Afternoon, everybody. Thanks so much for joining us. Matt O'Brien, I cover MedTech here at Piper. We're very lucky to have the TransMedics team here with us, this afternoon. From the company, Waleed, who's the, CEO, and then Steven, who's the CFO of the company. Thank you so much for coming out and doing this.
Thank you. Thanks for the invitation.
Maybe ground everybody in the room a little bit, and I know the story's been around for a while, but just ground everybody in terms of the TransMedics technology, how it works, and how it's differentiated versus traditional methods of organ donation.
Sure. Simply stated, for the last 50 years, organ transplant has been limited in preservation to cold static storage, which basically means putting a donor organ on ice from donor to recipient. TransMedics developed a whole new paradigm that is focused primarily on organ preservation. Why did we do that? Because cold static storage for organ preservation has 3 major limitations. First, it subjects the organ to a time-dependent injury, a decay curve. The longer the organ spends in cold environment, the higher the probability that this organ will never function. So that, by definition, put a time and distance limitation to how far can we go to get organs for transplant. So that resulted in significant underutilization of organs, donor organs for transplant.
Two, the organ is completely not functioning and not metabolically active, so that you cannot optimize the organ condition, you cannot assess its viability. There's no way of assessing organ function when you're sitting on ice or in a cold environment. You're not functioning. The heart is not beating, the kidney is not producing bile, the kidney is not making urine, or the lung is not breathing. That adds significant, further significant underutilization of the existing donor pool. The OCS, or our TransMedics technology, called the Organ Care System or OCS for short, addresses these three limitations in a comprehensive way. In OCS, the organ is never ischemic. The organ is always perfused with oxygenated, nutrient-enriched blood. The organ is not subjected to a decay curve. We can keep an organ alive on our system for days.
Number 2, the organ is metabolically active, so we can optimize the organ condition. We can treat the organ with pharmacological enhancers. We can do things to make the organ condition better. 3, the organ is functioning throughout. Heart is beating, lung is breathing, liver is producing bile. So we can assess its viability for transplant up to the minute the organ is being ready for transplant. So, taking all these capabilities, we did the largest number of studies and the largest volume of patients that prove unequivocally that we can improve the utilization of organs for transplant to to effectively double the number of heart and lung and liver transplants in this country. But more importantly, we can do it with an outcome that is better than standard of care, cold static storage.
That's what the OCS does and what the impact does.
Got it. Okay, and then, you know, I'll get into the move on the aviation side here in a minute, but I'm just curious on the center opportunity that you see here domestically and then even internationally. Where are you at as far as penetration of existing centers? And then, you know, where can that go over time?
Sure. So, Matt, to understand that, we, you know, I, I'd love to talk a little bit, or address that by starting two years ago. We shifted our business model, from traditional MedTech selling to, hospitals or transplant centers, to doing something completely different, where we, integrated ourselves into the workflow by doing the National OCS Program, which allows us to manage the entire process of donor to recipient. So we are providing service now that includes organ procurement, surgical procurement, clinical management of the organ on the device, and logistics and delivery.
So that all of a sudden shifted our growth trajectory to where we are right now, but also it eliminated that notion that we have to deal with individual centers going through a sales cycle that used to run three months, followed by another two or three months to get the center staff to be trained, followed by another time to make sure that that staff actually uses the system. Now, any center in the country can pick up the phone, dial 1-800-NOP, and they would have our service available to them across the country, across the United States. So we're no longer tied to a limited number of centers. We are literally. Our NOP service allows us to be utilized across any transplant program in the country.
But our repeat users is approximately 40-45 centers in heart and liver, and approximately 12-15 centers in lung.
Okay, and that 45 repeat users, I mean, or 12, 12-ish, where can that go to? Especially with the service that you're offering.
These are the centers that.
They're the big ones. Okay
The 40, 45, these are the centers that drive 80% of the volume in the United States.
Got it.
So for us, these are critical, critical mass already.
Okay.
Lung, we still have ways to go.
Okay. On the logistics side, how long is it going to take to, I mean, these planes are not cheap, right? $12 million a piece, I think, is what you said. Then you got to staff them, you're going to have fuel, and all this other stuff as well. How long is it going to take to put that group in place?
We already started the process.
Okay.
We, you know, with our latest results, we've already done, you know, close to, well, $2.1 million in aviation revenue and logistics revenue. We expect that to grow quarter-over-quarter. You know, we are aiming to be in a position to cover a significant portion of our NOP volume by the second half of next year, but we expect to see sequential growth quarter-over-quarter until we get there.
What about putting the actual fleet in place? How, where are you at now?
Right now we have nine planes.
Okay.
That we already control. We have two more in the pipeline, and, the goal is to staff that up to around 20 planes by the second half of next year.
Got it. And then, you know, med device companies are not really known for logistics. How do you guys ensure, you know, you're not Amazon. Nobody's Amazon. But how do you ensure your ability to be successful on the logistical side of things?
Yeah. We will. Actually, I'm glad you mentioned Amazon, Matt, because what we are positioning ourselves, at least in front of our users, is we are building the Amazon model for transplant.
Yeah.
That's our goal. Our entire logistics team are all ex-Amazon executives. Half of them were involved with the Last Mile program, so that's what we're positioning ourselves to be. Definitely it's not going to be at the scale of Amazon because we don't need to. We need to scale it properly for organ transplant.
Right.
That's what we're hoping to achieve.
How expensive is it going to be to keep that network up and running after you get the initial, you know, plane costs behind you?
You know, I think, I think we had a head start because we bought this aviation company, some aviation. So they had a staff of pilots, they had a staff of mechanics, they had some dispatch experience. Now we have to marry that to the full logistics, you know, experience with the Amazon team. And what we're doing now is building, like, a centralized command and control center in our offices in Andover. And so that's probably maybe one to two quarters before that's really full up and running. But, you know, once that happens, we can be way more efficient with our with the usage of our fleet-
Yeah
Because we'll have more algorithmic kind of methods of allocating our resources.
Okay, and I was just setting all that up to the point where I'm just trying to say: How big is this moat you're building, or can you build around this business? Because you do have competition, which we can get into in a minute, but you do have some competition out there. How big of a moat can you build around your franchise with this network that you're setting up?
Yeah, I mean, I think it's quite large because there's really very few players out there that can invest the kind of, you know, capital that we can invest to build it. Not just the technology, but the NOP service with, you know.
Yeah
Hundreds of people in that organization and then with the aviation as well. So we think it really puts us in a great advantage.
But if you. You know, if somebody were to start today and say, "Okay, I want to set up the same network and go make those investments," what I'm trying to get at is, with those 45 centers, I mean.
The network, the logistics network wouldn't work without our technology.
Without the technology.
Yeah. The technology is at the core of this.
Okay.
Without our technology and the results of our technology, great, anybody could buy a plane, anybody could buy a few, you know, hire a few surgeons and say, "Hey, we can procure your organs for you," but you're not going to be able to move the needle. You're not going to be able to grow heart transplant volume, liver transplant volume, year-over-year. That's not going to happen without the core technology that made that possible.
Okay. Okay. The other thing that struck me, and, you know, I don't cover, but looking through the investor deck, was the underutilized organs. I couldn't get over how, how many of them there are out there today. What can this network do to increase the utilization of these, these donated organs?
We've stated publicly numerous times that we think, conservatively speaking, conservatively speaking, we could double the heart and lung transplant volume in this country and increase liver transplantation by 50%. Literally, we consider that a low-hanging fruit. We think we could do better, and that, again, this is a function of the technology, not a function of the logistics and the NOP model. The NOP model accelerates our ability to do that, but it's really without the technology, we wouldn't be able to achieve that.
Okay, and I, I don't, I don't want to be, you know, just, I don't want to ask a question and sound negative at all, but then why do the network if you can increase utilization so much just with the core technology? It would seem like the network would help you increase the utilization with the core technology.
Oh, oh, that, that's.
Yeah.
I apologize if I.
But again, I don't cover, so I'm a little new to this.
Yeah. No, If we have the network.
Yeah.
We don't have the OCS and its capabilities, we wouldn't be able to double the heart and lung transplant.
Putting those two together give you that, that sense.
Yeah.
Okay.
If we just had the technology, it would take a decade to do it.
To do it.
I see.
Now we can do it at the pace that is appropriate.
Okay. Have you given any kind of timeframe as far as how quickly you think you can increase some of the utilization on the heart and lung side?
We're seeing that for the last 2 years. We've grown heart transplant in the United States last year by around 13% or so. Liver grew by around 7%. We expect this year that heart will grow close to 20% and liver will be growing at high teens, all from use of new organs that otherwise wouldn't have been used without the OCS.
Okay. Got it. What about on the lung side? I know that's been a little bit slower than you guys had hoped for. What do you need to do there to re-energize that franchise?
Well, we talked in our 3Q call that we are planning a new clinical program for lung for second half of next year to start, and we hope that that will energize the lung market for us. We're bringing in new technologies, new advancements to OCS, and we're hoping that it will have the growth effect that or catalyst effect that we are hoping to see for the lung-
Okay.
For our lung franchise.
Okay. So second half of next year is when.
Will start.
Okay. Okay, understood. What about the cold perfusion study that you have going on? That should read out next year, is that right?
No, we are starting a cold perfusion study later in 2024.
Okay.
It's mainly for heart.
Okay.
That's going to start in the second half of 2024 as well, and probably would read out late 2025, early 2026.
What, what benefit do you think that'll provide to the company?
It's really targeted towards the segment of the heart market that we currently don't have a lot of presence in, which is that right now, it's preserved in cold storage. Hearts that are, you know, 4 hours or less, you know, standard criteria hearts that are predominantly done with cold storage today. We believe cold perfusion has an advantage, and we believe that we're going to compare it to warm perfusion, and we'll have the data speak for itself.
Got it. And remind me the size of that segment of the market.
Around 15%-20% of the heart market.
Okay, got it. All right. And then I think you talked a little bit about OUS, and making a bigger push there. Can you just talk a little bit about timing there?
Well, OUS is going to be a significant catalyst for our growth in the mid to long term. The primary reason it's not today is reimbursement, access to reimbursement. But the success of NOP in the United States is really generating a lot of momentum for us in Europe, that many European countries want to replicate the NOP, and we would love to work with them on it, but it starts with reimbursement. Once we secure reimbursement, we can make the necessary investment in these geographies. If we don't have reimbursement, it's going to be tough. So we think over the next two to three years, that's when international business is going to grow enough to help fuel additional growth for the business.
Understood. Is that going to be the going into on the reimbursement side, is that. Well, I guess, what do you need to really start to generate that kind of coverage? From a data perspective or?
In Europe?
I'm assuming you're going to go country by country, too.
Yes, it has to be country by country. So it's the logistics, it's the bureaucratic process. We have the data, we're sharing the data, we're continuing to share data. It's just, it needs to take the time it takes within each geography, and we're actively engaged in many of the big European countries, so.
Are you talking to NIH over there? And what's their feedback then?
NHS.
NH, National Institute. Yeah, maybe NHI, you're right.
Yeah, NHS. I mean, we've been talking to NHS for a long time, and they are actually one of the few geographies in the UK that we have coverage in for DCD heart. Now it's expanding into NOP and how could they cover NOP, and how they want us to do NOP across all three organs. And it's like, "Okay, will you finance that?" So that's the dialogue that's ongoing. We're engaged similar dialogue in Switzerland, in Italy, in France, in Germany, the Netherlands. We've already achieved reimbursement in the Netherlands for heart, now we're going to talk about liver and lung. So it just, it's just going to take the time it takes to materialize. And, you know, with Europe, you just need to be patient and let the process take its course.
Okay. Okay, understood. Competitively, you do have, you know, a company, Paragonix, out there that's got a product. Can you just maybe compare and contrast a little bit yours versus what they're selling?
I mean, Lisa and the team are here from Paragonix, so it's tough for me to compare.
They're here?
Yeah, so.
I didn't see her.
You know, I think, you know. Listen, they, it's great to have competitors in the field, because it validates the market segment, and I think the data speaks for itself, so.
Okay. Okay. Sorry, Lisa. And then, what about just maybe longer term? You know, there are some, you know, some, like the Miromatrix out there that's working on a product, as well. I know they're farther out, but is that, you know, potentially, something that could be impactful?
We are rooting for any technology that could make the organ supply unlimited, because that will really uncap our potential to grow the transplant market. Whether it's xenotransplant, whether it's growing organs in an incubator, these organs needs to be tested, needs to be protected from Ischemia, from wherever they come from until the recipient, and we provide the platform to do that. So we're rooting for any technology or methodology to uncap the donor organ shortage that we're currently suffering from in the United States or around the world.
Speaking of donor organ, you know, challenges, I've heard about some legislation. I think one is actually in Massachusetts, where you have to kind of opt out of being an organ donor versus opting in.
How big of a tailwind could that be for your category longer term?
I think these are all initiatives that are helpful, but I, you know, we don't see them as significantly impactful, like what we're doing, because opting out has been the norm in Europe for a long time, yet the utilization rate still in the, you know, teens for heart and lung. We can change that. Whether from opt-in or opt-out, doesn't really matter.
Yeah.
It's helpful to have more donors, but the reality is the utilization is still low, and the OCS have proven that we can grow that utilization significantly and continues to prove that even in the post-market arena. So that's really what excites us, and it's what's really fueling our investment in NOP and logistics network, because we see the impact, and we really feel that doubling the organ transplant is an achievable goal over the next few years.
Okay. Okay, and before I get to Steven, any questions from the audience? Okay, so Steven, I'm just curious about the transition of the model now, just because of, you know, being more vertically integrated.
Yep.
How do you think about the profitability profile of TransMedics, you know, in maybe year one of the model?
Yeah, I mean, from a profitability perspective, so even in Q3 that we just completed, if you take out the kind of one-time acquisition costs, we did make a small profit in the quarter. So what I've said is, we're probably going to flirt with profitability for the next several quarters. There might be a quarter where we're profitable, might be one where we fall below. But as we exit 2024, I think we should be kind of on a steady path of sustained profitability and improving, so that by the end of, say, 2025, we're kind of more in our mature, you know, profit margin.
Okay. Speaking of margins, what about gross margins? I think you said mid- to upper-60s-
That's correct.
Once you get some scale under the new... you know, so is that in that kind of 2024 timeframe or 2025 timeframe?
Yeah. Yeah, I think. So we were at 61% last quarter. We had a drag last quarter because we still had this charter business and aircraft management business from the company we purchased, so that's all going to go away by the end of this year. And then it's going to take a few quarters, but I think as we get to the second half of 2024, we should be getting closer to that mid- to upper 60s%.
Okay. And what about on the EBIT side of things? You know, when do we think about... Where, I guess, you know, what does it look like then, and where can this go to?
We think of our business as a 30% EBIT business.
You think eventually a 30% EBIT?
Yeah.
Oh, wow. Okay.
This is end of 25.
Yeah, 30% at the end of 2025.
Yeah.
Okay.
Sure.
Is that kind of the. Okay, got it. And then finally, on the cash flow side of things, you know, when do you get cash flow positive? And then, you know, you've got a lot of opportunity. Are you going to stick with just kind of the core business right now, or eventually, are you going to start to fold in other assets to do other things we're not even thinking about from a platform perspective?
Yeah, I think, I think right now we're focused on the business that we've got and the acquisitions that we made. You know, our operating cash flow, we burned about $5 million last quarter. Again, that's probably going to flirt around that place for the next several quarters, and then as we exit 2024, we should be more in a position where we're generating operating cash flow. We still have the planes to buy, so free cash flow is probably future in 2025.
Okay. Then again, just, you know, stick with the core business. A lot of growth opportunities in front of you. Are you going to be a more multi, you know, platform, organ business?
The latter.
The latter?
Yeah.
Where can this go? I mean, you've already got a huge opportunity in heart, lung, and liver. Where else can this go?
Kidney. You know, kidney is nearly the size of heart, lung, and liver combined, and we're going to get there. It's only a matter of time. We just want to make sure that all three platforms are firing on all cylinders. First, get the company to cash flow positive territory, and then kidney will be next.
Okay.
We'll continue to invest in our next gen platform. We continue to invest in growing the NOP platform, and building our logistical network and efficientizing the model.
Okay.
Any other, you know, relevant technologies or that could grow organ transplant, we'll be right on it because that's our core mission.
Yep. What are the challenges on the kidney side of things to get to that organ?
There's really, we keep hearts beating outside of the body map.
Yeah.
Kidneys are a walk, cake walk compared to what we did with the heart. So...
Why go, why go to heart first versus kidneys then, if it's a bigger market?
Because, because we believe that if we do it in the toughest organ, the rest will be easy.
Okay.
That's how we did it. And, you know, also, when you prove it in the heart, it becomes easier for other organs, and that's how that's, you know, that's how it's panning out so far.
Got it.
And really, the kidney market is more fragmented. There's price sensitivity. It's 100% covered by Medicare. Very little commercial payers. So all that went into our decision to start with heart, lung, and liver first, and then once we secure these three organs, kidneys will be next.
Okay. And then, do you have to do any kind of, like, clinical work, or how much clinical work do you need?
Oh, yeah, we have to do a clinical trial. It's going to be large, randomized. You know, it's the only way we know how to do business.
Okay.
Large, randomized clinical trials, FDA-regulated, not post-market, to make sure that the data is, you know, Class A. So that's what we have to do.
Have you talked publicly about timing there at all, as far as when you're going to start the study?
Not really. You know, we expect it to be somewhere, you know, 25, 26, when we start a kidney trial.
Got it. Okay. All right. Well, it looks like we're just about out of time, so unless there's questions from the audience, I think we'll give everybody 90 seconds of their life back. But otherwise, thanks a lot, guys, for all the feedback.
Thank you. Appreciate it.