All right, we're going to wind up the morning track, Medical Devices track, at the 45th Annual TD Cowen Healthcare Conference with the executives from TransMedics. We're thrilled to have you guys here. Thanks for traveling a little bit south to get into the city of Boston and participate once again, and hot off the fourth quarter results and the earnings call, where you guys outperformed and had another very strong 2024. Let me just make these introductions. We've got Waleed Hassanein, Founder, President, and CEO of TransMedics, and Gerardo Hernandez, Chief Financial Officer. Gentlemen, great to see you.
Same here, Josh. Thank you for the invitation.
So Waleed, you led off the fourth quarter earnings call stating, "Enabled by our disruptive OCS technology, comprehensive NOP clinical services, and our rapidly growing transplant logistics infrastructure, we're doing things today that few thought possible in the organ transplant field." So you've proved naysayers wrong constantly since you founded the company in 1998. I think, I don't know if you remember this, but I know we first met in 2007. And new naysayers keep popping up over the years. Just take us through your approach on how you've dealt with the skeptics over the past 25 plus years, and even in the current environment where TransMedics has had profound success since getting the liver and heart indications approved by the FDA.
Josh, thank you for the invitation. Thank you to be at your conference. I think the way we approach these challenges has always been the case is just execute. We don't let noise dictate what we do. We understand where the noise is coming from, especially this latest round of noise is coming from the fact that we're disrupting the industry. We're disrupting an industry that has not seen innovation for five decades. We're disrupting monopolies that existed in the field of organ transplantation for five decades. For us, it's about executing our plan. It's about delivering better outcomes to patients. It's about increasing the supply of organs. If we do those right, everything else will take care of itself. At least that's our approach.
Great, and it seems like you've had a regimented strategic approach in dealing with a recent short report. You announced on the call that Kirkland & Ellis was enlisted to conduct a thorough investigation. An outside forensic accounting firm came in to support their work, and there was no evidence of fraud or other misconduct. That may be the end of what you're willing to share publicly, and I think you were asked on the earnings call last week, but just anything more to share? I mean, is that you think that the book is closed and that you've been audited? I think a board maybe led hiring of Kirkland & Ellis to do the review and.
We recommended to the board strongly that the board needs to run this analysis, this audit, and it has to be independently run because I was named in the short report, so it was pretty much three quarters of the management team, so we have a high degree of confidence in Kirkland & Ellis. They're the toughest in the business, and we wanted to have that thorough audit to be done, and we were very proud with the results. Zero out of 21 of the allegations was proven to be true. They've done this in a very thorough manner, brought in outside firms that specialize in forensic accounting. They teamed up with our existing auditors, PwC. That's done on all the short report. We've engaged with Covington & Burling to deal with the citizen petition to the FDA.
And the results are public on the FDA website, both the Covington legal opinion as well as our responses to these false allegations. And we enlisted our senior CMS advisors at Hogan Lovells, the best in the business. They represent most of the transplant community. And same thing happened. Again, this is something I think the community expects from us. Both our users and our investors know that we take these matters very seriously, and we hold ourselves to the highest ethical, legal, and moral standards. So for us, that was an easy part. Obviously, we were worried about making sure that we do not get distracted, our team does not get distracted on what's important, which is Q1 results. And the team did a phenomenal job, and the results, again, will speak for themselves.
Excellent. And then maybe just beat me to the punch on my next question, but the short report was public. There's been some rumblings that some transplant surgeons have read the report. And I mean, has there been any impact to the business? Clearly not in Q4, because as you've already posted those numbers, but what type of headwinds have you had to face out in the field as you're trying to win cases?
I think we're going to let Q1 results speak for themselves.
Understood. So the U.S. Transplant Network is evolving over the last couple of years. HHS is kind of driving change, and some of that may have been stemming from the mandate from the first Trump administration in 2019. But maybe just share your understanding of the initiative, where we are in the process, and how the evolution of the U.S. Transplant Network could create opportunity for TransMedics.
Sure. Actually, that initiative has been going on really since the Obama administration and continued through the Trump administration and Biden and now the second Trump administration. The basic concept around this initiative is really to revamp the transplant system in the U.S. to enable more organs to be transplanted. A lot has been said. A lot is, CMS has an initiative to cut down the number of OPOs by half in 2026, based on the results of utilization of 2025. Is that going to happen? We don't know. We think it may. The bottom line is the system needs a little bit of an upgrade. It's the best transplant system in the world, and I can say that because I've been in organ transplant for 25 years, and I can tell you our system is the best in the world, but it's antiquated, and it needs improvement.
Everything that is on the government initiative is focusing on growing the number of organ transplant. Yet there's none of the initiative implementation actually results in increased organ transplant. There's only one thing that resulted in double-digit growth on organ transplant in the U.S. for the last 20 years. That's called the OCS and NOP. And we've done that two years in succession, 2023 over 2022 and 2024 over 2023. So we think this is, if it's implemented, it will be a potential tailwind for TransMedics. But TransMedics is not taking chances. We are engaging with the stakeholders, with HRSA, with OPTN, with the Hill to educate them on the importance of OCS and NOP to growing the national transplant volume without focusing on minutiae detail that may or may not impact the transplant volume that much. And that initiative is starting in 2025.
We're waiting for the administration to be fully functional and fully staffed. But that's something that we've communicated publicly that we are planning to do. It's part of Stephen's new role with TransMedics to help me expand my bandwidth to engage with these stakeholders in D.C.
Great. I think it may have been two years ago when HHS issued an RFP for, I think, most stakeholders in the transplant network. And I think you proposed in your response that TransMedics become an Organ Management Organization instead of an OPO. And some of that was driven by, and maybe even more meaningful now after the last two years that you described where liver and heart volumes have gone up significantly in correlation with the introduction and approval of the liver and heart indications for OCS. But maybe just help us think through the possibility of that Organ Management Organization channel opening up for TransMedics. I know way too early probably to ask this question, but just thinking about the success that you now have on the table over the last two years, that historic proposal and everything that's evolving.
I think it's a nice to have. It's not a must-have because we're doing that today. We are doing that today, and it's more challenging to do it the way we're doing it, but we've grown more efficient on how to do it. It would be a nice to have, but it's not a must-have because the NOP and logistics network that we created is creating that momentum today. We're engaging with OPOs. We're engaging with transplant programs. But yes, if it happens, it would be a nice to have. But we don't rely on that to continue to drive our growth and to reach the 10,000 transplants in 2028. That's all done through our existing effort and existing network.
Maybe just to help everyone understand that organ management organization kind of proposal you made, just what would that entail if in the future that does come to be?
It entails everything that we're doing today as part of the NOP. The only additive that today we rely on allocation to be done by an OPO staff. What we've proposed to HRSA, which is the division of HHS, to allow TransMedics to follow the same allocation rules and do the allocation directly ourselves. That's the only nuance that we propose that's different than what we're doing today.
With this evolution of the U.S. Transplant Network, because the organ procurement reimbursement model is unique, some investors are concerned that there could be some disruption in the reimbursement system. I'd love to just hear, and I know you're asked this regularly, but just the current state of affairs for the reimbursement environment through Medicare and private payers and maybe the outlook for a stable reimbursement environment as we move over the next 12, 24, 36 months.
That's an excellent question, Josh. Reimbursement in organ transplant is very, very unique, and it's very different than anything that we deal with in medical device practices around the world. To understand why it's unique, you need to understand that organ transplant has been proven to be the most cost-effective treatment for these very chronic, very expensive end-stage organ failure disease conditions. So payers, including CMS, are highly motivated and incentivized to see more organ transplant than less organ transplant. It's more cost-effective than medical care. It's just optimal medical care and letting the patient decline over time because of the multiple rehospitalizations and ICU stays and what have you. So we don't expect significant change in the way organ transplant is being reimbursed because of that huge economical value to payers led by Medicare.
In fact, CMS is one of the drivers behind the modernization of the U.S. Transplant Act because they wanted to see more organ transplants done in the U.S. So from where we sit, we don't expect significant changes to the way organ transplants are being reimbursed because of that one very important fact.
Great. And going back to 2007 when we first met and I was introduced to TransMedics, you were putting on the tape your vision that the Organ Care System would unlock access to donor by cardiac death or circulatory death organs. And lo and behold, here we are. And you've done just that, driven some increased volumes in liver and heart transplants, which has been amazing to see. But that donor by cardiac d eath segment, your penetration is healthy. I think 53% in liver, 66% in heart. And I think investors are trying to determine how much growth is still left just in that DCD bucket. And I mean, our assumption is most of the unutilized organs every year are donor by cardiac death .
But maybe you can just build on that and help us get our arms around just the growth of DCD heart and liver in 2025, 2026, 2027 and how healthy it can be.
There's a lot more growth than what you guys are giving us credit for. The 55% and the 53% and 66%, you need to know that 50% of that pool are not even used for transplant today. We can do better. 50% of available DCDs are not even progressing to become DCDs. So that's one area of growth. Second is you need to know the DCD donor pool is growing. It's the fastest growing segment of the market, and it will continue to do that as long as we're continuing to utilize DCD for transplantation. OCS is going to enable both. It's going to enable ability to grow the 50% that is currently being not progressing to become DCD to consider those for transplant, and because we're going to continue to utilize DCD, we're going to stimulate the growth of DCD segment of the market.
But the vast majority, the vast majority of underutilization today is still in DBD. And that's another mechanism for our growth. That's what the heart and lung next-gen clinical programs are going to be focusing on. So from a growth perspective, we are in the very early innings of our growth cycle here. And that's, I'm talking just heart and liver. Lung, we all know lung has been extremely dormant for us and for others in the field. We are very excited about launching our lung program in the second half of this year. And in that case, lungs, DCDs are not used for transplant. Less than 5% of lungs are DCDs today. So we have a huge, huge opportunity both in DBD and DCD for lungs. And that's for heart, lung, and liver. We haven't talked about kidney.
Kidney would add 25,000 procedures in the U.S. alone from deceased donors, not living donors, deceased donors, and another 25,000 to 30,000 OUS. So huge opportunity in front of us. We're just getting started.
Just understand that DBD indication is another growth layer. But back to DCD and just thinking about some of the cost savings TransMedics can afford the U.S. Transplant Network. I think you agree with your OPO or sign a contract with your customer sign a contract with TransMedics that if there is a failure to progress run, they're not paying for both sides of the flight to and back. But maybe just help us think about, I guess, the system's capacity to continue to grow these DCD organs transplants and why TransMedics is so well positioned here.
Sure. TransMedics is in a very unique position because we control the entire process. We control the technology. Obviously, it's our technology, the NOP, and the vertically integrated logistics gives us the leverage to run the most cost-effective way of managing organs from donors to recipient. Because of that, we always said that we will pass some of that cost efficiency back to the transplant program. We have programs today where DCD, knowing that 50% of the DCDs do not progress, we protect the center from 50% of the logistics cost. We protect the centers from 100% of the technology cost. That is pretty much the bulk of the cost, the centers with experience. No other platform, no other company, no other technology, no other competitor can provide that cost efficiency to the system.
We are uniquely positioned because of the investments we made that gives us that leverage to share that cost efficiency with the transplant program. This is why we're driving more DCD. We did all this to make sure the centers are focusing on the most important variable, getting more organs to their patients, not worried about the cost. We are a transplant company. We're not a logistics company. For us, we should not be making money if the organ is not transplantable, and we also have a very high degree of confidence in our technology. We have the highest rate of utilization in the history of organ transplant at 97.5%. So the risk we're taking is very low, but that is really one of the key catalysts of why the DCD growth in the United States is we remove that fear of cost out of the equation altogether.
We're very excited about that, and we'll continue to offer that cost efficiency to the system.
Excellent. At the Investor Day last year and on the fourth quarter earnings call and our discussions in between and after, you can feel the excitement, or I can sense the excitement in these next clinical programs for heart and lung and to unlock deeper penetration into the DBD segments. And maybe just ISHLT is going to be in Boston in late April. I think you relayed that there'll be some preclinical results presented. And what else should we be expecting there to be? Maybe clinical trial design will be uploaded as well. And then maybe just to start there and also share why you're so enthusiastic about these clinical development programs and what they can do for the growth trajectory.
Sure. So let me start with the latter part. We're very excited about these clinical programs because we believe that these clinical programs will give us a huge catalyst to, one, resurrect the lung market that's been pretty much dormant for the last two and a half, three years, and significantly improve our utilization in DBD and DCD heart transplant by making two things a clinical reality in heart and lung transplant. One , our lung and heart transplant, which we have achieved for liver, but we've never achieved for heart and lung. And two, we are doing the first randomized prospective clinical trials to prove superiority of the OCS platform compared to any other platform in the control side of things, i.e., cold storage, whether it's controlled cold or non-controlled cold. So that's why we're excited.
About the ISHLT, the biggest excitement for us is around these two clinical programs. It's going to be in our lunch and symposium on Monday where we're going to reveal the detailed design. One, we're going to reveal all the preclinical testing in detail that gives us that confidence and that excitement about the impact, the potential impact of these clinical programs. Two, we'll reveal the clinical design that gives hopefully the Wall Street community the confidence of the huge impact on numbers, specifically on DBD and DCD. Also, we're going to be reporting in our symposium about long-term outcomes from the first country that did DCD hearts with OCS in Australia, showing significantly better outcomes of DCD, heart DCD with OCS versus NRP. These are the sort of that for us, that's the most exciting stuff in the ISHLT.
Hopefully, next year, there will be a lot more excitement with some of the early results of the clinical programs will be coming up. But that's the plan for this year.
Excellent. And Gerardo, sorry it's taking so long to bring into the discussion here. But just thinking about the guidance for 2025, 20%-25% revenue growth, you put that stake in the ground at the Investor Day as well in December. Maybe just TransMedics beat their initial guidance by 20% in 2024, more significantly in 2022 and 2023. So there's been a history of, in hindsight, of conservative guidance issuance. Maybe just talk about the philosophy of guidance setting and how much conservatism is baked into 2025. Hand it over to you.
Yeah, I think we're not changing the philosophy. We're continuing with the same philosophy. We want to beat. We want to beat what we put out there. I believe we have strong tailwinds that will allow us to get to the number for the year. We have the end of the year adoption is higher than the average. So that's almost a head start. We have in the service side, all the aviation. Last year, we started the year with 11 planes. We're starting now with 21. That's another head start. And we have, for sure, the clinical programs. So I'm very confident that we'll be there.
Excellent. And then just you issued some margin, high-level margin color, but there will be some margin expansion in 2025. But because service continued to grow as a percentage of revenues, the expansion won't be as strong as 2024. But maybe just to review the margin guidance and then one more follow-up for you.
Yeah, I don't think I said the expansion would be as strong as 2024.
Right, a little bit moderately relative to 2024. I'm sorry I misspoke.
What I found is that I said moderate. And what I found out that the definition of moderate can be from 50 basis points to 700 basis points. So I need to be more accurate on that guidance. So at operating level, we're expecting somewhere between 100 and 150 basis points improvement at operating level. The majority of that will come from operating expenses and then some improvement in gross margin. That's how we are seeing. And we're going to have in the future a much larger, if you will, operating margin extension. But right now, we are really focused on growth. That's really our priority. Investing in R&D, investing in OCS technology, next generation, advancing the kidney program. We're going to reinforce our product management, product development capabilities. So there is plenty to invest still in the business to unlock the growth that is coming.
Great. And the service model, the logistics business, the TransMedics Aviation vision that you've had for a number of years, and that is fully in play now, just talk about how big of a competitive moat ultimately you think TransMedics will have by having the type of control of the skies that you now do and will have even bigger control in the out years?
We never like to thump on our chest about something we're doing. We did it because we saw an opportunity to deliver a better service to our centers. We did it because we think that the only way we can control growth and manage growth and be able to meet the growth demands is by controlling the vertical called logistics. Because historically, the logistics around organ transplants were completely fragmented, was designed around the old model of regional allocation, not national allocation, using 30-year-old planes that is extremely expensive to operate. And they don't travel that far to get organs, which today we're getting organs from Hawaii to anywhere in the United States, from Alaska, from Puerto Rico, from the West Coast to the East Coast, and vice versa. So we think this is a very important thing.
Anybody who wants to grow organ transplant and be in the organ transplant business going forward, that's what's required. And we think it's important for us. It's important for our business model. I can't speak for others. But for us, this is very important. It's one of the secrets that enabled us to get here in a very short period of time. And again, the data speaks for itself. So we're looking forward to continuing to invest in our network and optimizing the network and making sure that that network is not just delivering growth on overall transplant and revenue for TransMedics, but also sharing in the cost efficiency with our transplant partners, the transplant programs that are using that network. And again, we went from 0 to 75% of our NOP volume being done on our own network.
So that speaks of the value that the transplant programs are seeing in that.
Excellent. And I want to just ask you about your perception of potential competition. And you've been facing competition your whole career since you founded the company. And do you feel like competitive headwinds are getting stronger, or are they going to be similar in 2025 versus 2024?
I think competition is very important. We respect the competition. It keeps us honest. It's very important for the market. We're here to machine perfusion for organs for transplant did not exist before TransMedics. So given that this is our zip code, we're not going to leave it to be attacked by competition. But competition, healthy competition is very important in the field. It's a large enough market that multiple competitors can exist. But this is what we do. And we expect our growth to be met regardless of competition. So I'll leave it at that.
Excellent. And so I don't want to put words in your mouth, but it sounds like from your stance on the fourth quarter call today, you still expect OCS to gain share in liver and heart in 2025 and beyond. Obviously, you need to get to the 10,000 preservation run goal in 2028.
Liver and heart, hopefully resurrecting the lung and going deeper in DBD and DCD, and ultimately getting to the kidney in 2027, 2028, but the 10,000 will be met with heart, lung, and liver, regardless of kidney.
Great. Maybe we can just spend the last couple of minutes just talking about that important indication, lung. TransMedics penetration has been a little bit slower. You're reinvigorating the program with this new clinical development or clinical program. Maybe just walk us through how you see maybe just the pace of increased demand from surgeons and transplant centers and what TransMedics needs to deliver in order for lung to kind of catch up with the penetration levels of heart. Maybe not liver, because liver is running a little bit faster.
I think it's very important to deliver to the market technology that overcomes the historical challenges of machine perfusion and lung, which is edema formation and safely doing organ transplant in the morning hours with whatever platform that they're using with superior clinical outcomes. That's what we are focusing on. We want to resurrect that program using our new technology to deliver better outcome for the patient, better outcome for the transplant program. So that's how we're setting the bar. And without burning the clinical trial design and the endpoints, we believe that the designs that we're going to reveal in April will accomplish that. And we cannot wait to actually experience that once the trial is started and we see that impact in the field.
In front of any trial results or clinical trial experience in the field, I mean, how do you see the lung franchise progressing in the first half of 2025?
The first half of 2025 is going to be the same old, same old, very small percentage penetration. It's really we are going to start paying attention in the second half of the year when the lung program is active because we're going to have firsthand view of the way the technology and the market is behaving towards the technology because everything will be run through NOP. We'll know how the field is reacting to the modifications and the improvements in the technology. When we see normothermic lung transplant with better outcomes than standard of care, that's when we know that we've delivered on our promise. Hopefully, starting in 2026, we see that putting these numbers on the board by higher penetration in the lung market than the single digits that we're in right now.
Excellent. I'm seeing the red light go off here, so we've run out of time. But thank you guys so much for participating again. And great to see you.
Thank you, Josh.
Thank you, Josh.