Transmedics Group Inc (TMDX) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TransMedics first-quarter 2019 earnings conference call. (Operator Instructions). As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Greg Chodaczek. Sir, you may begin.

Thank you. Earlier today TransMedics released financial results for the quarter ending March 30, 2019. A copy of the press release is available on the Company's website.

Before we begin I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the 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 the expectations or predictions of future results or performance are forward-looking statements.

All forward-looking statements including, without limitation, our examination of operating trends, the potential commercial opportunity for products and our future financial expectations, which include expectations for growth in our organization, regulatory approvals and reimbursement, guidance or revenue, gross margins and operating expenses in 2019 are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our financial prospectus relating to our initial public offering that we have filed with the Securities and Exchange Commission.

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 only accurate as of the live broadcast today, June 11, 2019. And with that I'll now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Thank you, Greg. Good afternoon, everyone. I'm delighted to welcome all of you to TransMedics' first earnings call as a public company for Q1 2019. Joining me today is Stephen Gordon, our Chief Financial Officer.

As many of you know, we completed our initial public offering in May raising approximately $97 million in net proceeds. We would like to express our gratitude to all of the investors who participated in this offering.

TransMedics is committed to expanding access to life-saving transplant procedures for patients suffering with end-stage organ failure across multiple disease conditions. Our initial focus is on lung, heart and liver transplantation. We strongly believe that we have positioned TransMedics to become a long-term growth opportunity based on the following six key facts.

First, using our proprietary paradigm shifting Organ Care System platform technology we have created an $8 billion greenfield commercial opportunity in lung, heart and liver transplantation alone. The Organ Care System or OCS is the only portable medical technology capable of maintaining human organs in a living and functioning state outside of the human body. Living and functioning, heart is beating, lung is breathing, liver is making bile.

This unique capability enables the OCS platform to optimize and assess human donor organs before transplantation outside of the human body. Based on these unique capabilities the OCS technology overcomes the two most significant challenges in the field of organ transplantation which are: low utilization of donor organs that exist today and the high and growing incidence of post-transplant clinical complications.

Using the Organ Care System technology we have generated substantial body of global clinical evidence demonstrating that the use of OCS technologies associated with significant increase in donor organ utilization and the reduction in post-transplant complications.

For example using the OCS lung technology resulted in 87% donor lung utilization for transplant. This represents a potential for a tenfold increase in donor lung availability compared to traditional cold static preservation. In addition, OCS lung technology resulted in 50% reduction in the most severe form of primary graft dysfunction, which is Grade 3 primary graft dysfunction after lung transplantation.

Similarly, the use of OCS heart resulted in 81% utilization of donor hearts for transplantation which represents a potential for a ninefold increase in donor heart availability as compared to standard of care, while cutting the rate of primary graft dysfunction, severe primary graft dysfunction by over 60% in heart transplantation.

Finally, the use of OCS technology has allowed for the creation of a brand-new procedure in heart transplant called heart transplant from donors after circulatory death, or DCD. These are hearts that have stop beating in the body of the donor for approximately 30 to 40 minutes. And they have never been used for transplantation before the development and availability of the Organ Care System heart.

Through our DCD commercial activities for heart transplant in Europe and Australia we have demonstrated and experienced a utilization rate greater than 80%, an excellent post-transplant short- and long-term survival. We believe that we can leverage these paradigm shifting clinical evidence and results to drive significant revenue growth and, over time, make the Organ Care System become the next standard of care for heart, lung and liver transplantation.

We have a robust portfolio of FDA approved and PMA pipeline of clinical indications. Our business model is disposable driven and in an ultra-concentrated market with approximately 55 centers driving 70% of the annual US transplant volume. And finally, we have secured US reimbursement for CMS in private payers for lung, heart and liver transplant. And we are actively engaged with European national reimbursement authorities to secure national reimbursement for OCS for our technology.

Our key priorities for 2019 and early 2020 are: driving revenue growth leveraging our three organ platforms, lung, heart and liver; two, receive US FDA PMA approval for standard and expanded criteria DBD heart transplant and drive OCS heart commercial adoption to make the OCS technology the only approved heart and lung or lung and heart perfusion technology in the field of organ transplant in the US; third, complete our OCS pivotal trial and prepare the FDA PMA filing in 2020.

As we stand we have enrolled 232 out of the initial target enrollment of 300 patients in the liver trial and we expect the trial to be -- successfully complete enrollment by the end of this year, early next year. Finally, initiate our US pivotal trial for DCD heart transplantation in the US to further expand the US heart total addressable market.

Our revenue growth strategy and execution can be summarized as follows. Our revenue growth is unique as it comes from both commercial sales of our FDA approved indication as well as revenue from ongoing US pivotal trials. OUS revenues are commercial from CE Mark indications.

Our strategy is very focused and very simple. Our strategy is to drive deeper adoption of the OCS technology within our leading centers starting with centers that participate in our trials and expanding from there to new centers that want to use the OCS technology as part of their day-to-day transplant technology.

We are also using post-market registries to continue to broaden and expand our clinical evidence, meet the FDA post-market program requirement and, importantly, engage transplant thought leaders and key opinion leaders in the transformation of the standard of care in the field of lung, heart and liver transplant.

Our focus in the near-term will be to leverage our commercial and clinical trial centers to drive strong year-over-year top-line growth. From there we will focus on maximizing our penetration and increasing the overall transplant volume at each center due to the increased utilization of donor organs using our OCS technology.

In summary, we have a significant opportunity in front of us. There are several growth catalysts in the near- and mid-term horizon. Q1 was very productive and we remain laser focused on meeting our growth objectives for 2019 and beyond. With that I will turn the call over to our CFO, Stephen Gordon, and then I will return with some closing comments.

Thank you, Waleed, and I'm very pleased today to be reviewing our financial results for the first quarter of our 2019 fiscal year. When sharing revenue results I will provide both gross revenue, which is the amount we invoice from our customers, as well as net revenue, which nets out certain clinical trial payments that we make to those customers who are involved in our clinical trials.

So for the first quarter of 2019 our gross revenue was $5.3 million. That's a 92% increase over the first quarter of 2018. And our Q1 net revenue was $4.7 million, an 86% increase over the first quarter of fiscal 2018. This strong increase in sales was primarily driven in the US from OCS lung commercial sales as well as solid clinical trial momentum in the OCS liver PROTECT trial. We also shipped our first disposables for the OCS hard expand continued access protocol, or CAP trial, in the first quarter.

Our gross margin for the first quarter of 2019 was 55%; that is compared to 37% in the first quarter of 2018. And this increase was primarily driven by our overall increase in sales, higher average selling price of disposable sets in the US as we transition from trial sales to commercial sales, and also overall improved efficiency in our production.

Our total operating expense of $8.5 million in the first quarter of 2019 grew 50% compared to $5.7 million in the first quarter of 2018 and this increase was primarily in SG&A as we transition our expense structure to support commercial growth in the US as well as developing the structure required to support a public company.

Our operating loss of $6 million in the first quarter of 2019 compared to $4.8 million in the first quarter of 2018 and our net loss for the first quarter was -- of 2019 was $6.9 million. That's a 41% change compared to $4.9 million in the first quarter of 2018.

Cash and cash equivalents was $12.2 million as of March 30, 2019, the end of Q1. And as you know, in May of 2019 we completed our initial public offering raising approximately $97.4 million of net proceeds after deducting underwriting fees.

So, turning to our outlook for 2019, we expect net revenue to be in the range of $23.5 million to $25.5 million, representing annual growth of 81% to 96% over the -- over 2018. Now I would like to turn the call back to Waleed for closing comments.

Thanks, Stephen. As you can see, we are very inspired and excited about the potential of TransMedics and the OCS technology to transform organ transplantation globally. Before opening up the call for questions, I would like to take a moment to thank the entire team at TransMedics who has worked tirelessly to execute on our vision.

We are just at the beginning of our journey to transform organ transplant market and I'm extremely proud to be a part of this team. With that we will now open it to questions. Operator?

(Operator Instructions). David Lewis, Morgan Stanley.

Good afternoon. Just a few questions from me, maybe two for you, Waleed, and one for Stephen. So, really just starting off on expanded indications for lung, specifically DBD and DCD. I guess two-part question. How soon can we see the full commercial launch? And I'm kind of curious what impact, if any, is the approval having on standard criteria launch or center interest or adoption. And a couple of follow-ups.

Thank you, David. I will start with the second half of the question. We think achieving that PMA approval for the expanded DBD and DCD indication will be a catalyst for the adoption of the OCS lung technology across the entire lung line in the US. And it will clarify a lot of the clinical indication questions that we were getting in the early commercial phases of the launch program.

So, we believe that this approval will streamline the process -- will streamline the adoption process. Then back to your first part, which is when do we see full-blown commercialization of the full indication. I expect that to be in the Q4 timeframe of 2019.

Okay, very helpful. And then, Waleed, just a catalyst update for everyone, quick one for Stephen. But just on catalyst, when do you think you expect to do the interim look on liver this year and do the panel date yet for heart in the fourth quarter?

So, I want to clarify one thing, David. The interim look in the liver is really a formal statistical sample size re-estimation. It has been pre-specified in black-and-white in the protocol to be done by an independent biostatistician to really give us a very simple go/no go decision on whether do we need an increased sample size to increase the power or the current sample size of 300 is more than enough to meet the study objective.

So, we are not going to get any more specific detail on the data analysis. That is pre-specified in the protocol that way to avoid any issues with an interim look at the data. So that should happen in late Q3/early Q4.

We will get an independent biostatistical firm to tell us if the 300 number is where we are stopping the trial and concluding the trial or do we need to add X number of patients to increase the power for the study analysis and we would get the number from the biostatistician. That date will be end of Q3, beginning of Q4. We will not get any specifics on the outcome data for this study, nor do we want to, to protect the trial integrity.

As far as the heart panel, we expect that to be in Q4 timeframe. We don't have a specific date identified, David, but I hope that once we have the major deficiency letter responses filed to FDA, that we will get an indication from FDA whether that's going to be November, December or some other timeframe. So we expect that in Q3 we would know definitely the exact date of that heart panel.

Okay, very helpful. And then, Stephen, just last for me and I'll jump back in queue. Obviously guidance pretty straightforward. Anything you'd offer us in terms of quarterly cycling or volatility across the quarters? Or is the right way to think about 2019 kind of stable, ratable improvement of revenue across the quarters? Thanks so much.

Yes, David, it's definitely the latter, just steady improvement across the quarters as we've added this additional approval. And as we start to do more transplants in our heart CAP and DCD trials, it's just going to be steady growth across the quarters.

Robbie Marcus, JPMorgan.

Thanks and congrats on the good quarter. Maybe I could start with just a housekeeping question first and then a couple operational questions. Can you help us with maybe how lung versus heart versus liver revenues broke down in the quarter? And then any updates on how many centers are utilizing the OCS?

Sure, Robbie, this is Stephen and I will give you a breakdown of the net revenue for the three organs. So for lung the net revenue was $1.4 million; for heart it was $1.9 million; and for liver it was $1.3 million. And just a little more color -- for lung and liver most of that is in the US; for heart most of that is outside the US. As far as the number of centers -- why don't you take that, Waleed?

So Robbie, this is Waleed. I think the number of centers right now stands at around 17 initiated centers in the US. We expect to see those numbers grow to about 20 by year-end. The focus on us is not the number of centers; the focus that we are -- Tamer and his team are focusing on is how we are penetrating in these centers and trying to get the -- now with the two indications in hand, get these centers to be utilizing the OCS lung in both indications and continue to rev up the utilization gear.

We expect to end the year between -- around 20 centers, but from that on we are going to be drilling into the utilization adoption curve within these 20 centers.

Great. And then, Waleed, I saw you guys at the ISHLT meeting. You had a really positive conference. You showed off some great EXPAND data. Can you just give us an update on how your discussions are going with the clinicians, where people are most interested in using OCS? As we sit here we have the question of why wouldn't more centers adopt it and more rapidly. So maybe give us some thoughts on the discussions where doctors decide not to use it, why and then how that's picked up since you presented the data.

Robbie, first of all, thank you for attending that conference. And as you saw, there was significant interest and momentum around revealing the data on both heart and lung. And since the meeting there has been high -- I would call it high-intensity around when is the PMA going to be approved for the indication of the lung.

There is significant momentum picking up from the heart front even though the PMA is still under review, but when we announced the final results for the EXPAND heart, that generated significant momentum for us in the US. And we expect and we hope to show that momentum in our Q2 and Q3 results.

So net-net, as I told David earlier, we are extremely fortunate that we secured the PMA approval for the lung in Q2. We really think that will play a key role in accelerating our adoption and smoothing -- I would say smoothing our adoption and facilitating our adoption to avoid any confusion in the indication. We're looking forward to executing on that goal and demonstrating that in Q2, Q3 and Q4 results.

And maybe just last from me. In your discussions where do you think doctors are most excited about using OCS in lung? Is it in the standard criteria or is it more in the expanded criteria? Thanks.

I think, Robbie, that's an interesting question. And obviously that question exists when you only have one PMA approval, but when you have both indications approved what we envision is the following. What we envision is a year from now we are not going to see a line in the sand, call it, standard criteria and extended criteria. I think that line exists fictitiously because of the way the PMA review cycle has been going on.

Ultimately we stand by our technology and what we believe is if we -- once we replicate the results we've seen in the trial in these centers in the commercial phase, centers should adopt the OCS technology broadly both from an extended criteria routine indication because OCS adds value in both indications.

In summary, I think a year from now our goal is to look at the penetration, look at the total volume increase in the center and that will give us the answer to that question. Right now people are just turning -- beginning to turn the wheel of adoption on and once they see the outcome we are seeing centers, new centers that haven't even participated in our study.

They've just used the system a couple times and all of a sudden every lung that's coming on board we hear that they are trying to go out with OCS. And we envision that to continue and we envision that to grow. And over the next three to four quarters we envision that that delineation will go away. But we need to prove it and we demonstrate it to validate that vision.

Josh Jennings, Cowen.

Congrats again on the expanded criteria in lung approval. I was hoping to just start on the reimbursement side. And I think clearly you guys have driven mad Medicare private payers will pay for clinical trials. And as you ramp up in commercial lung cases and now with the approval, can you just help us understand where you feel you're at?

I know you had some comments in the prepared remarks, but maybe you could expand on those and just talk about how successful you've been in terms of payer decisions to date on the commercial side and just how reimbursement is flowing through the organ acquisition cost center for your customers.

Thank you, Josh. The reimbursement and flow through the organ acquisition cost center is just a process, it is the way the technology is being reimbursed. It has been reimbursed during the trial and it's the commercial reimbursement mechanism and that's not going to change. So that's number one and that's been validated as we transition centers from trials to commercial lung centers.

I guess the educational piece that our commercial team and US reimbursement team is going through right now is mainly with new centers that hadn't established a billing history throughout the trial and just learning the billing techniques, billing mechanisms and building the billing history for commercial payers. And that's -- our team and Tamer's team is doing a phenomenal job walking them through the process.

We have built a repository of case examples and best practices that, again, our team is leveraging with new centers. And we obviously can plan and hope to continue to demonstrate that in our quarter-over-quarter growth. We see that reimbursement issue as something that we need to continue to focus and educate new centers on. However, we don't see that as a burden at all.

Great. And then just on the follow-up question on just the heart CAP program, the continued access program, can you just remind us where you are in terms of the ramp there actually in Q1? I think I may have missed just some of the details in the prepared remarks. And then just how do you expect that to ramp over the course of 2019 in front of FDA approval?

Actually, Josh, that's an excellent question. We expect two things to ramp over Q2 from Q1 to Q4 in 2019 on the heart front. One is the heart continued access protocol and two is the actual DCD heart program. These are the two heart preapproval US programs that will be generating clinical momentum and revenues in the US while we are awaiting the panel decision hopefully in Q4 of this year.

We are seeing ramp in the heart activities in the US, in Q1 we saw from, but we are seeing that ramping up in Q2 and we envision that continuing into Q3 and Q4. The DCD will add further momentum into the heart program.

If we step back for a second, in 2018 -- in 2018 we only had revenue in the US from lung and liver. We didn't have any access to heart revenue or any clinical activities in heart in the US. And 2019 is the first year we have revenues from lung, revenues from heart and revenues from liver. And we saw the beginning of Q1 seeing that in the heart, we expect that will continue in Q2, 3 and 4 of 2019.

Great and then my last question just sticking with heart and I know there's a question about panel timing potentially. Can you just walk us through what is left in terms of the submission process for FDA approval for heart? Is there any other back and forth with the FDA or answering of questions? Is all that in the rearview mirror? But maybe just to frame up what's left in front of the panel and through approval. Thanks a lot for taking the questions.

Thank you, Josh. We believe we have received all the questions that the FDA has on the application, at least that's our assumption as we sit here today. Right now our team is working on addressing all the questions, consolidating all the answers and we are targeting to file our formal response to the full list of FDA interactive questions in Q3. And we are hoping that that will -- that's the time point where we nail down the panel date.

In parallel to that, we've already engaged with our FDA panel prep team to begin the process of preparing for the panel. It is the same team we've worked with before for the lung. So we're taking it very seriously and obviously we are moving forward as if we're having a panel meeting in Q4 of 2019. But the response to FDA will go in in Q3.

(Operator Instructions). Jason Mills, Canaccord.

Hi, this is actually Cecilia on for Jason. And I just wanted to continue on the discussion around heart and just ask if you could contrast the position you'll be in with heart and centers in the US post-approval to ramp your volume versus the dynamics that have and are currently playing out with lung.

Thank you, Cecilia. We envision a slightly different dynamic. Assuming we have a positive panel vote, we would have a fairly large core group of centers that would have been already active with the heart technology either through the CAP program or through the DCD program. And these are the type indications that -- other than the DCD, these are the type of indications that would be under approval.

So we envision this to switch into post-market. And there are steps that we have to go through to transition from a pre-market study to a post-market that include getting the post-market registry protocol approved by the local center IRB, establishing a data collection agreement with the institution and data transfer agreement with the institution. But we expect that to be streamlined given that these institutions would have been already active in the CAP or the DCD.

So we envision that to be a little bit more streamlined. We envision more editing existing agreements rather than creating new agreements that -- which was the case for us in the lung. Of course our focus -- our initial focus is ensuring that we file the interactive questions list followed by securing a positive panel outcome. The execution piece in the centers we believe is going to be much more streamlined, but our focus is to make sure that the FDA panel is positive and we get this OCS heart approved in the US as soon as early 2020.

Okay great thanks. And then just quickly shifting to liver, can you just provide an update in trends that you're seeing, enrollment trends in the PROTECT trial? And just momentum that you've seen in Q1 flow through and what you expect going forward through the balance of the year?

Thank you, Cecilia. I am going to go out on a limb here, which I usually don't like to do too much of, but the liver program has seen the highest rate of enrollment of any program that we've done to date. That is our sixth or seventh clinical trial and it is the highest enrollment rate per quarter we've seen in Q1. We expect to see the same rate in Q2 and we should be in a position throughout this study out by the end of this year assuming no increase in the sample size.

That enrollment momentum is generated based on what we are hearing centers are seeing the value of the technology. And we are encouraged and humbled by that. Now we are focused on making sure that we get this trial completed, turn it into a PMA submission as soon as possible and begin the path towards approval of this very important indication for us.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to management for any closing remarks.

Thank you so much. We greatly appreciate you taking the time out of your busy schedule to be on this call and we look forward to convening for the Q2 results. We greatly appreciate your time. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.