All right. Hey, everyone. Thanks for joining us. I'm Lilly Lozada. I'm part of the MedTech Research Team here at J.P. Morgan. I'm happy to have the TransMedics Team with us here today. I'll pass it off to CEO Waleed Hassanein for a presentation, and then we'll jump into some Q&A.
Great. Thanks, Lilly.
Good afternoon, everyone, and thank you for joining us for this presentation. Let me take a few seconds to say a couple of words. We always start with this slide title, but given the current circumstances and some of the dynamic that TransMedics is experiencing over the last 48 hours, I want to take a second and say three things. Not only were we transforming and defining the new standard of care, but in doing so, we have disrupted five decades' worth of monopolies that existed in the field of organ transplantation, and our success is driving a lot of the dynamics that you guys are seeing. Two things you need to know about TransMedics: we do not get bullied, and we're extremely proud of what we're doing.
I want to give a shout-out to the entire TransMedics team, almost 800 strong, and tell them that we are going to survive this, and we are going to come out from this stronger, and we are going to continue on our mission to transform transplant medicine in the U.S. and around the world. With that, this is my forward-looking statement. Let me start by talking, giving a little bit of background on the very unique and exciting field of organ transplantation that happens to be the space we live in, and we have been for the last 28 years. Organ transplant is an extremely unique therapy where it is the gold standard for treating a very complex, very expensive, very chronic end-stage organ failure. Why? Because it provides patients with the best quality of life and double the life expectancy.
But most importantly, it is the most cost-effective treatment for treating these very expensive or very chronic disease conditions. So payers know that very well, and they want to see more and better organ transplant. So what are the challenges? The challenges are, for the last five decades, we've been barely utilizing the pool of available organs or donors that exist for organ transplant today. In addition, there is room for improvement in post-transplant clinical outcomes. Since the dawn of organ transplantation, organ transplant has seen significant innovation, both in the pre- and post-transplant settings. In the pre-transplant setting, medical therapy and medical management have improved: the development of mechanical circulatory support and ECMO, renal dialysis, liver dialysis, in post-transplant, innovation in immunosuppressive management, anesthesia management, postoperative care, and surgical techniques.
There remains one missing link that has not seen any innovation for the last five decades, which is a very critical area that a lot hinges on ensuring that this piece is complete, which is organ preservation. For the last five decades, this is what we were left with: to preserve one of the most valuable living organs, to give the gift of life for patients in need for organ transplant, an Igloo cooler filled with ice or static cold storage. There are three major limitations to this cold static storage approach, all three of which result in the challenges that have been facing organ transplant for the last five decades. First, organs with cold storage are not living. They are disrupted from an oxygen supply.
The organ is facing a time-dependent ischemic damage or injury, which means the longer the organ spends on ice, the higher the probability that this organ will never function, and the patient is at risk. That alone limited distribution of donor organs to a very limited window of time and distance limitation, which results in significant underutilization of the donor pool. But the next two actually add significant reasons or play a major role in the underutilization of the donor pool. First is that, given that the organ is not living, not metabolically active, there's no means of optimizing or improving organ capabilities outside of the donor body. That limits utilization because at any site of any risk to a donor or organ, the transplant center would turn it down because they know they cannot optimize or improve the functionality of that organ.
The most important one is the lack of viability assessment. There's no way of evaluating organ viability once you remove it from the donor body. When the organ is not living, there's no functionality. So that alone results in significant underutilization. What proves what I just stated is this chart right here. This is data from the published Organ Procurement and Transplant Network showing that in the United States, in 2023, we had close to nearly 16,000 donors in the far left side of the screen, 10,500 DBD and almost 6,000 DCD donors. Look at the utilization of organs every year or in that year. We only utilized nearly 3,000 lungs, 4,000 hearts, and 8,000 livers, leaving the vast majority of the donor pool unutilized.
So if somebody is wondering where TransMedics gets the organs to increase the national supply in the United States, it's not from Mexico. It's not from South America. It's from the unutilized donor pool that is sitting here in front of us in this slide, and we've been showing it since 2019. This is what resulted in an increase in the supply of organs in the U.S., and we could not have done it without the innovative technology of the Organ Care System and the more innovative network of the National OCS Program or NOP. So how did we establish a solid foundation for the business to address these transplant challenges? First, we developed first and best in its kind technology called the Organ Care System.
It's the only technology that is capable of literally replicating human physiology in a medical technology, keeping organs constantly alive and functioning outside of the human body and not suffering from any time-dependent injury. Second, we've built the largest body of clinical evidence based on FDA-level clinical trials to prove the value of using the Organ Care System in DBD and DCD donors in the United States, and finally, we didn't stop here. We developed another first-in-its-class network to vertically integrate the entire process of donor procurement called the National OCS Program and created a best-in-class network to maximize the utilization of donor organs. Let me walk you through the detail of how we achieved the results that we've achieved and what is unique about everything that I just described here. First, this is very important for people who are wondering what's happening with our competitive dynamic.
Let me tell you what's happening with our competitive dynamic. The OCS technology, fundamentals and unique capabilities that make us unique and really give us a unique place in the competitive paradigm are the following: One, we're the only portable oxygenated blood-based perfusion device to minimize the ischemic damage that occurs with ice. No other technology on planet Earth has that capability today. So if you want to compete with the OCS, you better invest the 20 years and the hundreds of millions of dollars to get to a platform that replicates human physiology in a portable fashion. Two, we're the only platform that enables optimization or improvement or recruitment of organs outside of the human body. For us to be able to do that, we had to maintain literally near human physiologic level of function for the organ outside of the human body.
If you cannot keep organs alive, if you cannot maintain human physiology ex vivo, you cannot deliver the value that the OCS is delivering. Most importantly, we delivered clinical diagnostics to give the highest degree of clinical confidence to transplant programs and transplant clinicians to accept organs that otherwise they would have walked away from with cold storage that nobody else has that capability. And that's by maintaining organ functioning outside of the human body to enable these standard tests or diagnostics to be applied to the organ en route from donor to recipient. And we believe that the above provides a comprehensive solution to the limitation of cold storage that we described earlier. There's nothing better than showing you how the organ care system works. This is what I mean by maintaining human physiology outside of the human body.
The lung is breathing, the heart is beating, the liver is producing bile, and the kidneys are making urine. That is what the OCS does. Today, we have three commercial programs, three commercial products in the U.S. approved by FDA for lung, heart, and liver transplantation. This is the evidence that we've built pre-commercialization just to get the license to enter the market in the U.S. We've delivered two major data points or value themes. First, we delivered the highest rate of solid organ utilization from deceased donor organs in the history of organ transplant. Period. Full stop. Two, we developed a whole new donor pool that did not exist prior to the OCS called DCD heart transplant. Five years ago, there was no such thing as a DCD heart transplant, a heart transplant from a donor that their heart stopped beating. We developed that from whole cloth.
Second, we delivered the best outcomes in organ transplant compared to the standard of care by demonstrating prospectively significant reduction in the severe post-transplant complications after lung transplant by 50%, 65% reduction of post-heart transplant complications, and both in short and long-term liver transplant complications by 43% and 84% in the long-term complications. As I said, we didn't stop here. For the last two and a half years, we developed the National OCS program or NOP. This is a nationally functioning integrated network that encompasses surgical expertise, clinical expertise, technology depot, and logistical network around that to provide our users, our customers, transplant program, the full breadth of a network capability operating seamlessly to deliver the best quality organ in the most cost-effective and efficient manner. There's nothing better than showing you an actual video of how the NOP actually works. This is our headquarters in Andover.
We run the entire NOP network from our digital command center, as you see here, where we can monitor every case as it happens in the United States real-time. The first initial interaction with the NOP comes through a phone line today. Next, it's going to be on an app where our clinical coordinators will field the call from a transplant program where they can fill in basic information about what type of organs we're going after, where the donor is, where the recipient is. From here, the clinical coordinator passes it on to a logistics coordinator who maps out the best, most efficient routing out of our 17 hubs spread across the United States and maps out the most efficient way to get that organ from point A, where the donor is, to point B, where the recipient is.
It initiates a cycle of activation of both a surgical lead and a clinical specialist lead where they get the information on our proprietary app. They go to one of our hubs, mobilize the proper technology to match the potential donor, in this case, with a heart, and they get ready to go to the donor hospital. Our logistics network gets activated from here where there is a combination of car and air transport from the hub to the donor and from the donor to the recipient. At that time, the surgeon is already at the donor hospital communicating with the accepting transplant program about their criteria for accepting the organ. Nothing we do is independent of our transplant center partners. Everything we do is to match and meet their expectation and potentially exceed their expectation.
Once the criteria is shared, our surgeons proceed with procuring the organ, instrumenting it in the OCS, and start the perfusion process. Then from there, there is a constant communication of what's happening with the organ, going back to the transplant program en route from donor to recipient, including showing pictures, videos, text messages to give the transplant center the highest degree of confidence that this organ is going to be fine, and they start preparing for the actual transplant procedure. A year and a half ago, we've added an entire vertically integrated network of air transport. We didn't do this because we like to fly. We didn't do this because we are a charter operator. We did this because we wanted to increase the efficiency of delivering NOP to our users.
We saw the huge cost gouging and inefficiencies that are in the system and the lack of transportation mechanism that enables us to get organs from Seattle to Boston or to New York. So we invested in vertically integrating our logistical network to maximize the efficiency and pass some of that cost saving and efficiency to the transplant program. Once the team arrives to the transplant hospital, the surgical team of that transplant program is waiting for the organ. They inspect the organ. Once they accept the organ, our team mobilizes back and goes back to the hub where they started from. So that's how the NOP network operates. Let me share with you some hard data, what the NOP has done for organ transplant in the United States. For the last two years, two and a half years, we've done more than 7,500 U.S.
NOP transplants. And that number is growing rapidly. 12% double-digit growth last year, 23 over 22 in heart and liver. Never happened in both organs in at least a decade. And the primary reason for that growth was the OCS and NOP. And we'll show you evidence of that. Today, more than 76% of liver transplantation that are done at our institutions are done on daytime. And that is a game changer in the field. Now, let me show you the hard evidence. We operate in hard evidence and data. We don't operate in any windows and allegations. So this is our volumes over the last three years. When we started in 2022, we've done 1,000 transplants. 23, as we reported, we've done 2,300 transplants. 24 is the largest year yet. And we are expecting to report at least 3,700 transplants in the U.S. done through the NOP.
As you can see, the OCS and NOP is the primary driver of this growth in the overall transplant volume. This is the 12% growth year over year for heart and liver. This is the results of growing liver transplantation into a morning procedure in 76% of the transplant program over the time that we operated the NOP. The reason why this is a game changer is two reasons. One, it enables the transplant program to manage the fatigue factor for their clinical staff. It's more cost-effective to run the expert transplant team in a morning-hour procedure than in the middle of the night where you're using teams that are probably not covering transplant routinely and paying double or one and a half times their average rate. Most importantly, it enabled transplant programs to perform multiple transplantations in one day versus the historical model.
You do one transplant in the middle of the night, and you lose the next day. So this is a game changer for liver transplantation. You will hear me talk about 2025. Our goal for lung and heart is to replicate that success using our next-gen OCS programs. So everything that I talked about so far, that's what we call internally in TransMedics, Gear 1 growth. Establish the business, establishing the NOP, vertically integrating the logistics. But what excites us and what gives us the confidence is really what the future holds. We haven't arrived yet, guys. We are in the early innings of the growth cycle for this business. And as you've heard us say at Investor Day in December, we cannot wait for 2025 and what we have in store for 25.
The next-gen heart and lung programs could potentially have a transformative effect, not only in the field, but also in TransMedics' growth potential. We expect to see the beginning of that at the second half of 25, but really, the huge potential will be witnessed in 2026. You've heard me say today the NOP comes through a phone call. We're transitioning that into an app. I'll show you what this app does and what the importance of that app, but we're not stopping here.
We've built an organic business that is capable of delivering growth, even if we don't do the above, primarily leveraging the network effect that we've built, transforming more of the centers that are using OCS from a small or a medium-sized user to a high-volume user, crossing the chasm of the adoption, increasing adoption in DBD and DCD, all of which we're looking forward to reporting on our rate increase in DBD and DCD for liver in our next earnings call. But we're not stopping here. We are going to reach 10,000 transplants that we've said we'll reach by 2028 based on Gear 2 levers. But we're not stopping there either. We have Gear 3 in mind, and we're starting to work in Gear 3 today. OCS Kidney would add a minimum of 25,000 procedures annually in the U.S. alone and a similar number in Europe.
Next-gen OCS platform that is more geared towards NOP model, more geared towards improving margins in the service, and definitely replicating the huge success of NOP. OUS will have a huge catalyzing effect to our growth. So at a high level, what excites us about the next-gen heart and lung program? Delivering two values that have not been delivered before in heart and lung transplantation. One, replicate the success of doing daytime transplant for all the efficiencies that we described. And two, moving the needle beyond preservation. TransMedics and anybody in the field today talk about preservation. So you hear TransMedics, you hear Paragonix, you hear OrganOx. These are all talking about preservation. We are going to move the baseline. We're no longer a preservation company. We're an organ supply and organ improvement company. That is very exciting to us. How are we going to do it?
We're going to do it by investing in next-generation technologies, next-generation solutions, next-generation circuit design, and novel metabolic and functional enhancers that we can give to the organ outside of the body to improve their functionality. Next, the NOP Connect. The NOP Connect, we believe, has a very important role to play. Full transparency of the entire procedure. If people are wondering if TransMedics hides something, why did we invest $3 million for NOP Connect? NOP Connect will give full visibility of the entire NOP procedure to the surgeon, to the transplant coordinator, to the hospital administrator if they wish so, and it's all going to be live managed, and everybody could see the entire procedure from A- Z, including the entire routing, entire connectivity.
That's who we are, and that's why we're investing in this NOP Connect to give us that full transparency, but more importantly, the efficiency of managing NOP Connect. Today, we can manage NOP at 3,700 transplants with a phone call. As we go to 10,000 and beyond, we need a more scalable platform, and we think NOP Connect will achieve that. So let me show you the pipeline and the timeline. So gear two, we're starting that in 25 and into 26. And these are what we talked about. And gear 3 is 2026 and beyond. Now, let's talk a little bit about the economic impact of the OCS. Many of the questions we've been hearing is that, "Oh, we hear OCS is too expensive.
Some of the low-penetrated centers do not; they're worried about the cost." Well, this is the crux of why major academic institutions and healthcare systems adopted the OCS at 85%-95% of their volume, and they were able to double or two and a half times increase their volume. You need to look at the transplant as a paradigm, and the OCS and the NOP impacts economically the entire paradigm of organ transplant. For payers, we lowered their exposure to the waiting list cost. Payers are paying tens of thousands of dollars per patient per month to keep them alive waiting for an organ transplant. The longer the patient waits for an organ transplant, the higher the cost to the payers.
There's a limit to how many patients could be added to the waiting list at a certain point because if there's no transplants being done, the waiting list mortality will mushroom out of control. And that's why more cost is added to keeping patients off the waiting list by treating them with mechanical circulatory support and medical technologies. But if we look at the transplant admission, by increasing the transplant volume, that is significant top-line growth for the transplant institution and significant improvement in the margin contribution by lowering their exposure to the rate of early allograft dysfunction, reoperation, ICU stay, and most importantly, dry-run cost that happens with DCD donors not progressing. And then finally, post-transplant paradigm, which is reduction in the readmission and retransplantation rate. That is a real cost in liver transplant.
Prior to the OCS, liver transplantation had an average of 25%-30% retransplantation rate. Based on the data we have for the approximately 5,000 liver transplanted today, our retransplantation rate is in the low single-digit numbers. So this is huge, huge cost savings both for transplant programs and for payers, and most importantly, for patients that are receiving organs in OCS. I'm not going to go into the detail of this, but this is the publication, one of the publications that was reported on from UC San Francisco, showing that OCS fared extremely positively in all the economic surrogates that they measured at their own institution by their own team. Competitive dynamic. We talked about technology-wise, but there's more than technology. There is IP. There is broad indication. There is huge pipeline, the versatility of the technology.
But then the NOP and the infrastructure we created with NOP is huge, huge, broad, deep moat around our business. And we're very proud of the work that our team is doing. This is the profile of TransMedics from a financial standpoint. We reported this in December as the last 12-month trailing, October to September 24. This is not a secret. We all saw the stock volatility after Q3 results. Ladies and gentlemen, we are on track to report 75%-80% growth year over year. So that's a fact. And from a cash perspective and profitability, these are the numbers. And as of end of September, we had $330 million in cash. So yes, we are transforming the standard of care. Yes, we are adding a significantly higher number of organs to help patients in need. We are doing it in the most cost-effective way.
We have a very strong pipeline. We are not slowing down, and we are proud of what we do. We are going to continue to do what we do, and we think this is just the beginning. We have a huge opportunity in front of us to drive more growth, to save more patients, and derive more cost efficiency in the field of organ transplant, and we are determined to prove that using the OCS and the NOP network that we have established. Thank you so much for your time.
Great. Maybe starting off with some of the near-term trends. I noticed in the deck you called out a little bit over 3,700 procedures for 2024, which is up from the 3,600 that you had called out at your Investor Day, so obviously better than expected.
By my math, points to something around $10 million of upside relative to the midpoint of the guide that you had previously pointed to. Understanding you haven't announced fourth-quarter results yet, but does that math make sense? And what can you share on the trends that you saw in fourth quarter, which seemed to be really strong?
Given that we haven't reported the financial results or pre-announced, I'll focus only on the transplant volume. I think the back-of-the-envelope calculation is close, but we want to wait and see the final roll-up of the numbers. But yes, Q4 was a banner quarter from a case volume in the U.S. And we expected that. And we're glad that we're delivering on our expectation.
Great. And for those who don't track it, I believe there was a healthy rebound in flight volumes in December following the weaker November.
You've previously cautioned against using this as an indicator for your business, but the read-through looks to be positive. So directionally speaking, does that sound about right? And is there any reason this wouldn't be a positive for both service and disposable revenues?
Historically, we cautioned against it when we had few planes. Now we have a fleet of planes that are more efficient to operate. So yes, it is becoming one of the things we track. And I think particularly in Q4, that's absolutely going to track, at least based on what we've seen so far, to the increased number of transplants. And I want to highlight a very important point. Our planes don't fly for any reason other than organ transplant. Period. Full stop. There's no, we don't charter our flights.
The only situation where a plane would fly without an organ is repositioning a plane in anticipation of a donor run that doesn't materialize. So our planes are dedicated 100% to organ transplant missions. So now with a bigger fleet and more efficient way of operating, yes, flight hours represent transplants or flight missions represent transplants.
Got it. Maybe looking backwards a little bit, one of the drivers of the shortfall in the third quarter was a softening in the transplant market itself. Organ transplant isn't generally thought of as having much seasonality given a lifesaving procedure with what's essentially a perpetual backlog. So from your point of view, what led to the split in procedure v olumes?
I think yes, we believe organ I mean, organ transplant is not a scheduled procedure.
Yes, it is a lifesaving procedure, but it is a procedure that has to fit in the ecosystem of life. And in life, there are seasonalities. Sometimes the number of donors could be impacted. Nobody could explain it why sometimes. And sometimes there's a legitimate reason. There's also the situation around summer holidays and the availability of critical mass of surgical staff to do transplant procedure. This is a reality of the situation. And the reality is sometimes we see that impact. We always see one quarter of that kind of impact. Sometimes it's Q3. Sometimes it's Q4. In 24, we saw it in Q3. But we said in a Q3 earnings call that historically, when we experience that, we usually end up with a strong Q4. And it appears that that is exactly what we've witnessed here.
Yeah. It sounds like your results were really strong.
But I guess, have you seen the market more broadly recover into the fourth quarter and first quarter of 2025? We have the volume data from UNOS to look at, but I'm curious to hear your thoughts as well.
Sure. I think the market numbers are all public. So commenting on them, we've seen growth in liver, at least based on the data that I saw this morning, about 9%. Remember that that's coming off a double-digit growth from last year. So this is great results. We are the main driver of that growth. And we can't wait to get the final data and talk about it in more detail at our earnings call. But yeah, we've seen flat heart numbers and maybe slightly down. But again, we need to remind everybody and remind ourselves that the heart was like liver.
They came off a 12% growth last year. So again, one of the reasons why we're very excited about the heart and lung programs that we're launching this year is it will give us more leverage and more capability to do more transplants, more heart transplants, and make the heart act and behave like the liver dynamic that we've seen so far. So we can't wait to get these programs started.
So you called out some seasonality over the summer months and capacity in the system affecting results. So is this kind of lumpiness something that we should expect moving forward and put another way? Is there any way to forecast the ebbs and flows of the transplant market on a quarterly basis if there's this kind of variance?
Yeah. And Gerardo, please correct me if I'm wrong.
I think we are going to be more descriptive in our next earnings call on the guidance for 2025. And yes, we will do a better job of articulating that because now we are a critical mass in the U.S. So yes, these seasonalities may impact us more going forward. But again, we are looking at year-over-year growth. And we're not going to stop looking at that growth trend. That's what is going to drive our growth overall. And that's what we are focusing on. But I'll let Gerardo.
No, that's exactly right. I think over the last four weeks, that has been the focus of the company to understand in 2025. So we should be very well prepared for that earnings release and 2025 guidance.
Great. On the topic of 2025, you've pointed to sales growth of 20%-25% or $516-$538 million off of the midpoint of this year's guide. So what are the underlying assumptions for this guide when it comes to market growth, clinical trial contribution, et cetera?
Sure. So I'll echo what my colleague Tamer, our head of commercial operations, stated at the Investor Day. We have built a business that is capable of growing organically at these levels. Where are we going to get the growth from until the clinical trial kicks in? We've built a very solid liver franchise. When you look at the liver franchise today and you look at our 75-80 customers, approximately 30% or 27%, to be exact, is in the high-penetrated category, leaving 80% of our liver customers still in the mid and low-end penetration.
What we talked about crossing the chasm from low penetration to medium penetration, from medium penetration to high penetration, that is a catalyst for growth. We're only at 55% penetration of the DCD liver. We can do better. We're only at 65%-67% penetration of DCD heart. We need to increase our penetration in DBD livers. We need to increase our penetration in DBD hearts. We need to resurrect the lung market that's been a sleeping giant for a while. Except for the latter part, the last part, which is the resurrecting the lung, all that could happen organically from our existing business. The clinical trials will be on top of that. We expect the clinical trials, however, to contribute some in 2025. But I would call it single-digit numbers compared to the organic business growth.
You have a lot of catalysts in the back half of the year. So how should we be thinking about growth trending in the first half ahead of that?
I think we're planning to discuss that in the earnings call.
Exactly.
Understood. Maybe shifting down the P&L, you'd previously put out bullish targets for profitability as well following a really strong performance to close out 2023 and starting 2024. You've talked to mature operating margins in the 30-ish% range, although we don't have a timeline for getting there with no long-term targets provided at the recent Analyst Day. But at a high level, how should we be thinking about how you're prioritizing growth versus cost savings? And when will you see that focus shifting more towards the latter? It's always exciting to drive growth, right?
But we need to do it in a way that it's a discipline.
So basically, all of the different initiatives that we're doing in terms of capital allocations are focused on driving growth. At the same time, in parallel, we are looking into every single corner of the company to capture those efficiencies and make sure that the investments that we do have a healthy return on investment. And I think that's really what it's going to drive, continue to drive those investments. That's the balance.
Got it. Maybe staying on the topic of margins, one of the puts and takes for your long-term profile is where service margins settle. You'd previously pointed to mature service margins in the 30% range and then raised it to 35% following a few stronger-than-expected quarters at the end of 2023. We've seen this take a few steps back over the course of 2024 as you've built out your aviation network.
So how should we think about your confidence in getting to 35% versus 30%?
Let me start, and Gerardo can finish the thought. I think we need to integrate the learnings from Q3. Did we lean a little bit forward? Maybe. But we are sticking by the 30-ish% margin on our service. And to remind the audience, when we talk service margin, we're talking not aviation. We're talking about the entire service component of our business, including clinical and surgical services as well. As we build the infrastructure, we expect significant leverage to come. And we stated that we are going to stop investing in acquisition of aircrafts in early 2025. And we are going to sweat these assets to hopefully develop more concrete evidence and deliver that evidence about what our margin would look like on the service front.
But I'll let Gerardo comment.
Yeah. I think the business has two different, very different areas of segments, right? One is anything about service, the aviation, et cetera. The other one is the product. Both of them have a very different cost structure and hence margins with some variability throughout the quarters. In my mind, I think it's more relevant to start looking at the business at operating margin, where I think we're going to start consistently seeing improvement year over year. Because we certainly, as you can see already in the financials, we do gain leverage in the operating expenses. So ultimately, what really matters at the end is what's our operating margin. And that operating margin will continue to improve consistently.
Got it. Looks like we're about out of time. So thank you to the TransMedics teams for being here. And.