TransMedics Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 12 speakers on the call.

Operator

Good afternoon, and welcome to the TransMedics Second Quarter 2024 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 Lane Morgan from the Gilmartin Group for a few introductory comments.

Speaker 1

Thank you, operator. Earlier today, TransMedics released financial results for the quarter ended June 30, 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 the 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, services 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 on 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 Q filed with the Securities and Exchange Commission on May 2, 2024, 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 our website at www.transmedix.com.

Speaker 1

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, July 31, 2024. And with that, I will now turn the call over to Wally Halfmeade, President and Chief Executive Officer.

Speaker 2

Thank you so much, Lane. Good afternoon, everyone, and welcome to TransMedics' Q2 2024 Earnings Call. As always, joining me today is Stephen Gordon, our Chief Financial Officer. As we've stated previously, 2024 represents a critical year for TransMedix. We have been and remain laser focused on scaling our business both in terms of revenue and operations while also investing in our future product pipeline and infrastructure.

Speaker 2

To be specific, we are focused on 3 initiatives. 1, completing the build out of our TransMedics aviation fleet and transplant logistics network to meet the growing demand for OCS NOP transplant missions. 2, continuing to drive both overall national transplant volume growth and market share expansion in the existing transplants using the OCS NOP technology and services. And 3, preparing to launch 3 new cardiothoracic clinical programs designed to reinvigorate of significant revenue and case growth, maintained profitability and achieved positive free cash flow, which is a milestone for our business. In addition, we built strong momentum across the above three key initiatives.

Speaker 2

Let me review key operational highlights. Total revenue for 2Q was $114,300,000 representing 118% growth from Q2 2023 and 18% sequential growth from Q1 2024. Our results were driven by continued growth in both OCS product as well as TransMedics Transplant Logistics Services revenue. We experienced significant growth in case volume across lung, heart and liver OCS NOP cases compared to the same period last year, as well as sequentially in both heart and liver cases compared to Q1. We experienced substantial growth in both U.

Speaker 2

S. And OUS commercial revenues compared to the same period last year and sequentially over Q1 2024. TransMedics Transplant Logistics service revenue for 2Q was $19,100,000 up from $14,500,000 in Q1, representing approximately 32% growth quarter over quarter. Overall gross margins for 2Q was 61%, slightly down from 62% in Q1, 24. As we've discussed previously, we believe we are still building the foundation of our business and therefore expect gross margins to fluctuate modestly over the next several quarters.

Speaker 2

For context, gross margins were 59% in 4Q 2024 to 2023. Importantly, we remain extremely confident. I repeat, we remain extremely confident that we will be able to improve gross margins over the next 12 to 18 months as we benefit from further scale in both product and service operations over time. And finally, we were pleased to deliver GAAP operating profit of $12,500,000 in Q2, representing 11% of total revenue. Net income was $12,200,000 As mentioned earlier, we are very proud to have achieved our 1st positive free cash flow quarter with approximately $2,000,000 of free cash generated despite purchasing a new aircraft during the quarter.

Speaker 2

Again, while we are expecting to remain profitable on operating basis, we fully expect some fluctuation in free cash flow over the next 12 to 18 months as we are continuing to invest heavily in our business and product pipeline. Now with that background, let me provide more detail across key operational metrics relating to building out our Transplant Logistics network. Through Q2, we continue to expand our fleet of owned aircraft, reaching 15 aircraft by end of Q2. We also added 2 new aircrafts in July, bringing our total owned TransMedics aircraft to 17 as of today. We also made significant investment in TransMedics aviation pilot headcount in Q2, nearly doubling our pilot crew size over Q1.

Speaker 2

These investments were made to maximize the operational efficiency of our current and growing fleet. Importantly, these investments are being made to prepare for the expected growth in demand for OCS NOP missions in 2025 and beyond. To that end, the daily average number of active TransMedics aviation planes grew to approximately 11 aircrafts compared to 9 in Q1 of 24. We expect this number will continue to increase throughout the year as we remain on track to reaching approximately 20 operational aircrafts by year end. Notably, our owned aircraft covered approximately 59% of our NOP flight missions in Q2, compared to 49% in Q1 of 2024.

Speaker 2

Let me take a moment to underscore the remaining long runway of additional growth ahead of us in this important area. First, at our current OCS NOP mission volume, we have room to grow our share of logistics. 2nd, we expect the overall OCS NOP volume to grow significantly over the next several years as we move closer to achieving our stated target of 10,000 transplants per year in the U. S. By 2028.

Speaker 2

At that level, logistics would represent a significant revenue opportunity for TransMedics. Said differently, as much as we are very proud of our execution and growth of our TransMedics transplant logistics to date, we have a long greenfield of growth ahead of us and we are committed to capitalizing on this opportunity to its fullest. From a customer footprint perspective, we have also continued to grow the number of programs that are using our transplant logistics services. In Q2, approximately 126 U. S.

Speaker 2

Transplant programs use TransMedics Logistics compared to approximately 105 in Q1 of 2024. Now that we have achieved a critical mass of user programs, we are increasingly focused on going deeper within these existing programs while growing our overall transplant volumes to better meet their transplant and logistics need. Based on the above performance, we have gained even greater conviction that our expanding transplant services will continue to be a key catalyst for the near and long term growth of TransMedics business. We see a clear line of sight to continued success through the balance of 24 and into 25 as we scale our air fleet and ground operations to support our growth plans. Moving now to our clinical programs.

Speaker 2

We continue to advance our new OCS Lung and Heart programs designed to reinvigorate the OCS Lung market and expand our clinical indications and product offering for OCS Heart. Importantly, we remain on track for the initiation of all three clinical programs in 2025. We are increasingly confident and excited about the potential clinical impact of our new OCS Lung and OCS Heart programs based on the following updates. First, we've made significant progress in developing our new OCS perfusion solution and new circuit designs for our OCS Lung and Heart clinical programs, which we expect to initiate the first of which in early 2025. In the Q2 of 'twenty four, we concluded a significant number of preclinical testing to evaluate the impact of these new OCS Lung and Heart Developments.

Speaker 2

The results demonstrated successful maintenance of donor lungs and hearts on OCS perfusion for more than 24 hours with significantly lower edema formation compared to controlled cold storage. This is a critical milestone towards enabling morning transplants for OCS Lung and OCS Heart similar to what we have successfully achieved with OCS Liver. We achieved this while demonstrating significant reduction of ischemia reperfusion injury histological markers for both OCS Lung and Heart compared to static cold storage and significant improvement of the overall operational performance of the OCS Lung circuit throughout 24 hours of perfusion due to our new circuit designs. 2nd, development of our cold perfusion heart program is underway. Again, we are very encouraged by the early preclinical results of this new concept and we expect this program to clinically kick off in the second half of twenty twenty five.

Speaker 2

I'm looking forward to sharing our preclinical experience with this new product on future calls. For reference, the detailed preclinical results will be formally and publicly presented at the upcoming heart and lung transplant scientific conferences in 2025. Again, we are very excited about our product pipeline the potential transformative nature of these programs to catalyze mid- and long term growth of our OCS platform to drive more lung and heart transplant volumes nationally. Let me shift gear. I would like to take a moment to mention that TransMedics has released its latest ESG data update, which was published this afternoon on our website.

Speaker 2

This data update supplements the information we provided in our inaugural report providing key data points and metrics about our ESG performance last year. In conclusion, we are encouraged by our H1 performance. We are now focused on continuing our strong execution throughout second half of twenty twenty four and preparing for the growth initiatives for 'twenty five and beyond. Given our strong performance in Q2 of 'twenty four, we are increasing our annual full year revenue guidance to between $425,000,000 to 445,000,000 dollars which represents 76% to 84% growth over full year 2023 revenue. I'd like to note and underscore that this guidance contemplates the fact that few of our aircrafts will be down for routine scheduled maintenance the second half of twenty twenty four, which could temporarily limit our pace of growth of our logistics revenue in H2.

Speaker 2

Also, it factors in some potential OUS revenue variability throughout the second half of this year. With that, let me turn the call to Stephen to cover the detailed financial results and performance for the quarter.

Speaker 3

Thank you, Waleed. I will now provide some additional detail on the Q2 results and other financial information for the quarter. Starting with revenue, for the Q2 of 2024, our total revenue was 114,300,000 dollars This is an increase of 118% from the Q2 of 2023 and an 18% sequential increase from last quarter. The $114,300,000 included $1,100,000 related to our Flight School, which would leave $113,200,000 of transplant related revenue. In the U.

Speaker 3

S, transplant revenue was $108,500,000 dollars The U. S. Revenue increased 122 percent from the Q2 of 2023 and also 18% sequentially from last quarter. Q222 2024 includes $19,100,000 of logistics revenue. The organ breakdown on U.

Speaker 3

S. Revenue was $77,000,000 of liver, dollars 27,200,000 of heart and $4,300,000 of lung. All organs grew substantially over the Q2 of 2023. And ex U. S.

Speaker 3

Revenue was $4,700,000 a 34% increase from Q2 of 2023. The breakdown outside the U. S. Was $4,300,000 of heart $400,000 of lung. Next, on the product and service revenue.

Speaker 3

As a reminder, our service revenue includes the NOP clinical service of surgical procurement and organ management, the logistics revenue and also the Flight School revenue. In Q2, product revenue was 71,700,000 and service revenue was $42,600,000 The service portion was 37.3 percent of the total. Gross margin for the Q2 of 2024 was 61%, down from 70% in the Q2 of 2023 and slightly down from 62% last quarter. In comparison to Q2 last year, the change reflects the higher service component of our business, which did not include logistics in the Q2 last year. Product margin was 80% in Q2 and this improved nicely from 77% last quarter and reflects a steady state product margin, which should remain in the 79% to 80% range.

Speaker 3

On the service side, margin was 28%, a decline from Q1 of 2024. This decline was primarily driven by the significant investment in pilot hiring and training to accelerate our operational timeline for our new planes and investment in aviation maintenance to ensure availability to maximize operational efficiency. As Walid mentioned, we expect some variability in the service margin, which will stabilize by early 2026 as we gain more operational efficiency and leverage. Importantly, with the strong product gross margin and improving service margin, we are confident that our overall gross margin will improve over the next several quarters. Total operating expenses for the quarter were $56,800,000 51 percent above Q2 2023 operating expense.

Speaker 3

This expense growth was driven by 67% growth in R and D related to investment in new product development and product quality and regulatory resources. SG and A grew 46%, primarily related to higher personnel costs and overall corporate infrastructure. Moving forward, while I still expect expenses to grow, the rate of growth will be lower than what we have seen in the first half of the year. Once again, we delivered GAAP operating profit $12,500,000 in the quarter or 11% of revenue. Net income was $12,200,000 These compare with an operating loss of $900,000 and a net loss of $1,000,000 in the Q2 of 2023.

Speaker 3

In Q2 2024, earnings per share was $0.37 and diluted earnings per share was $0.35 Total cash at the end of the quarter was $362,800,000 as of June 30, 2024. This is an increase of 12,500,000 dollars from the balance at March 31, 2024 and reflects $25,700,000 of operating cash and for the first time $2,000,000 of free cash flow. We purchased 1 jet in the 2nd quarter and then we purchased 2 additional jets in early Q3, bringing our total number of owned jets today to 17. Basic weighted average common shares outstanding for the quarter were 33,100,000 and diluted weighted average common shares outstanding for the quarter were $35,300,000 In summary, Q2 was another very successful financial quarter for TransMedics. We continue to grow our revenue and have now consistently shown a GAAP operating profit.

Speaker 3

In this quarter, we also generated free cash flow, which is an early example of our cash generation capability as we scale. That said, given current focus on investing in new planes, building our operational infrastructure and our product pipeline, we will see fluctuation in our free cash flow in the near term. Finally, just to repeat Walid's earlier comment, we are updating our annual revenue guidance to be in the range of $425,000,000 to $445,000,000 which represents 76% to 84% growth over the full year of 2023. Now, I would like to turn the call back to Waleed for closing comments.

Speaker 2

Thank you, Stephen. Overall, we are humbled and proud of our first half performance. We're looking forward to continuing to execute on all the major initiatives throughout 2024 to drive broader and deeper adoption of OCS NOP and TransMedics' transplant logistics. Importantly, we're focused on growing our U. S.

Speaker 2

National transplant volumes for the 2nd consecutive year to help patients in need for organ transplants in the U. S. And around the world. With that, I will now turn the call to the operator for Q and A.

Speaker 4

Operator? Thank

Operator

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

Speaker 5

Hi, team. Thank you for taking the question and congratulations on a really strong quarter. I think the first question I just had was specifically for heart. I think this was a point of concern for investors in the last few quarters. You had even talked about how you were seeing some challenges in the market given the advent of some of the credit technologies and your limited label, but you had a very strong Q2 here.

Speaker 5

So can you just talk to some of the drivers of that strength and how we should think about that sustaining into the back half?

Speaker 2

Thank you, Alan. I think Alan you might be thinking of a different comment. We've never we have never had any doubt about our heart franchise. There has been concerns from the Street. We've never once stated that we have any concern about our heart franchise.

Speaker 2

What we said is we expected some ebbs and flows giving the different dynamics around the start of a cold perfusion trial in the late 2023. I think that came to roost with the announcement of the European results of the same technology in the IH CHLT where they failed to meet their primary effectiveness endpoint. And I think what we're seeing in Q2 is the natural progression. The OCS remains to be the only FDA approved heart perfusion technology that is delivering significant growth of DCD utilization and DBD utilization from extended criteria donors in the U. S.

Speaker 2

And around the world. And the outcome speaks for themselves. So I think the community is now voting with their adoption, given the success of the OCS in meeting all the clinical challenges and all the clinical outcomes that we're facing in the marketplace. So we are very proud of our Q2 results, and we expect this to continue throughout this year. And next year, once we launch the heart programs, we expect this to even further accelerate.

Speaker 2

So we're proud of Q2 results, but stay tuned. We're not done yet. There's a lot in front of us to execute upon and even further accelerate the hard growth with the OCS platform.

Speaker 5

Thanks. And then just a quick follow-up on the guide. When we think about the back half, you talked about how you're going to be maintaining some planes, so that will be a little bit of a headwind to the business. But can you just help us think about the cadence because your guidance at the midpoint implies roughly $112,000,000 per quarter, So that implies a bit of a step down sequentially. So what cadence should we expect to see 3rd quarter, 4th quarter?

Speaker 5

And why shouldn't you be able to outperform that given you're already at more planes relative to what you had in the first half of the year by a pretty significant margin? Thank you.

Speaker 2

Thank you, Alan. I would at least from my perspective I'll give you my perspective Stephen will provide his as well. Listen, we do not expect to decelerate. We never do. However, what we always try to do with our guidance is to be practical and realistic, so there are no surprises whatsoever.

Speaker 2

Yes, we are at a higher number of operating aircrafts, but we all know that when we buy an airplane, it doesn't go into service right away. It takes 6 to 8 weeks, a minimum to get operational. Yes, we doubled our crew size, but it takes some 6 to 8 weeks to be fully trained and operational. So there are some operational variabilities that we are factoring in our guidance. That's at least my perspective.

Speaker 2

And we always we take guidance very seriously, as you know, and we have tendency to be conservative to avoid any surprises. And then I'll turn it on to Steven to give his perspective as well.

Speaker 3

Yes. Alan, I would just echo what Elyse said is that the nature of what we do, especially in logistics, is quite dynamic. As we mentioned, we're hiring ahead on pilots, we're training them, we're putting maintenance programs together, all to try to speed up that pace of getting these planes going. But at the size we are now, we know that there could be things that could cause delays. And so we don't want to assume that no delays will happen.

Speaker 3

So that's why we're being a little bit conservative. I think the pace certainly flattish to a little bit up over the second half is what we're looking at.

Speaker 4

I agree.

Operator

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

Speaker 6

Hey, great. Thanks. Good evening. Thanks for taking my questions. Just first, if we could just go into the pipeline, especially, I think the warm perfusion, you think you're expecting to start those programs early 'twenty five and it sounds like the cold perfusion later in 'twenty five.

Speaker 6

For the warm perfusion, if I remember correctly, it's device and its solution. Are you design locked on those? Kind of where are you in that process in terms of design lock on the product, on the solution and kind of going through the process to get the approvals to start the trials? And then will you be generating revenue off those trials?

Speaker 2

Thank you, Bill, for asking the question. We are locked and loaded. We are really in the final

Speaker 5

stages.

Speaker 2

And the next phase, the second half of this year will be mainly interactions with FDA and exercising our regulatory strategy. So we like to keep that between us and FDA. And hopefully, by early next year, we'll have a lot to talk about. But from a design perspective, we're locked and loaded. And that's why we feel very confident in these preclinical results.

Speaker 2

And that's why we actually already written them as abstracts for many of the early 2025 scientific conferences to be presented. So there's no design or exploration going on right now. It's supply chain and V and V testing.

Speaker 6

And on the lung product, is that a negative pressure? And then the question on the will you get reimbursed for those trials considering

Speaker 4

you already have FDA approval?

Speaker 2

Yes. These are, as you know and many on the call know that TransMedics has always all of our trials have been revenue generating trials. And these old trials or any clinical program, whether it's pre market or post market, will be through the NOP program. So there's absolutely be revenue generation expectation for us and our users. So the answer is yes.

Speaker 6

In device revenue also, you said NLP, but not device specifically?

Speaker 2

The NOP, it's a device NOP is the disposable. And yes, the answer is yes. We're not we don't we never charge for the device, the hardware OCS during NOP.

Speaker 7

Okay. And then

Speaker 6

just the last sorry, go ahead.

Speaker 2

Go ahead. No, go ahead.

Speaker 6

I'll just say the last clarification was just on will the lung include negative pressure in this first generation?

Speaker 2

Not in this turnaround. No, this is no, not in this turnaround, maybe in the future.

Speaker 6

Great. Thanks for taking my questions. I'll jump back into queue.

Speaker 2

Thanks, Bill.

Operator

Next question comes from Josh Jennings with Cowen. Please go ahead.

Speaker 4

Hi, good afternoon. It's great to see the continued strong momentum in the business. Congratulations on the quarter. Well, I wanted to ask about just the quality of life improvements that the OCS and then just the NOP is affording transplant teams. It's been tough to recruit surgeons into transplant surgery.

Speaker 4

I think at the American Transplant Congress, the keynote from the President of that society talked about we're in a new era in terms of quality of life for these surgeons and you're advancing morning surgeries in liver indication moving kind of attempting to get that more fully in play for heart and lung transplants. I guess my question is, I mean, are we do you expect more surgeons to move into transplant surgery out of medical school slash residency? And then are you hearing from your customers that they're having trouble maintaining their transplant surgeon base if they don't, I guess not your customers but non customers if they haven't adopted OCS and NOP?

Speaker 2

Thank you for the question, Josh. I need to be very careful here. I think all I can comment on are the facts that we know about the NOP that afforded the liver transplant community and the direct comments that were publicly made by many of the cardiothoracic transplanters at the last ISHLT about their hope that one day they could have heart and lung transplants as a scheduled procedure in the morning or semi scheduled procedure in the morning hours, like the liver community, actually 63% of the liver community that are using NOP have been experiencing. So yes, that's why we're making these investments and that's why we are moving we are turning every stone to get the cardiothoracic franchise to be at that same level of maturity and safety with machine perfusion, with OCS perfusion to enable that to happen. 2, your comment about the ATC or the ATS president is absolutely correct.

Speaker 2

There has been many public statements from leadership of the ATS, leadership and leaders in the field of organ transplant about the fatigue issue in organ transplantation specialty and the challenge of recruiting new surgeons. We hope that the OCS and NOP provides a real sustained solution for this on a national basis. That's why we've made that investment. And again, I can only speak for the results that we're seeing with the liver to see 63% of liver transplants being done on day hours, that's a huge accomplishment given that the NOP is really a young program that is less than 24 months old. So yes, the answer is we hope to be able to achieve that in the cardiothoracic arena.

Speaker 2

As far as other I can't really comment on programs that are not using NOP and the challenges of maintaining their surgical team. That's really something we cannot comment on.

Speaker 4

Understood. Okay, thanks for that download. And I wanted to ask about the international opportunity. I believe you've hired a couple of executives to work on access and maybe even lead the commercial organization over there. Should we be thinking about more meaningful contributions from international franchise in 2025 and beyond?

Speaker 4

And maybe just any updates you can share that would be helpful. Thanks for the questions.

Speaker 2

Thank you, Josh. Excellent question. I think contribution from OUS, mainly European markets, We definitely wouldn't have made these hires if we don't want to have that European opportunity starts materializing. I'd just like to caution us that market access OUS is going to take the time it takes and I hope that we could see early fruit of these efforts by end of 2025, but definitely into 2026 beyond. That's what we expect.

Speaker 2

We're also selectively targeting smaller OUS opportunities and the success of the NLP in the U. S. Have generated significant interest and excitement across the globe really to for TransMedics to try to replicate either all or a portion of the NOP model in these geographies. Stay tuned, we're in active dialogue, but we don't like to talk about discussions until they actually materialize into actionable items and that could negative that could positively impact revenue

Speaker 4

generation. Understood. Appreciate it. Thank you.

Speaker 2

Thanks, Josh.

Operator

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

Speaker 8

Hey guys, this is Jack Suntz on for Ryan. Congrats on the solid quarter and thanks for taking the questions. In your prepared remarks, you mentioned the pilot headcount increased by nearly twofold. So I'm just curious, is this to keep up with the pace of plane acquisitions? And just as a second part, are you at an okay pilot headcount level now going forward, especially if you are more accretive on planes in 2025?

Speaker 8

Or is this kind of an area that you will kind of continue to add headcount as the year goes on? Thanks.

Speaker 2

Thank you, Jack. The pilot headcount represents 2 opportunities for us. 1 to meet the growing number of active aircrafts that we're adding to the fleet, but also we will continue to beef up our pilot crew to be able to increase the operational capacity by double shifting the plane. So the plane is actually could potentially be available around the clock rather than 12 hours per day. So it has a double positive impact.

Speaker 2

1, we need new pilots to man new aircrafts, but additional pilots will be recruited to double shift each plane. So the plane could potentially be operational more than 12 hours a day. Ultimately, our goal is to ultimately reach 24 hours around the clock. But that's going to take time. So the answer is we are, I would say we are sort of in the middle or the midpoint and we will continue to evaluate the need for additional pilots as we grow our fleet and we grow utilization.

Speaker 2

We'll let the data dictate where we go on the number of planes and number of pilots. But right now, given what we know, given our operational success, we've made these investments in anticipation of the growth we see in front of us for the second half of this year and into 2025. We could not enter 'twenty five in a starvation mode on pilots or planes. That's why we're making this infrastructure investment now.

Speaker 8

Okay, understood. Thanks. And then just as a quick follow-up, can you just give us an update on where you're at on capacity? I think last year you had some cleanroom bottlenecks. So are you starting to reinvest in cleanrooms?

Speaker 8

Or do you have any expansion plans here? Thanks.

Speaker 2

Thanks, Jack. Nothing near term from a capacity constraint, but definitely within the next 12 to 18 months, we'll start strategic planning for business continuity standpoint, as I stated in some of the investor interactions we've had over the last quarter and a half or so. So I would say, over the next 12 to 18 months, we'll begin adding capacity from a business continuity risk management for business continuity standpoint, not for capacity constraint.

Speaker 8

Great. Thank you, guys.

Operator

The next question comes from Matthew O'Brien with Piper Sandler. Please go ahead.

Speaker 9

Afternoon. Thanks for taking my questions. Wally, I'd like to go back to the heart commentary you started off with on the Q and A side. I mean, I understand the competitor that was working on a clinical study, but that sequential step up can't just be a clinical trial shutting down, there's something else fundamentally that's improving there. If you had to point to 1 or 2 things that are improving on the heart side, what would they be and why aren't they durable in the next several quarters into 2025 and beyond?

Speaker 2

Yes. Thank you, Matt, for the question. I'm not saying that the clinical trial is shutting down at all. I'm just saying that it's one of the impact. The other so we expect this to be a durable the heart sustained durable momentum.

Speaker 2

We don't expect this to be a flash in the pan at all. I was just clarifying for Alan's question that we've never doubted the heart. We just said, Guys, this is just the ebbs and flows that goes around and there was the impact of this noise in the system about the whole perfusion trial and the impact and noise of the system of NRP, all of which now have been proven as we have predicted to be nothing but noise and they did not deliver any meaningful value, clinical value to help grow the heart transplant volume like the OCS has been delivering quarter in and quarter out on utilization of DCD donors and utilization of extended criteria DBD donors and long distance access to donors and salvaging donors in remote areas in the country that no other hold static or cold perfusion technology could salvage. So we fully expect this to be sustained and we expect accelerating it by launching our 2 clinical programs early next year, one for warm heart and one for cold heart in the second half of the year.

Speaker 9

Got it. Appreciate that. And then question for Steven, not through the model yet, but is this close to the low watermark for operating margin here in Q2 Q2 for the full year? And then I think you've made some comments about eventually even exiting next year at 30% on that metric. How do you is that first of all, is that 30% number right?

Speaker 9

And then secondly, how do you where does the leverage really come from

Speaker 8

in the model to get you

Speaker 9

to that kind of improvement? Thanks.

Speaker 3

Yes. Thanks, Matt. No, I mean, I consistently have said that. And that at that point, we will have significant revenue and that should allow us to drop down that kind of margin which is the model of that we think this business can generate. We're still in investment mode.

Speaker 3

So as I mentioned, at least on a cash flow perspective, we will see some variability. We're not quite at that consistent trend level. I do think we're at the point where we're going to be consistently positive operating profit. I don't see us going backwards. But from a kind of a cash generation, it could be variable.

Speaker 3

As far as the leverage, I think the leverage is coming from we're still growing investment, but just not at the pace that we were in the past, where we were probably in some cases growing spending not at the rate of revenue, but at a pretty fast pace. We've got the NOP organization in a very good critical mass. And so the increments to that are more nominal now. They're not major investments. The biggest investment that we talked about is really in the it's showing up in the service COGS area.

Speaker 3

So as that gets starts to really fill out, we'll really see that be a leverage point as well. So we have a lot of opportunity as the revenue grows here. It's a pretty highly leverageable model.

Speaker 8

Got it. Thank you.

Operator

The next question comes from Patrick Wood with Morgan Stanley. Please go ahead.

Speaker 5

Amazing. Thank you for taking

Speaker 10

the questions. Maybe to start, the 21 extra programs that came online for the logistics side of things. I'm just curious how the conversation is there? What do you think it was that tips those programs over the edge? And there's obviously a difference between earlier adopters and the second wave.

Speaker 10

Have you noticed any difference in what people care about, what they're demanding in those conversations? Or has it been very consistent?

Speaker 2

Thank you so much, Patrick, for the question. I would characterize the conversations are they're fairly similar. They all want to understand what the program how our TransMedics logistics could help them, how our TransMedics logistics could actually be a cost effective partner to them. The early adopters have demonstrated it in spade and the recent institutions are coming based on 3 things. 1, they're hearing from their peers and colleagues.

Speaker 2

3, they're seeing the growth and the reach that TransMedics Logistics is providing. And the third element is we're getting them organs that are probably either from a further location that they would never anticipate or they failed to secure a logistics partner in the middle of the night and they reached out to us and we were able to meet it. The bottom line is our financial offering and economic benefit is applicable to all. It's the same program across the country. So that makes it easy for us.

Speaker 2

So we don't really see a difference in the how do you call it in the there's no difference in the way different programs experience the cost efficiency of the OCS or TransMedics Logistics network because it's the same program across the board. And again, we feel extremely proud and humbled by the huge success and the rapid adoption. Now it's time for us to dig in and go deeper and really secure these relationship and go deepening these relationships and grow our logistics network through these relationships going forward.

Speaker 10

Super clear. And then maybe just as a follow-up, you're obviously investing in the new clinical programs and it's a big focus for you guys. I mean, to take one example, DVD label expansion, presumably you had discussions with customers, right, and had some temperature checks on that side. Was there demand coming into you guys that kind of prompted you to think about it that way? Was that partly what pushed it?

Speaker 10

Was it a sense that maybe it's being used occasionally off label? Like how those sort of conversations with customers on that side gone as well? Thanks.

Speaker 2

Sure. Thanks, Patrick. I think I would characterize this as something that TransMedics got here because we have been living, breathing, eating organ transplant for the last 25, 30 years. We see a dynamic, we saw a dynamic, we saw an opportunity, and we are trying to capitalize on it. We've always said this 20%, 25% segment of the heart market, the sub-three hour, sub-four hour heart preservation market was something that we will get to when we're ready and now we're ready.

Speaker 2

So it's just a continuation of our strategy. This is not something that's being pushed on us by customers or we always know that this is an area in the heart market that we don't have an indication for and we always plan to get to it. And we will get to it. And ultimately, it's going to help us really solidify our position in the heart franchise.

Speaker 10

Awesome. Thanks for taking the questions.

Speaker 2

Thank you. Thank you, Patrick.

Operator

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

Speaker 7

Wally, Stephen, Tamer, congrats on a blowout quarter.

Speaker 2

Thank you. Thank you, Suraj.

Speaker 7

So, Waleed, multipart 2 multipart questions, one for you, one for Stephen. So, Walid, I want to piggyback on what Bill had asked earlier, like if I heard you correctly, 24 hour perfusion for heart, Walise, what is the critical variable that you could share that is helping you get to that bogey? Is it perfusate mix, some free radical scavengers, temperature, perfusion pressure? What are you specifically tweaking? And the reason I ask is, if you can make an organ survive for 24 hours, and let's say organ dysfunction, PGD, everything is like within the normal band, let's assume that, then you have ethical, legal implications of not using such a device.

Speaker 7

So maybe if you can just kind of wrap around what are you seeing? How are you getting there?

Speaker 2

Thank you for the question, Suraj. The answer is yes. I can't speak right now on the specific, but all of the above. We are going to take the heart and lung market by a storm. We have new circuits.

Speaker 2

We have new perfusion solution. We have new therapeutic agents that we will fully exercise to hopefully replicate the huge success we're seeing on the preclinical level in the clinical arena and then we'll let the market, as you said, declare itself. We are committed to doing the hard work. We're committed to delivering the evidence, the unequivocal evidence, level 1 evidence that unfortunately there's only one company that has been delivering that in the field of organ preservation for transplant, which is TransMedics. TransMedics spent two and a half years focusing on our commercial success.

Speaker 2

We're going back to delivering more evidence to grow our franchise and deliver the best possible preservation technologies to the field of solid organ transplant. And we hope your assumption would actually pan out once we deliver that evidence. Our commitment is to deliver the evidence and we'll let the market dictate itself declare itself based on the outcomes.

Speaker 7

Waleed, would the clinical trial compare it to normal thermic OCS or cold storage?

Speaker 2

Suraj, we have to compare ourselves to the standard of care. And the standard of care, at least as many as you've heard, I'm sure in the last ISHLT, I'm going to only focus on the cardiothoracic because these are our upcoming clinical programs. What we've been hearing in the ISHLT is the historical standard of care. People have already moved away from declaring cold static storage as the standard of care any longer, they call it the historical standard of care. So I don't want to pre front any of our ongoing FDA discussions, but from a scientific standpoint, we would be comparing to the historical standard of care.

Speaker 2

That's the more meaningful comparator at least to prove the case.

Speaker 7

Fair enough. Stephen, again, one multipart question for you, if I may. The leverage ability and everything others have asked about the question. Maybe I'll rephrase and comment it from a different angle. So the math is suggesting 126 sites.

Speaker 7

There were roughly 600 organ runs that utilized aviation. Maybe you can if possible, you can give us what was the concentration in these 126 sites that used aviation? And Stephen, the point made about the President of ASDS talking about physician life becoming easier with OCS, does that give you all pricing power moving in 2025 and beyond? Gentlemen, congrats again. Thank you for taking my

Speaker 3

Suraj. Thanks for the question. Let me try to address it. First of all, we want to make sure it's clear that the 126 programs, many of them are across the same site. So one site could have multiple programs.

Speaker 3

So that's among the 126 is among heart, lung and liver. The concentration is really diverse today, right. We're still only 3 quarters into logistics. So there are a few sites that are using us on many, many cases for both OCS, NOP and logistics. And then there are some sites that are just coming on and they're just starting.

Speaker 3

So it's really diverse to give any kind of penetration number on logistics. All we can say is that you can see the growth in the revenue. It's getting more accepted and it's programs are really seeing great value in using our program because it's much more efficient than the way that's been done in the past. And then what was your third question,

Speaker 2

Suraj? I apologize. Pricing leverage in 2020.

Speaker 3

Yes, as far as pricing leverage, look, at the moment, we've got a pricing model that works. As we move out and grow, we need to determine what the right model is. Maybe service has some levers there. But for now, we're not trying to gouge the system. We have a pricing model that works and we're going to continue with that.

Speaker 3

We don't see any changes in the near future.

Speaker 2

I want to echo what Steven just said and especially on the second part of the question Suraj, which is an excellent question as always. Listen, we don't look at transplantation as an opportunity for pricing leverage. What we are focusing on is growing the overall national transplant volume. We're growing our portion our market share in the existing transplant volume. We are comfortable with our current pricing model.

Speaker 2

We want to be a trusted partner to transplant programs. This is a very important aspect of our mission. We're not in this to just provide capitalize on leverage. We know what our value is, but we have to be the trusted partner across all three organs and ultimately when we get to the kidney will be the 4th organ for all transplant programs in the U. S.

Speaker 2

And around the world. So that's where we are. We're proud of that. And as Steven said, the revenue speaks for itself and we'll leave it at that.

Operator

The next question comes from George Sellers with Stephens Inc. Please go ahead.

Speaker 11

Congrats on a really strong quarter. Maybe to revisit that last question a little bit. I'm just curious if maybe you could share a little

Speaker 7

detail on what that

Speaker 11

share at the detail on what that share at the 126 U. S. Transplant programs that you what that share could look like over time based on, for instance, the distance maybe that most of those organs are having to travel at those centers? And then secondly, could you give us some color on what the strategy is to drive deeper penetration in those different programs, if that's a more aggressive commercialization strategy or just some of the clinical work that you're working on. How should we think about that specific strategy?

Speaker 11

Thanks for taking the question.

Speaker 2

Thank you, George. To address the first part of the question, our strategy has always been our stated goal is to take 80 plus percent of the NOP cases to be done on our planes and our logistics network. That is our stated public goal and that is what we're marching towards. We're far from there. As I stated, we only covered 59% of the NOP missions at the current Q2 volume.

Speaker 2

So we have a long way to go. So that's I can't comment on anything that we haven't discussed publicly before. On the second part, listen, there's different ways there's a variety of different ways to increase market share and grow. Again, it's not just about increasing market share, it's about increasing market share and overall growing the transplant volume at these institutions. And we focus on the fundamental.

Speaker 2

We focus on delivering the value. We are focusing on proving the case. We're focusing on the outcomes and the outcome measures and the rest will take care of itself. Transplantation is a black and white. It's a life saving procedure.

Speaker 2

So, 1, we need to demonstrate that we can get them their organs in the best possible shape 2, we can get them more organs 3, we can address some of their logistical issues in the middle of the night and all of that will give us market share. 3, we provide the most economical way of managing organ transplants since the invention of organ transplants. The way our logistics network is operating is providing significant cost efficiency to every major transplant program that is working with us to protect them against DCD, lack of progressions and all sorts of additional expenses that with the historical model, they are liable for. With TransMedics and NOP and TransMedics Logistics, we share in these expenses. So that is how we're going to get the lion's share of the market with these approaches.

Speaker 2

Just focusing on the fundamentals and providing good clinical outcomes or the best clinical outcomes and the most cost effective way of managing organ transplant for these programs.

Speaker 11

Okay. That was really helpful color. I appreciate it. And then sticking with NOP, one benefit that was mentioned a little bit earlier on the call is to the transplant centers is the sort of improved quality of life for these surgeons that don't have to go and collect the organ and for the liver with the procedure time being a more normal time of day. But could you speak to within the TransMedics clinical support and surgical procurement folks, What's the risk of burnout for those folks?

Speaker 11

And then maybe how are you mitigating that risk?

Speaker 2

That's an excellent question, George. So let me and thank you for asking that question because it allows me to clarify a point made earlier by Josh. It's more than the quality of life for the transplant surgeons, guys. It's really providing the best quality of the surgical procedure for the recipient. We don't do brain aneurysm surgery at 3 o'clock in the morning, yet we do a heart, lung and liver transplants at 3 o'clock in the morning.

Speaker 2

We don't do even a cardiac bypass at 3 o'clock in the morning. So this is what we are this is where the value is, okay? It's making sure that we have the best quality of the surgical procedure in the form of arrested surgeon, the A team of clinical and surgical support staff in the operating room providing the best quality of care for the patient. So that's number 1. Number 2, the huge impact on hospital resource management.

Speaker 2

At 3 o'clock in the morning, the hospital needs to find support staff, probably are not transplant focused support staff and pay them 1.5 double time or even more. So that is all normalized and more efficientized by using an NOP case. Now let me go to the crux of your question, which is how do we mitigate burnout for our team. As the operator of the largest national network for this kind of service, which is the NOP, we have developed numerous models over the last 18 to 24 months to ensure that our staff is well rested and we run it through shifts. We run it through we have different programs to ensure that our staff is the most well rested and taken care of and again, to maximize the quality of care for that organ.

Speaker 2

That's why we have the largest group of surgeons on our payroll, to and senior experienced surgeons. And sometimes we double team the case if we think it's going to take longer. So we have maximum flexibility and we have programs and quality programs that are constantly being evaluated to minimize burnout. And it's not just to answer your question, we have one of the lowest turnover rate in NOP team because of that. And we monitor that very, very routinely to make sure that our team is fresh because we want our team to deliver the best quality of care for these Thank you, George.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Walid Hassaneen, CEO for any closing remarks.

Speaker 2

Thank you so much for joining us this evening. We appreciate your time and we look forward to speaking again in that Q3 call. Have a wonderful evening everyone. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
TransMedics Group Q2 2024
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