TransMedics Group, Inc. (NASDAQ:TMDX) Q1 2024 Earnings Call Transcript May 1, 2024

TransMedics Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to the TransMedics First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Laine Morgan from the Gilmartin Group for a few introductory comments.

Laine Morgan: Thanks, operator. Earlier today, TransMedics released financial results for the quarter ended March 31, 2024. A copy of the press release is available on the company’s website. Before we begin, I would like to remind you that management will make statements during this call, including during the question-and-answer portion of the call, that include forward-looking statements within the meaning of federal securities laws. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including without limitation, are an examination of operating trends, the potential commercial opportunity for our products and timing of new clinical programs and our future financial expectations which include expectations for growth in our organization and guidance and our expectations for revenue, gross margins and operating expenses in 2024 and beyond are based upon current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not undue reliance on these statements. Additional information regarding these risks and uncertainties appears under the heading Risk Factors of our Form 10-K filed with the Securities and Exchange Commission on February 27, 2024 and our subsequent Form 10-Q filings and the forward-looking statements included in today’s earnings press release which are available at www.sec.gov and on our website at www.transmedics.com. TransMedics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, April 30, 2024. And with that, I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Waleed Hassanein: Thank you, Laine. Good afternoon, everyone and welcome to TransMedics’ first quarter 2024 earnings call. As always, joining me today is Stephen Gordon, our Chief Financial Officer. For the past two years, TransMedics has delivered exceptional revenue growth while making transformational investments in our business. 2024 represents another crucial year, not only for exceptional growth but also for broadening our infrastructure and product pipeline to drive further growth, profitability and importantly, increased transplant volumes. Specifically, we are focused on three verticals; first, completing the initial buildout phase of our TransMedics aviation fleet and transplant logistics infrastructure. Second, preparing for the launch of three major new clinical programs to accelerate OCS lung and OCS heart adoption and expand our clinical indications for OCS heart in the US.

And finally, growing the overall, national transplant volumes even further through our one of a kind NOP program. On every front, we have started the year with very strong momentum towards achieving these goals. With 1Q results representing a new high watermark for our business, let me review the key highlights for first quarter performance. Total Revenue for Q1 grew to $96.9 million, representing 133% growth over Q1 2023 and a 19% sequential growth from Q4 2023. This growth was achieved through increased utilization of both, OCS product across lung, heart and liver, as well as TransMedics transplant logistic service. I want to highlight the diversified nature of our growth to dispel any potential misperception that our growth is only driven overwhelmingly by transplant logistics revenue growth.

Said differently, we fully expect -- I repeat, we fully expect our future growth to be driven by both, increased product and transplant logistics adoption. TransMedics transplant logistics service revenue for Q1 was $14.5 million, up from $9.2 million in Q4 of last year, representing approximately 58% growth quarter-over-quarter. We are continuing to demonstrate that our integrated and cost efficient TransMedics NOP and logistics service infrastructures are delivering real value to transplant programs across the US. We remain focused on expanding our operational capabilities for TransMedics logistics throughout 2024 which I will detail further later in the presentation today. Our overall gross margins for Q1 was 62%, up from 59% last quarter and in line with our expectations.

We are extremely confident that we will be able to further improve the gross margin over the next 12 to 18 months as we achieve more leverage of scale in both, product and service operations. The strong growth in revenue and gross margins enabled us to deliver GAAP operating profit of $12.4 million which presents 13% of total revenue. Net income was $12.2 million. We are very proud to have achieved these profitability metrics while still investing heavily in future growth. We remain laser focused, however, on delivering sustainable positive operating cash flow over the next several quarters. Before moving on to our momentum beyond our financial performance, I'd like to take a moment to recognize the entire TransMedics team which had -- which has worked tirelessly to achieve these results.

We are focused on execution to build upon the Q1 result. Now with that background, let me provide more detail across key operating metrics. As I stated above, we set a new high watermark for case volume across all three organ markets in Q1. Overall, NOP contribution remains at 98%-plus of our case volume; a trend which we expect will continue throughout the foreseeable future. Turning now to the key TransMedics transplant logistics metrics. Through Q1 we continue to expand our fleet of owned aircrafts reaching 14 on aircrafts by end of the quarter. Meanwhile, the daily average number of active TransMedics aviation planes were 9 planes in Q1 compared to 7 in Q4 of 2023. We expect this number will continue to increase throughout the year as we strive to reach 15 to 20 operational aircrafts by year-end.

Our owned aircrafts covered approximately 49% of our NOP flight missions in Q1 compared to 35% in Q4 of 2023. This further underscores the potential long runway to drive additional growth and maximizing efficiency across our transplant logistics operations. As we stated before, at scale we fully expect to cover 80%-plus of the total NOP missions using our TransMedics logistics services for both, air and ground transport. We will continue to use carefully selected highly reliable and safe operators for supplemental lifts to support our additional missions. From a customer footprint perspective, we have also continued to grow the number of programs that are using our transplant logistic services. In Q1, approximately 105 US transplant programs used TransMedics logistics compared to approximately 97 in Q4 of 2023.

As we have rapidly achieved this critical mass of our users, we are now focusing on going deeper within these programs and meeting more of their transplant logistics needs going forward. Overall, we're very pleased with the early success of our transplant logistics services and are confident that transplant programs are seeing the significant cost efficiency and reliability of TransMedics logistics compared to historical model. We look forward to expanding further throughout the year and into 2025 as we scale our air fleet and ground operations. We are also encouraged by our growing base of clinical evidence from real world outcomes and the growing excitement around our offering across clinical transplant users. We saw this excitement firsthand in April of this year as we attended the International Society of Heart and Lung Transplant Conference in Prague.

At the meeting, several scientific presentations by transplant academic experts demonstrating the value of OCS heart and OCS lung were presented. Here are the key highlights. Dr. Jacob Schroder from Duke presented the OCS Heart Perfusion or OHP registry experience with DCD heart transplants in the US. The data demonstrated that OCS heart was used in approximately three quarters of all DCD heart transplanted at OHP registry centers. The data also demonstrated that OCS DCD heart transplants had superior patient survival outcomes compared to NRP DCD transplants in high-risk recipients. This provided evidence that OCS heart affords better protection of the DCD donor hearts as compared to NRP. During his presentation, Dr. Schroder commented that the overall OCS NOP cost is more favorable to NRP costs when factoring in the cost of dry runs, the clinical support overhead and the hardware costs.

Importantly, Dr. Schroder highlighted that the OCS NOP enhances the ability for any heart transplant program in the US to offer the clinical service of DCD heart transplantation to their patients without the burden of overhead costs and clinical learning curves, giving the standard or unified procurement and management of donor hearts by the TransMedics NOP staff. Next, Dr. Mani Daneshmand from Emory University Medical Center presented the outcomes of OCS BCD compared to standard-of-care DBD hearts in the US. The data showed that OCS DCD hearts were transported nearly double the distance from donor to recipients and had doubled the cross-clamp time [ph]. This signifies the broader access to DCD donors afforded by OCS NOP. The data also showed that despite higher risk donor factors, OCS clinical outcomes were similar to standard criteria DBD outcomes in the US.

This further validates the safety profile of the OCS Heart. Simply stated that, the OCS enabled a DCD heart transplant to have similar survival outcomes to the US National DBD heart transplant outcomes which are the best in the world. Dr. Daneshmand also highlighted that the increased use of OCS NOP has led to significant reduction in moderate and severe primary graft dysfunction or PGD, after OCS DCD heart transplants. If your PGD is the most severe early post-heart transplant clinical complication and historically has been associated with worse, short and long-term patients survive. Next, Dr. Mauricio Villavicencio from Mayo Clinic presented the OCS Heart DBD experience from the OHP registry. The data showed that OCS NOP resulted in excellent post-transplant clinical outcomes from DBD donors compared to standard criteria donors preserved with static cold storage, despite having 3x longer distance travel and doubled cross-clamp time in the OCS NOP arm [ph].

Again, this data validates the broader access to distant donors and potential for improved workflow afforded by the OCS NOP. Next, Dr. Gabe Blore [ph] from Baylor St. Luke's presented the OCS lung expand trial 5-year clinical results. The data showed that the OCS lung expand lungs from extended criteria DBD and DCD donors had similar survival and freedom from chronic rejection at 5-years post-transplant compared to routine standard criteria DBD lung transplanted at the same program over the same time period. These results support the huge clinical potential of increasing donor lung utilization for transplants using extended criteria DBD and DCD donors in the US. Finally, Dr. Steve Huddleston, from the University of Minnesota shared the latest data from the thoracic OCS perfusion registry or the TOP registry.

The data showed that the OCS lung enabled the use of extended criteria donor lungs for DBD and DCD donors and resulted in post-transplant survival outcomes that are similar to standard criteria lung transplant, despite nearly having doubled the cross-clamp time, again, further validating the huge clinical impact on expanding the donor pool and the potential growth of lung transplant volumes in the US. Collectively, these presentations once again highlighted our ever-growing body of positive clinical evidence, as well as the exceptional clinical outcomes enabled by OCS and NOP. Now, let me shift gears and talk about our plans to further grow OCS adoption and the overall national US transplant volumes even further. Specifically, I want to discuss three new major clinical programs designed to grow adoption of our OCS lung and OCS heart, as well as expand our OCS heart FDA clinical indications in the US.

Pending FDA approval, we expect that all three programs will initiate enrollment within the next year. Let me start with detailing the OCS lung program. As we stated many times, we believe that the clinical stakeholders across the United States lung transplant market need to be reintroduced to the potential positive clinical value of the OCS lung perfusion and assessment. More specifically, we believe the ability of the OCS lung and NOP to increase their transplant volumes, improve their post-transplant clinical outcomes and enhanced workflow remain underappreciated. Our goal is to replicate the successful outcomes achieved with OCS liver where 62% of transplant volumes at OCS NOP programs are now done in the morning working hours compared to middle of the night and replicating that with the OCS lung.

Said differently, we want to have lung transplant programs and clinical and surgeons experience firsthand the value of OCS NOP to enable morning transplants while growing their overall transplant volumes and improving their post-transplant clinical outcomes. To do this, we're planning to launch a new clinical program to achieve the following. First, we will target a minimum of 12 to 24-hour plus of OCS lung perfusion using the NOP model to increase access to transplantable donor lungs and optimize work hours for transplant program staff. Importantly, we aim to prospectively randomize between OCS NOP versus controlled cold static storage to assess a clinical value. We also plan to use newly developed near physiologic OCS perfusion solution combined with blood to minimize the impact of longer perfusion on lung edema and potentially eliminate any clinical concerns of lung perfusion times on lung function.

We will also use next-gen perfusion circuitry [ph] and ventilation modality to maximize the protection for the donor lungs during prolonged OCS perfusion and ex-vivo ventilation [ph]. We expect the entire clinical program to be managed by NOP to increase the rate of enrollment and adoption during the trial phase. From a timing perspective, we are targeting initiation of this program sometimes around the end of 2024. Now, let me move on to our planned OCS heart programs. We are also actively working on two distinct large OCS heart programs in the US that will be also managed exclusively via the OCS NOP model. The first is OCS heart therapeutic warm perfusion for DBD hearts. This program is aimed at increasing utilization of DBD hearts from both, standard and extended criteria donors to increase the overall heart transplant volumes in the US.

We intend to target 12-hour plus of OCS heart perfusion using the NOP model to increase access to donor hearts and optimize the work working hours for our transplant program staff. We will also aim to prospectively randomized OCS NOP versus controlled called cold static storage to assess the clinical value. We're planning not only to use our newly developed near physiologic OCS perfusion solution combined with blood but in this particular program we're adding a new proprietary metabolic enhancing therapeutic agents to maximize protection of the donor heart and improve its post-transplant clinical performance. From a timing perspective, we are talking are getting initiation some of this program sometimes around the end of 2024. Finally, our second heart program is a new program that will require a new technology from the ground-up.

It's aiming at OCS heart cold oxygenated perfusion for DBD hearts that are preserved for less than six hours. This program is designed to support a new FDA clinical indication for OCS heart in the US that will allow us to perfuse and preserve standard criteria DBD hearts for less than six hours which is not our current clinical indications in the US. To do this, we're planning to offer a new lower cost product that utilizes cold oxygenated blood-based perfusion technology. More specifically, we're developing our new pulsatile [ph] fully portable cold perfusion technology and cold perfusion circuitry to achieve easy-to-use system for use within our existing NOP model. Again, we'll aim to prospectively randomized to hold controlled cold static storage to assess the clinical value.

And we are targeting early 2025 to initiate this important clinical program. As you can see, we are advancing a very strong pipeline of clinical programs designed to drive significant growth in OCS case volume and the overall national cardiothoracic transplant volume in the US. However, we're not stopping here. We're also continuing to invest heavily in our next-gen OCS technology platform for all four -- for all three organs that will be highly automated, optimized for NOP workflow and designed to streamline the clinical support workload to allow us to continue to deliver the highest clinical quality of care and achieve better product leverage. We plan to share more details in this initiatives later this year. To summarize, we are highly encouraged by our Q1 performance and are focused on several initiatives designed to further propel growth for TransMedics products and services.

Given our strong performance in Q1, we are increasing our annual revenue guidance to $390 million to $400 million which represents 61% to 66% growth over full year 2023 revenue. With that, let me turn the call to Steven to cover the detailed financial results for the quarter.

Stephen Gordon: Thank you, Waleed. I will now provide some additional detail on the Q1 results and other financial information for the quarter. So starting with revenue. For the first quarter of 2024, our total revenue was $96.9 million. This is an increase of 133% from the first quarter of 2023 and a 19% sequential increase from last quarter. The $96.9 million included $0.9 million related to our flight school. We have now exited all of the Summit Legacy Charter business. So other than this $900,000 from the flight school, all revenue is transplant-related. In the U.S., transplant revenue was $91.9 million. U.S. revenue increased 145% from the first quarter of 2023 and 22% sequentially from last quarter. And as Waleed said, Q1 2024 revenue included $14.5 million of logistics revenue.

The organ breakdown on U.S. revenue was $67 million of liver, $20.2 million of heart and $4.7 million of loan, all organs growing substantially over Q1 2023 and sequentially from Q4 2023. Ex U.S. revenue was $4.1 million, a 1% increase from Q1 of 2023 and a 16% sequential increase from last quarter. The ex U.S. breakdown was $3.1 million of heart and $1 million of lung. Next, on the product and service revenue. As a reminder, our service revenue includes the added amounts we charge for the NOP clinical service of surgical procurement and organ management and also includes the logistics revenue. The flight school is also included in service rep. In Q1, product revenue was $61.3 million and service revenue was $35.5 million. So the service portion was 36.7% of the total.

Gross margin for the first quarter of 2024 was 62%. This is down from 69% in the first quarter of 2023 and up from 59% last quarter. In comparison to Q1 last year, this reflects the higher service component of our business which did not include logistics in the first quarter last year. Product margin was 77% in Q1, recovering as expected to more normalized product margins from the 73% we saw in Q4 which included a onetime unfavorable item. Service margin was 36%, improved from 35% last quarter as we continue to gain efficiency in our service offering. And as a reminder, all costs related to aviation, including fuel, pilots, maintenance and depreciation, are included on our service COGS. Total operating expenses for the quarter were $47.5 million, 54% above Q1 2023 OpEx. This expense growth was driven by 94% growth in R&D related to investments in new product development, NOP tools and product quality and regulatory resources.

SG&A grew 45%, primarily related to higher personnel costs and overall corporate infrastructure. I want to point out that our operating expenses grew significantly throughout the year last year. So the year-on-year growth comparison next quarter should not be as pronounced as it was this quarter. Given the strong revenue and margin performance, we were able to deliver GAAP operating profit of $12.4 million or 13% of revenue. Net income was $12.2 million. These compared with an operating loss of $2.6 million and also a net loss of $2.6 million in Q1 of 2023. And basic earnings per share in the quarter was $0.37 and diluted earnings per share in the quarter was $0.35. Total cash at the end of the quarter was $350.2 million as of March 31, 2024.

This is down $44.6 million from December 31, 2023. $39 million of cash was used to purchase 3 additional jets in Q1, bringing our total number of owned jets to 14. Basic weighted average common shares outstanding for the quarter were 32.8 million and diluted weighted average common shares outstanding for the quarter were 34.7 million. In summary, Q1 was a very successful quarter financially for TransMedics. We grew our revenue both annually and sequentially, improved our gross margin and showed good drop-down to profitability. All of this continues to validate our strategy of leveraging our NOP clinical service and logistics service to increase utilization of the Organ Care System and to increase the number of transplants in the U.S. Finally, just to repeat Waleed's earlier comment, we are updating our annual revenue guidance to be in the range of $390 million to $400 million which represents 61% to 66% growth over the full year 2023.

Now, I'll turn the call back to Waleed for closing comments.

Waleed Hassanein: Thank you, Stephen. Overall, we are humbled and proud of our Q1 results as we simultaneously drove continued revenue growth, expanded our infrastructure and achieve profitability while advancing our clinical and R&D pipelines. We're looking forward to continuing to execute on all the major initiatives throughout 2024 to drive broader adoption of OCS NOP and growth of the overall transplant volumes to help patients in need of an organ transplant. With that, I will now turn the call to the operator for Q&A. Operator?

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