TransMedics Group, Inc. Q3 FY2020 Earnings Call

Thank you, operator. Earlier today, TransMedics released financial results for the quarter ended September 30, 2020. 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 that include forward-looking statements within the meaning of Federal Securities Laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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, our examination of operating trends, the potential commercial opportunity for our products and our future financial expectations, which include expectations for growth in our organization, regulatory approvals and reimbursement and guidance and/or expectations for revenue, gross margins and operating expenses in 2020 are based upon our 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 place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2020, as supplemented by our other SEC filings, including our quarterly report on Form 10-Q for the third quarter of 2020. 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, November 4, 2020. And with that, I’ll now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Thank you, Brian. Good afternoon, everyone, and welcome to TransMedics 2020 third quarter earnings call. Joining me today are Stephen Gordon, Chief Financial Officer; and Dr. Tamer Khayal, Chief Commercial Officer. I want to start by taking a few minutes to reiterate our overall strategy and plans to capitalize on the significant market opportunity in front of us. Simply stated, our goal is to establish and solidify TransMedics OCS technology and services as the new gold standard for lung, heart, liver and ultimately kidney transplants worldwide. TransMedics is uniquely positioned to provide a turnkey technology and service solution to streamline the organ transplant process and expand transplant volumes. We are marketing this strategy in the U.S. under the national OCS service program. To achieve this, we have developed a multi-faceted strategy designed to create a first of its kind national transplant ecosystem that leverages our OCS technology and establishes new regional clinical OCS expertise that is strategically located across the United States. We initiate a working relationship with leading organ procurement organizations to enable us to access the broadest number of potential donor organs for transplants in the U.S. In addition, we are creating a comprehensive new workflow that will enable us to clinically manage and transport donor organs from donor to potential recipients anywhere across the continental U.S. Despite the macro headwinds over the past few months, we have made significant and meaningful progress in implementing this strategy. And we expect to continue to grow our footprint and activities throughout 2021. This program will be another major catalyst for our near and long-term growth for TransMedics. Securing FDA approvals for the OCS pipeline of clinical indications is paramount to maximizing the commercial opportunity within our three transplant markets. These are lung, heart, and liver transplantation. We are confident that despite the challenges posed by the COVID pandemic and the recent FDA panel delays, we have a unique and frankly unrivaled offering that our mid and long-term prospects remain very strong. With that as a backdrop, let me turn to review our third quarter results. Our third quarter net revenue was $7.1 million, outperforming expectations, while overall revenue is down 2% year-over-year. U.S. net revenue grew 36% from Q3 2019. In terms of recovery, we saw transplant volume improve steadily throughout Q3 with lung transplants lagging behind heart and liver due to COVID impact. We expect this clinical phenomenon for lung transplantation to continue throughout the COVID pandemic. Our performance was driven in part by our OCS Heart DCD program, which continued to accelerate through Q3, and we completed enrollment of the OCS DCD heart trial. We recently secured FDA approval for an OCS DCD CAP, or continued access protocol that would enable us to transplant 90 additional patients. We expect this to be initiated in early 2021, given the need for new RV processes, etc., within the transplant centers. In the third quarter, we initiated and booked orders from eight new U.S. heart transplant centers. Meanwhile, our interactive review with the FDA for our OCS Liver PMA is ongoing, and we are confident that we remain on track for potential approval in 2021. This assumes, as we have noted before, an FDA Advisory Panel Meeting, given that it is the first of its kind PMA for normothermic perfusion indication for liver transplant in the U.S. As mentioned, our national OCS service model is continuing to progress nicely in its 30 days. In Q3, our service program in one OPO enabled four lung transplants. What’s interesting is that three out of those four lung transplants were transplanted in new transplant centers that had never used the OCS before. We’re excited about this because that shows the ability to grow our footprint within the U.S. using this national service program. Importantly, we have confirmed interest to expand to three new OPOs in Q4 and a robust pipeline of several OPOs to be initiated over the next several quarters. Turning now to our first OCS Heart indication. While we continue to wait for the rescheduling of our FDA Panel Meeting, we have already submitted all relevant materials to the FDA review team. We continue to believe that the delay is a net positive for TransMedics, given that all data would have been verified by the FDA by the time of the new panel meeting. We’ve been notified that the FDA is currently working to schedule our panel meeting in Q1 2021, and we look forward to announcing the exact date as soon as it is scheduled by the FDA. Let me be crystal clear. Despite this unforeseen delay, we remain extremely confident in the robustness and quality of our clinical data from our OCS Heart PMA. We remain extremely confident in our clinical positions and our ability to address FDA panel questions relating to our OCS Heart PMA. Now, let me cover the COVID pandemic and the potential impact on the remainder of 2020. In looking to the next several months, I would like to reiterate that we are cautiously optimistic with our expectations for the duration of this year. While we have seen incremental recovery in transplant procedures and revenue growth since earlier this year, we’re also cognizant of the strong signs of a potential second major peak of COVID in the U.S. and Europe. Depending on the ability of hospitals to mitigate impact, we may see capacity constraints and disruption to the normal flow of transplant operations as we’ve seen in Q2. Given these uncertainties, we are not restating our guidance for 2020. That said, given the strength of our balance sheet, we are confident in our ability to remain flexible and to drive the business forward despite the ongoing COVID impact and FDA delay on our revenue growth. Now, let me turn to what we are foreseeing for next year for 2021. Looking further out to 2021, in addition to achieving OCS Heart FDA approval, hopefully early in 2021, we’re also looking forward to several key catalysts and milestones that we plan to achieve next year: One, we expect to achieve OCS Liver FDA approval in the second half of 2021. Two, we expect to expand our national OCS service model to cover many of the major transplant and OPO regions throughout the year. Three, we expect to announce the results of the OCS Heart DCD trial in 2021. Four, we plan to file our DCD PMA to the FDA in 2021 for the expansion of our heart indication to include access to DCD donors. Overall, we fully expect that we will have all three OCS products approved and generating commercial revenues in the U.S. in the second half of 2021. Finally, we expect several major scientific and clinical publications reporting the clinical results of OCS programs throughout next year. With that, I will turn the call to Stephen Gordon, our CFO to review our financial results for the quarter.

Thank you, Waleed. I will provide some additional detail on the third quarter results and other financial information in the quarter. For the third quarter of 2020, gross revenue was $8 million and net revenue was $7.1 million. Net revenue decreased by 2% from the third quarter of 2019. And in the U.S., gross revenue was $6.8 million and net revenue was $5.9 million. U.S. net revenue increased 36% from the third quarter of 2019. The organ breakdown on U.S. net revenue was $0.6 million lung, $4.3 million of heart, and $1 million of liver. And ex-U.S. revenue was $1.2 million, that’s down 59% from the third quarter of 2019. Almost all of the ex-U.S. revenue was OCS Heart. As evidenced in our top line results, the impact of COVID-19 and subsequent recovery of transplant volumes has disrupted various trends in our business. A substantial portion of U.S. revenue in Q3 2020 was driven by OCS Heart orders related to our DCD and EXPAND CAP trials. As Waleed mentioned, we had several initial stocking orders in the quarter, which supported the strong heart revenue. On the other hand, the U.S. OCS lung, as well as ex-U.S. business in general have been slower to recover to pre-COVID levels. Our gross margin for the third quarter of 2020 was 71%. This is up from 59% in the third quarter of 2019 and also up from the 65% we reported in Q1 of 2020. While we believe the strength in our gross margin this quarter helps to show a path toward our goal of mid-70s at steady state, our third quarter gross margin was higher than what we would consider typical at this level of revenue. The gross margin was favorably impacted by the higher mix of U.S. revenue compared to ex-U.S. as U.S. sales have a higher average selling price. We also saw favorable impact as we were recovering production volumes from the second quarter COVID impact and also driven by lower overall spending during the period. Total operating expenses were $9.6 million in the third quarter of 2020, that's down $1.8 million from the third quarter of 2019 and down $0.2 million sequentially from the second quarter of 2020. During this period, our spending levels in several areas, including travel, trade show attendance, and other discretionary items continued to be lower than normal. However, we are continuing to add resources and incremental investment in our growth, specifically, in two critical areas: the national service program and our next generation organ care system. Our operating loss was $4.6 million in the third quarter of 2020 compared to $7.2 million in the third quarter of 2019, and our net loss for the third quarter of 2020 was $5.1 million compared to $8.3 million in the third quarter of 2019. Cash, cash equivalents and marketable securities closed at $132.7 million as of September 30, 2020, which equates to a burn of $6.7 million in the quarter. The weighted average common shares outstanding for the quarter was $27.2 million. Finally, while we are not giving specific guidance for Q4, given the impact of the OCS Heart DCD trials ending in Q3 and the current wave of COVID cases, we expect flat to slightly down revenue in the fourth quarter of 2020. So with that, I’ll turn the call back over to Waleed.

Thank you, Stephen. While 2020 brought in significant challenges, it has not impacted our fundamental goal, nor our ability to become the standard of care for solid organ transplants growth globally. We are confident that we are on the right path to achieving this goal, as we established TransMedics as a highly differentiated and reliable partner to major transplant centers in the U.S. Despite the headwinds and delays over the past few months, we are continuing to make significant progress on our strategic initiatives aimed at accelerating our revenue growth and driving durable long-term success. We’re looking forward to 2021, when we expect to have FDA approvals and revenue contributions from the lung, heart, and liver indications. This will put TransMedics at the forefront of a significant growth trajectory for the next several years and allow us to deliver on our vision for the TransMedics business. Thank you so much for joining us on this call. And now, we’ll open up the line for questions.

And your first question comes from David Lewis from Morgan Stanley.

Hi, Waleed and Stephen. This is Cecilia on for David. Thanks for taking our questions. I guess I wanted to start off, Waleed, just with lung, really what you’ve seen through Q2 and as Q3 has progressed, and looking into Q4, just percentage of cases in terms of getting back to a normalized level. I know there are issues with lung, but just kind of how you’re thinking about how centers have kind of focused their attention and really have the ability to drive volumes going forward?

Sure. Thank you, Cecilia. From our perspective, many of the trends I’m going to share on this call to answer these questions are already public on the UNOS webpage. When you look at the weekly transplant volumes for solid organs that are published by UNOS on their webpage, you will find that in Q2, all organ transplants went down to near zero level throughout the majority of Q2. We’ve seen this activity recovering on frankly all solid organs, however, the lung remains the last organ to fully recover. We’ve seen the heart as the leading organ to recover, I would say, to 85% to 90% of the pre-COVID levels followed by the liver, and lung is the last organ to recover, and it’s not near the 85% or 90%. It’s still hovering roughly between 60% and 70%. But the more important trend that we’re seeing also from the same published data from UNOS is with every major peak of COVID activity, there is a significant dip in lung transplant that is not reflected in the heart or liver transplant. Based on our knowledge of the granular level of information we’re getting from centers, the major reason for that is that lung transplants require prolonged ventilation time window after the transplant procedure. This applies two levels of pressure on lung transplant activities: one, we need to prioritize ventilators for COVID patients; and two, they also want to make sure that donors have not been exposed to a COVID environment, given that the COVID is impacting mainly lung tissues. We had our firsthand experience with several donors in Q3 who were otherwise healthy, but they tested COVID positive back in May and were rejected outright for transplant. So that’s why when we saw this dynamic, we believe that this lung phenomenon will continue with us throughout this COVID pandemic. Let me shift and answer the second part of the question: as we look forward, are we going to see the lung continue to lag behind? Overall, I think we cannot predict. I expect in Q4 to see a different dynamic, where we could potentially see the lung becoming the predominant generator of our revenue. But overall, from a transplant activity standpoint, we will continue to see lung volumes lagging behind heart and liver, at least in the near future. But we certainly expect that lung will contribute to revenue for TransMedics even during the COVID crisis.

Great. Thank you, Waleed. And if I could just turn to heart as well, can you just talk a little bit about the dynamics you saw in the quarter, the accelerated DCD Heart enrollment? Really what you’re hearing from centers, the new centers that you called out? And just kind of excitement, I guess, ahead of PMA approval for the initial indication and then the expanded opportunity. Thank you.

Thank you, Cecilia. I mean, the momentum speaks for itself on the heart. The momentum in the DCD Heart indication in general speaks for itself. We finished a 172 patient randomized trial in less than nine months, or about nine months. We have 25 centers that have signed up to be a part of this program, even before the first PMA indication is approved. When we see that level of momentum clinically, we expect to see results that align with that momentum. So that’s number one. Number two, we are working very diligently, as evidenced by our ability to secure a CAP approval within less than 30 days from finishing the original trial, to maintain that clinical momentum. Our number one priority is to continue to allow access to the OCS lifesaving technology to patients in the U.S., while we work with the FDA throughout their bureaucratic process of review and approval. Our partners at the FDA have been extremely understanding and they helped us achieve that goal. So that’s what we’re planning to continue until we achieve the first PMA indication for the heart.

And your next question comes from the line of Robbie Marcus from J.P. Morgan.

Hey guys, this is actually Allen on for Robbie. Just wanted to say congrats on the first quarter to start off. I know you didn’t provide guidance for fourth quarter, but as you look forward to that kind of flat to slightly down target that you pointed to, I just want to double-check, is that year-over-year or quarter-over-quarter, and does that kind of assume the continued trend of COVID-19 given, as you highlighted, we’ve seen these kind of flare-ups and hear around a potential kind of second or third wave, whatever you want to call it?

Hi, Allen. This is Stephen. So I would conclude that Q4 2020 over Q4 2019 is kind of flattish to slightly down. What it means for COVID is exactly kind of what Waleed was just discussing, that we’re seeing a lot of COVID activity and it is going to cause some impact. At the same time, we do see some recovery and we are seeing lung recovery, as Waleed mentioned. Our trials are ongoing, so we feel like we’ve got a reasonable pathway there.

And Allen, I’d like to add to what Stephen had said; no one knows what the second or third wave is going to look like from a disruption to the transplant activity. However, what I can describe is what we know that is different today than we were in Q2. One, many of the key transplant programs are highly sensitized to the fact that we’re in Q4, and they’re trying very aggressively to recover the transplant volume that was lost in Q2. So the established protocols to enable them to continue to do transplant, even within a second or third wave will make a difference. Whether that will materialize, we will have to wait and see. That’s number one. Number two; in Q2, we had not fully initiated our service activities, and it was only limited to just beginning in one OPO. Today, every lung transplant program in the United States is familiar with our activities, and that is extending beyond one OPO, which we hope will have an impact in a big pandemic. We hope it will have an impact. How visible that impact will be, remains to be seen. So the last point I want to make is the strength of TransMedics; as I’ve always said, the strength in the TransMedics business is the track record. We’re not relying on a single product or a single indication. We saw in Q3 a great quarter, given the circumstances. However, it was driven mainly by the heart. We expect the heart to be maybe slightly quieter in Q4 because of the transitioning to the CAP, but we expect the lung and the liver to pick up. So again, even if COVID has an impact across all the organs, if we see that hitting the lung in a disproportionate level, the heart and the liver should help us balance that impact a little bit better.

Got it. And then just a quick follow-up, given the pandemic and the financial constraints that it has put on hospitals, how easy is it for your sales reps to kind of get back on the offensive, or having that conversation when it comes to entering new accounts and getting primed for the full launch, so to speak, of your portfolio next year? Are centers and hospitals really going to have a conversation right now, or are they still encountering some challenges on that front? Thank you, guys.

Thanks, Allen. Listen, I’m not exaggerating nor do I hope that anything would change to alter this phenomenon. We are not seeing any back pressure on our offensive. We’ve never been on the defensive. The opposite is true. We’re seeing people understanding the importance of having access to the service model to give them freedom and better management of the logistics, even during the pandemic. We have not seen any pushback on that front. Furthermore, we are working very hard to ensure that we’re keeping our eyes and ears open wide during this time to make sure that we come out of this a lot stronger and build a strong relationship with these institutions. Overall, we have not seen any impact of COVID on our ability to be offensive on the commercial front. In fact, we’ve seen exactly the opposite; this COVID pandemic has actually initiated a lot more interest in the service model, given the logistical implications of having the organs delivered to the institutions versus sending their teams during the COVID pandemic to do that outside of the region. We hope to continue to see that maturity throughout the next several quarters, and it’s going to reflect itself in revenue growth.

And your next question comes from the line of Suraj Kalia from Oppenheimer & Company.

Hey Waleed, Stephen, can you hear me okay?

Yes, we can hear you, Suraj.

Perfect. Congrats on a nice quarter. So Waleed, forgive me, it's just been jumping around in between quotes. Did you indicate the stocking order for hearts in the quarter?

We mentioned that there were eight new institutions that were initiated in Q3.

Got it. For obviously the delay of the FDA heart panel was disappointing. I’m sure there are valid reasons for that. And I also don’t expect you to discuss any data specifics, but out of curiosity, because we’ve been asked by clients a lot on this. What was the reason for the DCD Hearts utilization rate being lower with OCS or in fact hearts being lost? Would there be physiologically any reason why OCS would be different from just cold storage?

So Suraj, let me make sure I understood the question correctly, so I can address it appropriately. The current utilization rate of donor hearts using cold storage is about 30%. The OCS is not resulting in any lower utilization rate. The opposite is true. The data clearly shows that the OCS resulted in utilization rates of north of 82% in the EXPAND and even higher in the EXPAND CAP. So the utilization rate in the OCS arm is significantly higher than cold storage. So there’s nothing I’m aware of that addresses your question.

That’s exactly what I was looking for, Waleed, because if some of these questions surprised us, everyone is just trying to figure out why that delayed. And Waleed, again, you might have talked about this. How do you see some of the long-term organ damage that we have seen with COVID? What are the implications for TransMedics X years down the line? How do you see this opportunity, if at all? Is this a credible play or would you say there’s a lot of speculation right now? Thank you for taking my question.

Thank you, Suraj. Well, no one, and certainly we don’t like or ever want to be in a position to wish it on anybody. But I think end organ damage as a result of COVID is now becoming clearer and frankly clinically justified. We know that there is endothelial damage, and we know that there is lung damage for sure. The big open question is heart damage and liver damage. If that were to pan out, certainly we expect there will be a higher rate of patients in need for lung transplants. The only open question now is that we’ve seen in Q3 several patients who are ex-COVID patients that required a lung transplant due to complete lung damage caused by COVID. I think that’s publicly and nationally covered in the news. What we know will be seen is how the impact of these endothelial damages translates into heart failure and liver failure. If that pans out, it will likely result in an uptake of younger, healthier potential patients who need heart and liver transplants. Again, we don’t wish that on anyone. I think we have a robust business opportunity and market potential without that cohort of patients, but certainly, from a clinical and pathophysiological standpoint, COVID will have an impact and may potentially increase the number of healthier patients who need organ transplants.

And your next question comes from the line of Josh Jennings from Cowen.

Hi, this is Brian here for Josh. Thank you for taking my questions. To start, I have two questions on the DCD Heart program. The first is, can you just confirm that the longest duration endpoint in the study is the six-month survival endpoint? And does that mean we may see the data from the trial sometime around the middle of next year? And then secondly, can you share if your plan for the DCD filing is to include data from the CAP as well as the study data?

Thank you, Brian. So the longest primary endpoint that we have to meet to file the PMA is six months outcome. That is the longest endpoint we have to meet to file the PMA. However, we’re following all DCD Heart patients for up to one year post-transplant and maybe even longer, but that’s in the hopefully post-market setting, and that’s not going to dictate the timing of the PMA filing. We expect to see the final results sometime in the first half of 2021, and we are driving our team and internal resources to be able to submit that PMA towards the sort of middle of the year to give time for everything to line up and the six months data to be verified and ready for submission to the FDA. To answer the third part of the question, the PMA will go in with the original study, depending on the timing of the review. Remember, this is a breakthrough indication. We hope it will have a much more streamlined and frankly faster timeline than a traditional PMA. But we will have to wait and see. Depending on the timing, if that timing is extended to normal timing of 12 months to 14 months, there will be additional data submitted for supplemental data from the CAP. If that timing is shorter, we may not need to include CAP. But it’s not a requirement for the PMA to go in or requirement for the final approval. It all depends on the timing and how many patients are accumulated in the CAP.

Okay, thank you. That’s helpful. Can you talk about the company’s readiness for either a U.S. launch in liver ahead—potentially ahead of the U.S. launch and the Extended Criteria Heart—or two simultaneous launches? I guess my question is really, are there constraints we should be mindful of, with respect to say manufacturing, or commercial support, should these launch timelines overlap next year?

We know that launch timelines will overlap. We want it to overlap. We’ve been hoping to be in this position for a long time, Brian. From where we sit today, we don’t expect any headwinds relating to logistics, inventory, or even clinical organization. In fact, we are working very hard, in parallel, when we’re streamlining our national program, to have the plug-ins for additional indications once FDA approval is in hand. This is actually what we’ve been doing for lung, and we’ve said that before. This is not news; what we’re doing for the service program in the lung is foundational and fundamental in nature. We will be able to leverage all this work that Tamer and his team have been doing for the last nine months in the launch of the heart and the liver, and it will frankly accelerate the ramp at a much faster pace than what we’ve experienced with the lung.

And there are no further questions at this time.

Great. Thank you, operator. Thank you, everybody for your time. Have a wonderful evening, and looking forward to speaking again in our next earnings call.

Thank you for joining today’s conference call. You may now disconnect.