TransMedics Group, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Transmedics Q3 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Brian Johnston with Gil Martin Group. You may go ahead, sir.

Thanks, operator. Earlier today, Transmedics released financial results for the quarter ended September 30th, 2020. A copy of the press release is available on the company's website. Before we begin, I'd 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, are 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 and 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 could cause actual results or events to really 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 4th, 2020. And with that, I'll now turn the call over to Ali Hasmeen, President and Chief Executive Officer.

Thank you, Brian. Good afternoon, everyone, and welcome to Transmedics 2020 Third Quarter's earnings call. Joining me today are Stephen Gordon, Chief Financial Officer, and Dr. Tamar Kayal, our 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 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 multifaceted strategy designed to create a first of its kind national transplant ecosystem that leverages our OCS technology, establishes a new regional clinical OCS expertise that are strategically located across the United States and initiates a working relationship with leading organ procurement organizations. We do this 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 are 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, that we have a unique and frankly unrivaled offering and that our mid- and long-term prospects remain very strong. With that as a backdrop, let me turn to review our third Q results. Our third quarter net revenue was $7.1 million, outperforming expectations. While overall revenue was down 2% year-over-year, U.S. net revenue grew 36% from 3Q 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 phenomena 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 as 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 needs for new IRB processes, et cetera, 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 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 normal thermic perfusion indication for liver transplant in the US. As mentioned, Our national OCS service model is also continuing to progress nicely in its early 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 await the rescheduling of our FDA panel meeting, We have already submitted all relevant material to 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 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 FDA. Let me be crystal clear. Despite this unforeseen delay, we remain extremely confident in the robustness and quality of our clinical data in the OCS Heart PMA. We remain extremely confident in our clinical positions and our ability to address FDA or panel questions relating to our OCS Heart PMA. Now let me cover COVID pandemic and 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 US and Europe. Depending on the ability of hospitals to mitigate impact, we may see capacity constraint and disruption to the normal flow of transplant operation, 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. In looking further out to 2021, in addition to achieving OCS HART FDA approval, hopefully early in 2021. We're also looking forward to a number of key catalysts and milestones that we are planning 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 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 US 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 Oregon 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. And 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 the U.S. revenue in Q3 2020 was driven by OCS HEART orders related to our DCV and EXPAND CAP trials. And 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 volume 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 continue 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 quarter of 2020 and 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 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. And 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 Hart DCD trials ending in Q3 and the current wave of COVID cases, we expect a 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 globally. We are confident that we are on the right path to achieving this goal as we establish 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 contribution from the lung, heart, and liver indications. This will put transmedics on 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 will open up the line for questions. Operator?

And once again, if you would like to ask a question, Press star 1 on your telephone keypad. And we'll pause for a moment to compile the Q&A roster. And your first question comes from David Lewis from Morgan Stanley.

Hi, Lelyda and Steven. This is Cecilia on for David. Thanks for taking our questions. I also wanted to start off, Wally, just with Lung, really what you've seen through Q2 and then as Q3 has progressed and looking into Q4, just percentage 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 and many of the trends I'm going to share on this call or 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 the webpage, you will find that in Q2, all organ transplant, all solid organ transplant 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 to be the last organ to fully recover. We've seen the heart as the leading order to recover, I would say, to 85% to 90% of the pre-COVID levels. and followed by the liver and lung is the last organ to recover and it's not near the 85 or 90 percent. It's still hovering between I would say roughly speaking between 60 and 70 percent. But the more important trend that we're seeing also from the same published data from UNOS or the graphs from UNOS is With every major peak of COVID activity, you see 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 lung transplant requires prolonged ventilation time window after the transplant procedure. So it applies to two levels of pressure on lung transplant activities. One, you need to prioritize the ventilators for COVID patients. Two, they also want to make sure that donors are in no way having been exposed to a COVID environment, given that the COVID is impacting mainly lung tissues. We had our first-hand experience with several donors in Q3 that are healthy, otherwise healthy. However, they tested COVID positive back in May, and they were rejected outright for transplant. So that's why when we saw this dynamic and we saw these results, we believe that this lung phenomena 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 continuing to be lagging behind? Overall, I think we cannot. I expect in Q4 to see different dynamic where we could potentially see the lung becoming the predominant generator of our revenue. But overall, from a transplant activity, we will continue to see lung volume 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, Wally. And if I could just turn to HART as well. Can you talk a little bit about the dynamics you saw in the quarter with the accelerated DCD HART 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 this expanded opportunity. Thank you.

Thank you. Thank you, Cecilia. I mean, the momentum speaks for itself on the heart. The momentum in the DCD and the heart indication in general speaks for itself. We finished 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. We expect when we see that level of momentum clinically, we expect to see results that are in sync with that type of momentum. So that's number one. Number two, we are working very diligently and 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 life-saving technology to patients in the U.S. while we're working with FDA throughout the bureaucratic process of review and approval and everything else. And that's what we've done. And, you know, our partners at 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.

Thank you.

And your next question comes from the line of Robbie Marcus, from JP Morgan.

Hey, guys, this is actually Allen on for Robbie. I want 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, slightly down target that you pointed to, I just want to double check. Is that year over year or quarter over quarter? And what does that kind of assume for the continued trend of COVID-19? given, you know, as you highlighted, we've seen these kind of flare-ups and fears around a potential kind of second or third wave, whatever you want to call it.

Hi, Al. This is Stephen. So I would consider that Q420 over Q419, kind of flattish to down, slightly down. You know, and what it means for COVID is exactly kind of what Waleed was just discussing, that, you know, we're seeing a lot of COVID activity and it is going to cause some impact. At the same time, you know, we do see some recovery, and we're seeing lung recovery, as well, they mentioned. You know, our trials are ongoing, so, you know, so we feel like we've got a reasonable pathway there.

And, Alan, I'd like to add to what Stephen has said, that, you know, no one knows what the second or third wave is going to look like from a from a disruption to the transplant activities. 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 they established protocols to enable them to continue to do transplant even within a second or a third wave. Is that going to materialize? We would have to wait and see. That's number one. Number two, in Q2 we had not really fully initiated the service activities, and it was only limited to probably beginning in one OPO, and we really were just getting started. Today, every lung transplant program in the United States is familiar with our activities, and that is extending beyond one OPO. Is that going to help 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 fact we're not relying on a single product of a single indication. So we saw in Q3, we had a great quarter given the circumstances. However, it was driven mainly by the heart. We expect that 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. Again, even if COVID, the COVID will have an impact across all three organs, but if we see this hitting the lung in a disproportionate level, the heart and the liver should help us kind of balance that impact a little bit better.

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

Thanks, Alan. Listen, I'm not exaggerating, nor I hope that nothing would change to change this phenomenon. We are not seeing any back pressure on our offensive. We've never been on the defensive except during the peak of the COVID, and it wasn't a defensive. It's more of everybody shutting down and nobody's going to the hospital. you know, the opposite is true. We're seeing people understanding the importance of having access to the service model to give them freedom and give them better management of the logistics, even during the pandemic. We have not seen pushback on that front. And, you know, listen, we are also working very hard to make sure that we're not, we are, we're 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. Net-net, we have not seen any impact of COVID to our ability to be in the offensive and the commercial front, and yet what we've seen is actually the opposite. What we've seen is 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. And we hope to continue to see that mature throughout the next several quarters, and it's going to reflect itself in revenue growth.

Operator.

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

Hey, Waleed, Stephen, can you hear me okay?

Yes, we can hear you, Suhas.

Perfect. Congrats on a nice quarter. So, Waleed, forgive me, I've just been jumping around in between calls. 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. Well, 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, would there be any reason for DVD hearts to the utilization rate being lower with OCS or, in fact, heart speed loss, would there physiologically be 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 rate of north of 82% in the expand and higher even in the expand cap. So utilization rate in OCS ARM is significantly higher than cold storage. So I don't know if that addresses your question. This is not a topic. Go ahead.

That's exactly what I was looking for, Waleed, because some of these questions surprised us, and everyone is just trying to figure out why the delay. And Waleed, Again, you might have talked about this. How do you see some of the long-term organ damage that we are seeing 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 you would 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 ill on anybody. But I think end organ damage results from COVID, now it's becoming clearer and, frankly, clinically justified. We know that there's endothelial damage. We know that there is lung damage, for sure. The big open question is heart damage and liver damage. You know, if that were to pan out, certainly we expect there will be higher rate of patients in need for lung transplant. The only open question now, and we've seen in Q3 several patients who are ex-COVID patients that their lung was completely damaged by COVID, that they required a lung transplant. I think that's publicly and nationally covered in the news. What remains to be seen is how the impact of this endothelial damage translates into heart failure and liver failure. If that pans out, that will result in probably an uptake of younger, healthier potential patients in need for heart and liver transplants. You know, again, we don't wish that to be the case. I think we have a robust business opportunity and a market potential without that cohort of patients. But certainly from a clinical and pathophysiologically, certainly COVID will have an impact and it will potentially increase the number of healthier potential patients you need for an organ transplant.

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

Hi, this is Brian here for Josh. Thank you for taking my questions. Um, 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. So that is the longest endpoint that we are We have to meet to file the PMA. However, we're following all VCD heart patients for up to one year post-transplant, maybe even longer. But that's, you know, hopefully in the post-market setting. That's not going to dictate the timing of the PMA filing. The second part of the question, yes, 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, just to give time for everything to match and the six months data to be verified and ready for submission to 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, and remember this is a breakthrough indication, we hope it will have a much more streamlined and frankly more expedited 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 to 14 months, there will be additional data submitted for supplemental data from the CAP. But if it is a more streamlined timeline, we may not need to submit CAP, but, you know, it's It's not a requirement for that PMA to go in or a 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. And can you talk about the company's readiness for either a U.S. launch in liver or potentially ahead of the U.S. launch in the expanded criteria HART 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 wanted 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 plugins for additional indications once FDA approval is in hand. This is actually what we've been doing for the lung, and we've said that before. This is not news that what we're doing for the service program in the lung is foundational and fundamental in nature, that we will be able to leverage all this work that Tamara 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 in a lot faster pace than what we've experienced with the lung.

And there are no further questions at this time.

Great. Thank you, operator.

I'll now turn the call back over to the leaders for any final remarks.

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

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