TransMedics Group, Inc. (NASDAQ:TMDX) Q2 2024 Earnings Call Transcript

TransMedics Group, Inc. (NASDAQ:TMDX) Q2 2024 Earnings Call Transcript July 31, 2024

Operator: Good afternoon, and welcome to the TransMedics Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Laine Morgan from the Gilmartin Group for a few introductory comments.

Laine Morgan: Thank you, operator. Earlier today, TransMedics released financial results for the quarter ended June 30, 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, 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 in organization and guidance, and/or expectations for revenue.

Gross 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 filed with the Securities and Exchange Commission on May 2, 2024, our subsequent Form 10-Q filings and the forward-looking statements included in 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 Hassanein, President and Chief Executive Officer.

Waleed Hassanein: Thank you so much, Laine. 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, an 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, representing 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 2024 — 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 GAAP 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 pipeline. Now with that background, let me provide more detail across key operational metrics relating to building out our transplant logistics network. Through Q2, we continued to expand our fleet of owned aircraft, reaching 15 aircraft by end of Q2.

We also added 2 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 aircraft compared to nine in Q1 of ’24. We expect this number will continue to increase throughout the year as we remain on track to reaching approximately 20 operational aircraft 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. Second, we expect the overall OCS NOP 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 force.

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 use TransMedics logistics compared to approximately 105 in Q1 of ’24. Now that we have achieved a critical massive 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 TransMedics 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 on 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 hearts 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 gears. 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 of ’25 and beyond. Given our strong performance in second quarter of ’24, we are increasing our annual full year revenue guidance to between $425 million 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 at that few of our aircraft 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.

Stephen Gordon: 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 be $113.2 million of transplant-related revenue. In the U.S., transplant revenue was $108.5 million. The U.S. revenue increased 122% from the second quarter of 2023 and also 18% sequentially from last quarter. Q2 2024 includes $19.1 million of logistics revenue. The organ 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. In Q2 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 time line 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 grew 46%, 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 of $12.5 million in the quarter or 11% of revenue. Net income was $12.2 million. These compared 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 $0.37 and diluted earnings per share was $0.35.

Total cash at the end of the quarter was $362.8 million as of June 30, 2024. This is an increase of $12.5 million from the balance at March 31, 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 2 additional jets in early Q3, bringing our total number of owned get 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 GAAP 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.

Waleed Hassanein: 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 TransMedics 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?

Q&A Session

Operator: [Operator Instructions] The first question comes from Allen Gong with JPMorgan. Please go ahead.

Allen Gong: Hi team. Thank you for taking the question and congratulations on a really strong quarter. I think the first question I just had was specifically for heart. I think this was a point of concern for investors in the last few quarters. You had even talked about how you were seeing some challenges in the market given the advent of some competitive 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?

Waleed Hassanein: Thank you, Allen. I think, Allen, you might be thinking of a different comment. We’ve never — 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 given 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 ISHLT, where they fail to meet their primary effectiveness end point. 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 U.S. and around the world, and the outcomes 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 heart programs, we expect this to even further accelerate. So we’re proud of Q2 results, but stay tuned. We’re not done yet. There’s a lot in front of us to execute upon and even further accelerate the heart growth with the OCS platform.

Allen Gong: And then just a quick follow-up on the guide. When we think about the back half, you talked about how you’re going to be maintaining some plans, so that will 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 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’re already at more planes relative to what you had in the first half of the year by a pretty significant margin?

Waleed Hassanein: Thank you, Allen. I would — at least from my — 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 we’re — 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 a minimum to get operational. Yes, we doubled our crew size, but it takes some six to eight weeks to be fully trained and operational. So there are some operational it 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.

Stephen Gordon: Yes. Allen, I would just echo what Waleed said is that the nature of what we do, especially in logistics is quite dynamic. 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 could cause delays. 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, certainly flattish to a little bit up over the second half is what we’re looking at.

Waleed Hassanein: I agree.

Operator: The next question comes from Bill Plovanic with Canaccord. Please go ahead.

William Plovanic: Hey, great. Thanks. Good evening. Thanks for taking my questions. 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?

Waleed Hassanein: Thank you, Bill, for asking the question. We are locked and loaded. We are really in the final stages. And the next phase — the second half of this year will be mainly interactions with FDA and 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 V&V testing.

William Plovanic: 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?

Waleed Hassanein: 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 all trials or any clinical program, whether it’s premarket or post-market will be through the NOP program. So there’s absolutely be revenue generation expectation for us and our users. So the answer is yes.

William Plovanic: In device revenue also, you said NOP but not device specifically.

Waleed Hassanein: The NOP device — NOP is the disposable. And yes, the answer is yes. We’re not — we don’t — we never charge for the device, the hardware OCS during NOP.

Stephen Gordon: Okay.

William Plovanic: And then just…

Waleed Hassanein: Sorry, go ahead. Go ahead. No, go ahead.

William Plovanic: I’ll just say the last clarification was just on will the lung include negative pressure in this first generation.

Waleed Hassanein: Not to this turnaround. No, this is — no, not to this turnaround, maybe in the future.

Operator: Next question comes from Josh Jennings with Cowen. Please go ahead.

Joshua Jennings: Hi, 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 in the transplant surgery. I think at the American Transplant Congress, the keynote from the President of that society talked about when a new era in terms of quality of life for these surgeons and you’re advancing morning surgeries and liver indication moving kind of attempting to get that more fully in play for heart and lung transplants. I guess my question is, I mean, are we, do you expect more surgeons to move into transplant surgery out of medical school/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 noncustomers if they haven’t adopted OCS and NOP.

Waleed Hassanein: 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 some scheduled procedure in the morning hours, like the liver community actually 63% of the liver community that are using NOP have been experiencing. So yes, we — 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 ATS President is absolutely correct. This 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 cardiothoracic arena.

As far as 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.

Joshua Jennings: Understood. And wanted to ask about the international opportunity. I believe you’ve hired a couple of 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.

Waleed Hassanein: Josh. Excellent question. I think 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 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 NOP in the U.S. have generated significant interest and excitement across the globe, really, to — for TransMedics to try to replicate either all or a portion of the NOP model in these geographies. And stay tuned. We are in active dialogue, but we don’t like to talk about discussions until they actually materialize into actionable items and that could negative — that could positively impact revenue generation.

Operator: Next question comes from Ryan Daniels with William Blair. Please go ahead. Hey, guys, this is Jackson. Don for Ryan.

Unidentified Analyst: This is Jack on 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 plan acquisitions. And just as a second part, are you at an okay pilot headcount level now going forward, especially if you are more accretive on planes in 2025? Or is this kind of an area that you will kind of continue to add headcount as the year goes on?

Waleed Hassanein: Thank you, Jack. The pilot headcount represents 2 opportunities for us. One is to meet the growing number of active aircraft that we’re adding to the fleet, but also we will continue to beef up our pilot crew to be able to increase the operational capacity by double shifting the plane. So the plane is 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 midpoint and we will continue to evaluate need for additional pilots as we grow our fleet and will grow utilization.

We’ll let the data dictate where we go on the number of planes and number of pilots. But right now, given what we know, given our operational success. We are — 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 ’25 in a starvation mode on pilots or planes. That’s why we’re making this infrastructure investment now.

Unidentified Analyst: Okay. Understood. 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 neuron bottlenecks. So are you starting to reinvest in clean rooms? Or do you have any expansion plans here?

Waleed Hassanein: 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 1.5 quarters or so. So I would say over the next 12 to 18 months, we’ll begin adding capacity from our business continuity, risk management for business continuity standpoint, not for capacity constraint.

Operator: The next question comes from Matthew O’Brien with Piper Sandler. Please go ahead.

Matthew O’Brien: Afternoon. Thanks for taking the questions. Waleed, 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 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 in the next several quarters into ’25 and beyond?

Waleed Hassanein: Yes. 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. The other — 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 Allen’s question that we’ve never dialed at 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 NOP, 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 you kind of extended criteria DBD donors and long distance access to donor and salvaging donors in remote areas in the country that no other hold or cold perfusion technology could salvage.

So we fully expect this to be sustained, and we expect accelerating it by launching our 2 clinical programs early next year, one for warm heart and one for cold heart in the second half of the year.

Matthew O’Brien: Got it. Appreciate that. And then a 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 eventually you’ve been 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 — where does the leverage really come from in the model to get you to that kind of improvement?

Stephen Gordon: Yes. Thanks, Matt. No, I mean, I consistently have said that at that point, we’ll have significant revenue and that should allow us to drop down that kind of margin, which is the model that we think this business can generate. We’re still in investment mode. So as I mentioned, at least on a cash flow perspective, we will see some variability. 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, we’re still growing investment but just not at the pace than we were in the past, where we were probably, in some cases, growing spending 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 gets — starts to really fill out we’ll really see that be a leverage point as well. So we have a lot of opportunities as the revenue grows here. It’s a pretty highly leverageable model.

Operator: The next question comes from Patrick Wood with Morgan Stanley. Please go ahead.

Patrick Wood: 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 how are the conversations there? What do you think it was the tips of those programs over the edge? And there’s obviously a difference between earlier adopters and the second wave. Have you noticed any difference in what people care about what they’re demanding in those conversations? Or has it been very consistent?

Waleed Hassanein: Thank you so much, Patrick, for the question. I would characterize the conversations are, they’re fairly similar. They all want to understand 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 Spain and the recent institutions are coming based on three things. One, they’re hearing from their peers and colleagues through they’re seeing the growth 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 fail to secure a logistic 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 — in the — there’s no difference in the way different programs experience the cost efficiency of the OCS or TransMedics logistics network because it’s the same program across the board. And again, we feel extremely proud and humbled by the huge success and rapid adoption. Now it’s time for us to dig in and go deeper and really secure these relationships and go deepening these relationships and grow our logistics network through these relationships going forward.

Patrick Wood: Super clear. And then maybe just as a follow-up. 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, presumably, you had discussions with customers, right, and had some temperature checks on that side. The demand coming into you guys that kind of prompted you to think about it that way? Was that partly what pushed it was in a sense that maybe it’s being used occasionally off label? Like how are those sort of conversations with customers on that side gotten as well.

Waleed Hassanein: Thanks, Patrick. I think I would characterize this as something that 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-3 hour sub-4-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 heat 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.

Operator: Next question comes from Suraj Kalia with Oppenheimer & Company. Please go ahead.

Suraj Kalia: Waleed, Stephen, congrats on a blowout quarter.

Waleed Hassanein: Thank you. Thank you, Suraj.

Suraj Kalia: So Waleed, multipart questions, one for you, one for Stephen. So is, 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. What’s 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 or 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 what are you seeing, how are you getting there?

Waleed Hassanein: Thank you for the question, Suraj. The answer is yes. I can’t speak right now on the specific, but all of 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 on 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 are 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 2.5 years focusing on our commercial success. We’re going back to delivering more evidence to grow our franchise and deliver the best possible 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, the clear itself based on the outcomes.

Suraj Kalia: I will leave would the clinical trial compare it to normal thermic OCS or cold storage?

Waleed Hassanein: 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 ICT, I’m going to only focus on the cardiothoracic because these are our upcoming clinical programs. What we’ve been hearing in the ISHLT is the historical standard of care. People have already moved away from the clearing cold static storage as the standard of care any longer, and 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 competitor, at least to prove the case.

Suraj Kalia: Fair enough. Stephen, again, one multipart question for you, if I may. The leverageability and everything others have had 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 organ 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 physician life becoming easier with OCS, does that give your pricing power moving in 2025 and beyond. Gentlemen, congrats again.

Stephen Gordon: Yes, Suraj, thanks for the question. Let me try to address that. First of all, I 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 on heart, lung and liver. The concentration is really diverse today, right? 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 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.

Suraj Kalia: Pricing leverage in 2024.

Stephen Gordon: Yes. As far as pricing leverage, look, at the moment, we’re, we’ve got a pricing model that works. As we move out and grow, we need to determine what the right model is. Maybe service has some levers there. But for now, we’re not trying to go out to 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.

Waleed Hassanein: 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 — capitalize 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 will 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.

Operator: [Operator Instructions] The next question comes from George Sellers with Stephens Inc. Please go ahead.

George Sellers: 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, 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?

Waleed Hassanein: Thank you, George. To address the first part of the question, our strategy 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% of the NOP emissions at the current Q2 volume. So we have a long way to go. So that’s — 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, the transplant volume at these institutions.

And we focus on the fundamentals. We focus on delivering the value. We are focusing on proven the case. We’re focusing on the outcomes and the outcome measures and the rest will take care of itself. Transplantation is a black and white. It’s a life-saving procedure. So one, we need to demonstrate that we can get 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 the — 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 TransMedics 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.

George Sellers: Okay. That was really helpful color. I appreciate it. And then sticking with NOP. One benefit that was — I 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 organ for the liver the procedure time being a more normal time of day. But could you speak within the TransMedics clinical support and surgical procurement folks. What’s the risk of burnout for those folks? And then maybe how are you mitigating that risk?

Waleed Hassanein: 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 3:00 in the morning. Yes, we do a heart, lung and liver transplants at 3:00 in the morning. We don’t do even a cardiac bypass at 3:00 in the morning. So this is what we are — this is where the value is, okay? It’s making sure that we have the best quality of the surgical procedure in the form of a rescue 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 3:00 in the morning, the hospital needs to find support staff, probably are not transplant focused support staff and pay them 1.5 double time or even more. So that is all normalized and more efficienized by using an NOP case. Now let me go to the crux of your question, which is how do we mitigate burn out for our team. As the operator of the largest national network for this kind of service, which is 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 order.

That’s why we have the largest group of surgeons on our payroll and 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 burn out. And it’s not just to answer your question. We have one of the lowest turnover rate in NOP 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.

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

Waleed Hassanein: Thank you so much for joining us this evening. We appreciate your time, and we look forward to speaking again in the Q3 call. Have a wonderful evening, everyone. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.