid Hassaneen, President and Chief Executive Officer.

Speaker 2

Thank you so much, Brian. Good afternoon, everyone, and welcome to TransMedics' 4th quarter and full year 2023 earnings call. As always, joining me today is Stephen Gordon, our Chief Financial Officer. Our 4th quarter performance represents a new high watermark for TransMedics business. We ended the year on a very strong note, laying a solid foundation for continued growth.

Speaker 2

Also, the Q4 was the Q1 that we had TransMedics Transplant Logistics services operational during the full 3 months of the quarter. Although it is early although TransMedics Logistics is in its early innings, I am thrilled to report on the early successes of the logistical services. We successfully executed on every front and overcame early operational challenges as we continue to expand our footprint and team. Let me share the summary of our results for Q4 and full year 2023. Total revenue for 4Q grew to $81,200,000 representing 159% growth from 4Q 2022 and a 22% sequential growth from 3Q 2023.

Speaker 2

For the full year 'twenty three, total revenue was $241,600,000 representing 159% growth over 2022. So for the 2nd consecutive year, we delivered on and even exceeded our aspirational aspirations to double revenue year over year in the 1st years of OCS commercial launch. TransMedics Logistics Services revenue for 4Q was $9,200,000 up from $2,100,000 in 3Q. We are proud of this success in the 1st full quarter of operations. Based on everything we know today, we are growing extremely confident and bullish on the significant potential positive impact of TransMedics Logistical Services to help us grow the use of NOP platform.

Speaker 2

We fully expect our integrated NOP and logistics services to enable TransMedics to deliver an end to end seamless, efficient and safe solution to transplant programs across the U. S. Simply stated, providing a world class service through a highly cost efficient model. Our overall gross margin for 4Q was 59%, down from 66% in 4Q 2022. The full year 2023, our gross margin was 64% compared to 70% in 2022.

Speaker 2

I know Stephen is going to detail this in his section of today's presentation. However, I want to take this opportunity to give you my perspectives on this important topic of TransMedics gross margins. Please remember, we are still very early in our commercial ramp and more so with our logistics services. There are several leverage points. I repeat, there are several leverage points for both product and service revenues that are not fully reflected in our models yet.

Speaker 2

Based on everything we know today, we are extremely confident that we will be able to ramp the gross margin up over the next 12 to 18 months as we achieve more leverage of scale in our operations. In the meantime, we are thrilled that we achieved a 35% gross margin for our service business faster than we had projected, exceeding our early expectations. Again, it is just the beginning. We also achieved critical profitability milestone in 4Q as we delivered our 1st GAAP operating profit quarter. Specifically, we delivered $2,600,000 of operating profit and $4,000,000 of net profit in the 4th quarter.

Speaker 2

This marks a critical step forward as we strive to reach and sustain positive cash flow in the very near future. Before moving on, I'd like to take a moment to recognize that these exceptional results were only possible through the hard work of the entire TransMedics team. Let me send a message to team TransMedics. We are grateful for your world class effort, commitment and creativity in navigating every operational challenge of our rapidly growing business in 2023. Importantly, I want to make it crystal clear that we are now gearing up for another strong year of execution in 2024.

Speaker 2

Now let me move on to provide my perspectives on some important trends and what do they mean for our business. In line with our growth strategy, we grew our case volume across all 3 organ markets in 'twenty three compared to 'twenty two. Our OCS lung case volume grew by approximately 11%, our OCS heart case volume grew by approximately 82%, and our OCS liver case volume grew by approximately 199%, almost tripling from 2022. For the full year, we have transplanted approximately 2,300 OCS transplants in the U. S.

Speaker 2

Compared to approximately 1,000 transplants in 'twenty two. We plan to report our annual OCS case volume in the U. S. Going forward as a benchmark towards the stated goal of performing 10,000 transplants in the U. S.

Speaker 2

By 2028. In terms of NOP contribution, as we predicted, NOP represented the lion's share of OCS transplants in the U. S. We ended the year with an overall NOP rate of more than 98% across all three organs. We are confident that this sustained growth and success of NOP is based solely on the operational efficiency to grow transplant volumes, highest level of clinical care of donor organs and the overall cost efficiency experienced by transplant programs across the United States.

Speaker 2

Importantly, we are planning to present several data analyses during the upcoming transplant conferences in 2024 to unequivocally demonstrate the improved clinical outcomes achieved using OCS NOP in the U. S. Again, I want to stress a key point. The success of OCS NOP program is based on better clinical, economic and operational outcomes experienced by the transplant centers and not based on anything else. In Q4, we buttressed the NOP clinical staffing by adding 37 new clinical specialists and 4 procurement surgeons.

Speaker 2

Now, let me share the impact of our OCS technology and NOP on the overall national transplant volume in the U. S. For the first time in nearly 8 plus years, both liver and heart transplant volumes grew by 12% nationally in the U. S. Based on our OCS case number and donor mix, we are confident that our OCS technology and NOP services were primary drivers for this annual transplant volume growth.

Speaker 2

The overall national growth came from both increased use of DCD donors, driven by OCS use, as well as a modest increase in DVD donor utilization. This is a great first step to prove the ability of the OCS and NOP to grow the overall U. S. Transplant market. We are looking forward to continuing this trend in 'twenty four and hopefully seeing similar growth in lung driven by OCS and NOP over the next few years.

Speaker 2

Now, let's discuss the percentage penetration of the OCS use in each organ market segment nationally in the U. S. We ended 23 with the OCS case volume representing approximately 17% share of the national liver transplant volume, approximately 16% share of the heart national transplant volume and approximately 4% share of the lung national transplant volume in the U. S. For anyone who may be assuming that TransMedics has maxed out on our growth potential, these data provided crystal clear evidence that we have a long way to go to continue to grow our market share in the U.

Speaker 2

S. This will be fueled further by our unique ability to also expand the overall national growth of transplant volumes in the U. S. To help patients who are desperately in need for a life saving transplant procedure. Our vision is that by the time we reach the 10,000 U.

Speaker 2

S. OCS transplants that this number, 10,000, would represent a portion of the overall U. S. Transplant market and not the total addressable U. S.

Speaker 2

Market. Now, let me turn to a more detailed discussion on our transplant logistics service strategy and review its early performance in late 2023. I want to start by highlighting our strategy and value proposition. Please allow me to share some important facts and background on this important topic. One, historically, for cold preservation and organ transport, transplant center relied exclusively on charter flight brokers and local small operators.

Speaker 2

I repeat, transplant center relied on charter flight brokers and or local small charter operators. These brokers typically have used what they promote as an asset light model, meaning they don't own or operate any aircrafts. Their role is simply to contract a charter flight and a crew from a local or regional operator when a donor mission is needed. When TransMedics first deployed the NOP program, you all remember, we too relied on the same network of charter brokers. Unfortunately, we quickly learned through firsthand experience that the brokered charter flight model had significant limitations

Speaker 3

to help

Speaker 2

grow the transplant volume in the U. S. And was becoming a huge bottleneck for our NOP program. This regional charter brokerage approach was very operationally inefficient and added significant costs to the transplant centers due to: 1, fragmented local and regional operators using older aircrafts that were not capable of covering the new longer range donor missions now afforded by the new U. S.

Speaker 2

National Organ Allocation Laws and the use of OCS technology and its and NOP's capability to go longer distances to increase utilization of donor organs for transplant. 2, significant shortage of chartered plane availability for 20 fourseven to cover the growing demand for transplant mission. This resulted in the loss of approximately 20% to 30% of donor retrieval missions for NOP in 2022 early 2023. 3, the lack of control over the planes and pilots by most charter brokers, often resulting in the use of more than one plane and multiple crews to complete a single mission, which sometimes doubled the transportation bill paid by the transplant center. 4, lack of control over the starting location of the aircrafts led to use of highly inefficient routes, which added even more costs in order to reposition the aircraft.

Speaker 2

5, lack of control over air safety standards of these contracted charter sorry, of these contracted local or regional operators flying 20, 30 year old aircrafts. In fact, our own NOP clinical and surgical teams experienced a few near catastrophic events on brokered aircrafts in 2022 and 2023. 6, an inefficient round trip cost model, even if the donor organ is not procured for transplant or if a DCD donor never progressed to become a donor. Finally, a very complex cost structure with multiple middlemen that paid with associated profit margins for the owner of the aircraft, the operator of the aircraft and the broker of the chartered flight. All these added significant and unnecessary cost burden to the transplant centers.

Speaker 2

So while this asset model might be light for the broker, it is clearly a very heavy financial burden to the transplant centers and payers who ended up paying multiple middlemen. Importantly, it is also severely it also severely limits the ability to grow transplant volumes due to shortage of dedicated aircrafts and we saw it as a roadblock to our stated goal and commitment to growing the U. S. Transplant volume. To address these significant inefficiencies, safety issues and capacity constraints in the historical model above, TransMedics created a new, more scalable model that meets the current and future needs for growth of the transplant markets in the U.

Speaker 2

S, while providing significant operational and cost efficiencies to the transplant centers. Let me share with you our vision and our goals that we've actually achieved to date. 1, we set out to maximize donor organ utilization for transplants by building and operating a modern fleet of jets that can go longer distances. This fleet is dedicated to transplant missions and not charter flights. Using newer model aircraft allows us to use less fuel, so we can be environmentally responsible, reduce maintenance costs and reduce downtime to maximize availability to conduct transplant missions.

Speaker 2

2, our goal was to maximize operational efficiency, which will reduce cost on the transplant centers. 3, our goal is to maintain the highest level of air safety for our staff, our clinical users and the precious donor organs we are caring for. 4, maximize logistics availability to ensure that we reduce the waste of donor organs that do not get used due to lack of plain availability. And finally, leveraging the unique NOP network and proprietary modern dispatching algorithm with a digital command and control center structure to significantly reduce cost burden of DCD donors that don't progress to become a donor. The NOP network infrastructure created by TransMedics has given us a unique ability to share our cost efficiencies with our transplant center users.

Speaker 2

Now with above background, let me share with you some important early performance metrics for TransMedics Transplant Logistics Service, which encompasses aviation and ground logistics for NOP missions. As mentioned earlier, revenue from Transplant Logistics service alone was $9,200,000 in 4Q, compared to $2,100,000 in 3Q, as we are only operational for approximately 4 to 5 weeks in 3Q. The average number of active TransMedics aviation planes were approximately 7 planes in 4Q compared to approximately 3.5 in 3Q. We ended the year with a total of 11 owned aircrafts that will become fully operational in early 2024. Approximately 98 transplant programs in the U.

Speaker 2

S. Use TransMedics Logistics service in 4Q compared to approximately 36 programs in 3Q. This is an important metrics to unequivocally show that operational availability, cost efficiency and high safety standards enabled us to disrupt the inefficient historical model and take market share relatively quickly. We were able to cover only approximately 35% of our NOP flights needs in 4Q using TransMedics aviation planes, compared to 13% in 3Q. At scale, we are hoping to cover 80% of the NOP cases using our TransMedics logistics service for both air and ground transport.

Speaker 2

We will use carefully selected, highly reliable and safe operators for supplemental lifts to support our missions. So far, we are humbled and proud by these early results. We are continuing to expand our air fleet and crew to operate the aircrafts. We are hoping to have 15 to 20 aircrafts operational by end of 'twenty four or early 'twenty five. We opened the digital command and control I'm sorry, command and dispatch center in Andover at the end of December, and we are now fully operational 20 fourseven, three sixty five from this state of the art facility.

Speaker 2

This dispatch center is designed to maximize operational availability and efficient routing of our NOP resources to minimize plain repositioning cost on the transplant programs. Again, based on everything we know today, we are extremely confident and bullish on the potential positive impact of transplant logistics services on the growth of our NOP case volume and a more efficient utilization of our clinical resources. Before I leave the TransMedics Logistics section, I want to share some perspective on a matter that recently entered the public domain. Many of you may be aware that a letter was emailed to TransMedics from a member of the U. S.

Speaker 2

Congress on February 21st, writing in his capacity as an individual member of Congress regarding TransMedics business practices. Prior to receiving this letter, we had never communicated with this congressman nor with any member of his staff. This letter contains serious accusations, which are grossly inaccurate, unfounded, and based on wrong information. Let me repeat again. This letter contains serious accusations, which are grossly inaccurate, unfounded and based on wrong information.

Speaker 2

Rest assured, TransMedics has responded to this letter with the same level of seriousness with factual evidence to set the record straight. Our formal response is posted publicly on the Investors section of our website. It is clear that what TransMedics is doing in the area of transplant logistics is disrupting this antiquated charter brokerage model for organ transplantation. This is creating some competitive dynamic in this area by some of our historical by some of the historical brokers that are struggling to compare or to compete with our operationally efficient and cost effective logistical capabilities. Finally, let me give you a bird's eye view of our growth strategy in 2024 and hope to detail these initiatives in our 1Q 2024 call in May.

Speaker 2

Our goal in 'twenty four is to continue to invest in building out our TransMedics transplant logistical services throughout 'twenty four to give us more operational leverage and efficiencies. We will focus on growing our NOP case volume in all three market segments by driving both growth in the overall transplant volume and take share of existing volumes. We will initiate a new clinical program to try to reinvigorate the lung transplant activities in the United States. Finally, we are investing in our next gen OCS technology platform that will be more optimized for NOP workflow and streamline the support process on our clinical staff to maintain the highest clinical management quality and achieve better product leverage. We are humbled by our success in 2023.

Speaker 2

However, we are not standing still. We are laser focused on our execution plan for 2024 to help drive growth in the overall transplant volumes in the U. S. And for TransMedics business. That being said, we need to balance our bullish plans with potential scalability and competitive challenges.

Speaker 2

We are providing an annual revenue guidance between $360,000,000 to $370,000,000 which represent 49% to 53% growth over 2023. With that, let me turn the call to Stephen Gordon to cover the detailed financial results for the quarter.

Speaker 4

Thank you, Waleed. I will now provide some additional detail on the Q4 results and other financial information for the quarter the year. So starting with revenue. For the Q4 of 2023, our total revenue was $81,200,000 This is an increase of 159% from the Q4 2022, the 22% sequential increase from last quarter. The $81,200,000 included $1,100,000 related to our flight school and $1,400,000 related to Summit Aviation's legacy business, So a total of $2,500,000 that is non transplant related.

Speaker 4

The $1,400,000 of legacy business is not continuing and is expected to be 0 in the Q1 of 2024, so that leaves $78,700,000 of transplant related revenue worldwide. In the U. S, transplant revenue was $75,200,000 US revenue also increased over 159% from the Q4 of 2022 and the U. S. Grew 26% sequentially from last quarter and this included the $9,200,000 of TransMedics logistics revenue.

Speaker 4

The organ breakdown on U. S. Revenue was $54,700,000 of liver, $17,600,000 of heart and $2,900,000 of lung, all organs growing substantially over Q4 of 2022. We did see a modest sequential decline in lung revenue, while liver and heart continued strong sequential growth in Q4. Ex US revenue was $3,500,000 a 51% increase from Q4 of 2022, but also a sequential decline from Q3 of 2023.

Speaker 4

As we have stated in the past, our revenue outside the U. S. May not be consistent due to the nature of transplant and the lack of reimbursement outside the United States. The OUS organ breakdown was $3,200,000 of heart and $300,000 of lung. Next, I will cover the product and service revenue.

Speaker 4

Our service revenue includes the added amounts we charge for the surgical procurement and organ management and now also includes the amount we charge for organ procurement and transplant logistics, including air and ground services. In Q4, product revenue was $51,900,000 and service revenue was $29,300,000 So the service portion was 36% of the total in Q4 and that includes the non transplant service revenue. Gross margin for the Q4 of 2023 was 59%. This is down from 66% in the Q4 of 2022 and reflects the higher NOP service component of our business, which was still in the early stage in Q4 of 2022. Now drilling down one level, the product margin was 73% in Q4 and service margin was 35%.

Speaker 4

We did experience an unfavorable impact to product margin of about 300 basis points that will not repeat in Q1, which was related to the end of year inventory cleanup and adjustments. We have made changes to our processes, so we will not see this type of quarterly anomaly in the future. On the service side, we are pleased that we were able to deliver 35% service gross margin in our 1st full quarter of providing our logistics service. And just to repeat, the service portion of the business includes the NOP clinical service as well as air and ground logistics. So this achievement gives us confidence that we will be able to provide this service with the mid-30s service gross margin or better as we grow our footprint and utilization of aviation.

Speaker 4

As a reminder, all costs related to aviation including fuel, pilots, maintenance and depreciation are included in the service cost of goods sold. Total operating expenses for the quarter were 45,300,000 65% above Q4 of 2022 operating expense and this expense growth was driven by investment throughout the organization including 87% growth in R and D related to investments in new products, development and NOP tools and 59% growth in SG and A for both NOP support and overall corporate infrastructure. The growth in operating expense of 65%, while growing revenue by 159%, allowed TransMedics to deliver its first GAAP operating profit of $2,600,000 and net profit of $4,000,000 for the Q4 of 2023. These compare with an operating loss of $6,800,000 in Q4 of 'twenty two and a net loss of $6,700,000 in Q4 of 'twenty two. Total cash at the end of the year was 394,800,000 dollars as of December 31, 2023, which equates to cash usage of $32,300,000 from the balance at the end of Q3 of 2023.

Speaker 4

However, operating cash was a positive $8,300,000 in the quarter, which was offset by the purchase of 3 additional planes in the quarter for about $39,000,000 Basic weighted average common shares outstanding for the quarter were 32,600,000 and diluted weighted average common shares outstanding for the quarter were 34 point 2,000,000. Now let me share some summarized information on the full fiscal year 2023 results. For the full year, total revenue was 2 $41,600,000 again at 159% increase over the prior year. And the U. S.

Speaker 4

Organ breakdown the full year was $151,500,000 of liver, dollars 59,400,000 of heart and $10,500,000 of lung. Ex US was $14,000,000 of heart, dollars 1,300,000 of lung and $100,000 of liver. And again non transplant revenue for the year was $4,900,000 Product revenue for the year was 100 and $76,100,000 and service revenue was $65,600,000 Gross margin for the full year 2023 was 64% compared to 70% in 2022. Again, this is a result of the higher portion of NLP service revenue. Product margin was 77% and service margin was 29% for the full year of 2023.

Speaker 4

Total operating expenses were 100 $2,500,000 for the full year 2023, up 89% from $96,700,000 in 2022 and included $27,200,000 of one time acquired in process R and D related to our acquisition of technology from Bridge to Life and $2,000,000 of acquisition related expenses from our acquisition of Summit both in the Q3 of 2023. Our operating loss for the year was $28,700,000 for 2023 compared to $31,400,000 in 20 22 and net loss was $25,000,000 in 2023 compared to $36,200,000 in 2022. Overall, 2023 was a tremendous year for TransMedics as we demonstrated the potential to grow our business while helping to increase the overall number of transplants. By adding logistics services to our NOP offering, we can now provide a true turnkey solution to our transplant center customers. We continue to be extremely optimistic about our opportunity to continue to grow in 2024 and beyond.

Speaker 4

To repeat Wally's earlier comment, we are providing annual revenue guidance in the range of $360,000,000 to $370,000,000 which represents 49% to 53% growth over the full year of 2023. Also for modeling purposes, we expect gross margins to improve throughout 2024 We would expect to exit 2024 in the 63% to 64% range for overall gross margin, we would expect the product mix and service mix to be around 65% product and 35% service in 2024. We expect expenses to grow in 2024, likely in the 30% to 40% range. Now I would like to turn the call back to Waleed for closing comments.

Speaker 2

Thank you, Stephen. We're very humbled by and proud of TransMedics' performance in 2023. We more than doubled our overall revenue. We helped grow the national U. S.

Speaker 2

Heart and liver transplant volumes by double digit numbers. We launched a new TransMedics logistics network to drive more operational and cost efficiency for our clinical users, and we achieved our 1st GAAP operating profit quarter for the business. In totality, we set a solid foundation for sustained growth of our business and our mission of growing transplant volumes to help patients in need for an organ transplant. Now, we are laser focused on our 2024 operational plans and on our path towards achieving 10,000 OCS transplants by 2028. With that, I will now turn the call back to the operator for Q and A.

Speaker 2

Operator?

Operator

Our first question comes from Alan Gong with JPMorgan. Please go ahead.

Speaker 5

Hi, team. Thanks for the question. Congrats on the good quarter. I want to start off diving a little bit deeper into your guidance. You provided the gross margin outlook by disposables versus service, but I think a big question that we still have is, when we think about your disposables versus service on top line, how should we think about the drivers of the growth that you're expecting to see?

Speaker 4

Yes, Alan. As far as drivers of growth, I mean, we continue to, as Waleed mentioned, we want to penetrate deeper across all three organs and we want to deliver a clinical program in lung that will help increase the lung later in the year. And the impact of the logistics business is not just for the growth in logistics, it's also to grow the case volume, which we expect to happen.

Speaker 2

Alan, thank you for the question. From our perspective, I agree with Steven, but let me give you a little bit more granular response. We're nowhere close to being done growing in transplant volume. We will grow our transplant volume by going deeper into existing accounts, by adding more DCD and DBD organs across all three organs by reinvigorating the lung program, by adding new accounts in areas where we don't have enough accounts like the lung program as well as adding more DBD to our heart franchise. We are just in the beginning of this commercial ramp up.

Speaker 2

The other impact is the indirect or direct impact of operational efficiency with TransMedics Logistics may even drive more growth into the actual case volume. And the overall revenue growth from the logistics aspect of our business. So it is we monitor and drive both sides of our business, the disposable and product as well as the service. And the synergies that exist between the two will also have an important catalyst to adoption of the disposables.

Speaker 5

Got it. And then just as a quick follow-up, we've seen the letter that you sent in response to the congressional letter. So I won't dive more into that. But there also was an article out kind of talking about more thorough investigation of OPOs as a kind of a continuation of the investigation that's been ongoing over the last few years. How should we think about the potential for that to disrupt the underlying transplant market?

Speaker 5

And how should we think about the longer term impact on TransMedics?

Speaker 1

Thank you.

Speaker 2

Thank you, Alan. As you said, what was announced today in the Washington Post is just a continuation of what's been ongoing for several years, trying to disrupt or revamp the OPO network in the U. S. The bottom line is the following. TransMedics went out alone and developed a unique model called the NOP.

Speaker 2

We build it, we executed it, and we delivered results to grow transplant volumes in this country by double digits, numbers that hasn't been seen in almost a decade. We are going to continue to do that. And we are proud of what we've accomplished. We don't think what's happening with the OPOs or what's been announced earlier today has anything to do with us. But we are here and we are proud to show anybody who cares to know how to grow transplant volumes in this country.

Speaker 2

We've already done it and we will continue to do it. So again, it's unfortunate what's going on, but as you said, it's been going on for several years. In the meantime, we are focusing on our business. We're focusing on driving more organ transplants in this country successfully with excellent results using our NOP service and now our logistics service. Next question, operator?

Operator

The next question comes from Josh Jennings with TD Cowen. Please go ahead.

Speaker 6

Hi, good evening. Thanks for taking the questions. Congrats on the strong finish to a remarkable year. Wanted to just ask about the congressman's letter. You provided us a strong rebuttal, treating every accusation allegation.

Speaker 6

Willie, do you think there could be any short term disruption to the business with these headlines flowing around? And our sense is that you've added so many transplant programs as customers. They're all aware of the business model, don't seem to have any issues with it. But just one, any short term spectrum potential and then 2, any next steps that you expect from this inquiry by the congressman?

Speaker 2

Thank you, Josh. Josh, the first part of your question, listen, one has always to assume some level of confusion, okay? This letter came out of left field. It was not supported by any facts. It was completely unfounded.

Speaker 2

I am sure whomever is behind this is going to try to use that letter to try to distract from TransMedics business. But what they're not counting on or what you guys should expect is TransMedics is not going to stand still. We are going to defend our practice, our success, our goal to grow transplant volumes, our ability to support these transplant institutions to deliver the best clinical support for their organs and for their patients as we have been doing for the past 25 years. And we all you all know that TransMedics defend our positions very vigorously and fairly. So, we're not going to be standing still.

Speaker 2

We're going to try to minimize that distraction as much as we can. Do we expect distraction? Absolutely, because it's natural. As far as the next part of the question, I really don't know, Josh. I don't know.

Speaker 2

I don't know where this letter how this letter came about other than it appears that there is some misinformation being propagated. But our response is pretty strong and it was designed as such to make sure that if anybody wants to go down the same path that they need to know exactly the facts before they come and levy these accusations against TransMedics. And of course, we're doing that with a full coordination of our senior advisors and legal team in Washington DC. But we don't know what the next steps are other than we have responded on time and in a comprehensive fashion. And we are propagating our positions to all the right people around TransMedics and in the Congress as well.

Speaker 6

Thanks for that. And just a follow-up, just you mentioned Waleed about the plan to present some data analyses demonstrating improved clinical outcomes in U. S. Transplants using or transplant centers using the NOP and the OCS within the NOP. Any metrics you can share with us that we should be looking for and how impactful you think these data analyses can be in terms of driving even increased demand and adoption trends for NOP and OCS?

Speaker 6

Thanks for taking the questions.

Speaker 2

Thank you, Josh. I think our key metrics are the ones we've been monitoring all the time. We're looking at both short and long term definitive outcomes. We're looking at grades of PGD, primary graft dysfunction, early allograft dysfunction. We're looking at patient and graft survival, both at 6 12 months.

Speaker 2

So these are the metrics that transplant programs are measured by. And also we're looking at penetration and growth of the case volume within each transplant program in each market. So these are the metrics we'll be discussing at ISHLP and ATC and ILTS.

Operator

The next question comes from Bill Blavonnik with Canaccord. Please go ahead.

Speaker 3

Great. Thanks. Good evening. Thanks for taking my questions. Very strong quarter, it looks like especially in the liver.

Speaker 3

And I'm just curious, I mean, by our math, it looks like the liver procedures were probably up about 20% sequentially and almost triple year over year. I was just kind of if you could help us understand what is kind of the really driving the liver adoption because it seems to be going much faster than the heart, which looks like it was up sequentially, but just not at the scale and pace at which liver is?

Speaker 2

Thank you, Bill. I think there's several reasons and frankly, several expected reasons for that. We all know that liver transplant procedures are nearly double or even 2.5x the heart transplant procedures. So that's number 1. Number 2, liver transplantation is a dedicated service at transplant programs versus heart transplant is always adjunct to regular open heart surgery and cardiothoracic surgery in general.

Speaker 2

That's number 2. I think we are confident that the heart will pick up. Liver will always lead the way just because of the sheer number of procedures. I think over the next 2 or 3 years, the heart will get up there as we continue to demonstrate growth in the overall transplant volume. We will get the number of procedure up.

Speaker 2

We will see the long term effective OCS as we will start reporting that at the next ISHLP and we are extremely confident that AHEART will pick up the pace. And more importantly, we're going to go out in a limb and we'd say that over the next couple of years, we should see the lung starting to really become more contributing to our overall growth. Again, not at the same level of liver because of the sheer number of procedures, but that's our goal is to get all 3 organs to be contributing close to each other.

Speaker 3

Great. Thanks. And then my second question if I could is just aviation ramp has gone a lot faster than we expected. You're 13 points now. You said you get to 16 to 20.

Speaker 3

How do we I think you gave us the metric of 80%. When do you expect to hit the 80%? And then how should we think about average revenue per case for aviation as you get a little more information, you're getting deeper into this? And then how do we think about that service gross margin longer term because I think originally you thought it'd be 30%, you're already surpassing 35%? And thanks for taking my questions.

Speaker 2

Thank you, Bill. As always, 3 layered questions. The first aspect, we hope to be fully operational at the scale of doing 75%, 80% of our transplant missions with our own fleet when we surpassed 20 operating TransMedics flights or aircrafts, which means we're talking sometime second half of twenty twenty five. So that's number 1. The second part of the question was remind me again, Bill, please.

Speaker 2

The average price per mission. We can't comment on that until we are completely dispersed equally across the two sides of the United States, the East and West, because the mix is different. And that will happen hopefully as we exit 2024. And then finally, as far as the margin is concerned, I think it's early. I think we are going to be in the 30s and I will leave it as that for now and then we will see how we are executing going forward.

Speaker 3

I

Speaker 4

would just add, as I mentioned, we do expect modest improvement over the year as we really what's important as we ramp the number of hours on the planes that we have and cover more of the fixed cost of the aviation plan.

Speaker 6

Great, thanks.

Operator

The next question comes from Ryan Daniels with William Blair. Please go ahead.

Speaker 7

Yes, guys. Congrats on the strong quarter and year and thanks for the questions. Stephen, maybe wanted to start with on the margin front. It's more revenue related actually. This quarter, it looks like about 34.5% of your sales came from the logistics and that's if you're only covering about 35 percent of your NOP cases with your own logistics solution.

Speaker 7

So why would that percentage that the 60 five-thirty 5 stay the same as it ramps towards 80%, given that you're only at 35% today, just trying to square that up?

Speaker 4

Yes. I think it's important to note that that mix today, that's not just logistics, that's all of the NOP service. So we only had $9,000,000 of logistics service, which is a smaller percent of the total. And so as we grow this business, a couple of things are different. One is we part of the service revenue this quarter was some overhang from non transplant related revenue.

Speaker 4

That's going to go away in Q1. So that's a little bit coming out of the service. The other thing is we expect international to kind of come back to where it was last quarter. And so that is higher product revenue. So both of those are kind of skewing the service product mix in the wrong direction, I would say in Q4, it will change a bit in Q1.

Speaker 4

And then it remains to be seen how we pass how we go through the rest of the year. But generally speaking, I think the service portion is going to be in the mid to kind of maybe slightly upper 30% range. I don't think it ever gets to like 40% of our business.

Speaker 7

Okay. That's very helpful color. And then maybe a broader strategic question, obviously with the growth and dynamic opportunity here a ton on your plate, but you've also got Bridges to Life Technology Acquisitions, New Product Development, you're really building out the logistics business, hiring a lot of clinicians to support your growth targets. So I'm curious if you could perhaps outline maybe 2 or 3 of the largest strategic initiatives that we should be keeping an eye on in 2024, not to set the platform as much for this year, but really to set that platform getting to the 10,000 cases? Thanks.

Speaker 2

Brian, thank you for the question. We're planning to detail all these in our next earnings call. But very important, we are doing all of the above, and we are looking forward to sharing more specific and granular details about our goals in 'twenty four and beyond in our next earnings call.

Speaker 7

Okay. I look forward to that. Thank you.

Operator

Next question comes from Suraj Kalia with Oppenheimer and Company. Please go ahead.

Speaker 8

Well, it can you hear me all right?

Speaker 2

We can hear you just fine, Suraj.

Speaker 8

Perfect. Gentlemen, congrats on an excellent quarter. So, Waleed, two questions. First, our math says you exited Q4 with liver, heart and lung market shares of approximately 25%, 20% and 4%. You guys do not put out guidance lightly, especially given your performance in the last 2 years and how the street starts building things in.

Speaker 8

And rough math is telling us based on your FY 'twenty four guide, you guys are looking to get somewhere close to 25% to 30% share in heart and livers and 10% to 15% lungs. Are we approximately right in our math and can you give us some additional granularity? How are you all thinking through DVD, DCD or site movement? I guess just strip down the $360,000,000 $370,000,000 guide a little more for us if you could?

Speaker 4

Yes, Suraj, this is Steven. So I don't think we can give where we expect share to be. We definitely expect share to improve from where we are today. As we said, we looked at it on an annual basis and we were kind of back 16% to 17% share in heart and liver and we certainly expect to improve that as we go into 2024. And the next part of your question, Suraj, remind me?

Speaker 8

Just in terms of any additional color how are you thinking about DBT versus DCT and also the bell curve for site distribution. I guess just trying to understand is that how you're targeting or getting to those numbers?

Speaker 2

Yes. Suraj, let me address that one and thank you for the question. I think Suraj, the way we approach this is very broad. I mean, we look at our case distribution and here's what we expect. We expect, if we are heavily used in DCD, we expect that to continue and we expect to continue to drive that forward across all three organs.

Speaker 2

But we're not going to stop here. We are going to find ways to invigorate DBD utilization. We do that through a variety of different programs and mechanisms to drive adoption in that area to drive overall national transplant volume. So number 3, we look at areas that are quiet or relatively quiet or lower penetration like the lung. And we find ways to reinvigorate the lung and it doesn't matter at that point whether it's DBD or DCD.

Speaker 2

Can you imagine if we are more than where we are in the lung and near heart at least, what would that do to our revenue mix and penetration overall, it will be great. After that, as far as the transplant programs is concerned, again, our service is universal. Our service has been proven to results in every promise that we set to achieve or every hypothesis or value that we set to achieve. And now it's up to transplant programs to decide whether or not they want to be thriving and growing in the future of being a leading transplant program. And that is the way every transplant program should look at OCS and NOP and transmedical logistics.

Speaker 2

This is the future and we know that. We've proven it And we are standing by our commitment to transforming the field. And we welcome and expect many of the transplant programs will be contributing part of our growth going forward, because we are contributing to their growth. So it's not a one size fits all. We have to be dynamic.

Speaker 2

We have to be flexible. We have to tackle it in a broad range across all three organs, across the 2 different types of donors and be creative on how we pull the levers to achieve our goals. And again, we are very early given the penetration rates we discussed.

Speaker 8

Fair points. Walid, if I could quickly ask a follow-up, very nice sequential jump in the number of sites using TransMedics Aviation. So Waleed, as it normally happens, right, even at our site visit, one of the comments you had made was like, look, we want to make it like a one stop shop attach TransMedics Aviation to every run. So you go to sites, the 98 sites you talked about in Q4, what has been the reception? And I'm trying to understand, is it like you all went to, I don't know, pick a number 200 sites, 98 are on board, the remaining 1 or 2 are resisting for whatever reason.

Speaker 8

Just set the stage for us to slice and dice how aggressive TransMedics is or lack thereof. Gentlemen, you guys are on a roll. Congrats again. Thank you for taking my question.

Speaker 2

Thank you very much, Suraj. Unfortunately, I might disappoint you by saying I cannot give you more granular detail other than remind you that there are not 250 programs out there that we would go to. Again, our approach to these programs is very, very simple. When we get called for an NOP case, we provide them the option to use our TransMedics logistics. We provide them a price quote and it's up to them to decide, whether they want to use us or not.

Speaker 2

Some centers like using us to came back and asked Tamar and Andre for a long term contract. Some centers are we don't require that, but some center wanted to do that and we are there to help them achieve that goal. The bottom line for us is we know and we are confident that we are providing an operationally scalable and the most efficient cost structure in transplant logistics in the United States. And it's going to get better from here as we have more leverage and more plane and more capacity to meet many of these cases. And it's up to the transplant program to participate in this if cost effective or efficient model or not.

Speaker 2

I hope I addressed the question and I'm sorry that I can't give you more granular detail than that at this early stage of launching logistics. It's only 1 quarter, Suraj.

Speaker 8

No, fair enough. Fair points. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Waleed Hassanen for any closing remarks.

Speaker 2

Thank you, operator. Thank you all very much for being with us this evening, and we look forward to speaking again in May. Have a wonderful evening.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
TransMedics Group Q4 2023
00:00 / 00:00
Remove Ads