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spk09: Good afternoon, and welcome to the TransMedx Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Lane Morgan from the Gilmartin Group for a few introductory comments.
spk00: Thank you, Operator. Earlier today, Transmedics released financial results for the quarter ended June 30th, 2024. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call, including during the question and answer portion of the call, that include forward-looking statements within the meaning of federal securities laws. Any statements contained in this call that relate to the 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, services, and timing of new clinical programs, and our future financial expectations, which include expectations for growth and organization and guidance, and or expectations for revenue. Growth margins and operating expenses in 2024 and beyond 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. Additional information regarding these risks and uncertainties appears under the heading Risk Factors of our Form 10-Q, followed with the Securities and Exchange Commission on May 2, 2024, our subsequent Form 10-Q filings, and the forward-looking statements including today's earnings press release, which are available at www.sec.gov, and our website at www.transmedics.com. TransMedics disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, July 31, 2024. And with that, I will now turn the call over to Waleed Hassani, President and Chief Executive Officer.
spk06: Thank you so much, Lane. Good afternoon, everyone, and welcome to Transmedics' second quarter 2024 earnings call. As always, joining me today is Stephen Gordon, our Chief Financial Officer. As we've stated previously, 2024 represents a critical year for Transmedics. We have been and remain laser-focused on scaling our business, both in terms of revenue and operations, while also investing in our future product pipeline and infrastructure. To be specific, we are focused on three initiatives. One, completing the build-out of our transmedics aviation fleet and transplant logistics network to meet the growing demand for OCS NOP transplant missions. Two, continuing to drive both overall national transplant volume growth and market share expansion in the existing transplants using the OCS NOP technology and services. And three, preparing to launch three new cardiothoracic clinical programs designed to reinvigorate the OCS lung clinical adoption and expand our OCS heart franchise. Through Q2, we delivered another quarter of significant revenue and case growth. maintain profitability, and achieve positive free cash flow, which is a milestone for our business. In addition, we built strong momentum across the above three key initiatives. Let me review key operational highlights. Total revenue for 2Q was $114.3 million. representing 118% growth from Q2 2023 and 18% sequential growth from Q1 2024. Our results were driven by continued growth in both OCS product as well as transmedics transplant logistics services revenue. We experienced significant growth in case volume across lung, heart, and liver OCS NOP cases compared to the same period last year, as well as sequentially in both heart and liver cases compared to Q1. We experienced substantial growth in both U.S. and OUS commercial revenues compared to the same period last year and sequentially over Q1 2024. Transmedics transplant logistics service revenue for 2Q was $19.1 million, up from $14.5 million in Q1. You're presenting approximately 32% growth quarter over quarter. Overall gross margins for 2Q was 61%, slightly down from 62% in Q1, 24. As we've discussed previously, we believe we are still building the foundation of our business and therefore expect gross margins to fluctuate modestly over the next several quarters. For context, gross margins were 59% in 4Q 2023. Importantly, we remain extremely confident. I repeat, we remain extremely confident that we will be able to improve gross margins over the next 12 to 18 months as we benefit from further scale in both product and service operations over time. And finally, we were pleased to deliver a gap operating profit of $12.5 million in Q2, representing 11% of total revenue. Net income was $12.2 million. As mentioned earlier, we are very proud to have achieved our first positive free cash flow quarter with approximately $2 million of free cash generated despite purchasing a new aircraft during the quarter. Again, While we are expecting to remain profitable on operating basis, we fully expect some fluctuation in free cash flow over the next 12 to 18 months, as we are continuing to invest heavily in our business and product pipelines. Now with that background, let me provide more detail across key operational metrics relating to building out our transplant logistics network. Through Q2, we continue to expand our fleet of owned aircraft, reaching 15 aircraft by end of Q2. We also added two new aircraft in July, bringing our total owned Transmedics aircraft to 17 as of today. We also made significant investment in Transmedics aviation pilot headcount in Q2, nearly doubling our pilot crew size over Q1. These investments were made to maximize the operational efficiency of our current and growing fleet, Importantly, these investments are being made to prepare for the expected growth in demand for OCS NOP missions in 2025 and beyond. To that end, the daily average number of active transmedics aviation planes grew to approximately 11 aircrafts compared to 9 in Q1 of 2024. We expect this number will continue to increase throughout the year as we remain on track to reaching approximately 20 operational aircrafts by year-end. Notably, our owned aircraft covered approximately 59% of our NOP flight missions in Q2, compared to 49% in Q1 of 2024. Let me take a moment to underscore the remaining long runway of additional growth ahead of us in this important area. First, at our current OCS NOP mission volume, we have room to grow our share of logistics. We expect the overall OCS NLP volume to grow significantly over the next several years as we move closer to achieving our stated target of 10,000 transplants per year in the U.S. by 2028. At that level, logistics would represent a significant revenue opportunity for transmedics. Said differently, as much as we are very proud of our execution and growth of our transmedics transplant logistics to date, We have a long green field of growth ahead of us, and we are committed to capitalizing on this opportunity to its fullest. From a customer footprint perspective, we have also continued to grow the number of programs that are using our transplant logistics services. In Q2, approximately 126 U.S. transplant programs used transmedics logistics compared to approximately 105 in Q1 of 24. Now that we have achieved a critical mass of user programs, we are increasingly focused on going deeper within these existing programs while growing our overall transplant volumes to better meet their transplant and logistics need. Based on the above performance, we have gained even greater conviction that our expanding transplant logistics services will continue to be a key catalyst for the near and long-term growth of Transmedic's business. We see a clear line of sight to continued success through the balance of 24 and into 25 as we scale our air fleet and ground operations to support our growth plans. Moving now to our clinical programs. We continue to advance our new OCS lung and heart programs designed to reinvigorate the OCS lung market and expand our clinical indications and product offering for OCS heart. Importantly, we remain on track for the initiation of all three clinical programs in 2025. We are increasingly confident and excited about the potential clinical impact of our new OCS lung and OCS heart programs based on the following updates. First, we've made significant progress in developing our new OCS perfusion solution and new circuit designs for our OCS lung and heart clinical programs, which we expect to initiate the first of which in early 2025. In the second quarter of 24, we concluded a significant number of preclinical testing to evaluate the impact of these new OCS lung and heart developments. The results demonstrated successful maintenance of donor lungs and heart on OCS perfusion for more than 24 hours, with significantly lower edema formation compared to controlled cold storage. This is a critical milestone towards enabling morning transplants for OCS lung and OCS heart, similar to what we have successfully achieved with OCS liver. We achieved this while demonstrating significant reduction of ischemia reperfusion injury histological markers for both OCS lung and heart compared to static cold storage and significant improvement of the overall operational performance of the OCS lung circuit throughout 24 hours of perfusion due to our new circuit designs. Second, development of our cold perfusion heart program is underway. Again, we are very encouraged by the early preclinical results of this new concept, and we expect this program to clinically kick off in the second half of 2025. I'm looking forward to sharing our preclinical experience with this new product on future calls. For reference, the detailed preclinical results will be formally and publicly presented at the upcoming heart and lung transplant scientific conferences in 2025. Again, We are very excited about our product pipeline and the potential transformative nature of these programs to catalyze mid- and long-term growth of our OCS platform to drive more lung and heart transplant volumes nationally. Let me shift gear. I would like to take a moment to mention that Transmedics has released its latest ESG data update, which was published this afternoon on our website. This data update supplements the information we provided in our inaugural report, providing key data points and metrics about our ESG performance last year. In conclusion, we are encouraged by our H1 performance. We are now focused on continuing our strong execution throughout second half of 24 and preparing for the growth initiatives for 25 and beyond. Given our strong performance in second quarter of 24, we are increasing our annual full-year revenue guidance to between $425 to $445 million, which represents 76% to 84% growth over full-year 2023 revenue. I'd like to note and underscore that this guidance contemplates the fact that few of our aircrafts will be down for routine scheduled maintenance the second half of 2024, which could temporarily limit our pace of growth of our logistics revenue in H2. Also, it factors in some potential OUS revenue variability throughout the second half of this year. With that, let me turn the call to Stephen to cover the detailed financial results and performance for the quarter.
spk01: Thank you, Waleed. I will now provide some additional detail on the second quarter results. and other financial information for the quarter. Starting with revenue, for the second quarter of 2024, our total revenue was $114.3 million. This is an increase of 118% from the second quarter of 2023 and an 18% sequential increase from last quarter. The $114.3 million included $1.1 million related to our flight school, which would leave $113.2 million of transplant-related revenue. In the U.S., transplant revenue was 108.5 million. The U.S. revenue increased 122% in the second quarter of 2023, and also 18% sequentially from last quarter. Q2 2024 includes 19.1 million of logistics revenue. The Oregon breakdown on U.S. revenue was 77 million of liver, 27.2 million of heart, and 4.3 million of lung. All organs grew substantially over the second quarter of 2023. And ex-U.S. revenue was 4.7 million, a 34% increase from Q2 of 2023. The breakdown outside the U.S. was 4.3 million of heart and 0.4 million of lung. Next, on the product and service revenue. As a reminder, our service revenue includes the NOP clinical service of surgical procurement and organ management, the logistics revenue, and also the flight school revenue. NQ2 product revenue was $71.7 million, and service revenue was $42.6 million. The service portion was 37.3% of the total. Gross margin for the second quarter of 2024 was 61%. down from 70% in the second quarter of 2023, and slightly down from 62% last quarter. In comparison to Q2 last year, the change reflects the higher service component of our business, which did not include logistics in the second quarter last year. Product margin was 80% in Q2, and this improved nicely from 77% last quarter, and reflects a steady-state product margin which should remain in the 79% to 80% range. On the service side, margin was 28%, a decline from Q1 2024. This decline was primarily driven by the significant investment in pilot hiring and training to accelerate our operational timeline for our new planes and investment in aviation maintenance to ensure availability to maximize operational efficiency. As Waleed mentioned, we expect some variability in the service margin. which will stabilize by early 2026 as we gain more operational efficiency and leverage. Importantly, with the strong product gross margin and improving service margin, we are confident that our overall gross margin will improve over the next several quarters. Total operating expenses for the quarter were 56.8 million, 51% above Q2 2023 operating expense. This expense growth was driven by 67% growth in R&D related to investment in new product development and product quality and regulatory resources. SG&A grew 46 percent, primarily related to higher personnel costs and overall corporate infrastructure. Moving forward, while I still expect expenses to grow, the rate of growth will be lower than what we have seen in the first half of the year. Once again, we delivered GAAP operating profit, 12.5 million in the quarter, or 11 percent of revenue. Debt income was 12.2 million, These compare with an operating loss of 0.9 million and a net loss of 1 million in the second quarter of 2023. In Q2 2024, earnings per share was 37 cents, and diluted earnings per share was 35 cents. Total cash at the end of the quarter was 362.8 million as of June 30th, 2024. This is an increase of 12.5 million from the balance at March 31st, 2024. and reflects 25.7 million of operating cash, and for the first time, 2 million of free cash flow. We purchased one jet in the second quarter, and then we purchased two additional jets in early Q3, bringing our total number of owned jets today to 17. Basic weighted average common shares outstanding for the quarter were 33.1 million, and diluted weighted average common shares outstanding for the quarter were 35.3 million. In summary, Q2 was another very successful financial quarter for Transmedics. We continue to grow our revenue and have now consistently shown a gap operating profit. In this quarter, we also generated free cash flow, which is an early example of our cash generation capability as we scale. That said, given current focus on investing in new planes, building our operational infrastructure and our product pipeline, we will see fluctuation in our free cash flow in the near term. Finally, just to repeat Waleed's earlier comment, we are updating our annual revenue guidance to be in the range of $425 million to $445 million, which represents 76% to 84% growth over the full year of 2023. Now, I would like to turn the call back to Waleed for closing comments.
spk06: Thank you, Stephen. Overall, we are humbled and proud of our first-half performance. We're looking forward to continuing to execute on all the major initiatives throughout 2024 to drive broader and deeper adoption of OCS NOP and transmedic transplant logistics. Importantly, we're focused on growing our U.S. national transplant volumes for the second consecutive year to help patients in need for organ transplants in the U.S. and around the world. With that, I will now turn the call to the operator for Q&A. Operator?
spk09: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Alan Gong with JPMorgan. Please go ahead.
spk11: Hi, team. Thank you for taking the question, and congratulations on a really strong quarter. You know, I think the first question I just had was specifically for Hart. You know, I think this was a point of concern for investors in the last few quarters. You had even talked about how, you know, you were seeing some challenges in the market given the advent of some of the credit technologies and your limited label, but you had a very strong second quarter here. So can you just talk to some of the drivers of that strength and how we should think about that sustaining into the back half?
spk06: Thank you, Alan. I think, Alan, you might be thinking of a different comment. We have never had any doubt about our heart franchise. There has been concerns from the street. We've never once. stated that we have any concern about our heart franchise. What we said is we expected some ebbs and flows, giving the different dynamics around the start of a cold perfusion trial in the late 2023. I think that came to roost with the announcement of the European results of the same technology in the IASHL-T, where they failed to meet their primary effectiveness endpoint. And I think what we're seeing in Q2 is the natural progression. The OCS remains to be the only FDA-approved heart perfusion technology that is delivering significant growth of DCD utilization and DBD utilization from extended criteria donors in the US and around the world. And the outcome speaks for themselves. So I think the community is now voting with their adoption, given the success of the OCS in meeting all the clinical challenges and all the clinical outcomes that we're facing in the marketplace. So we are very proud of our Q2 results and we expect this to continue throughout this year. And next year, once we launch the... hard programs, we expect this to even further accelerate. So we're proud of Q2 results, but, you know, stay tuned. We're not done yet. There's a lot in front of us to execute upon and even further accelerate the hard growth with the OCS platform.
spk11: Thanks. And then just a quick follow-up on the guide. You know, when we think about the back half, you talked about how you're going to be maintaining some planes, so that'll be a little bit of a headwind to the business. but can you just help us think about the cadence because your guidance at the midpoint implies, you know, roughly $112 million per quarter, so that implies a bit of a step down sequentially. So what cadence should we expect to see third quarter, fourth quarter, and why shouldn't you be able to outperform that given, you know, you're already at more planes relative to what you had in the first half of the year by a pretty significant margin? Thank you.
spk06: Thank you, Alan. I would, at least from my perspective, I'll give you my perspective and Stephen will provide his as well. Listen, we do not expect to decelerate. We never do. However, what we always try to do with our guidance is to be practical and realistic so there are no surprises whatsoever. Yes, we are at a higher number of operating aircrafts. But we all know that when we buy an airplane, it doesn't go into service right away. It takes six to eight weeks minimum to get operational. Yes, we doubled our crew size, but it takes them six to eight weeks to be fully trained and operational. So there are some operational challenges. that we are factoring in our guidance. That's at least my perspective. And we always, we take guidance very seriously, as you know, and we have tendency to be conservative to avoid any surprises. And then I'll turn it on to Stephen to give his perspective as well.
spk01: Yeah, Alan, I would just echo what Waleed said is that the nature of what we do, especially in logistics is quite dynamic. You know, as we mentioned, We're hiring ahead on pilots. We're training them. We're putting maintenance programs together, all to try to speed up that pace of getting these planes going. But at the size we are now, we know that there could be things that, you know, that could cause delays. And so we don't want to assume that no delays will happen. So that's why we're being a little bit conservative. I think the pace, you know, certainly, you know, flattish to a little bit up over the second half is what we're looking at. I agree.
spk09: The next question comes from Bill with Canaccord. Please go ahead.
spk08: Hey, great. Thanks. Good evening. Thanks for taking my questions. You know, just first, if we could just go into the pipeline, especially I think the warm perfusion, you think you're expecting to start those programs early 25, and it sounds like the cold perfusion later in 25. For the warm perfusion, if I remember correctly, it's device and its solution. Are you design locked on those? Kind of where are you in that process in terms of design lock on the product, on the solution, and kind of going through the process to get the approvals to start the trials? And then will you be generating revenue off those trials?
spk06: Thank you, Bill, for asking the question. we are locked and loaded. We are really in the final stages. And, you know, the next phase, the second half of this year will be mainly interactions with FDA and, you know, exercising our regulatory strategy. So we like to keep that between us and FDA. And hopefully by early next year, we'll have a lot to talk about. But from a design perspective, we're locked and loaded. And that's why we feel very confident in these preclinical results. And that's why we actually already written them as abstracts for many of the early 2025 scientific conferences to be presented. So there's no design or exploration going on right now. It's supply chain and VNV testing.
spk08: And on the lung product, is that a negative pressure? And then the question on the, will you get reimbursed for those trials considering you already have FDA approval?
spk06: Yes, these are, as you know, and many on the call know that Transmedics has always, all of our trials have been revenue generating trials. And these old trials, or any clinical program, whether it's pre-market or post-market will be through the NLP program. So there's absolutely be revenue generation expectation for us and our users. So the answer is yes.
spk08: In device revenue also, you said NLP, but not device specifically.
spk06: The NOP, it's a device. NOP is the disposable. And yes, the answer is yes. We never charge for the device, the hardware OCS during NOP. Okay.
spk08: Sorry, go ahead.
spk06: Go ahead. No, go ahead.
spk08: I'll just say the last clarification was just on will the lung include negative pressure in this first generation?
spk06: No, not in this turnaround. No, not in this turnaround. Maybe in the future.
spk08: Great. Thanks for taking my questions. I'll jump back into queue.
spk06: Thanks, Bill.
spk09: The next question comes from Josh Jennings with Cohen. Please go ahead.
spk04: Good afternoon. It's great to see the continued strong momentum in the business. Congratulations on the quarter. Well, I wanted to ask about just the quality of life improvements that the OCS and then just the NOP is affording transplant teams. It's been tough to recruit surgeons into transplant surgery. I think at the American Transplant Congress, the keynote from the president of that society talked about we're in a new era in terms of quality of life for these surgeons, and you're advancing morning surgeries. and the liver indication moving, attempting to get that more fully in play for heart and lung transplants. I guess my question is, I mean, do you expect more surgeons to move into transplant surgery out of medical school slash residency? And then are you hearing from your customers that they're having trouble maintaining their transplant surgeon base if they don't, I guess not your customers, but non-customers, if they haven't adopted OCS and NOP?
spk06: Thank you for the question, Josh. I need to be very careful here. I think all I can comment on are the facts that we know about the NOP that afforded the liver transplant community and the direct comments that were publicly made by many of the cardiothoracic transplanters at the last ISHLT about their hope that one day they could have heart and lung transplants as a scheduled procedure in the morning or semi-scheduled procedure in the morning hours, like the liver community, at least 63% of the liver community that are using NOP have been experiencing. So yes, that's why we're making these investments and that's why we are turning every stone to get the cardiothoracic franchise to be at that same level of maturity and safety with machine perfusion, with OCS perfusion to enable that to happen. Two, your comment about the ATC or the ASTS president is absolutely correct. There has been many public statements from leadership of the ASTS, leadership and leaders in the field of organ transplant about the fatigue issue in organ transplantation specialty and the challenge of recruiting new surgeons. We hope that the OCS and NOP provides a real sustained solution for this on a national basis. That's why we've made that investment. And again, I can only speak for the results that we're seeing with the liver. To see 63% of liver transplants being done on day hours, that's a huge accomplishment given that the NOP is really a young program that is less than 24 months old. So, yes, the answer is we hope to be able to achieve that in the cardiothoracic arena. As far as other, you know, other, I can't really comment on programs that are not using NOP and the challenges of maintaining their surgical team. That's really something we cannot comment on.
spk04: Understood. Thanks for that download. And wanted to ask about the international opportunity. I believe you've hired a couple executives to work on access and maybe even lead the commercial organization over there. Should we be thinking about more meaningful contributions from international franchise in 2025 and beyond and maybe just any updates you can share? That would be helpful. Thanks for thanks for the questions.
spk06: Thank you, Josh. Excellent question. I think, you know, contribution from OUS, mainly European markets, we definitely wouldn't have made these hires if we don't want to have that European opportunity starts materializing. I'd just like to caution us that, you know, market access OUS is going to take the time it takes and I hope that we could see early fruit of these efforts by end of 25, but definitely into 26 and beyond. That's what we expect. We're also selectively targeting smaller OUS opportunities, and the success of the NLP in the U.S. has generated significant interest and excitement. across the globe, really, for transmedics to try to replicate either all or a portion of the NOP model in these geographies. And stay tuned. We're in active dialogue, but we don't like to talk about discussions until they actually materialize into actionable items that could positively impact revenue generation.
spk04: Understood. Appreciate it. Thank you.
spk06: Thanks, Josh.
spk09: Next question comes from Ryan Daniels with William Blair. Please go ahead.
spk02: Hey, guys. This is Jackson for Ryan. Congrats on the solid quarter, and thanks for taking the questions. In your prepared remarks, you mentioned that pilot headcount increased by nearly twofold. So I'm just curious, is this to keep up with the pace of plane acquisitions? And just as a second part, are you at an okay pilot headcount level now going forward, you know, especially if you are more accretive on planes in 2025 or later? Is this kind of an area that you will kind of continue to add headcount as the year goes on? Thanks.
spk06: Thank you, Jack. The pilot headcount represents two opportunities for us. One is to meet the growing number of active aircrafts that we're adding to the fleet, but also we will continue to beef up our pilot crew to be able to increase the number operational capacity by double shifting the plane. So the plane actually could potentially be available around the clock rather than 12 hours per day. So it has a double positive impact. One, we need new pilots to man new aircrafts, but additional pilots will be recruited to double shift each plane. So the plane could potentially be operational more than 12 hours a day. ultimately our goal is to ultimately reach 24 hours around the clock, but that's going to take time. So the answer is we are, I would say we are sort of in the middle or the, you know, the midpoint. And we will continue to evaluate the need for additional pilots as we grow our fleet and we grow utilization. We'll let the data dictate where we go on the number of planes and number of pilots, but ultimately, Right now, given what we know, given our operational success, we've made these investments in anticipation of the growth we see in front of us for the second half of this year and into 2025. We could not enter 2025 in a starvation mode on pilots or planes. That's why we're making this infrastructure investment now.
spk02: Okay, understood. Thanks. And then just as a quick follow-up, can you just give us an update on where you're at on capacity? I think last year you had some clean room bottlenecks. So are you starting to reinvest in clean rooms, or do you have any expansion plans here? Thanks.
spk06: Thanks, Jack. Nothing near term from a capacity constraint, but definitely within the next 12 to 18 months, we'll start strategic planning for business continuity standpoint, as I stated in some of the investor interactions we've had over the last quarter and a half or so. So, I would say over the next 12 to 18 months, we'll begin adding capacity for business continuity, risk management for business continuity standpoint, not for capacity constraint.
spk02: Great. Thank you, guys.
spk09: The next question comes from Matthew O'Brien with Piper Sandler. Please go ahead.
spk03: Afternoon. Thanks for taking the questions. Well, Lee, I'd like to go back to the heart commentary you started off with on the Q&A side. I mean, I understand the competitor, you know, that was working on a clinical study, but that sequential step up can't just be a clinical trial shutting down. There's something else fundamentally that's improving there. If you had to point to one or two things that are improving on the heart side, what would they be, and why aren't they durable, you know, the next several quarters into 25 and beyond?
spk06: Thank you, Matt, for the question. I'm not saying that the clinical trial is shutting down at all. I'm just saying that it's one of the impact. So we expect this to be a durable, the heart sustained durable momentum. We don't expect this to be a flash in the pan at all. I was just clarifying for Alan's question that we've never doubted the heart. We just said, guys, this is just the ebbs and flows that goes around. And there was... the impact of this noise in the system about the cold perfusion trial and the impact and noise of the system of NRP, all of which now have been proven, as we have predicted, to be nothing but noise, and they did not deliver any meaningful value, clinical value, to help grow the heart transplant volume like the OCS has been delivering quarter in and quarter out on utilization of DCD donors and utilization of extended criteria DVD donors and long distance access to donors and, you know, salvaging donors in remote areas in the country that no other cold static or cold perfusion technology could salvage. So we fully expect this to be sustained and we expect accelerating it by launching our two clinical programs early next year, one for warm heart and one for cold heart in the second half of the year.
spk03: Got it. Appreciate that. And then question for Stephen, not through the model yet, but is this close to the low watermark for operating margin here in Q2 for the full year? And then I think you've made some comments about, you know, eventually even exiting next year at 30% on that metric. How do you, is that, first of all, is that 30% number right? And then secondly, how do you, How do you, you know, where does the leverage really come from in the model to get you to that kind of improvement? Thanks.
spk01: Yeah, thanks, Matt. No, I mean, I consistently have said that, and that, you know, at that point we'll have significant revenue, and that should allow us to drop down, you know, that kind of margin, which is the model that we think this business can generate. You know, we're still in investment mode, so as I mentioned, at least on a cash flow perspective, we will see some variability here. we're not quite at that consistent trend level. I do think we're at the point where we're going to be consistently positive operating profit. I don't see us going backwards. But from a kind of a cash generation, it could be variable. As far as the leverage, I think the leverage is coming from, you know, we're still growing investment, but just not at the pace that we were in the past, where we were probably in some cases growing spending, you know, not at the rate of revenue, but at a pretty fast pace. We've got the NOP organization in a very good critical mass, and so the increments to that are more nominal now. They're not major investments. The biggest investment we talked about is really in the – it's showing up in the service COGS area. So as that starts to really fill out, we'll really see that be a leverage point as well. So we have a lot of opportunity as the revenue grows here. It's a pretty highly leverageable model.
spk03: Got it. Thank you.
spk09: The next question comes from Patrick Wood with Morgan Stanley. Please go ahead.
spk10: Amazing. Thank you for taking the questions. Maybe to start, the 21 extra programs that came online for the logistics side of things, I'm just curious, you know, how were the conversations there? What do you think it was that tipped those programs over the edge? And you know, there's obviously a difference between earlier adopters and, you know, the second wave. Have you noticed any difference in, you know, what people care about, what they're demanding in those conversations, or has it been very consistent?
spk06: Thank you so much, Patrick, for the question. I would characterize the conversations are, they're fairly similar. They all want to understand the what the program, how our transmedics logistics could help them, how our transmedics logistics could actually be a cost-effective partner to them. The early adopters have demonstrated it in SPADE, and the recent institutions are coming based on three things. One, they're hearing from their peers and colleagues. Three, they're seeing the growth and and the reach that Transmedics Logistics is providing. And the third element is we're getting them organs that are probably either from a further location that they would never anticipate, or they failed to secure a logistics partner in the middle of the night, and they reached out to us, and we were able to meet it. The bottom line is our financial offering and economic benefit is applicable to all. It's the same program across the country, so that makes it easy for us. So we don't really see a difference in the – how do you call it? There's no difference in the way different programs operate. experience the cost efficiency of the OCS or Transmedics Logistics Network because it's the same program across the board. And, you know, again, we feel extremely proud and humbled by the huge success and the rapid adoption. Now it's time for us to dig in and go deeper and really secure these relationships and go deep in these relationships and and grow our logistics network through these relationships going forward.
spk10: Super clear. And then maybe just as a follow-up, you know, you're obviously investing in the new clinical programs, and it's a big focus for you guys. I mean, to take one example, DBD label expansion, you know, presumably you had discussions with customers, right, and had some temperature checks on that side. Was there, you know, demand coming into you guys that kind of prompted you to think about it that way? Was that part of what pushed it? Was in a sense that maybe it's being used occasionally off label, like, you know, how are those sort of conversations with customers on the outside going as well? Thanks.
spk06: Sure. Thanks, Patrick. I think I would characterize this as something that, you know, Transmedics got here because we have been living, breathing, eating organ transplant for the last 25, 30 years. We see a dynamic. We saw a dynamic. We saw an opportunity. And we are trying to capitalize on it. We've always said this 20, 25% segment of the heart market, the sub-three-hour, sub-four-hour heart preservation market was something that we will get to when we're ready, and now we're ready. So it's just a continuation of our strategy. This is not something that's being pushed on us by customers, or we always know that this is an area in the heart market that we don't have an indication for, and we always plan to get to it, and we will get to it. And ultimately, it's going to help us really solidify our position in the heart franchise.
spk10: Thanks for the questions.
spk06: Thank you. Thank you, Patrick.
spk09: The next question comes from Suraj Kalia with Oppenheimer and Company. Please go ahead.
spk07: Walid, Stephen, Tamer, congrats on a blowout quarter.
spk06: Thank you. Thank you, Suraj.
spk07: So, Walid, two multi-part questions, one for you, one for Stephen. So Walid, I want to piggyback on what Bill had asked earlier. Like, if I heard you correctly, 24-hour perfusion for heart, less edema, and some of the other comments you made. Walid, what is the critical variable that you could share that is helping you get to that bogey? Is it perfusate mix, some free radical scavengers, temperature, perfusion pressure? What are you specifically tweaking? And the reason I ask is if you can make an organ survive for 24 hours, and let's say organ dysfunction, PGD, everything is like within the normal band. Let's assume that. Then you have ethical, legal implications of not using such a device. So maybe if you can just kind of wrap around, you know, what are you seeing? How are you getting there?
spk06: Thank you for the question, Shiraz. The answer is yes. I can speak right now on the specific, but all of the above. We are going to take the heart and lung market by a storm. We have new circuits. We have new perfusion solution. We have new... therapeutic agents that we will fully exercise to hopefully replicate the huge success we're seeing in the preclinical level, in the clinical arena, and then we'll let the market, as you said, declare itself. We are committed to doing the hard work. We're committed to delivering the evidence, the unequivocal evidence, level one evidence. That, unfortunately, there's only one company that has been delivering that in the field of organ preservation for transplant, which is Transmedics. Transmedics spent two and a half years focusing on our commercial success. We're going back to delivering more evidence to grow our franchise and deliver the best possible results. preservation technologies to the field of solid organ transplant. And we hope your assumption would actually pan out once we deliver that evidence. Our commitment is to deliver the evidence and we'll let the market dictate itself, declare itself based on the outcomes.
spk07: Waleed, would the clinical trial compare it to normal thermic OCS or cold storage?
spk06: Suraj, we have to compare ourselves to the standard of care. And the standard of care, at least, as many as you've heard, I'm sure, in the last IACHLT, I'm going to only focus on the cardiothoracic because these are our upcoming clinical programs. You know, what we've been hearing in the IACHLT is the historical standard of care. People have already moved away from declaring cold static storage as the standard of care any longer. They call it the historical standard of care. So I don't want to pre-front any of our ongoing FDA discussions, but from a scientific standpoint, we would be comparing to the historical standard of care. That's the more meaningful comparator, at least, to prove the case.
spk07: Fair enough. Stephen, again, one multi-part question for you, if I may. You know, the leverageability and everything, you know, others have asked about the question. Maybe I'll rephrase and comment it from a different angle. So, the math is suggesting 126 sites, there were roughly 600 Oregon runs that utilized aviation. Maybe you can, if possible, you can give us what was the concentration in these 126 sites that used aviation? And, Stephen, the point made about the president of ASDS talking about, you know, physician life becoming easier with OCS, does that give you a pricing power moving in 2025 and beyond? Gentlemen, congrats again. Thank you for taking my questions.
spk01: Yes, Raj, thanks for the question. Let me try to address it. First of all, we want to make sure it's clear that the 126 programs, many of them are across the same site. So, one site could have multiple programs. So, that's among the 126 is among heart, lung, and liver. The concentration is really diverse today, right? We're still only three-quarters into logistics. So, there are a few sites that are using us on many, many cases for both OCS, NOP, and logistics. And then there are some sites that are just coming on and are just starting. So it's really diverse to give any kind of penetration number on logistics. All we can say is that you can see the growth in the revenue. It's getting more accepted and it's, you know, programs are really seeing great value in using our program because it's much more efficient than the way that's been done in the past. And then what was your third question, Suraj? I apologize. Pricing leverage in 2020. Oh, yeah. As far as pricing leverage, look, at the moment, you know, we've got a pricing model that works. You know, as we move out and grow, we need to determine what the right model is. Maybe service has some levers there. But for now, you know, we're not trying to gouge the system. We have a pricing model that works, and we're going to continue with that. We don't see any changes in the near future.
spk06: I want to echo what Stephen just said, and especially on the second part of the question, Suraj, which is an excellent question as always. Listen, we don't look at transplantation as an opportunity for pricing leverage. What we are focusing on is growing the overall national transplant volume. We're growing our portion, our market share in the existing transplant volume. We are comfortable with our current pricing model. We want to be a trusted partner to transplant programs. This is a very important aspect of our mission. We're not in this to just provide, you know, capitalized on leverage. We know what our value is, but we have to be the trusted partner across all three organs, and ultimately when we get to the kidney, we'll be the fourth organ for all transplant programs in the U.S. and around the world. So that's where we are. We're proud of that. And as Stephen said, the revenue speaks for itself, and we'll leave it at that.
spk07: Thank you.
spk09: Again, if you have a question, please press star, then 1. The next question comes from George Sellers with Stevens, Inc. Please go ahead.
spk05: Hey, good afternoon. Thanks for taking the question. Congrats on a really strong quarter. Maybe to revisit that last question a little bit, I'm just curious if maybe you could share a little detail on what that share at the 126 U.S. transplant programs that you mentioned, what that share could look like over time based on, for instance, the distance maybe that most of those organs are having to travel at those centers? And then secondly, you know, could you give us some color on what the strategy is to drive deeper penetration in those different programs if that's a more aggressive commercialization strategy or just some of the clinical work that you're working on? How should we think about that specific strategy? Thanks for taking the question.
spk06: Thank you, George. To address the first part of the question, our strategy It has always been our stated goal is to take 80-plus percent of the NOP cases to be done on our planes and our logistics network. That is our stated public goal, and that is what we're marching towards. We're far from there. As I stated, we only covered 59 percent of the NOP missions at the current Q2 volume. So we have a long way to go. I can't comment on anything that we haven't discussed publicly before. On the second part, listen, there's different ways, a variety of different ways to increase market share and grow. Again, it's not just about increasing market share. It's about increasing market share and overall growing the transline volume at these institutions. And we focus on the fundamental. We focus on delivering the value. We are focusing on proving the case. We're focusing on the outcomes and the outcome measures, and the rest will take care of itself. You know, transplantation is a black and white. It's a life-saving procedure. So, one, we need to demonstrate that we can get them their organs in the best possible shape. Two, we can get them more organs. Three, we can address some of their logistical issues in the middle of the night. And all of that will give us market share. Three, we provide the most economical way of managing organ transplants since the invention of organ transplants. The way our logistics network is operating is providing significant cost efficiency to every major transplant program that is working with us to protect them against DCD lack of progressions and all sorts of additional expenses that with the historical model, they're liable for with transmedics and NOP and transmedic logistics we share in these expenses. So that is how we're going to get the lion's share of the market with these approaches, just focusing on the fundamentals and providing good clinical outcomes or the best clinical outcomes and the most cost-effective way of managing organ transplant for these programs.
spk05: Okay, that was really helpful, Keller. I appreciate it. And then sticking with NLP, one benefit that was mentioned a little bit earlier on the call is to the transplant centers is the sort of improved quality of life for these surgeons that don't have to go and collect the organ and for the liver with the procedure time being a more normal time of day. But could you speak to within the transmedics clinical support and surgical procurement folks You know, what's the risk of burnout for those folks? And then maybe how are you mitigating that risk?
spk06: That's an excellent question, George. So let me, and thank you for asking that question because it allows me to clarify a point made earlier by Josh. It's more than the quality of life for the transplant surgeons, guys. It's really providing the best quality of the surgical procedure for the recipient. We don't do brain aneurysm surgery at 3 o'clock in the morning, yet we do a heart, lung, and liver transplant at 3 o'clock in the morning. We don't do even a cardiac bypass at 3 o'clock in the morning. So this is where the value is. It's making sure that we have the best quality of the surgical procedure in the form of a rested surgeon, the A-team of clinical and surgical support staff, in the operating room, providing the best quality of care for the patient. So that's number one. Number two, the huge impact on hospital resource management. At three o'clock in the morning, the hospital needs to find support staff, probably are not transplant-focused support staff, and pay them one and a half, double time, or even more. So that is all normalized and more efficientized by using an NOP case. Now, let me go to the crux of your question, which is how do we medicate burnout for our team? As the operator of the largest national network for this kind of service, which is the NOP, we have developed numerous models over the last 18 to 24 months to ensure that our staff is well-rested and we run it through shifts, we run it through We have different programs to ensure that our staff is the most well-rested and taken care of and, again, to maximize the quality of care for that organ. That's why we have the largest group of surgeons on our payroll and, you know, senior experienced surgeons. And sometimes we double-team the case if we think it's going to take longer. So we have maximum flexibility and we have programs and quality programs that are constantly being evaluated to minimize burnout. And it's not just to answer your question. We have one of the lowest turnover rate in the NLP team because of that. And we monitor that very, very routinely to make sure that our team is fresh because we want our team to deliver the best quality of care for these organs that we're taking care of.
spk05: Okay, great. Thanks for all of that detail and for taking the questions. Thank you, George.
spk09: This concludes our question and answer session. I would like to turn the conference back over to Waleed Hassanin, CEO, for any closing remarks.
spk06: Thank you so much for joining us this evening. We appreciate your time, and we look forward to speaking again in a Q3 call. Have a wonderful evening, everyone. Thank you.
spk09: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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