TransMedics Group, Inc. Q3 FY2025 Earnings Call

Good afternoon, and welcome to the TransMedics Third Quarter 2025 Earnings Conference Call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Laine Morgan from Gilmartin Group for a few introductory remarks. Thank you.

Thank you. Earlier today, TransMedics released financial results for the quarter ended September 30, 2025. 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. These forward-looking statements address various matters, including, among other things, future events, results and performance, financial guidance and projected expectations, potential market and business conditions, our examination of operating trends, the potential commercial opportunity for our products and services, the potential timing, outcome and impact of new clinical programs, and our potential initiatives, opportunities and plans in the U.S. and globally, including timing and expectations. These statements involve risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by the forward-looking statements. Accordingly, you should not place undue reliance on these statements. Additional information regarding these risks and uncertainties appears under the heading Risk Factors of our Form 10-Q filed with the Securities and Exchange Commission on July 30, 2025 and our subsequent SEC filings, which are available on our website. You can also find the company's slide presentation with information on third quarter 2025 results on the Investor Relations section of the TransMedics website. TransMedics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements.

Thank you so much, Laine. Good afternoon, everyone, and welcome to TransMedics' Third Quarter 2025 Earnings Call. Joining me today is Gerardo Hernandez, our Chief Financial Officer. Organ transplantation remains a key area of focus for policymakers in both the U.S. and around the world. In the U.S., the ongoing national modernization initiative is focused on growing transplant volumes, while streamlining organ donation, coordination and oversight processes. Internationally, efforts are similarly focused on maximizing utilization of donor organs for transplants, while also finding more efficient ways to manage organ procurements and improving post-transplant clinical outcomes. Globally, TransMedics is uniquely positioned as the ideal solution to address these initiatives through our differentiated OCS technology, NOP clinical and logistical services and our proprietary transplant digital ecosystem. As we will outline today, we are seeing strong signals supporting this conviction. We are now laser-focused on capitalizing on our momentum worldwide to provide our unique solutions to promote organ transplantation and save more lives. We are extremely proud of our strong results achieved in Q3 despite the anticipated and typical transient seasonal slowdown seen in the U.S. national transplant volumes as reported by UNOS OPTN data in Q3. Specifically, we're very encouraged by the year-over-year growth trend, which we strongly believe is a more relevant and meaningful performance metric, especially in a seasonal quarter like Q3. Let me share the summary of our results for 3Q 2025. Total revenue for 3Q 2025 was approximately $144 million, or exactly $143.8 million, representing approximately 32.2% growth year-over-year. We experienced year-over-year growth across all 3 organ segments, driven by higher overall utilization and center penetration of OCS NOP in the U.S. Specifically, we saw year-over-year growth of nearly 41% in liver, approximately 14% in heart and approximately 5% in lung revenues in Q3. Our overall gross margins for 3Q was approximately 59%, representing 2.9% growth year-over-year. We delivered operating profit of approximately $23.3 million in 3Q, representing more than 16% total revenue, up from $3.9 million or approximately 4% of total revenue in 3Q 2024. And finally, we have driven strong cash generation. We have significantly improved our billing processes and have maintained a healthy AR collections, which resulted in the addition of approximately $65.6 million of cash to our balance sheet as we ended 3Q with over $466.2 million in cash. Shifting now to TransMedics' transplant logistics infrastructure and performance. Transplant logistics service revenue for 3Q was $27.2 million, representing approximately 35% year-over-year growth. Throughout 3Q, we owned and operated 21 aircraft before adding our 22nd aircraft in October, which we were targeting to end 2025 with 22 owned aircraft. In 3Q, we maintained coverage of approximately 78% of our NOP missions requiring air transport compared to approximately 61% in Q3 of 2024. Meanwhile, we have continued to add to our pilot crew, enabling us to experiment with double shifting a portion of our fleet by year-end. We are pleased by our strong operational 3Q performance achieved despite the expected transient seasonality. We are confident that this seasonal impact is behind us as we have seen volume rebound in September and into early Q4. Moving now to update on our Next-Gen OCS ENHANCE Heart and DENOVO Lung clinical programs. We are thrilled to report that several U.S. heart and lung transplant centers are approaching the initiation of patient enrollment for the ENHANCE Heart and DENOVO Lung trials. We remain confident that the enrollment will start in Q4 2025. Meanwhile, our team is actively working to complete our responses to the remaining FDA questions and expect that all IDE conditions for both trials will be satisfied by early next year. We're very excited about initiating these 2 programs to demonstrate the potential positive clinical impact of our Gen 2 modification on heart and lung transplantation in the U.S. Importantly, we hope that these programs will catalyze significant OCS Heart and OCS Lung adoption in the U.S. in 2026 and beyond. Now, please allow me to discuss our effort to expand our TransMedics NOP model outside of the U.S., which represents a key midterm growth driver for TransMedics. As I stated before, TransMedics' U.S. NOP success has been highly visible across the global transplant markets. This resulted in many international geographies engaging with TransMedics to explore the potential for replicating all or a portion of our NOP model and our integrated logistics platform to help them grow their transplant programs. Importantly, through these market engagements, we became very aware of their significant needs for dedicated transplant logistics support for reasons similar to those we've seen and experienced in the U.S. To that end, in September, we were excited to announce our plans to launch our first OUS NOP program in Italy. We are now actively establishing up to 4 hubs to serve as launch points for that program, strategically covering both Northern and Southern Italy. We are also actively staffing up our Italian clinical support teams. Now, it is important to note that we are planning to start building a European air and ground transplant logistics network similar to the one we have established in the U.S., however, appropriately sized to meet the European needs. Given our current knowledge of the Italian and European transplant logistics need, we see a significant opportunity for TransMedics to capitalize on by replicating our transplant logistics service in Europe. Please allow me to repeat, given our current knowledge, we see a significant business opportunity and revenue-generating opportunity by replicating our transplant logistics service in Europe to meet the growing needs for a dedicated transplant logistics network in European countries. We expect the Italian NOP program to launch in the first half of 2026. We're also currently engaged with several other European countries and also engage with regions outside of Europe to expand our program beyond Italy in the coming years. Stay tuned. This initiative will serve as an additional growth catalyst beginning as early as late 2026 and more meaningfully in '27 and beyond. With that, let me turn to the here and now. We are laser-focused on finishing out 2025 strong to round out another great year for our business and potentially grow the U.S. national transplant volumes for the third consecutive year in a row. We are continuing to drive adoption of our OCS NOP across all organs. We are expanding our OPO partnership to increase organ utilization for transplantation around the United States. Next week, we are hosting our annual transplant leadership forums in Boston with approximately 200 transplant leaders from all transplant market segments expected to participate. We are continuing to strengthen our clinical support staffing to meet the growing demand. And finally, we remain on track to begin double shifting a portion of our aircraft fleet by year-end to enhance operational efficiency. We are confident that all these activities will position us well to end the year strong and be in a good position for the expected ramp in adoption in 2026. Before I conclude, please allow me to provide a status update on our long-term growth initiatives and our planned new global headquarters and manufacturing facility. First, we are very pleased with the preclinical and product development progress of our OCS Kidney program, which is underway and was announced publicly at the World Transplant Congress Scientific Conference in August. We expect to reveal the design of our OCS Kidney device in early 2026 at the American Society of Transplant Surgeons Winter Symposium. Second, the development of our Gen 3 OCS platform is well underway with significant progress already made on many of the advanced technology platforms that will be encompassed in that next Gen 3 OCS platform. We expect to share more detail on Gen 3 OCS platform in the second half of 2026. Third, as Gerardo will outline later, we are actively investing in critical business infrastructure systems to better position TransMedics to scale and grow with strong controls and efficiencies. Finally, we have narrowed down our selection for the new global headquarters of TransMedics to the city of Somerville, a northern suburb of Boston. We are in the final stages of lease negotiations for a state-of-the-art new building to combine all of our functions in one campus, and we expect to announce the location in early January 2026. As you can see, we are not slowing down, and we are growing our technology platform and geographical outreach. As I have stated before, our near-term capital allocation strategy is a growth-oriented strategy. That said, while we expect operating margins to fluctuate somewhat as we deploy capital across these initiatives, we have a high degree of confidence in our long-term ability to deliver substantial top and bottom line growth. Now, let me conclude my remarks by commenting on our expectations for the remainder of 2025, which Gerardo will detail further. Based on our performance to date and our expectation to end the year strong, we are narrowing the range to raise the midpoint of our full year 2025 revenue guidance. We are now guiding to a range between $595 million to $605 million for full year 2025 revenue. This represents approximately 36% growth over the full year 2024 at the midpoint.

Thank you, Waleed. Good afternoon, everybody. I am pleased to be here to discuss TransMedics' third quarter results. Please note that a supplemental slide presentation with additional details on our third quarter 2025 results is available in the Investors section of our website. As Waleed highlighted, we sustained momentum through the third quarter with disciplined execution across the entire TransMedics team. Despite the typical seasonal slowdown in the U.S. transplant activity, where Q2 tends to be one of the strongest periods followed by some moderation, our performance remained strong. Continued benefits from our ongoing strategic investments drove solid performance across both product and service lines, along with continued margin expansion and improved profitability versus Q3 of 2024. It's worth noting that in our earlier years, our rapid growth trajectory offset the natural seasonality in the U.S. transplant activity. As we've reached greater scale, our results have started to follow those underlying market dynamics more closely, even as the business continues to expand at a healthy pace. Total revenue for the third quarter was approximately $144 million. U.S. transplant revenue was approximately $139 million, up 32% year-over-year and down 9% sequentially. By organ, liver contributed $108 million, heart with $27 million and lungs with $4 million. OUS revenue was $3.6 million, up 41% year-over-year and down 13% sequentially. OUS revenue by organ was $3.2 million in heart, $0.3 million in lungs and $0.1 million in liver. Product revenue for the third quarter was $88 million, up 33% year-over-year and down 9% sequentially, reflecting continued momentum across both liver and heart programs and solid underlying activity levels compared to 2024. The sequential decline was in line with the typical seasonality moderation in transplant activity during the third quarter. Service revenue for the third quarter was $56 million, up 31% year-over-year and down 8% sequentially. The primary driver of growth was logistics revenue, which increased 35% year-over-year, reflecting continued expansion and strong utilization of our aviation fleet compared to 2024. Sequentially, logistics revenue declined 9%, consistent with the expected seasonal slowdown in transplant volumes during the third quarter. Total gross margin for the quarter was approximately 59%, up nearly 290 basis points year-over-year and down roughly 260 basis points sequentially. The year-over-year improvement was driven by higher fleet utilization, cost efficiencies in logistics and limited unplanned aircraft downtime. We are also starting to see early benefits from spreading the scheduled maintenance more evenly throughout the year. Sequentially, the decline mainly reflects lower activity levels in the quarter and the impact of investments we are making in infrastructure to drive future efficiencies and support our anticipated growth in 2026. Total operating expenses for the third quarter of 2025 were $61 million, up 8% year-over-year, and the increase was primarily driven by a 7% increase in R&D expenses, reflecting continued investment in our innovation pipeline and the ramp-up of our product development capabilities. SG&A expenses grew 8% year-over-year, reflecting ongoing expansion of our IT infrastructure and investments in strategic growth initiatives. Sequentially, total operating expenses were up 2%, primarily driven by an increase in SG&A in support of our ongoing expansion activities. Operating income for the quarter was $23 million, up 494% year-over-year and down 36% sequentially. Operating margin expanded to 16% compared to 4% in the prior year. Net income for the third quarter was $24 million, representing a 477% year-over-year increase and a 30% sequential decrease. Earnings per share were $0.71 and diluted earnings per share were $0.66 for the third quarter of 2025. We ended the quarter with $466 million in cash, up $66 million from June 30, 2025. This increase was driven by strong operating cash generation, supported by continued improvement in our billing processes and healthy collections, reflecting our focus on efficiency and disciplined working capital management. Overall, our third quarter performance reflects the same disciplined execution, efficiency gains and progress across our clinical and innovation programs that we've demonstrated throughout the year. Together with the scalability of our model, these results continue to validate our ability to deliver strong financial performance and sustained momentum through the rest of 2025 and beyond. Looking ahead, as Waleed mentioned before, we are narrowing our full year revenue guidance to a range of $595 million to $605 million. With only 1 quarter left in the year, this reflects our increased visibility and continued confidence in the strength of the business. At the midpoint, this represents roughly 36% growth over 2024, driven by expanding transplant volumes and sustained momentum across our service platform. In terms of gross margin, as mentioned in previous calls, we expect overall margins to remain around 60% over the coming years. This outlook reflects the various factors influencing both product and service margins beyond just mix. As we expand internationally and continue investing ahead of growth, we may experience some near-term pressure on margins. However, we expect those impacts to normalize and margins to recover as volumes scale across markets. In terms of capital allocation, our focus is on driving long-term value. We are concentrating our investments in 3 key areas: first, fueling growth through continued R&D investments and targeted expansion into selected international markets; second, building a stronger foundation by implementing systems that simplify and optimize processes across the business, improving efficiency and scalability as we grow; and third, enhancing our infrastructure to support long-term scalability, including our planned move to a new global headquarters to accommodate growth, ongoing upgrades to expand our manufacturing and product development capabilities, and our continued evaluation of strategic opportunities that could further strengthen our platform for the future. Collectively, these initiatives play an important role in preparing TransMedics for its next stage of expansion as we move towards the 10,000 transplant milestone and beyond and reinforce our global leadership in transplantation. Aligned with our focus on efficiency, we have also made progress on our double shifting pilot program to improve fleet utilization. Pilot hiring and training are advancing well, and we continue to expect early results in the first half of 2026. This insight will help us determine the appropriate fleet size and utilization model to maximize efficiency and capital returns. Recently, in October, we achieved our goals of owning 22 jets by the end of 2025. Looking ahead, we remain open to acquiring additional jets when the right conditions are in place, whether to enhance U.S. capacity or to support our international expansion efforts. Finally, with stronger top line performance, continued efficiency gains and disciplined spending, we expect to deliver at least 750 basis points of operating margin expansion for the full year of 2025 compared to 2024. While there could be additional upside, that will depend on our final sales performance and the timing of our investment plan for Q4 of 2025. We continue to expect operating margins to reach or approach 30% by 2028. While we may see some fluctuations as we expand internationally and invest ahead of growth, we remain confident in the long-term direction and scalability of our model. Our OCS technology, together with NOP platform and integrated logistics network, give us a clear advantage in expanding access to transplantation worldwide. With the scalability of our model and strong execution across the organization, TransMedics is well positioned to sustain growth, expand margins and deliver long-term value, while giving more patients a second chance at life. And with that, I'll turn the call over to Waleed for closing remarks.

Thank you so much, Gerardo. Overall, we're very pleased with our third quarter performance and the significant progress our team continues to make across multiple growth initiatives. Importantly, we are now laser-focused, as I stated earlier, on ending 2025 on a strong note and better position TransMedics for another strong growth year in 2026. It's becoming increasingly clear that TransMedics is uniquely positioned with unparalleled attributes that include OCS technology, NOP clinical services, the transplant logistics network and our proprietary NOP Connect digital platform. All of these collectively enable us to deliver unrivaled life-saving solutions to global transplant markets. Of course, none of this would have happened without our dedicated world-class TransMedics team that are working around the clock to make organ transplantation more accessible to patients who are waiting for a new lease on life in the form of a new organ. We are inspired and committed to continue our drive to expand the access to organ transplantation and improve post-transplant clinical outcomes of organ transplant therapy around the world. With that, I will now turn the call to the operator for Q&A.

We have the first question from Allen Gong at JPMorgan.

My first question is about the trajectory heading into the fourth quarter and beyond into 2026. Based on your guidance, it seems you're anticipating sales to be just under 30% in the fourth quarter. How should we view this as a run rate looking forward to 2026? Additionally, should we consider 2025 as a significant year for seasonality, given that you've been normalizing more towards market growth as your company has expanded?

Thank you, Allen. Let me start with the second part of the question first, if you allow me. As I've stated publicly before, I think seasonality in organ transplant is something that we all have to be comfortable with and anticipate year after year, especially as we continue to grow and be a dominant player in the U.S. transplant market. As Gerardo mentioned, we see this seasonality every year, and we saw the seasonality every year nearly for the past almost a decade. And so, we should expect that going forward. Now, let me turn to the first part of your question. We plan to issue our guidance for 2026 at our next earnings call. I think 2025, our focus right now is to end 2025 strong and achieve our stated guidance. And then, that gives us time to evaluate our initiatives, the clinical programs that are underway, then we will issue guidance for 2026, which we fully expect to be a growth year for TransMedics over 2025, but allow us the time to state our 2026 expectations with the benefit of finishing the year and adding these data points that will be crucial to providing guidance for the full year 2026.

And then, a quick follow-up just on international. I know the Italy announcement was definitely a pleasant surprise. And I guess, when we think about your efforts to expand beyond that to cover the breadth of Europe, I imagine it won't be quite as straightforward as you can call it that as your efforts in the U.S. But what kind of challenges do you anticipate ahead of you for that? And how long do you think it will take before you can get your NOP and your logistics services in Europe to the same level as they are in the U.S.?

Thank you, Allen. Europe consists of diverse regions, and we need to respect that by tailoring our network of operations to the specific clinical and regulatory needs of each country. Italy is set to be a crucial first step for us. We are optimistic about our current position in Italy and aim to launch there in early or by the first half of 2026. We are actively working with other European regions as well, each with its unique requirements. One common need across Europe is the establishment of a dedicated transplant logistics network. While it won't match the size of the U.S. network, it presents a significant opportunity to enhance the adoption of our OCS in various European markets and beyond. Our immediate focus is on establishing a strong presence in Italy, fulfilling our commitments, providing top-notch service, and achieving success in this market. We firmly believe that success in Europe leads to further success, and if we can excel in Italy, it will pave the way for expansion throughout Europe. Given the complexities and needs of the Italian landscape, we are confident that if our solution works well there, it can be successful across the continent.

We have the next question from the line of Bill Plovanic from Canaccord.

I just wanted to clarify. Do you expect to receive the final IDE sign-off from the FDA on the ENHANCE and DENOVO and begin enrolling, treating the first patients or generating the first revenue in the first half of '26? Is that what you're saying?

Thank you for the question, Bill. We plan to enroll a small group of initial patients and recognize revenue in the fourth quarter of 2025. We have received conditional approval to start the trial, particularly for the heart aspect, and this will occur in Q4. The limitations will be lifted once we answer all pending FDA questions, which we expect to resolve in the first quarter of 2026 or early 2026. Afterwards, the trial will be fully open without conditions. However, we will begin enrolling and generating our first revenue in the fourth quarter.

Okay. Perfect. I'm trying to grasp the operating margin guidance of 750 basis points, which equates to 16% for the year and corresponds to $96 million. The midpoint for the fourth quarter suggests an increase of only $10 million, or 6.5%. As you discuss the development of European logistics, could you provide a dollar figure for us? Are we looking at $10 million, $100 million? How should we approach the capital expenditure needed and the timing of those investments?

Bill, this is Gerardo. In terms of CapEx and investment for the European NOP, we will be providing a little bit more color next year in our next call. However, for my anticipated forecast on operating margin in 2025, it assumes that it has certainly space to improve upside. It assumes that we land in the low end of our guidance range and that we actually deliver on our investment plan in the U.S. in Q4. So I believe we have space to surpass what I shared, but we'll see where we land.

We have the next question from the line of Ryan Daniels from William Blair.

This is Matthew Mardula on for Ryan Daniels. So I want to touch up with HHS decertifying an OPO in the middle of the year. Have you seen any disruptions from the OPO decertification? And I understand that HHS wants to increase the number of transplants and not have organs go to waste. But could the continued decertification of OPOs impact the number of organ transplants? Or do you just view this as a small minimal risk?

Thank you for the question. At the first part of the question, we do not see any disruption to organ transplantation in the U.S. based on the actions taken by HHS. That's number one. Number two, we believe wholeheartedly that if the stated goals and vision of HHS and HRSA and CMS are to be achieved, actually, we believe it could provide a tailwind to organ transplant efficiency in the United States by having more performance metrics that everybody could get behind and be held accountable to. So we have to wait and see, and we have to allow the time for these initiatives to materialize, but we are confident in our ability to operate in the current OPO model or any other modernization model that may come out from this initiative. And frankly, we see this as a potential opportunity, not a potential risk, but we have to wait and see.

We have the next question from the line of Chris Pasquale from Nephron Research.

Waleed, logistics penetration has been in the high-70s for 3 straight quarters now. Curious how you think about where that goes over time. Is 80% a bit of a ceiling because the other 20% are drivable? Or do you think that, that number could still go higher as you guys continue to roll out the service?

Thank you, Chris. I want to clarify, Chris, that 78% or 79% or 80%, it's our planes for only the mission requiring air transport. So we expect that number to go up definitely in the low-to-mid 80s. I think in 2025, we see a ceiling in the low-80s or 80%, roughly speaking, just because of some of the existing contracts that are supporting other logistics providers in the United States. The other element to that is the long-distance transport. Remember, our planes are short distance or relatively speaking, they're light jets. So any Alaska or Puerto Rico missions, we have to do them on third-party aircraft because that's a longer jet. But Alaska and Puerto Rico, we can do with our jet. So to summarize, we expect that number to go up in the mid-80s at least in the foreseeable future as we continue to gain market share and we continue to prove to the community that TransMedics logistics is providing not just the safest, the most efficient, but also cost-effective logistics partnership in organ transplant.

And then, sort of related to that, you guys rolled out the new NOP Connect kind of digital ecosystem earlier this year. I'm curious whether we have enough experience with that now to see what impact that's having, either on your collection or sort of cash conversion cycle being simplified or on adoption of the broader services that you put into place?

Chris, that's an excellent question. We are not only feeling very excited about the rollout of this new ecosystem, we are already taking some very good feedback from the community, and we are rolling out our 0.2 version of it in Q4. We are seeing some great efficiencies. I wouldn't go as far as saying we're seeing the full efficiency or the full impact yet. We expect that to come throughout 2026.

We have the next question from the line of Josh Jennings from TD Cowen.

I wanted to circle back just on the 2025 guidance, revenue guidance update, and just the increase of $5 million at the midpoint. Waleed, maybe help us think through, and Gerardo, some of the assumptions baked in there. I mean, was 3Q results better than TransMedics' internal expectations with stronger start than expected? In October, you have another plane. But maybe just help us think through what's driving the guidance increase, a little bit more detail.

Thank you, Josh. As you know, we don't give that much detail. All I can say is, we are confident. One, we are pleased by the results of Q3. Two, we are confident in the trends we saw at the end of Q3 into early Q4. But we have to be prudent. We're still early in Q4. We still have 2 more months to go, and we have to be respectful of that. Gerardo, do you want to add anything else?

Well, no, I think we have a number of tailwinds, as Waleed was mentioning. What we're seeing in terms of OCS adoption and organ utilization is really fueling the momentum of the OCS. So we're confident to get to the number. Of course, as you know, our philosophy has been to not only achieve but as much as we can, go above and beyond. But we're confident with where we are right now.

Great. And just a follow-up. I think it's clear that there really hasn't been an overhang in terms of some of the headlines that came out on DCD donors and some of the New York Times expose, but I wanted to just confirm that. Any impact to donor registrations that you're seeing? And then, maybe give us the status of the waitlist for liver, heart, and lung transplants. We just anecdotally talked to some heavy OCS users who have talked about their waitlist going down because volumes have increased dramatically, but I think those have refilled, but maybe help us on those 2 topics.

Thank you, Josh. Let me start with the waitlist. We can't really comment on it because it's quite dynamic, and all the relevant data is available. Over the past three years, while we operated NOP, many centers have repeatedly adjusted their waitlists. The increase in national transplant volume speaks volumes. While centers may occasionally reset their waitlists, it's a temporary measure. Some centers can rebuild their lists quickly, while others may take longer. Our primary focus is on increasing the supply of suitable organs for transplants, and the onus is on the centers to manage their waitlists because these procedures are life-saving. As for the first part, it’s unfortunate that an exposé has come out, but we have repeatedly indicated that we cannot let any negative behavior from certain individuals in the transplant community impact national transplant volume, which significantly benefits patients awaiting organ transplants. It’s critical for investigative reporters to recognize that while highlighting negative actions is necessary, they represent a small fraction of the overall picture. The main goal for us, and for everyone involved in organ transplantation, is to prioritize the patients. Misrepresenting transplantation as chaotic is not in the best interest of patients. In my view, the U.S. organ transplant system remains among the best, if not the best, in the world, and we need to be mindful of that.

We have the next question from the line of Suraj Kalia from Oppenheimer & Co.

Waleed, can you hear me all right?

I can.

So Waleed, I have a question for you and one for Gerardo. I'll start with you, Waleed. Putting short-term fluctuations aside, you and your team have met your targets. There’s a common belief that gaining additional liver market share will be challenging. Can you provide a counterargument for fiscal year '26? Or can you suggest that your confidence for that year is based on contributions from heart and lung trials, along with the international efforts you mentioned? Please give us some insight into how you are approaching the transition into fiscal year '26.

Thank you for the insightful question. I want to break it down into several parts. First, I believe there is a misconception among some skeptics that gaining market share in the liver space will be challenging. We have a different perspective. We see ourselves as just starting to make an impact in the liver sector, and we have significant opportunities ahead in liver transplants to increase our adoption rates over the next few years, beyond just 2026. The growth will come from increasing donations from deceased brain-dead donors, expanding the use of donation after circulatory death, and potentially extending the waiting period for DCD. We firmly believe that the idea that growth in the liver market will be hard to achieve is a flawed perspective based on incorrect narratives. Number two, we fully believe and expect that the next-gen heart and lung clinical programs will generate significant momentum in the adoption of both DBD and DCD heart and lung. And listen, we are all going to experience that as it materializes throughout 2026. But that is our expectations going into '26. And that's where we stand from a U.S. perspective. Again, the initiation of NOP OUS will be a potential catalyst, albeit in the second half of 2026, but it is going to become a catalyst for us in next year. A lot of publications are in the launching pad or in review that will generate that evidence that will be required or will facilitate the adoption picture that I just described, Suraj. I hope I addressed your question.

Yes. Well, in reality, there is not much to add, Waleed, more. Suraj, we didn't see any significant change in the, let's say, split between ground and air transportation through the quarter compared to what we've seen earlier in the year. And we are assuming more or less the same thing for Q4. I think that's what I would say, not much more to add.

We have the next question from the line of Patrick Wood from Morgan Stanley.

Amazing. I'll keep it to one, just given the time. Waleed, you mentioned double shifting twice at the start in the comments. And just curious how you're seeing that as an opportunity, what that means both financially for you guys, but then also for your customers and the ability to potentially service them faster? Is that a valid thought process? Just how do you see that affecting the business overall?

Thank you, Patrick. We are currently experimenting with double shifting, which we plan to implement more broadly in '25. The goal is to enhance the efficiency of our existing fleet and fully utilize our current assets before considering additional investments in our fleet. From my perspective, as we scale this approach, we expect to see improvements in our bottom line and the margin contributions from this service model. Gerardo, feel free to correct me if I’m mistaken.

No, that's right. And basically, what will be happening, Patrick, there is that the same number of planes will fly a higher number of missions, maximizing the return on capital. That's basically the concept.

We have the next question from the line of Samantha Munoz from Piper Sandler.

This is Samantha on for Matt. I guess, first, I know the 10,000 transplant target has been out there for a while, but we're now seeing you start to communicate potentially even surpassing that target. I guess, what gives you the confidence that you can get there? And then, how much of that is dependent upon these next-gen heart and lung programs?

Thank you for the question. We are very confident that we will reach our target. When we set that target, we did so without expecting the acceleration from heart and lung programs. Our goal is to achieve 10,000 transplants even without the next-gen heart and lung programs. The new heart and lung transplant programs will help speed up our progress and enhance their contribution to the overall numbers. We are highly confident in this approach. I want to emphasize that if we maintain our current growth trajectory without any additional growth triggers in U.S. transplant volumes, reaching 10,000 transplants by 2028 will account for about 50% to 55% of the total national heart, lung, and liver volumes, indicating that the market is not saturated. In fact, there is still roughly half of the market available for further growth in heart, lung, and liver transplants. On top of that, what we said is, the kidney program being introduced in 2027 will give us access to an additional 23,000 to 25,000 procedures in 2027 and beyond, and that could even catalyze our growth beyond the 10,000 target into 20,000 by 2030. So that's what we stated. So we have a very high degree of confidence reaching the 10,000 transplants. Our results are pointing in that direction. Our growth rates are pointing in that direction. And we are hoping that the next-gen heart and lung clinical programs will accelerate the path to getting there. And again, we remain convinced that 2028, at 10,000 transplants with the current market growth, we would be at approximately half of the U.S. heart and lung and liver transplant market, leaving room for growth even beyond that.

That's perfect. If I could sneak in one more also on the next-gen heart and lung programs. It's great to hear that those are going to start enrolling this quarter. How are you thinking about the duration of these trials and how long they're going to take to enroll?

The length of these trials doesn't significantly concern us; we anticipate it will be between 12 to 18 months. What truly matters is observing the trajectory and the impact of these trials, particularly in terms of heart and lung volume penetration on a quarterly basis. Since these trials will generate revenue, the results will be reflected in our quarterly reports. We are eager to see these outcomes because they will indicate the impact even before the trials conclude.

We have the next question from the line of David Rescott from Baird.

Waleed, I'd like to follow up on your comments regarding the timing of the trial. I'm looking for more clarification on the implications of starting to enroll in the trial in Q4 versus having all the necessary conditions for full IDE clearance in Q1. Is this situation similar for both heart and lung? Would it be reasonable to think that Part A of the heart trial can begin enrolling in Q4, while Part B might start in 2026? I'm trying to get a better understanding of what's happening and whether there are any changes to the contributions expected from clinical trials in Q4.

Thank you for the question, David. I want to remind you that we didn't anticipate much contribution in Q4 from the trial, essentially none from it. We seem to be ahead of schedule. To clarify the difference between the two trials as we currently understand them, the heart conditional approval covers both Part A and Part B. We have a significant conditional approval, allowing us to start enrolling in both parts in Q4. The lung trial is a bit different; it has a more limited conditional approval because the questions posed are quite straightforward, and we believe we can address them fairly quickly. Additionally, the FDA's conditions were restrictive, but since the questions are straightforward, we expect to navigate through them. Therefore, I want to emphasize that we anticipate enrolling our first cohort of patients for both heart and lung in Q4, with the hope that by early Q1, we will lift all conditions from both IDEs, resulting in unrestricted trials for all indications in both parts for heart and the one part for lung. We won't face any caps on enrollment. That's the key message I wanted to convey in my earlier remarks.

Okay. That's very helpful. Regarding Europe, I have a two-part question. I understand you've already made some comments on this. The market in Europe is quite fragmented, with different agencies overseeing organ donation and allocation in various countries. First, for Italy, is it assumed that organs transplanted through the new service there will primarily remain within Italy? Or is there a chance that they could be redistributed for transplants across Europe? Secondly, regarding the margin comments, I know you've indicated that gross margins are expected to stay in the 60% range generally, but there may be some near-term challenges as you expand in Europe. I'm looking for clarity on the timeline for any potential decrease in margins followed by a recovery, while still maintaining that 60% range. Additionally, there might be a difference between gross and operating margins, so any insights there would be appreciated.

Sure. Thanks, David. We are not planning to disrupt the movement of organs within each European geography where we will be operating. Specifically regarding Italy, there is currently movement of organs across the country and between Switzerland and Italy, as well as some other select European countries. Our role is not to alter these existing dynamics but to facilitate the successful utilization of these organs for transplants. Even for local transplants within Italy, it appears there are significant logistical challenges in moving organs. Therefore, this presents a substantial business opportunity for us, similar to how we addressed these issues in the U.S. on a larger scale. Now, I'll turn it to Gerardo to discuss the margin question.

David, in our Q4 call, we will provide more details on what to expect regarding the margin. However, I can confirm that I remain confident in our long-term margin being around 60%. I believe that is the level we will see as volumes increase, particularly outside of the U.S. More importantly, we are focused on the operating margin, which we find more relevant than the gross margin due to our operating model. We will offer additional details in Q4.

We have the next question from the line of Mike Matson from Needham & Company.

I have a question regarding the heart trial design, and it may also relate to the lung trial, although I couldn't find information on the lung trial yet. The endpoint is patient and graft survival at 30 days. My understanding is that typically, even without using TransMedics, the survival rate is in the 90s. I believe you are conducting this study with the goal of demonstrating superiority. Will this trial have enough power to actually show superiority from a high-90s or mid-90s survival rate compared to what you will achieve using OCS for those organs?

Thank you, Mike, for the question. I want to clarify one important point. The primary effectiveness endpoint is not just patient and graft survival at 30 days alone. It includes patient and graft survival at 30 days with freedom from primary graft dysfunction within the first 72 hours after heart transplant. When you combine these two, you end up with numbers not in the high-90s for patient survival, but likely in the low-to-mid 80s. This gives us a broader signal to properly power the study and aim for superiority. While you raised a great point, the clarification is that the primary endpoint is not solely patient and graft survival; it’s that survival together with the absence of primary graft dysfunction. This combination is what empowers us to hopefully demonstrate superiority. We’re very excited about launching the trial, and both lung and heart will follow the same design and selection for the primary effectiveness endpoint to achieve the goal and avoid the statistical anomaly of the very high patient survival numbers in the United States.

Okay. That makes a lot of sense. For the kidney, I believe you mentioned that the design will be revealed in early '26. However, I assume you will need to conduct a trial before you can obtain approval. Could you discuss the timing of that? Additionally, will this trial also involve payments for those organs, similar to what we have with the heart and lung trials?

Yes, that's a great question, Mike. We are set to reveal the design of the technology and product. We plan to conduct a significant trial in the United States and possibly an international trial as well. This will be a revenue-generating trial, which excites us because it is designed to demonstrate superiority. The implications of this trial will be significant not only for patient clinical outcomes but also financially, since CMS is the sole payer for end-stage renal failure expenses in the U.S. I hope and believe that CMS will be closely monitoring this trial and will support it due to the substantial cost efficiencies from improved outcomes and increased utilization of kidneys that are expected.

We have the next question from the line of Daniel Markowitz from Evercore.

The first one, you mentioned that the prior guide wasn't assuming anything for 4Q from next-gen heart and lung trials. It's nice to hear that's running a bit ahead of schedule. Just confirming, does the new guide assume some contribution since that's running ahead of schedule now that you're closer and have visibility to it?

That's an excellent question. Yes and no. The answer is, from a contribution, no. Yes, we're ahead of schedule. But realistically speaking, if we start enrolling in November, the impact is going to be minuscule. That's why we always guided without any meaningful contribution. All what we want to achieve is having the first handful of patients enrolled gives us an early signal of how the trial is rolling out and really tees us up for early 2026.

Got it. Okay. And then, the second one, I wanted to ask on recent industry news. We had OrganOx takeout announcement. I just wanted to give you an opportunity to kind of react to this announcement. What do you think this means for the market and more specifically for TransMedics over the coming years?

Thank you, Daniel. This is an excellent question. As I stated publicly before on my call with investors, we're very, very pleased, and congratulations to OrganOx and the OrganOx team about this acquisition. We're very pleased because it shows 3 things. One, it shows that TransMedics have created a multibillion-dollar industry in organ transplantation that didn't exist before. We're very pleased because it shows how undervalued TransMedics stock is, given the huge difference and improvement in OCS Liver and market share that OCS Liver has over any other platform in the market in the U.S. And number three, it validates that this is an area of the market that is now becoming an exciting opportunity for the med tech industry. So again, congratulations to OrganOx, but we feel very confident in our position. We feel very confident that we are way undervalued, given our leadership position, given our outcomes, given our numbers, given our market share, and we are determined to go and continue to execute and grow our market share in liver, heart, lung, and soon kidney.

We have the next question from the line of Tom Stephan from Stifel.

Apologies if any of this has been asked; jumping between calls. But maybe just one for me. Waleed, market slowed in the third quarter for the second straight year, and we saw somewhat of an accompanying deceleration in OCS. So maybe can you talk about why OCS seemingly faces, I'd just say, a bit of incremental pressure during times when the U.S. transplant market seems to slow down? And then, how should we be thinking about that dynamic maybe if market softness persists?

That's an interesting question. We believe the market softness and seasonality are inherent to organ transplants, which we have observed for several years. What is changing is that TransMedics is gaining a larger market share. This market share is distributed among top users and current users, and we are also expanding organically into new centers. In Q3 this year, we maintained our market share among our repeat users, top 20 accounts, and consistent users within the institution. Any variability is occurring with the centers that are new to the NOP or not regular users in the NOP, and we are monitoring that situation. We are not overly concerned because we are continuing to grow year over year. It's more relevant for us to focus on our year-over-year growth and track our penetration within DBD and DCD. All of these metrics are trending positively as we become a larger player in the market, which can contribute to the quarter-to-quarter variability. We expect this variability annually, particularly in Q3, especially following a significant increase in Q2.

We have the next question from the line of Young Li from Jefferies.

I'll just keep it to one. So I appreciate all the clarifications and color on the trial enrollment. I guess, I'm kind of curious what factors allow you to enroll these trials faster than the prior trials that you have run?

I’m not saying the enrollment will be quicker. Our fastest trial was the DCD Heart trial, where we enrolled 90 patients in 9 months. We’re not indicating it will be faster, but considering the anticipated impact and the momentum we’re experiencing in the centers, the enthusiasm for these trials typically leads to quicker enrollment. That’s the point we’re making. We need to execute and deliver on that. This reflects the program's success, and we’re eager to launch it and will monitor execution as it unfolds.

Any follow-up question, Young Li?

I'm okay.

This concludes our question-and-answer session. I would like to turn the conference back over to Waleed Hassanein for closing remarks.

Thank you all very much, and look forward to chat again early next year. Thank you very much. Have a great evening.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.