TransMedics Group, Inc.
Q1 2021 Earnings Call Transcript

Published: 5 May 2021

[Operator:]

Good afternoon and welcome to TransMedics' First Quarter 2021 Earnings Conference Call. . I would now like to turn the call over to Lynn Lewis from the Gilmartin Group for a few introductory comments.

[Lynn Lewis:]

Thank you. Earlier today TransMedics released financial results for the quarter ended March 31, 2021. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, are examination of operating trends, the potential commercial opportunity for our products and our future financial expectations, which include expectations for growth in our organization, regulatory approvals and reimbursement, and guidance and/or expectations for revenue, gross margins and operating expenses in 2021 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.

[Waleed Hassanein:]

Thank you very much, Lynn, and sorry, everyone, for the technical difficulties earlier. Good afternoon everyone and welcome to the TransMedics 2021 first quarter earnings call. Joining me today is Stephen Gordon, our Chief Financial Officer. As we stated in our last call, we are expecting several catalysts in 2021, which we believe will set a strong foundation for long-term growth for TransMedics. The positive FDA panel vote to approve our Heart DBD PMA indication was the first catalyst to be achieved this year and we're looking forward to many more throughout this important year. Today I will be covering the following 5 major topics on our call. First, a summary of our financial results for the quarter. Second, the progress achieved across our key strategic initiatives. Third, commentary on our OCS Heart panel meeting results. Fourth, a status update on the upcoming catalysts in 2021 and their potential impact on our business. And then finally, I will discuss expectations for the remainder of 2021. Starting with the first topic. Net revenue for the first quarter was $7.1 million. While our overall revenue declined roughly 6% year-over-year, it is important to recognize that our U.S. business grew 11% despite minimal contribution from OCS Liver, due to the completion of the CAP enrollment. We are encouraged by the growth in our U.S. business and the continued recovery in the U.S. transplant activities. O-U.S. revenues continued to struggle due to the COVID impact on transplant numbers and the overall disruptions throughout the European hospitals. We are laser focused on our key strategic initiatives we outlined for 2021 to help drive growth for our business, which leads me to the second major topic to discuss. In the first quarter, we made meaningful progress across all strategic and operational initiatives for TransMedics. Let me start by describing the status of the National OCS Program.

[Stephen Gordon:]

Thank you, Waleed. I would now provide some additional detail on the Q4 results and other financial information for the quarter. For the first quarter of 2021, gross revenue was $7.6 million and net revenue was $7.1 million. Net revenue decreased by 6% from the first quarter of 2020. However, in the U.S., gross revenue was $6.3 million and net revenue was $5.8 million and U.S. net revenue increased 11% from the first quarter of 2020. The organ breakdown on U.S. net revenue was $2.3 million of OCS Lung, $3 million of OCS Heart and $0.4 million of OCS Liver. Our ex-U.S. revenue was $1.3 million, up $7 million from Q1 of 2020 and included $0.1 million of OCS Lung and $1.2 million of OCS Heart. The key driver of Q1 revenue performance was strong OCS Lung and OCS Heart sales in the U.S., reflecting continued recovery in U.S. transplant activity. But the completion of the OCS Liver PROTECT CAP and a lower transplant activity outside of the U.S. were headwinds for the quarter. Gross margin for the first quarter 2021 was 68% compared to 65% in Q1 last year and 63% last quarter, and in line with our stated expectation of the increasing gross margin. Total operating expenses for the quarter were $11.3 million, which was down 12% from Q1 of 2020 and up 6% from the fourth quarter of 2020. While limited travel and other spending due to COVID are still impacting our spending, we have continued to invest in growing our national OCS program. Our operating loss was $6.5 million in the first quarter of 2021 compared to $8 million in the first quarter of 2020 and our net loss for the first quarter of 2021 was $7.9 million compared to $8.9 million in the first quarter of 2020. Finally, cash, cash equivalents and marketable securities were $118.1 million as of March 31, 2021, which equates to a reduction of $7.5 million from the balance at the end of 2020. And weighted average common shares outstanding for the quarter were $27.4 million. And just confirming, while these comments are due to current uncertainty, we are not providing guidance for 2021 at this time.

[Waleed Hassanein:]

Thank you, Stephen. While revenue is expected to continue to be impacted in the near term by the cadence of clinical trials and FDA review timelines, we are optimistic and confident in our long-term prospects, given our progress across all growth catalyst in 2021. We are advancing rapidly towards 2 major regulatory decisions on our OCS Heart and OCS Liver indications that will have significant commercial ramifications in our business and will fundamentally alter our growth trajectory long term. The ultimate goal remains that we end 2021 with 3 approved transplant market indications in the U.S. and we remain confident that this goal is attainable. I'm excited about and confident in the future of our business as we continue to transform the field of organ transplantation globally using our OCS technology platform. With that, I'll now turn the call to the operator for Q&A. Operator?

[Operator:]

. Your first question comes from the line of Robbie Marcus from JPMorgan.

[Unidentified Analyst:]

You've got Farhan on here for Robbie. So firstly, on the heart panel, I understood your commentary there, but help me understand a little better. What's your sense of when it happen about or what you expect the label to look like from the panel outcome and what you need in terms of the additional trial you mentioned to potentially get to the expanded criteria. Just help me kind of talk through some of the puts and takes here.

[Waleed Hassanein:]

I think our label that will come out of this panel will help us cover all the expanded criteria that we studied in the EXPAND Trial. We feel very confident about that. We don't -- at this point, we don't expect to do additional trials to be able to get the label for extended criteria. The trial I was referring to is a post-approval registry. That's the part of the post-market program that we have proposed to the FDA all along. So I just want to clarify. The label we are thinking of and speaking about should be able to cover all the expanded criteria hearts that were studied in the EXPAND Trial.

[Unidentified Analyst:]

Okay, great. Thank you. And then switching to the Lung. I know you saw in the previous quarter some pent-up demand and some backlog to work through. What are some of the commercial dynamics you've seen progressing through this quarter? Have you seen recoveries in broader med tech? Is that something you've been seeing in the lung franchise and what do you expect going forward from here?

[Waleed Hassanein:]

We expect the Lung to continue to recover. It's still lagging out of the 3 organs, but it's coming close and we expect to see that recovery to continue as long as we don't get another COVID peak. The thing that we've been noticing more transparently recently is there are more and more patients being transplanted after they've been suffering with COVID. Younger patient profiles that are coming to the transplant waiting list in an acute situation and getting a lung transplant because they had suffered from COVID and COVID ended up completely destroying the lung function. So that's something that we are keeping our eyes on because that could create another wave of pent-up demand that could stay with us long term. But that's the only thing -- that's the only new dynamic that we witnessed in Q1. More and more patients -- younger patients, not traditional lung failure patients, are coming for our lung transplant because they had COVID last year.

[Operator:]

Your next question comes from the line of Cecilia Furlong from Morgan Stanley.

[Cecilia Furlong:]

I guess I just wanted to start with the service model. Could you talk a little bit more about the traction you've seen in Q1, COVID kind of disrupted to certain extent, pathway. So I guess just the value proposition right now in a world recovering from COVID of the service model. And then what you're thinking about commercialization for Heart, just how you roll that out between active centers in the CAP versus moving hard into the service model?

[Waleed Hassanein:]

Sure. So the first one relating to the national program, we are -- as we stated before, we're excited about this program. We are -- we think this program is going to have a significant impact, sort of mid and long-term on the adoption of our technology. What we have done in Q1 is broadly disseminated the value proposition, both clinically, economically, financially and even work-life balance-wise and COVID-related impact-wise, to all the lung transplant programs. We are seeing the traction starting to build. We expect that traction to continue to build into Q2 and Q3. Really, I'm looking towards the end of this year to really have a palpable momentum that is generated from this program. If there is anything, given the COVID environment, everything is going to take a little bit longer than what we wanted to. So Q1 was an early win for us to see that momentum starting to build. We need to be patient and we need to continue to reiterate the value proposition throughout the next 2 quarters and hopefully by year-end we'll see tangible evidence of that momentum building up that will hopefully be reflected in our revenue. Relating to the Heart commercialization, Cecilia, and trying to even with the Liver commercialization, we're going to follow the same path. We start with the active programs that have experience with OCS, whether through the CAP expand or whether -- or add to them the 25 DCD program, given the fact that -- yes, they have been active only with DCD, but now they understand the value proposition of an OCS Heart and we focus in those first. And then on top of that, we layer the national program. We envision ourselves to continue to provide flexible -- 2 flexible mechanisms for adoption of our technology through the direct acquisition and the national program, at least throughout 2021 and into mid-2022 where one or both will declare themselves as we have to continue that way. So we're staying flexible. We're enabling both mechanisms to drive adoption. We don't want to disrupt that adoption curve early on. But we think this is going to be different than the Lung for all the reasons we stated several times before.

[Cecilia Furlong:]

And I guess to just on OCS DCD heart performance in the first quarter, could you just talk about the trends you saw as COVID headwinds listed and just really what you're seeing at the end of the quarter and into and the kind of April timeframe just from a cadence standpoint. And then, just on Liver as well, when we could hear a bit more clarity on this second tranche go through or if you just progress to the panel?

[Waleed Hassanein:]

Sure. So we're very bullish on the DCD Heart program for 2 reasons. One, the numbers -- the pace of enrollment is still at all-time high compared to any program we've conducted in the past. But what we've seen in Q1 that gives us even more confidence and more excitement is that now we're not -- we're no longer limiting or we're no longer limited or focused or concentrated enrollment in the hands of the top 3 or 4 leading centers. Now we are seeing distribution of enrollment really deep into the 25 -- broadly across the 25 centers, which is very exciting for us. And we're seeing centers that are sort of medium volume transplant programs, really doing quite a number of cases in Q1 to that would meaningfully impact their total volume. And when you look at a macro level, we track this on a quarterly basis. In the U.S. in Q1, there was approximately 65 or 70 new hearts or additional heart transplants as compared to last year Q1. Of those, 45 were in OCS because they were DCD hearts. These are new hearts that otherwise would not have been transplanted. So the OCS contributed to approximately 50% or 60% of the growth of heart transplant in Q1. So that's very exciting for us. We expect this to -- we hope and we expect this trajectory to continue on the Heart front. Relating to the Liver CAP, I think Cecilia we're really cutting it very close here. We are doing our best, trying to convince the FDA that the CAP is important, but also when you look at it from their perspective, the panel scheduled in mid-July. And by the time we get approval, it will be probably sort of early June, mid-June. So I think it will be very clear during Q2 whether or not we would have a second tranche in the CAP or we're just going to drive through the panel and just drive these approval from there. So hopefully, we'll have that visibility with the next 60 days or so.

[Operator:]

Your next question comes from the line of Josh Jennings from Cowen.

[Unidentified Analyst:]

Brian here for Josh. I just wanted to start with a clarification on your comment on the Liver CAP. So I understand the view that approvals clearly outweigh the CapEx activity in terms of priority for the company. But what is the rationale you've gotten specifically for not increasing the CAP, given that the data we've seen very favorable and don't raise any concerns about the safety or efficacy?

[Waleed Hassanein:]

Brian, that's an excellent question. Unfortunately, that -- I can't comment specifically. But at a very, very, very, very high-level feedback we received is we're so close to the panel, one we just go through the panel and get approval. So we're going back with some of the arguments you highlighted and we hope that we will prevail and we'll wait and see in the next 60 days. But we completely agree with your sentiment, but also we see it, we see where they're coming from -- so, but there is nothing there that we are aware of that gives us any pause or concern. The data is very strong. We are as confused by that feedback as you are, but also we understand how close we are to the timeline for the panel.

[Unidentified Analyst:]

And maybe changing gears to O-U.S. Can you just share the month to month progression of the trends you've experienced recently and just whether you see that getting better or sort of staying the same over the next couple of months.

[Stephen Gordon:]

Yes. Brian, this is Stephen. So if you look at kind of where we are in the April, we are definitely seeing some uptick in the international business. It's slow and steady. I don't think it's a trend yet, but we definitely are seeing that come back from where it was early in Q1.

[Operator:]

Next question comes from the line of Bill Plovanic from Canaccord.

[William Plovanic:]

Two questions. Just first is clarification on the Heart approval. Do you have any FDA audits remaining to gain that approval?

[Waleed Hassanein:]

No, we passed all the audits with flying colors a while back.

[William Plovanic:]

Okay. And then in terms of in the discussion on the label, have you completed the label discussion that pushed on for approval and then same question for the post-approval study? Where are you in those discussions?

[Waleed Hassanein:]

Right. So Bill, that's a great questions. No, at this point we are focused on waiting on them making final decision and once that -- the decision is made, the few remaining profits is the PAS design and the final label language, so that -- these are the two things that we're waiting for.

[William Plovanic:]

Okay. And then have they provided a time frame? Or do you have a time frame? Would you have expected at that kind of final decision before you move on to the labeling PAS?

[Waleed Hassanein:]

I think the time frame -- overall time frames are the same that we've communicated pre-panel, which is 3 to 4 months from panel date, and I believe these are the same time frames that will hold given our recent discussions with the FDA.

[William Plovanic:]

Okay. And just, yes, it was in your prepared marks to confirm that we're not going to ask you to go back and do any more animal testing or anything of that nature as a required regulatory approval. I don't even know if they can, but I just want --

[Waleed Hassanein:]

I can. So, Bill, listen, I cannot predict what the FDA is going to ask for. My remarks were -- and the remarks I made on the panel date is there's a significant mischaracterization here. There are tens of animals of data really closing to hundreds of animal data that was submitted. For some reason, it was not reflected in the panel discussion, and we have access to all this data and all the results to address the question that was raised at the panel date, that's what gives us the confidence. So that's one aspect of the answer. The second aspect of the answer is, as you all know, the FDA always prioritize human data over any preclinical testing. So we feel very confident that whatever misunderstanding or mischaracterization, we can clarify given the data that we have access to. And that was really the comment and/or the remark I was trying to get across, that we feel very confident in our position with our preclinical program, with our preclinical data that would help address any open or remaining questions by FDA. And the fact that the statement at the found date was not accurate or correct, given the significant number of animal studies that were presented and submitted in this PMA.

[William Plovanic:]

Okay. That's really helpful. Thanks. And then second question is just on the OPO program. You provided a podiatry. I just -- just any kind of color around the first site that signed up the first and second sites signed up, kind of what you're seeing in terms of traction. I appreciate that you're now up to 6, but it's really speaking. I'm kind of looking for, okay, those first 1 or 2, what has this done for their business? Have they doubled what they're doing? Has it tripled? Or are they just getting going? I'm just trying to kind of get a feeling for maybe what this can do once you get this expanded to more players? And what the timing for that is?

[Waleed Hassanein:]

Sure. I think, Bill, that's a great question. I think what I can share publicly is the following

[Operator:]

Your next question comes from the line of Suraj Kalia from Oppenheimer.

[Suraj Kalia:]

So Waleed, a few questions. Let me start out with the DCD trial. Waleed, remind me, it's a non-inferiority trial, and there is no hierarchical analysis for superiority relative to cold storage, right?

[Waleed Hassanein:]

Not so, Raj. This is a DCD trial. So we're comparing apples and bananas, right? And meaning cold storage standard plicera hearts. So the design was always because these are parts that otherwise would have not been transplanted. It's highly unlikely, I would stop here. So that's the design. We actually questioned the validity of doing a randomized trial for this indication, and we wait and see what the result shows. But our expectations is that we -- the design is what it is, which is another trial. I don't remember, Suraj, if we have a testing for superiority or not. Usually, when we have an we test for superiority, but I don't have the answer to that. I need to -- I'll follow-up with you off-line to give you the exact answer based on the protocol.

[Suraj Kalia:]

So Waleed, in terms of liver, we have seen the top line data on liver. And just following up on the heart panel, I was wondering if you could walk us through, is this something in the data below the top line, the PMA was filed -- correct me if I'm wrong, Q2 of 2020. So FDA has been looking at this data for a long period of time. Is this something in your view that could again be a hiccup for the FDA on the Liver side?

[Waleed Hassanein:]

Suraj, I cannot predict what could be a hiccup for FDA on any of their application. All I can assert is the following

[Suraj Kalia:]

And Waleed, one final question, and I'll hop back in queue. Post the panel, the heart panel, I'm just trying to get a practical assessment of the feedback you are getting from the ground. Post the heart panel, how many new centers do you expect to add in the heart centers in the U.S. and O-U.S. once you'll get DBD approval in heart?

[Waleed Hassanein:]

I think once FDA approval is in hand, I think we are targeting anywhere between 25 to 30 heart launching sites. These are the 25 DCD heart sites, plus the 5 that we're involving in expand CAP. That would be our sort of the low hanging fruit.

[Operator:]

Okay. I don't see any question at this time. I will turn it over back to Waleed for any closing remarks.

[Waleed Hassanein:]

Thank you, operator. Thank you, everybody, for joining us on this call, and we look forward to our next call. Have a wonderful afternoon. Bye-bye.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.