Thank you, everybody for joining us. Patrick Wood, I run the US MedTech team here. I've got an exciting disclosure for you before we start, which is, please see Morgan Stanley research disclosures website, morganstanley.com/researchdisclosures. I'm sure all of you will be going there. Any questions, feel free to reach out to your sales rep. And with that, very excited to have, Waleed Hassanein, and Stephen Gordon here, CEO and CFO of TransMedics, respectively, for what should be a really fun, discussion for fire side chat. I'm sure you're all familiar with TransMedics. And for those of you who aren't, it's a super interesting story.
Maybe if we kick it off, I think, you know, the 2023 guidance in 2024, you know, it implies a slight slowdown on the second half of the year. I mean, is it realistic to say that some of that's maybe a little bit of conservatism, or are you seeing something in the market that, you know, may come?
Yeah. Well, Patrick, thank you for the kind invitation to be here. Let me clarify. We never gave guidance for 2024. We only gave guidance for the second half of this year, and it is. We beat by $10 million, and we raised the guidance by another $10 million. So, you know, we're conservative in guidance. We highlighted some operational challenges that we're facing. And, you know, one of our main goal is to signify that with these operational challenges we're dealing with, nobody should expect 20%-30% quarter-to-quarter growth. That's really what the purpose of the guidance was. But and we expect a significant growth for our business in 2024, and we will issue guidance for 2024 at the Q1 call.
Midterm, you've given a sort of vision for 10,000 or so transplants. I know you guys, demand has been faster than expected. You've been a little capacity constrained.
Mm-hmm.
Can you help people understand how quickly you can bring capacity online and-
Sure. So capacity for us is a continuum. It's not, it's not a one point. So from a supply capacity of our product, I think we're already at the 10,000, and that's assuming median level staffing and median level efficiency. The next level of capacity is really clinical staffing that supports these cases. As we see more and more NOP cases, going out 24 hours, and the centers are liking what they're seeing, and it's positively impacting their work-life balance, which is one of the huge value proposition of NOP. We need to beef up our clinical staffing. And then the last capacity question is about logistics, and that's where our big investments are focusing on right now, is standing up TransMedics logistics, air and ground logistics, because that's gonna be a huge...
One, it's gonna be a huge bottleneck reliever near term, but also it's gonna be a huge catalyst for the growth of NOP in 2024 and beyond. So-
That seems like a good segue inside. It feels like the next evolution of the business. Maybe for those who are less familiar with, you know, the expansion, the aviation, that side of things, paint the picture of how you see TransMedics long term, as a business.
Sure. You know, as we stated before, publicly, every heart, lung and liver transplant, I would say 95%-97% of heart, lung, and liver transplant, they fly from donor to recipient, and when they fly, they fly a charter flight. The historical model for charter flight was geared towards limitations of cold storage. It was never harmonized. It's operating under sort of mom-and-pop, fragmented, operators across the country that are regionally focused with 30-year-old aircrafts that can only fly somewhere between 250- 700 nautical miles at the outer range. Today, between the NOP, OCS and national allocation of organs, you know, 90% of the organs are flying out longer distance.
We're covering, you know, 3,500 nautical miles going to Anchorage, Alaska, you know, Hawaii, Honolulu, what have you. So it's not scalable. But more importantly, the NOP growth rates have clearly highlighted the huge inefficiency that exists in the system and the capacity constraint that existed in the historical transplant logistics. So for us, we saw this as a huge bottleneck for our growth to get to that 10,000 and beyond number, and that's why we're taking control of it. So if I fast-forward two or three years from now, TransMedics not only will be in charge of the surgical procurement and management of the organ on OCS and the OCS technology, but we'll also be in charge of and billing for all the logistics involved with that organ.
So we see this as a huge, you know, revenue implication, significant margin improvement in the service line, as well as a significant catalyst for the growth of the NOP and the OCS.
Do you think, do you think having access to that kind of a network, because the transplant market's relatively concentrated to some degree?
Mm-hmm. Mm-hmm.
How does that change the discussion that you have with some of the larger centers?
You know, Patrick, we wouldn't invest in this if we don't believe in what I'm gonna say right now. For us, we get the aviation and the logistics business set up right. From our perspective, it's game, set, and match, because every transplant program does not want to be dealing with 17 vendors around aviation. They do not want to be dealing with multiple calls about different quotes from different operators. They do not want to deal with three-four margins stacked up on top of the actual cost of the case. They know who TransMedics is. They trust what TransMedics is doing. They trust the quality of care and the quality of service we provide.
And for us to provide the aviation service and the logistics, it would be, again, we're no longer competing in a market with organ preservation technologies. We are in a league of our own, called organ supply, and that nobody else is in that space. So for us, it's a very exciting time, and frankly, it's we believe that, you know, as I've stated publicly, that the logistics will be one of the biggest catalysts for NOP utilization in this country since the invention of the NOP. So, we're looking forward to it.
And then maybe shifting to DCD, it seems like a very big opportunity in many ways.
Mm-hmm.
For those who are less familiar, can you maybe just highlight DCD and how that works and the state of play today, and how you, I guess, fix the issue that exists in that way?
Sure. So DCD is a big deal. The DCD, the definition of DCD is donor after cardiac or circulatory death. Historically, DCD were a small fraction of the donor pool. They never were utilized for organ transplantation. Today, it's the fastest-growing segment of the donor pool and utilization of organs. The biggest growth in heart transplant in this country is driven by DCD, and it's driven by the OCS being FDA approved for, as the only FDA-approved device for DCD, preservation. So for us, DCD is here to stay. It's one of the biggest catalysts for the overall growth of the market, in the U.S. and around the world that do DCD.
We are extremely fortunate to be the lion's share of these DCDs are done on our platform, and they're done in NOP. The nuance, I think, that Patrick was referring to is this issue about dry runs. This is important to understand that DCD, legally, a donor doesn't become a donor until the heart stops beating. Today, in the early days of DCD donation, different organs accept different windows of time for the heart to stop beating. The shortest is the heart and liver groups. They really start panicking if that time, the window of time from discontinuation of life support until the heart stopping beating, is between 30 and 40 minutes. They usually abort the case around that time. Lung, we could stay till 90 minutes.
The kidneys, we could stay to 120- 180 minutes. So, we see higher rate of donors not progressing to become a donor in heart and liver DCD. We call them dry runs at a range of between 40% and 50%, but that's early. We expect that number to go down over time. So, to summarize, DCD is here to stay. It's a huge contributor to the overall volume growth of the national transplant numbers. It's a great thing for OCS because the lion's share of DCD transplants are done in OCS with NOP. So this is why we're not scaring the centers about the rate of dry run. We're telling them, "Call us. Every time you have a DCD, call us. We'll go. We will put our resources behind you," because we are building the market.
It's early days. Two or three years out, we expect that number to go down, the dry run numbers to go down, and we expect that the overall balance between DCD and DBD to go back to around 50/50 or so.
And maybe, obviously, heart, liver, lung, all have different dynamics in terms of business and long term and different requirements. I'm not asking you to pick your favorite child, but, like, from your perspective, is there one that you're a little more excited about than the others? And if so, why?
No, we're excited about all three of them.
Mm.
They all have their own challenges. Obviously, you know, the liver is growing the fastest, but also that is somewhat expected by us because it's the largest procedural volume of the three organs. It's nearly double the heart and lung combined. But you know, OCS has huge value in all three organs. Lung got negatively impacted by COVID, and we're focusing on reviving that over the next 12- 18 months. And heart, you know, again, the value proposition is clear. DCD hearts cannot be done without OCS. In fact, DCD hearts did not exist before OCS. So, you know, we love all our children equally.
Well, I tell mine, too.
Yeah.
It's not true. XVIVO's cold perfusion trial. Just curious if you have any thoughts on that?
Sure. Thank you for asking. We are very excited about that trial, because obviously, any new trial in the field is an important advancement. We actually think it's gonna further solidify our value proposition for the OCS and NLP because we hope it will show that you cannot do DCD without the OCS. Why do we say that? Because we have data that we will be sharing at the next ISHLT, that will hopefully address that question unequivocally, showing that the hearts that were done with OCS directly, with warm perfusion, perform better compared to NRP. Also, it will add additional cost to NRP, which is a welcome addition for us because everybody complains about the cost of OCS.
Now, the NRP will be more expensive than OCS, but definitely it's an important trial. We think there's a room in the market for cold perfusion because that's why we acquired the LifeCradle cold perfusion technology from BTL, but we see it differently. We see cold perfusion to be the low-cost solution for standard criteria hearts that are 10%-15% of the heart market that we currently don't have access to, that are currently being done with cold storage. So we will have a cold perfusion trial with the OCS device in the next year or two, but it will be focused on a different segment. But we welcome a trial, the XVIVO trial.
We think it's an important part of the business, an important part of the market, so.
On the topic of technology innovation, obviously, you said, you know, LifeCradle, you acquired that side of things. What do you see? Is there still room to go for in terms of OCS technology long term?
No, there's significant, there's significant room. It's really one of our biggest area of focus right now after NOP and, and the logistics aspect of our business. We see, we see, next gen OCS as one of the key catalysts to getting to 10,000 cases and beyond in the U.S. We see automation. We see cloud-based communication. We see remote control to minimize the impact of human interaction with the technology. So it's all to facilitate more NOP cases without the bottleneck of human interaction. So, we're very excited about what's coming, built-in biological sensors. So we don't need to do blood sampling for every test that we do in the organ.
Communicating all these results to the transplant program through the cloud doesn't require human interaction in the middle to again streamline the process, streamline the NOP, and, you know, hopefully get us to be scalable business to go 10,000 beyond and beyond in the U.S.
I appreciate you haven't given us a long-term view on this necessarily, but, you know, thinking about 10,000 organs and long term, you've got a number of moving parts in the business. You got the transportation side, barriers to entry, and a, let's say, a dense customer base. But how do we think about the margin structure for the business therefore, long term, and think about, like, relative price negotiations, but also barriers to entry? Do you have a vision for, like, where you see possibility of the business long term?
I think, I'll address the barriers to entry and let Stephen talk specifically about the margin perspectives. You know, we see barriers to entry in our market as a multilayered approach or strategy. The NOP is a big moat. We always said that, but with adding the logistics control over that, that gives us a bigger, wider, deeper moat around the business that nobody in the industry can access. Again, that puts us in a very unique situation. However, given how we are integral part of this market, we also have to be good corporate citizens within our transplant community and don't use that unique position to gouge the market. I think we're gonna be a very profitable business.
Let's Stephen address the specifics on-
Yeah, I mean, obviously, we expect this to be a profitable business. We're, we're running it to be a profitable business. We, as a device business, we were getting pretty close to profitability now, and with the change in our, you know, business model, it's probably gonna be out another year before we're profitable, but it's, it's not 10 years, right? It's another year out. The margin structure does change. We now have service as a bigger part of our overall business, but it's really all in support of driving more product revenue, right? And so maybe the overall gross margin, where I used to think it was in the mid-70s, maybe it's now in the mid-60s, but it's on a much higher revenue base because we have, you know, an additional, say, $30,000 per case.
money is money.
I know.
If you think of, like, the NOP as an offering, and you think of the customer base, how should we think about the penetration within the biggest transplant centers? Because some of them have some logistics networks already set up, and so in a way, you're displacing some of that. Those are the cases, you know, they try it a bit, and then you see a sudden adoption curve. Like, how do you think about that breakthrough with the customers?
For the NOP and the OCS, that's pretty predictable. You know, our track record points to the following trajectory. They start using the OCS and NOP in the most challenging cases, DCD, longer transport time, older donors, and they do handful of cases, very quickly, very rapidly, and then they kinda take a hiatus for a couple of weeks, trying to make sure that they understand the billing mechanisms for those cases. And then from there, they come back and, you know, once we get them over that billing hump, they continue to grow.
Right now, you know, if we look at the centers that used NOP for the first time last year, we are in, you know, between 70%-80% of their total volume, but their overall volume is growing. The early adopters that really adopted the NOP early and continued, they've nearly doubled their volume year-over-year. For us, it's still early. We're only 18 months into our commercial launch, and we're already at a $200 million run rate. So it's early, but what we're seeing. What the, the. All the signs we're seeing so far are extremely encouraging that this is. That when we say this is a long-term growth business, it's really proven to be the case.
We expect to see early centers go from, like, low single-digit penetration to the high 80s, maybe even 90% penetration over a two-year period and growing their overall volume. So that's what we expect. As far as the logistics piece, you know, some of our competitors have, you know, talked publicly that, oh, they have contracts with the transplant program, and TransMedics is not going to be able to move us. Guess what, guys? We're only three weeks into TransMedics Aviation. We've already displaced them from every account that we did an NOP in. Transplant is not based on contracts. It's based on can you deliver an organ at a reasonable price in the middle of the night?
If you can deliver that and you're there, 100% service availability, no contract will stand, and that's what we're doing, and that's where we want to be doing, you know, when we have full-scale operation. I'm not concerned about any operator having a contract with a center X, because what we've announced to all transplant programs is once TransMedics Aviation is fully operational, any NOP case will not be done except on TransMedics Aviation business. And when we give them our quotes, they know that it's better than any other competitor out there, and we're already three weeks into it, where we're seeing many of the contracts completely dissolving. So we expect that to continue to be the case, and we expect at scale that even won't be an issue.
So that's at least where we see it right now.
Some organs, sometimes the surgeon can be a little funny about wanting to see it themselves ahead of time. How does that fit into the business model?
It's very important. We know that. Given our clinical background, we know that, and from day one, we mapped out the NOP workflow to ensure that the surgeon has full visibility of how the organ is behaving. Starting when our surgeon is in the operating room with the donor, there is a FaceTime call relaying the information of the donor. And now more and more centers, they get comfortable that they only need a regular call after the organ has already been assessed. And then en route, today, there's multiple communication through our HIPAA controlled app to show them pictures, test results on OCS. Our goal is with the next generation OCS, that won't even need to happen.
There will be a cloud-based repository where the surgeon can log in with the UNOS ID, which is their unique identifier for the organ, and they could see the results themselves without even communicating with our team. So that's, that's the next step. That's a very important step, though.
You're quite early in the commercialization journey. We're kind of really at the start, so volatility is kind of to be expected. And cardiac, the heart grew nice sequentially last quarter. There's a little bit of volatility on the year-on-year number. How should we think about heart adoption and the growth curve for half- a heart in the, in the back half of the year and as we look through?
I think, listen, it's, you know, I know that the heart dynamic caught some attention after the last call. We're not concerned. This is the ebbs and flows of organ transplant. There's, we are not concerned. This is early. We got very quickly to 13%-14% of the national volume on heart, even faster than the liver. And now it's just normalizing, and then we expect to see growth again in 2024. You know, we're not concerned about the heart. Again, there are data readouts coming out in the ISHLT early next year. We are communicating some of the results to the users now, and we expect to see another growth in the heart in 2024.
We're not concerned about the heart at all. We are still doing 70%-72% of all DCD hearts in this country on OCS. That's the lion's share of DCD heart. Once we announce the data at the ISHLT, I don't think it's going to be a close call because the data is very, very binary. So we just need to be patient and get the data out there in the proper venues, and I think we'll see that heart growth accelerating again in 2024.
How do you think about the interplay between the heart and NRP? I mean, the latter needs quite a lot of extra labor and service and specialists, but like, how do we think about those two relative technologies?
It's very important. It's a very important question. Again, I don't want to burn the data too much, but we are going to be not showing only clinical outcomes, OCS versus NRP, but also we're going to be showing charge data, OCS versus NRP. And this fallacy that the OCS is more expensive than NRP is going to be proven wrong. And now, if in fact, XVIVO starts a trial and adds another layer of cost on top of the NRP, again, it's going to be game, set, and match for us because it will add more cost to the NRP, where we know that their utilization rate is less than 40%. So, it's not going to be a close call.
But again, we need to wait till the ISHLT data readout, and we'll see the reaction to that.
Obviously, there are other organs in the body. How are you thinking about the possibility longer term to potentially expand into other organs?
We are going to expand into kidneys, but for me, the priority right now is to solidify the logistics and solidify the lung, getting the lung to contribute to our growth trajectory, at least close to the heart. And then from there, we're going to move into kidneys, but it's definitely our next frontier.
When we're thinking about all the organs and, you know, the growth rate over time, I mean, there's obviously potentially you can work down the waiting list.
Mm-hmm.
to the point where, just imagine a scenario
Mm-hmm.
is zero. Do you have a sense what, like, gross organ adds in a year are? Like, just complete the maximum you could ever do. If is 10,000, how much of that is 10,000?
10,000 is 70% of what we're doing today-
Yeah.
-of heart, lung, and liver. So that number was selective, intentionally conservative because of that. We, again, I've stated this publicly, we feel very strongly that we could double the heart and lung volume in the United States with the OCS and with room to spare, with a big room to spare. Again, the numbers don't lie. We have 15,000 donors in the United States. We only get 2,500 lungs and 3,500 hearts. There's a lot of room for growth beyond that. The 10,000 number is, again, it's 70% of today's heart, lung, and liver volume. So, we are definitely gearing up to do a lot more than that. And if DCD continues to grow, that will add a significant layer.
There are opinions out there that we are going to see growth in DCD market, because now as we utilize more and more DCD, there are more and more DCD being reported, that historically were not being reported, in the U.S. because nobody was using their organs, so nobody was reporting them. Now, it's contributing to a higher rate of DCD reporting, which a welcome addition for us.
And obviously now, you know, it's been a public company a little while, but, you know, being public, you see, you have your own internal agenda and debates and discussions, but then there's a whole other external discussion, and those don't always match. So I guess, are you like, where is the focus internally that you don't see externally in the discussion? Or vice versa, like, where, where is there loads of attention externally, but
Yeah. Yeah. So we focus, obviously, we have to balance both. But for us, we're focusing on building the fundamentals of our business. We believe that we have a tremendous business here with huge growth potential near, mid, and long term. We believe we're in the early innings of that growth trajectory. We're focusing on is building a solid foundation to capitalize fully on this opportunity. That's our internal focus. Our external focus is to address all the confusion that might exist as we continue to grow, and also to manage expectation properly, to make sure that whisper numbers don't get out of control. You know, it's a balancing act, but we love it, and, you know, it's exciting. I don't know, Stephen.
Yeah, no, I think, look, we're focused on you know, executing and creating, you know, what we know to be true. So sometimes, like NRP is a great example. Like, yeah, there's a lot of talk about NRP. In the meantime, you know, we're on our way to doing 2,000 transplants this year, and there's, you know, a handful, not a handful, more than a handful of NRPs. But, you know, it's not a huge concern for us that... You know, we're focused on something much bigger.
Yeah. I guess to summarize, we're very good at deciphering what's noise and what's real. And we're very good, and we're very accustomed to dealing with lots of data points, internal, external, market dynamic, competitive dynamic. And, you know, I guess, I hope our execution speaks for itself. You know, that's our track record, so.
I think with that, we're almost perfectly at the ten minutes past mark. So thank you so much.
Great. Thank you.
Appreciate it.
Thank you. We appreciate it. Great, Patrick, thank you so much. We appreciate it.