All righty, let's kick this off. It's exactly five past. Patrick Wood, obviously run the U.S. MedTech team. Before we get started, the exciting thing around disclaimers, they're on the website, morganstanley.com/researchdisclaimers, so I'm sure you can all have fun with that. And with that, big thank you to both Waleed and Stephen, as CEO and CFO, respectively, of TransMedics, for agreeing to do this and join us today in what is a genuinely, really interesting end market, and quite a lot of change happening. So big thank you, thanks for joining us.
Thank you, Patrick, for inviting us to be here.
Of course. Why don't we start quite big picture? I mean, obviously, Q2 is another excellent quarter, but looking back a little bit longer term, you know, how would you characterize the journey that TransMedics has been over the recent years, compared to what your original expectations of what that journey would have looked like? What, like, what surprised you?
I think what surprised us the most is how quickly we needed to pivot to bring in NOP into the mix, a lot sooner than what we had originally anticipated, but you know, as far as the impact, the growth, we had always hoped and saw that. We just were surprised at how quickly that we need to accelerate that into our mix, and we're glad we did, so.
Is that just because the customer demand for a full service network was just so much higher than you had originally anticipated?
It was really our realization pretty quickly in the early days of the lung commercialization, and that's even predating COVID, that the OCS opens up a huge access to donor organs that otherwise have never been tapped, and watching programs struggle to staff up and train enough people to be able to operate the OCS, then layer on top of that, the huge learning curve that you get exposed to with new people being trained to operate the OCS. We saw that, and Tamer and I decided that this is not the way we want to run our commercial launch, and we accelerated the NOP, and that's why as soon as the heart and liver were FDA approved, we, those two markets only saw NOP predominantly, especially liver.
We're so glad that we did that because we wouldn't be here today if it wasn't for NOP.
Right. And maybe just to level set some people in the room, I'm sure some are very familiar, but some who aren't. Maybe it's worth just very quickly explaining the NOP and the distribution network on that side, and maybe touching on DBD and DCD as 'cause you mentioned about expanding the market in that way, just so everyone's on the same page.
Sure. So, to describe NOP, I think I need to go a step back and describe what was it like for TransMedics before NOP. We were a traditional MedT ech company that sells our technology to transplant programs or transplant hospitals, and transplant hospitals have to train personnel in their team. They need to come to Andover to be trained of how to operate the OCS. And then these individuals that are trained have to be on call when a donor offer comes available, and they need to fly out with the OCS. They need to prepare everything. They fly out to where the donor is, bring the organ on the OCS, and manage the organ on OCS from donor to recipient. And then sometimes they even stay and do or assist in the transplant procedure.
Lots of things to go loose here, where you know, one, you need to have enough trained people to be on call 24/7 to capture every possible demand. Two, the learning curves, the different level of understanding of how to operate the OCS, and it just was not sustainable and was not scalable.
So with the NOP, all the centers have to do is literally dial 1800 OCSNOP or a 1800 number, and they tell us where the donor is, and our entire logistics team define where the best location to deploy a team from TransMedics, TransMedics surgeon, TransMedics clinical specialist, the OCS technology, with our TransMedics logistics, to go to the donor, procure the organ, manage the organ on OCS, and bring it back, and sometimes even babysitting the organ overnight so the transplant program can do the transplant procedure in the morning. Huge advantage to the transplant program, standardizing the practice to, you know, to, you know, expert level, having our team be the one responsible for managing that organ, and giving the transplant program the most cost-effective way to manage the transplant procedure.
It's completely different, and again, we wouldn't have been here for achieving this huge growth trajectory without the NOP and without the integration of NOP into our model.
And then just the final level-setting thing, just so everyone's on the same page, is how you're expanding the market, DBD and DCD and the relative. That, just so people understand.
Sure. So the market before OCS, the predominant donors were DBD, donor after brain death. So today it's 50/50, and in some instances, it's even a little bit more like 60/40, DCD over DBD. DCD is donor after circulatory or cardiac death. And that's the fastest growing segment of the donor market. Historically, these organs cannot be preserved on ice or cold or cold perfusion because there's no way of knowing if these organs will ever function again, because the heart had stopped beating for a period of 30- 35 minutes.
Today, the OCS and OCS NOP is driving the lion's share of DCD in the U.S., and it's the one of the main reasons why we're able to grow the overall heart and liver transplant volumes in the U.S. by double-digit number last year, which has never been seen in more than a decade and a half. So, so it's very, very important segment of the market, so.
Maybe shifting a little bit shorter term. You guys obviously had a very strong 2Q. You know, the guide implies a more flattish sequential H2. I mean, maybe help sort of give the audience some idea. There's obviously some puts and takes around the aircraft. We were discussing before this, obviously, there's some people who love to try and track the aircrafts and publish that, which is full of all kinds of problems, which I don't know if that's worth touching on. But a sense around that H2 guide and conservatism relative to some of the puts and takes that exist within it.
Sure. Yeah, thank you for asking that question. It's very important. I think, as we stated in Q2 call, we take guidance very seriously, and we factored in the second half of the year guidance all the things we know to be true. We know that in the summertime there's a low in organ transplant numbers in the United States. In fact, it's down 12%-17%. It depends which organ you look at in Q3, because there's summer vacation, there are people that are taking their families on vacation, and it just historically, that's what we are used to seeing.
The second element to that is we know for a fact that there are many of our planes that are scheduled, they're due for scheduled maintenance, and we elected to do them in the second half of the year to prepare for that 2025 and what we anticipate to be a huge demand year for us and make sure that our fleet is ready to go, starting in January first, and that's what we signal to, and that's what we stated, so if anybody's tracking our tails, of course, you will see less tail numbers from TransMedics used in Q3 because that's where the scheduled maintenance were scheduled, and as that's, that's what we thought we communicated, but we're communicating it again.
Do not track our tails in Q3 and Q4 because we will have few of those tails down for scheduled maintenance to prepare for 2025 huge demand that we're anticipating, and we want to make sure that our fleet is ready to go.
Yeah, makes complete sense. Maybe we shift to the clinical programs because there's quite a few and maybe starting with sort of heart and lung 24-hour. Maybe it's worth giving people an idea of the preclinical testing that you guys have done on that side of things, and as 24 hours for cold storage, and why it's so important to be able to do it this upcoming morning for the market.
Sure. So, rather than going granular on the preclinical testing, I think, I'd like to stay high level, and as I stated on the call, you know, there has been a lot of confusing data sets coming into the field of organ preservation while we're building the NOP. Data that's not driven based on real trials, it's based on anecdotes and the like, and we wanted to reengage directly to generate level one evidence to really drive transplantation forward and drive the growth in organ transplant forward. So how are we doing that? We're doing that by completely revamping everything we do on OCS, primarily focused on two major limitations, historical limitations or historical misperception about machine perfusion.
There, because of some early trials by other technologies in the field, generated this misperception that if you keep organs perfused for a long period of time, the organs will become edematous, especially heart and lung, and those organs will suffer from primary graft dysfunction, or you probably will not be able to salvage these organs. That's very important for us because, that misperception is just fact, you know, factually, is not true for OCS, but we wanted to even address that even for OCS, so we went out, and we completely redesigned many of the elements of OCS, focused primarily on that notion of prolonged perfusion time, and how can we prove unequivocally that organs are not damaged, are not edematous, up to 24 hours, so we revamped our solution, we revamped our perfusion module or our disposable sets.
We revamped our clinical use model, and we're very, very excited about our preclinical program that is really have demonstrated unequivocally that organs, heart and lungs that are preserved on OCS with these new changes for 24 hours are superior to organs that were preserved for six hours either using cold storage or cold perfusion, or even OCS. Why is that important for us? Because we want to move heart and lung transplant to achieve the same level of success that we've achieved with liver, where we're now doing two or three or sometimes four transplants in the morning hours and allowing the transplant program to better manage their resources in the middle of the night. This will be a huge advancement in the field, we believe, and we cannot, we cannot wait to get these programs started.
That's really what's behind these clinical programs.
... Makes sense. Maybe I know it's an Institute 2025 thing, but maybe a little bit more detail on the cold perfusion heart side of things-
Mm-hmm.
For the audience, and you know, what that could do for TransMedics longer term.
So cold perfusion is something that we're exploring to provide complete roundup of our product portfolio, primarily focusing on a very small niche in the market, which is sub four hours or sub even three hours. For us, it has to make sense, and it has to make clinical sense because we never want to introduce something into the market just to say we have a low-end, low-priced product. We want to make sure that there is value to it. We are developing a new form of cold perfusion, focused only on the short preservation times for heart only, and we will run it head-to-head to cold static or cold perfusion, or even cold perfusion if we see a clinical need for it.
But if we prove that warm perfusion is superior to cold storage or cold static, that would be sufficient for us. But that program is targeted for the second half of next year.
Got it. And, you know, thinking about what you're building with NOP and OCS, heart, liver, lung, you know, you're getting to a point of being kind of a one-stop shop across the entire platform. Are there any, to your mind, within the US, puzzle pieces that you still feel particularly passionate are missing to just have that, "You never need to use anybody other than us," sort of a setup?
I'll give you my perspective, Patrick, and
Sure
... you know, Stephen, please weigh in as well. From our perspective, you know, the big piece that was missing is controlling our own logistics. And now that we're building the logistics network, I think we're going to reach a level of around 20- 22 planes, and we want to sweat those assets in 25. We're not going to acquire additional planes until we see the demand growing at the level that gives us high confidence that buying additional planes will be required. But other than that, it's just continuing-
Yeah
... doing our own thing.
I agree. Now it's about, it's about efficiency, right? So we built this infrastructure, we've built the critical mass, and now we want to be as efficient as possible in how we use it and do as many transplants as we can based on the infrastructure that we've built.
It's a good point, Stephen, in terms of like that, the training, the investment. You know, Q2 was a special quarter in some ways, first cash flow positive quarter-
Sure
despite having also bought a plane
Yes
during that quarter. Now, how are you guys thinking about the internal investment rate relative to that, sort of the use of cash? Because you're going to start generating quite a bit of it.
Yeah. No, it's a great point. We do want to, you know, continue to improve the margin. That's what the efficiency should bring, and get it to a kind of a first-in-class medical device kind of margin, with strong growth. So we will continue to invest over the next few years, especially in R&D, with some of the next-generation work. But the rate of growth should be a lot lower than what we've seen over the last couple of years, and still lower than the revenue growth.
Yeah, makes sense. And then back to the point around logistics. I mean, you kind of stressed this at the 2Q call, but I think it's like 59% of your owned aircraft performing the NOP flight missions. Because the logistics line has multiple variables coming on, but it does the base growth in the actual transplant volumes that you guys are doing. But then on top of that, that's a higher NOP fulfillment, including your own planes.
Mm-hmm.
So when we look forward to the 10,000, you know. Do you think that the market is adequately understanding what that service line looks like, or are they still just too focused on the OCS side of things?
Which market are we talking about? The-
The stock market.
You know, listen, we run our business based on what we what our transplant market needs, because if we, if we do our job right there, the stock market is going to understand because it's all going to result in revenue growth, improvement in margin, and the like. But again, I tried to explain it. We are at 59% based on Q2 numbers. We are far from the 80% at the full scale. It will require 3-4X-fold increase in numbers of the quarter. And so I don't want people to think, "Well, they're already nearly at 60%, so it's only 20% more." That's 60% of the Q2 number of 2024. To aim at 10,000 in 2028, we need at least 4X the number of cases.
We still have a long way of growth to go, and we're planning to fully capitalize on that.
For your own amusement, one of my colleagues on my team was like, "Your market cap is quite close to American Airlines." Different business model, but he did do a chart of market cap per plane.
Our planes are more efficient.
Market cap per plane would definitely indicate that. I mean, if we then shift a little bit to competition, there's no one really at the same sort of doing really what you're doing, but around the edges of different organs, there's different competitors. Maybe help people understand the general lay of the land, and then I suppose after that might be worth any initial thoughts on a Swedish company's entrance into... Not really competing with you, it's, but you know what I mean, it's tangentially.
Sure. Sure. When we look at the competition, you know, the lay of the land is, you have TransMedics over here, and there's a lot of kinda noise-generating activities on the edges, and everybody wants to copy what TransMedics is doing. Here are the facts: Nobody could copy what TransMedics is doing because nobody has a warm, physiologic, portable technology that is addressing heart, lung, and liver, and soon, kidney. Nobody has that. And frankly, we do not see or aware of anybody even come remotely close to having that access to that level of technology. Two, you need to know that the reason for our success is because we invested heavily in warm, physiologic, portable perfusion. What's out there is categorized at three- two big ones and one small one.
The two big ones is, let's do a better igloo box, make it look better, make it look cuter, and claim that it has a relative value if we don't use ice. So that's cold static, controlled cold static storage. If the igloo was good enough, why did we spend 28 years of our lives and hundreds of millions of dollars developing warm? Cold is good for a niche, small segment of the market that is sub three hours of preservation. And even then, we hope to prove that we're gonna be superior in that front. So that really doesn't present an area of true competition for us.
The second area is this notion of, "Oh, if I add a pump to an Igloo cooler, it's gonna have an incremental value." Well, we all know the data from the other Swedish company that came out, all they could really show is some relative risk reduction that is, frankly, equivalent to what the first cold static data is. So why would I increase the risk for the heart to be edematous by perfusing it cold in a non-physiologic environment? And you still cannot do DCD, you cannot go longer distances, you cannot do anything that we can do with the OCS. And then finally, you have this single organ warm perfusion technology for liver that is non-portable.
Because of the limitation of their technology and because, you know, they developed this notion of, "Well, you don't really need to be portable, you can bring the liver on ice for six or eight hours, and then you spend two or three more hours perfusing it in your hospital." I would rather put that liver into the patient quicker rather than investing an additional three hours. The liver is already coming to the transplant program injured, with cold ischemia. That's how we see the competition. We internally, our biggest competitors, our ability to meet the demand for the NOP and OCS, and continue to focus on delivering the highest clinical care for the organs that we're managing and the outcomes we're delivering for patients.
If we focus on that, we will continue to be in a league of our own. As far as the other question, obviously, we wanna congratulate the team in Paragonix about this great transaction. We love competing with Swedish companies. Our track records speak for themselves, so we welcome the competition in the U.S. And you know, it's always refreshing to see competition in the field of organ transplant and preservation because this means that we are focusing on a good area that's helping patients, and it's a renaissance for organ transplantation. So welcome, Getinge, to the field of organ transplant in the U.S.
It means wasp in Swedish, by the way.
Huh?
It means wasp in Swedish. Not a lot of people know that. You know, we started talking about NOP and that. So how critical is now the ability to offer an integrated transportation logistics network? Because obviously, you were in the market first, now people are coming, it's gonna be a partnership, you know, with one of the other Swedish peers.
Yeah.
How critical is that in a competitive environment?
I think this is something for the stock market, not the clinical market. I think the stock market or the street needs to understand that us integrating our logistics does not happen if we don't have the OCS, a warm perfusion technology that is portable. If we are a static cold or a perfused cold, we don't need our own transportation logistics because of the limitation of transport is the same, and that would be okay with the old historical model. What we found ourselves in a situation in 2022 and early 2023, is we were losing 20%-30% of the demand call for NOP procurement because the organs are far, and the existing model of organ transportation did not satisfy that demand, and we ended up losing these organs.
And these organs, frankly, most of them were never even transplanted. That's where we could not, you know, stand still and do nothing about. Because we're in the business to grow organ transplant market in the U.S. So again, the integration of logistics is a critical aspect for NOP because of the impact of OCS, not just on itself. We're not an airline company or a logistics company. We're an organ transplant and organ supply company, so.
Maybe, you know, a lot of the discussion was focused around the U.S., but the OUS, huge market, a lot of volumes, very different structural setup, I suppose. How are you thinking about that opportunity? How are you thinking about the approach to that market and how it differs from the U.S.?
Patrick, I think you highlight a very important point, that OUS market is nearly as big as the US market, you know, especially European market, and we haven't even talked about China. The thing with OUS market that makes us focus on it as a long-term catalyst for our growth is the lack of reimbursement. And in Europe specifically, you need to tackle reimbursement country by country, and in some countries, region by region. So once we secure reimbursement, that's when NOP-like models will be developed outside of the U.S. We think that the markets would accept NOP in Europe. In fact, our success in the U.S. is generating a lot of interest and focus from European and non-European countries.
And we are willing and able to make that investment, but there has to be a basis for reimbursement first, because we cannot go and finance healthcare systems in Europe, where you know we have it has to be a win-win for both of us.
Having been treated in the NHS in the U.K. for most of my life, I would recommend not doing that. No, that makes complete sense. It, you know, you touched on China briefly. It might be worth updating people on kind of where we're at there and the opportunity, for-
Oh, the opportunity in China is huge, and it's not factored in any of our plans right now, for a variety of different reasons, and I'd like not to really highlight them in this conference, but we're watching that market very, very closely. We think it's a huge opportunity for OCS. I think for us, it's wise to focus on the task at hand, which is becoming the standard of care in the U.S., driving profitability, driving shareholder value, and then go invest our own dollar in China when China is ready to take on new technologies for organ preservation, and you know, we're watching that market pretty closely.
But right now, our priority is U.S. For OUS priority is Europe and Middle East and Australia.
Maybe shifting back to the U.S. based on, you know, reimbursement. You know, we get a reasonable amount of questions from people trying to work out, and maybe they're looking at this wrong, but like, what the margin structure for the clinics and the programs themselves looks like when they're utilizing NOP-
Mm-hmm.
whether by organ or in totality, or in some cases, does it even matter? 'Cause a lot of the time, that would have been an organ you never even would have had the chance to... So how do you think about the interplay between the margin structure and whether it matters or not?
The answer to that is historically, organ transplant is associated with roughly 40% margin, all in, across the three organs. We see the OCS NOP with integrated logistics as a huge value add to provide a very cost-efficient and financially viable solutions in three different levels. One, to Patrick's point, we're allowing these programs to grow this very high margin procedure volume, which historically, they wouldn't have access to these organs that we're now enabling to do. Two, by delivering better outcomes, now their exposure to complications that cost the program high dollars that could eat up in their margin gets significantly reduced, which further improve their margin contribution.
And then the third one, and is really the cherry on top, is the, us controlling the logistics allows us to share some of the cost efficiency of us managing our own fleet, and logistics network with the transplant program. So we're delivering the most cost-effective transportation in the history of organ transplant, period, full stop. I'll give you one example: there is not, and probably will not be, a single logistics operator in the U.S. or around the world that can offer the transplant program 50% discount on a DCD donor that does not progress to become a donor, because they can't. They have to fly out, and they have to bring the team back if the donor doesn't, progress. We can. We can because we have a network effect in the United States.
We have a network effect with our logistics network, so and we wanna share the risk with the transplant program. And if the donor doesn't progress, they get a 50% discount. Nobody can offer that. This is just one example. The other, of course, is the efficiency of operating your own fleet. You're not paying the margin stack up for the owner, for the operator, and for the broker. That's another historical thing that transplant programs were exposed to.
Can you get to a point where a new program being set up or even an established program trying to hire new quality surgeons is gonna struggle unless that program is willing to offer those surgeons morning transplants or the com...? Do you see what I mean? Like a hiring side from the hospitals end.
Yeah. The only thing I can comment there is what we heard at the American Society of Transplant Surgeons plenary session this earlier this year, where they, the leaders, the academic leaders of organ transplant surgical societies, are saying the advancement in machine perfusion and programs like NOP now will enable us to recruit more transplant surgeons and avoid this burnout that exists in the field of organ transplantation. Again, and the example they used is they stated that "We don't do brain aneurysm surgery in the middle of the night. We don't do open heart surgery in the middle of the night. Why are we doing organ transplant surgery in the middle of the night?" And now the OCS NOP enables these visions to become reality.
That's what excites us the most.
... thus far, a lot of the growth has been for you guys, DCD, really. Longer term, how do you think about the opportunity to do more of the DBD volumes?
We're starting in 2025. Half of our clinical program in 2025 are laser focused on DBD. So 2025 is gonna be a big year for TransMedics, and as I stated on the call, and I'm doubling down on it, we are going to take the heart and lung market by storm once we announce these clinical programs in 2025, and half of those programs are gonna be pure DBD. That's why we're structuring these programs, to get the DBD back up again, because we believe that there is a huge untapped segment of the market that we haven't even addressed yet, are the unutilizable DBDs today, and we're coming.
You know, from your background, that different areas of the healthcare system have different... You need clinical data everywhere, but different specialists have different degrees. Like, a structural heart surgeon is extremely clinical data-led. What does it look like in transplants, like, in terms of the ferociousness of data?
Listen, we've always said this is a. We don't have a marketing team because the best way to market in transplant is with data. The only difference is, as we're building the NOP and the logistics, there hasn't been anybody out there generating level one evidence as TransMedics historically have generated. We're back again, and we're focusing on generating that level one evidence, and again, we're excited about 2025 and beyond because that new set of data hopefully will be a huge catalyst for our growth near term.
Okay, last one for both of you. You know, you obviously spend a lot of your time and energy internally doing, you know, your base roles. Is there anything which consumes a lot of oxygen and passion internally that you're surprised doesn't particularly get the airtime externally? You know what I mean, like-
Yeah. Well, I'm not surprised because we haven't really talked about it that much. Yeah, there's you know, our next gen program is really a huge focus for us, all of us in TransMedics. And it's both on the technology side. The next gen OCS will look and feel completely different than the OCS today. So for anybody who's trying to replicate the OCS today, go at it, good luck, because the next OCS will be something completely different. The other thing that really excites us is we're moving away from NOP being a phone-operated service. We are developing an entire digital ecosystem. Think of the Uber ecosystem. When you call an Uber, you open up your Uber app, you push for where you're going, where you're starting from.
That's what we're doing for transplantation in the U.S. And hopefully, this will be rolled out sometime in the first half of 2025 , and that will, we believe, will have a huge impact because for the first time, any surgeon in any major transplant program can monitor the entire process, from donor to recipient, in his or her own iPhone or Android device. Steve?
Yeah, no, I would agree with that, especially, you know, from my perspective. I'm looking at that as, like an enterprise application, so it crosses not just the clinical aspect, but even the financial aspect and the billing aspect. Just like Uber, you know, bills immediately, we're gonna be able to bill immediately.
Yeah.
So I'm excited about that part as well. But it really, the way it's, where it's headed is really exciting.
It just provides us more integration and more transparency to the transplant program. We become fully integrated within the transplant program. The administrator we have is a persona that has access to the same app level data and more data on their transplant that was conducted with OCS NOP, so they can see the full picture. We want that transparency because that's how you show them how much cost-effective it is.
A lot of data to back up what you're saying, then. I think with that, we're. It's almost perfect timing, so massive thank you, William and Steve. Thank you.
Thank you.
Thank you, Patrick. Appreciate it.