Going to get started here. My name is Josh Jennings from the TD Cowen Medical Devices team, along with my teammates Brian Kennedy and Eric Anderson. We are thrilled to start off the medical devices track in terms of executive fireside chats and presentations with TransMedics executives, CEO and founder Dr. Waleed Hassanein, and CFO Stephen Gordon. Gentlemen, thanks so much for heading south and joining us here in Boston, right near your headquarters.
Thank you, Josh, for the opportunity to be here.
Great to see you both in person. I wanted to just initially just touch on just had your earnings call last week and issued some impressive guidance, $360 million-$370 million on the top line, represents 50% growth at the midpoint. It was remarkable 160% growth comp from 2023. Wanted to just kind of walk through some of the drivers. I think we called out a 65%-35% product versus service mix and just, I guess, on the service line, any incremental detail you can share just on flight revenues and how that's going to progress over the year and any cadence, quarterly cadence action we should be considering.
Yeah, I think some of the things we talked about at the earnings call about we're covering in Q4, we covered about 35% of the cases with our own planes. We expect that to improve over the year. A long-term goal there is to get to be 80% covered by our own planes. I don't know if we get there in 2024, but certainly in 2025. And then the other, I think, part of the logistics service revenue is most of it in Q4 was East Coast focused, so kind of shorter distances. And we would expect as we expand to the West Coast, those distances get longer, so the price for a flight gets a little bit higher as well. So all of that is driving the growth in the logistics part of the service.
Right. And you guys mentioned or gave us the penetration rates for U.S. liver, heart, and lung, 17% liver, 16% heart, 4% lung. And can you just talk about some of the drivers that are in place in 2024 to drive deeper penetration, each of those indications? I wanted to start first with liver and heart and maybe focus a little bit more on lung and some of the deeper penetration there as we get to the end of this year and into 2025 with liver and heart first.
Sure. We wanted to, by reporting 17% liver, 16% heart, to show the community in the street that we are still early in our penetration. So we have a long greenfield opportunity in front of us to increase our penetration rate, but not just penetration, penetration of the total national market, but also we reported that we've grown the national market for liver and heart by 12%. And we are pretty much the driver of that growth. So I want people to understand that and digest these two facts because in 2024, we could be at 17%-20% total penetration. And people say, "Oh, you didn't grow the market. You didn't really grow." No, we're growing. If we grow the market another 12% in 2024, that would be huge. How are we going to do that?
So we look at different levers, deeper penetration within the existing accounts, adding organically newer accounts, looking at the mix between DBD and DCD. We look at heart DCD, we're already at 66%-70%. So there's an incremental piece there that we could take away from NRP. But liver, we're only at 50%. So that's another 50% growth in DCD liver. But the other thing we need to remember is that DCD is growing year-over-year in the United States. So it's a huge opportunity. DBD is a sleeping giant. And for us, obviously, 2024 is going to be a full-court press on getting some DBD activity going on both liver and heart. But still, we're going to be just scratching the surface. There's more opportunities going out. Our goal is to move from 2024 to 2028 towards the 10,000 transplant.
Our goal is to show the community the trajectory of how we are going to get there year over year. On the lung, it's a completely different story. On the lung, the market is really, really in deep hibernation, has been since COVID. So we're only 4% penetrated. So we see that as a huge opportunity, Josh, to, if we can get the lung just to contribute just closer to the heart, that would be a huge impact in our top line growth. How are we going to do it? We're going to do it by going back to the fundamentals. This is a market that only moves toward it moves to the drums of clinical efficacy data. So the lung community had forgotten the efficacy or the benefit of machine perfusion, not just OCS, any machine perfusion because of COVID, the hiatus of two years around COVID.
We are going to reinvigorate that market with a new clinical program, whether in the form of a pre or a post-market trial that has technology development, new technologies, new solutions to focus the community in the U.S. on the value of machine perfusion. And we're going to do it exclusively through the NOP network. So we're very excited about this program. I wanted to start that program early in 2024, but unfortunately, we have to wait till late 2024, early 2025 because there are some development timelines involved.
Excellent. Maybe just to focus on lung and just the technology developments that you've talked about adding negative pressure capabilities. But how will the OCS Lung system evolve that can then get you there to where you can start this post-market study and drive outcomes?
Well, we're not sure if that first program is going to have negative pressure ventilation or not because negative pressure ventilation is going to have to be an IDE. So it's going to be a pre-market. But there's multiple clinical programs we have in mind to reinvigorate that market. And as I stated on the last call, we plan to talk about that in a little bit more detail and more granularity on the May call coming up.
Great. Just thinking about the growth of the heart and liver volumes in the United States in 2023, any sense or any help just thinking through the percentage of that growth being driven by DCD channels opening up or organs opening up versus extended criteria DBD?
We see that, as we stated publicly, heart is more 60% DCD, 40% DBD. Liver is about 50/50. So when we look at our penetration in DCD for heart, we're at 66%-70%. When we look at our penetration in DCD and liver, it's only 50%-51%. So there's room to grow there. And for us, it doesn't really matter where it's coming from. Growth is growth. We know it's early. We know we're early. We just capture the growth, solidify our position, whether it's DBD, DCD, and then we move into next year with a new strategy to make sure that we are capturing whatever is left. For example, if we grow DCD liver penetration in 2024, so 2025 is going to be we're going to be focusing on growing the DBD to balance it. That's how we're looking at it. We're still early in our commercial success.
We are planning to just drive growth when growth, where growth is, and then we continue to monitor that nuances between DBD and DCD.
Excellent. Just on the DCD opportunity.
I'm sorry to interrupt, Josh. Yeah, also remember that we have a segment of the heart market that we don't even have indication for, which is the less than four-hour transport time heart. So DBD, that's pure DBD. That's another low-hanging fruit that we're planning at some point, hopefully soon, we're going to tackle that. So we're still early, guys. Anybody who thinks that TransMedics has peaked or has matured, we're not going to be able to grow beyond that. There's a lot more where that came from.
Absolutely. If we were to just stick on DCD heart and livers, those opportunities, contrary to Congressman's letter, it's our understanding that TransMedics Aviation or the logistics network is actually saving the U.S. transport network on flight costs, and particularly in these DCD runs, whether they're successful harvesting and preservation runs or dry runs. Can you just talk about that dynamic and how that could incentivize centers to even more centers to enlist TransMedics and the NOP service to do those DCD runs?
Sure. First, let me remind everybody that when we started the NOP, we were working with the existing model of logistics, aviation and ground transport, using these third-party brokers that are existing out there. And what we've identified is how inefficient that model is, how it opens up the entire market for gouging, price gouging. And it's very inefficient to even cover the demand of NOP. We lost 20%-30% of our NOP hotline calls in 2022 and early 2023 because these national brokers could not identify logistics or find logistics for our missions. So the way we launched our TransMedics logistics is to overcome all that by being super efficient and passing that cost efficiency back to our transplant program. So without being too specific, there's a significant efficiency just by operating your own planes and managing your own planes.
The old model, that transplant program is paying three margins: a margin to the plane owner, a margin to the operator, and a margin to the broker. TransMedics is the owner, operator, and the manager of the logistics. So that's number one. Number two, the old model, if you are a center in a city and you're going out to another city to procure a DCD organ, you are liable for the round-trip flight or logistics operation from that city A to city B and back. Based on our NOP network, we are offering any transplant program that uses our logistics a 50% discount on the overall charge because we can be running it more efficiently rather than when we know DCD has a dry run rate of 35%-sometime even 50%, near 50%.
So it doesn't make sense to let the centers eat all that cost when they're not doing the transplant procedure. So these are the two big examples I can give publicly. And that's why we feel very confident that anybody who thinks that TransMedics logistics is not saving the system's money, I mean, this is how we grew it from zero to $9.2 million in one quarter with that success that we're seeing. And again, it's too early. It's very early. We are going to see significant growth in that business.
Just on the DCD dry run opportunity, you talk about 30%-35% of DCD organs aren't actually procured and transplanted. I mean, they're.
35% to 50%.
35%-50%. Sorry. Thank you. So there's an opportunity to drive cost savings to the U.S. transplant network. There's also a revenue opportunity. And you just talked about the dynamics of how TransMedics is generating revenue on those dry runs. I mean, there's flight expenses. Do you also get a service revenue for sending your NOP team from a hub to where the donor is?
So three things. One, we get service component of the charges because our team is going out to evaluate these organs. Now, if we are running the logistics, we get 50% of the logistics total bill that we quote to the transplant program. And ultimately, what we hope to do is over the next two or three years, we cut down that dry run rate significantly below the 35% by allowing more and more time to wait because we have the OCS on the other end that we can evaluate these organs. This 30-minute cutoff time that you leave if the patient doesn't expire within 30 minutes is based on old cold storage limitations. Now with the OCS, we know we have better outcomes on DCD with the OCS compared to cold storage.
Now that gives us the opportunity to start clinical programs to gradually make that time go from 30 minutes to 40, 45 minutes, maybe even higher in the case of the liver. That results in significant reduction of the overall Dry Run rate. We're tackling it on three fronts.
Excellent. And you mentioned just prior to building out the fleet and some of the aviation acquisition that some of these charter jet companies were not being able to service some of these runs for TransMedics. You said 20% plus. I mean, that just represents I mean, it seems like that's 20% more demand that you guys experienced or more in 2023, and that should all be solved and that demand should be captured plus some as you're moving down.
We'll go down to zero right away because as we're building our infrastructure. I want to remind the community that when we talk about TransMedics logistics, it's not just planes. It's planes and ground. So obviously, ground is the smaller portion of the two, but we're talking about the entire logistics component, not just planes. It's planes and ground.
Excellent. I mentioned the Congressman's letter to TransMedics. Your team had a thorough response that seemed powerful and correcting some of the accusations or allegations in that letter. Any next steps that you're aware of? It may just be too soon to know. I mean, what should investors expect next, either out of the Congressman's office or is there any more response that TransMedics will make public?
I cannot comment on what do we expect from the Congressman's office. All I can say is what I said on the public call. We're working with the King & Spalding Government Relationship Group, and we're working with the most senior team members there. And in their view, they see hundreds of these individual letters every year that ends up at the current stage we're in. Is that going to be the case? Is it be something else might happen? I really can't comment on that. But what we did with our response is we took the opportunity to dispel every negative mischaracterization of the facts because we were surprised by that letter of how poorly diligent the information in that letter is, how the amount of fabrications in that letter was mind-boggling for us. So we wanted to take this opportunity to set the record straight.
I think we've done a good job of that. We hope to be the end of it, but we prepare if something else might arise.
Understood. I wanted to, Stephen, just jump into some questions around the profitability in Q4 and the sustainability of that profitability in 2024. Maybe to start, I mean, it's great to see the first GAAP operating and net profit results out of TransMedics in the fourth quarter. Seemed a little bit earlier than we had anticipated. You provided gross margin guidance 63%-64% for 2024. Service gross margins in the mid-30s% or better. Maybe just help us think about maybe the drivers of that sequential improvement that you're expecting gross margin over the course of 2024, and then just how should investors think about gross margin expansion in the out years and the drivers of that expansion?
Yeah, sure. Yeah. I mean, I think we're at a very important point in the company's history where we're moving from not just a revenue growth company, but also one that's generating profit as well, which is the objective of the company. I think we expect modest improvement in 2024, driven by a high rate of revenue growth and a lower rate of expense growth. As far as margin expansion, we're still in the early days of the logistics portion. So we're not efficient yet in Q4. We had planes that were not operating, even though we were paying for them. We have probably some hiring of pilots ahead of when they're trained and fully ready to go.
So as the hours and the runtime of those planes improve and increase, and we cover them not just 35%, but 50% and 60%, that's going to drive the service margin up. So that's a great opportunity. And then the product as well, with volume growth and with a little bit more of control over our supply chain, we think there's some modest growth there as well. So I feel like we're in a very good position.
Excellent. You didn't provide distinct guidance on profitability for 2024, but you left some clues with gross margin and the kind of percentage of operating expense growth for year-over-year. I mean, what could impact profitability as we move through the quarters in 2024? I mean, I clearly built out of the TransMedics aviation and the logistics businesses. There's some costs there, but.
I think our objective here is, as we exit 2024, to be in a sustainably profitable situation. Like I said, I think in the past, as we enter 2024, we're right on the cusp. So it could drop below profitability in Q1 or Q2. But as we leave 2024, we should be in a very sustainably profitable place.
Excellent. Wanted to touch on. Oh, question from the audience. Yes, Michael.
For the DBD opportunity, especially the little bit, is the opportunity predominantly for extended distance runs, or is there also an opportunity for shorter runs where the convenience is enough to justify the cost of resources?
The distance is disappearing very, very quickly in the liver segment of our business because it's not about distance anymore. It's about getting three livers from three different cities and keeping them overnight and then allowing that transplant team to wake up in the morning and start three liver transplants in a row. That's been a huge drive for adoption in the liver. It's not about going further distances. It's about the scalability of growing a transplant program and doing it in a way that doesn't burn out the very limited resources that exist at a transplant program. A perfect example of that is Emory in Atlanta. They changed their transplant team. They have a very small skeleton group. They grew their transplant volume in the last two quarters because they're using NOP exclusively.
That is the perfect team that is getting three and sometimes four livers overnight. One of the four might be from Atlanta, but the surgeons are burned out. They want to go to sleep. They want to wake up the next day. And TransMedics NOP team is managing these livers for them. So that's one opportunity. The second opportunity in DBD is fatty livers, older donors. It's not just about distance. There are perfect livers out there that have some percentage of fat. The minute you put that liver on cold storage, these fat cells will congeal, and that liver becomes a hostile foreign body when you transplant it. And it's a horrendous outcome. Older donors, again, they are more susceptible to ischemic damage. Even if it's a short distance, it doesn't matter. If it's an older donor, healthy liver, why would we lose that liver?
These are the opportunities in DBD livers.
How are OPOs dealing with the cost of OCS and their total operations?
Yeah. Really, OPOs are not involved at all. It's really transplant programs. They manage the cost of OCS through two mechanisms. They get reimbursed through the Organ Acquisition Cost Center, CMS, and that covers all the CMS patients. The commercial payers, they are approaching commercial payers after they do the first few with showing the value, growing the volume, going after donors that they wouldn't use, showing their post-transplant outcomes improvement, and then they get additional dollars. And that's been ongoing in 2023. And it's one of the main drivers for growth. Major commercial payers that cover organ transplant have been approached by pretty much every major liver transplant program in this country in 2023 to get additional dollar to support the deployment of NOP OCS. And that's a fact. So that's how they're managing it. There's another question. Very little. Paragonix is nothing but a creative ice box.
And we know what ice does. And I'm sorry if anybody from Paragonix is in the audience. I know you guys are not ice, but it's cold static storage. Cold static storage has severe limitations. That's why TransMedics is in existence today. Some segment of the market, they don't want to, they're afraid of the OCS cost because they don't know much about it or they don't know much about getting additional dollar. So they say, "We'll do a Band-Aid. We'll do the next best thing. Let's pay $16,000 for a Styrofoam igloo cooler." You could buy a Yeti for $100 or $150, and you could achieve the same results. So I mean, they have a niche to play, for sure, which is pristine organs, short transport time. Absolutely. But we don't see them encroaching in where we are. And we're not static either.
We're planning to enter into that segment for hearts very soon. We don't see that as a major threat for our success today in NOP.
Let me just follow up on that answer, Waleed. You had made the Bridge to Life acquisition last year, and that brings in a cold perfusion technology for that DBD short transport time segment of the market, which I believe is somewhere in between 15%-20% of transplants. But anything more to share? I know you may update us later in the year, but.
Yeah, we'll talk about that later in the year. But that's what I said. We're not sitting still. We are going to enter that segment of the market. And we think there are opportunities to improve than just static storage, so.
Just on Michael's question just about the organ acquisition reimbursement cost center, if there's some investors who occasionally do checks and get feedback that some Medicare reimbursement isn't coming through in a timely fashion. I think at ISHLT, there was a panel of transplant center administrators that relayed a different message. Maybe just the current status of reimbursement for NOP OCS technology and the new TransMedics aviation?
I think this confusion comes when you ask a physician or a surgeon about Medicare cost report. They really are not that involved. They don't know the mechanisms. And there's a farce in transplant medicine. They tell you, "Oh, we're getting reimbursed $0.50 on the dollar or whatever, $0.60 on the dollar." That's not accurate. It's just a reflection of the mechanism. CMS pays for organ transplant. CMS captures the cost of all organ acquisition for CMS patients and non-CMS patients, right? That's the rule. To have visibility of adjusting the budget for the organ acquisition budget for the following year. So the transplant program, by law, has to enter all the organ acquisition costs in the cost report for CMS, even for non-CMS patients. But CMS pays for the CMS portion of that cost. That could be $0.50 on the dollar.
That could be $0.60 on the dollar. That could be $0.30 on the dollar. So that translation is not accurate. CMS covers CMS portion of the cost report. It's been ongoing since 1984, 1985. It's been ongoing for OCS specifically since the trials. That hasn't changed. We don't expect it to change. And again, it's not changing, and we don't expect it to change because of a very important fact. Transplant is the most cost-effective treatment for these very expensive end-of-life end-stage organ failure disease states. That's why CMS commercial payers are highly incentivized and driving for more organ transplants to happen. That's why commercial payers responded to centers that presented them cases to increase their organ acquisition budget by a significant amount to cover the OCS NOP positively and favorably. And they all got the money requested, so.
Thanks for that download. I want to also follow up on the logistics franchise and some of the feedback we've gotten over the past year from surgeons on what could TransMedics do better and that have exposure to and experience with the NOP. There was some frustration on just the NOP not capturing every single case at their center. Our read-through on some of that commentary is that once you experience the service model and you experience all the benefits, as you mentioned in one of your early answers, the quality of life can stack organs. I mean, I guess the ultimate question I'm trying to get forward is, I mean, how sticky has NOP been? Just any metrics you can share just on once you get a taste of NOP, you're not going back.
I don't want to jinx it, but NOP has been extremely sticky. It's only a matter of time. We see this pattern pretty much everywhere. You start here, and over 18 months, 24 months, you're doing 60%, 70%, 80% of the volume, and their overall volume is growing. That's why we grew heart and liver by 12% a year. That didn't happen by chance. So the overall volume of some of these centers have grown significantly. So we've never I mean, knock on wood, we've never seen an NOP center that starts with NOP and walk away from NOP. The opposite is true. It's just a matter of time, guys. Again, this is starting our third year in this. And NOP, we've been operating NOP for heart and liver for 18 months before then. And we went from 1,000 to 2,300. So it's just a matter of time.
It's just a matter of time. But it's been very sticky.
Excellent. We may have time for one last question, I believe. But just ISHLT conference is coming up. The abstracts were made public, I believe, last week. There's an update on the Organ Care Perfusion Registry tracking outcomes in DCD heart transplants. But I probably don't want to front-run anything from that conference. But just with that being in the public domain, any just comments on that abstract and then anything else you want to share just about this upcoming conference and the symposium you guys are hosting?
Yeah. We don't want to front-run this. This is a very important program for us at a very high level. We are going to present data to solidify our DCD heart franchise and hopefully address why should people go 100% to DCD hearts on OCS compared to NRP? We are going to dismiss this fallacy that NRP is cheaper than OCS. We are going to show why DBD hearts should be on OCS. We will talk about the success of the NOP. We hopefully preview what we're planning to do with the lung program to reintegrate the lung market in the U.S. Did I miss anything?
Excellent. Well, Waleed Stephen, thanks so much for joining us here today and once again at the TD Cowen Healthcare Conference. Great to see you, and thanks for all the answers.
Thank you.