Transmedics Group Inc

NASDAQ:TMDX

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon, everyone. Thank you for standing by, and welcome to the TransMedics Q2 2020 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference call is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Brian Johnston.

[Brian Johnston]

Thank you, operator. Earlier today, TransMedics released financial results for the quarter ended June 30, 2020. 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 Federal Securities Laws, which are made pursuant to the safe harbor provisions of the Private Security Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are future -- are forward-looking statements. All forward-looking statements including, without limitation, our 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 2020 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 annual report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2020, supplemented by our other SEC filings, including our quarterly report on Form 10-Q for the second quarter of 2020. TransMedics disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 5, 2020.

With that, I'll now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

[Waleed Hassanein, executive]

Thank you so much, Brian. Good afternoon, everyone, and welcome to TransMedics Second Quarter 2020 Earnings Call. Joining me today is Stephen Gordon, our Chief Financial Officer.

I want to start our call by extending my gratitude and well wishes to our TransMedics clinical support team and transplant health care professionals, who have been on the front lines, ensuring that organ transplant procedures are continuing during this COVID pandemic. As we highlighted on our last call, COVID caused significant disruption to the global transplant activities beginning in late March and throughout the second quarter. Similar to medical procedures broadly, transplant activities fell to near 0 throughout April and early May. The slowdown caused the waiting list numbers to continue to grow. And ultimately, transplant programs decided to temporarily deactivate a portion of the waiting list in order to allow transplant activities to recover before bringing these patients back in the waiting list and letting the waiting list continue to grow.

Despite these challenges posed by the pandemic, we made meaningful progress on our commercial, regulatory and clinical initiatives throughout the second quarter of 2020. Since the trough in April through early May, we've experienced recovery of transplant activities across many regions in the U.S. As we have highlighted previously, resuming transplant activities is a priority for many hospital systems. We're seeing continuing recovery. However, we remain cautiously optimistic given the emergence of new hotspots in key regions in the U.S. where major OCS centers reside.

With that context, let me now shift to a review of our Q2 results. Our second quarter net revenue was $3.4 million, which represents a 40% overall decline from second quarter 2019. Given our strong first quarter, first half '20 net revenue was up 6% compared to first half 2019. Through the quarter, we recognized revenue for all 3 organs, OCS organ programs. OCS Lung was the most heavily impacted by COVID in Q2 given the virus impact on donor lungs and the new testing mandates that were implemented on donor lungs -- donors. Our OCS Heart DCD program continued to accelerate and grew in Q2 to a total of 51 transplants, up from 26 at the end of Q1. In June, we filed our OCS Liver PMA to FDA and the review process is currently underway. We expect to receive a list of review questions and hold our 100-day meeting -- review meeting with the agency in October to map out the approval process and time lines. We're also continuing to make significant progress with our national service model offering and, in the second quarter, conducted significant outreach to major OPOs across the U.S. We are confident that our service model will be active in many regions in the U.S. in the second half of 2020.

In May, we successfully closed an equity offering that contributed approximately $75 million in net proceeds to buttress our balance sheet and give us a long robust runway to drive our business growth. We are grateful to all new and existing investors, who participated in this financing.

Now let me shift to review our key strategic milestones and catalysts for 2020 and 2021. Most significantly, the FDA has informed us that our OCS Heart panel will be held virtually to review our PMA application on October 7. We are looking forward to that important day, and we're laser-focused on securing a strong positive panel vote to support the approval of the OCS Heart system. Assuming a positive panel vote, we would expect approval within 3 to 4 months. As mentioned, we remain ahead of schedule for the OCS Liver approval and, following our earlier than expected PMA submission, continue to expect approval in 2021.

As we look ahead, we also expect a continued rebound of OCS Lung programs as hospitals better navigate the balance of managing the COVID crisis while enabling other procedures, particularly transplants. We also expect to benefit from the expansion of our national service initiative. Specifically, the national service initiative would be initiated across major regions in the U.S. in 2020 and will expand through early 2021 and beyond. OCS Lung will be the main driver through the launch of this initiative and will expand to include OCS Heart and OCS Liver once FDA approvals are in hand.

From a clinical perspective, the OCS Heart DCD programs remain on track to complete enrollment in 2020 and for a PMA submission in 2021. Overall, we fully expect that we will have all 3 OCS products approved and generating commercial revenue in the U.S. in 2021.

Turning to our thoughts on the second half of this year. As I mentioned earlier, we are optimistic, however, we are cautious in our optimism. Even though we have seen incremental recovery in transplant procedures, we are concerned that the rebound may not be linear given the emergence of new hotspots and the resurgence of the COVID virus in regions that had already stabilized. We also continue to keep an eye on the potential for a second peak in the U.S. later in 2020. Given these uncertainties, we are not restating guidance for 2020. That said, we are not pulling back but actually leaning forward to initiate many key regions in the U.S. with our national service initiative to potentially lessen the impact of any future peaks on transplant activities if and when they happen.

We will also use this as an opportunity to demonstrate the benefits of our OCS service offering to reshape the face of the new standard of care of organ transplantation using the OCS technology and the TransMedics service initiative. Importantly, we're continuing to push our key FDA approvals forward for heart and liver to best position us for 2021, regardless of the near-term impact of COVID. Finally, our strong balance sheet gives us maximum flexibility to drive the business and weather this current COVID storm.

With that, I will turn the call to Stephen Gordon, our CFO, to review our financial results for the quarter.

[Stephen Gordon, executive]

Thank you, Waleed. I will provide some additional detail on the second quarter results and other financial information in the quarter. For the second quarter of 2020, gross revenue was $3.9 million and net revenue was $3.4 million. Our net revenue decreased by 40% from the second quarter of 2019. In the U.S., gross revenue was $3 million, and net revenue was $2.4 million. U.S. net revenue was down 43% from the second quarter of 2019. The organ breakdown on U.S. net revenue was $0.4 million of OCS Lung; $1.3 million of OCS Heart; and $0.7 million of OCS Liver. And outside the U.S., net revenue was $1 million, all of that -- all of which was OCS Heart. As we mentioned in previous communications, the substantial impact of the global COVID-19 pandemic on organ transplants significantly reduced our revenue from our earlier expected growth trajectory. The most significant impact was in the month of April, which had really almost no revenue, but we did recover somewhat in May and June to get to the $3.4 million, although we're obviously not back to pre-COVID levels.

Our gross margin for the second quarter of 2020 was 56%. That's down from 59% in the second quarter of 2019 and down from the 65% that we were at in the first quarter of 2020. And the lower gross margin is also a result of the lower volume in the quarter. Our total operating expenses were $9.8 million in the second quarter of 2020. That's down $1.3 million from the second quarter of 2019 and it's down $3.1 million from the first quarter of 2020.

This reduction in operating expenses was a result of specific cost reduction actions that we took to preserve cash during the pandemic as well as certain areas that were naturally reduced like travel and trade shows, which were on hiatus during this time.

Our operating loss was $7.9 million in the second quarter of 2020 compared to $7.7 million in the second quarter of 2019 and compared to $8 million in the first quarter of 2020. And our net loss for the second quarter of 2020 was $8.5 million compared to $9.2 million in the second quarter of 2019 and compared to $8.9 million in the first quarter of 2020.

And as Waleed mentioned, we raised an additional net cash of $75 million in a public stock offering in the quarter, and this allowed cash, cash equivalents and marketable securities to end at $139.4 million as of June 30, 2020, providing a very long runway for the company to weather the COVID-19 storm and continue to maintain investment in our commercial growth as planned. Finally, weighted average common shares outstanding for the quarter was 23.3 million.

And with that, I'll turn the call back over to Waleed.

[Waleed Hassanein, executive]

Thank you, Stephen. Despite the challenges posed by the pandemic, we are extremely confident in TransMedics' mid and long-term prospects and durability to the COVID disruption. Here are the facts supporting our position.

Organ transplant procedures are emergent. They're nonelective and life-saving procedures. Despite the COVID impact, we expect that transplant procedures will recover as COVID cases start trending down. As we stated earlier, we don't expect the recovery to be exactly linear due to the ups and downs of the new hotspots throughout the U.S. There's a built-up -- pent-up demand in the form of the national waiting list that continued to grow even during the COVID crisis. Organ transplant procedures are high-margin, high-revenue procedures that many hospitals rely on for their financial stability. And relating to key FDA approvals, we're looking forward to the October OCS Heart Panel meeting, and OCS Liver PMA is already under review, both of which should be approved in 2021.

Our balance sheet is strong to allow us to weather this COVID storm and FDA delayed panel as well as invest in our platform and growth initiatives. Thank you so much for joining us on this call. And now we will open up the line for questions. Operator?

[Operator]

[Operator Instructions] And first question comes from the line of Robbie Marcus from JPMorgan.

[K. Gong, analyst]

This is actually Allen on for Robbie. I just had a few quick ones. So I guess as we look to the back half of the year, I was hoping that you guys may provide some additional color on the trajectory of the recovery. I know you said that April was down to almost nothing to get back up to $3.5 million. You clearly had a very sharp recovery in May and June. So I guess when we look out to 3Q and 4Q, how should we think about that recovery trajectory continuing? Should we think about it as a bit more sequential, even though you are seeing a resurgence in some major geographies? And how should we think about you returning to maybe back to, like, say, like 100% of what you had last year versus eventually growing above that?

[Waleed Hassanein, executive]

Thank you, Allen. So for the -- as far as the trajectory, it's not linear. We've seen continued improvement, but given the emergence of hotspots in the South and Southwest and the west part of the country, some of that blunted the recovery. So we expect sequential, but it's not a linear recovery line that we see. That's why we're cautious in our optimism. Are we seeing a recovery? Absolutely, we are seeing a recovery. But it's just with these hotspots coming in major regions in the U.S. that are actually heavy OCS regions, we just think that this could blunt the recovery in one month and maybe recover once that crisis subsides. What we know is institutions, hospitals, centers are much more equipped and better equipped today than they were in March and April where, once we see a hotspot kind of easing off, we see the transplant activities returning, maybe a little bit faster than what we experienced before, but definitely during the peaks, things kind of -- get slowed down.

Relating to the second half of your questions -- your question, I suspect that we are still going to be at last year's level by end of this year. I think it will take us through Q3 and maybe even through Q4 to get to last year's level before we start seeing growth beyond last year's level. That's at least based on what we know today. Stephen?

[Stephen Gordon, executive]

Yes, I would agree with that assessment.

[K. Gong, analyst]

Got it. And I guess just another quick follow-up. On the clinical trial pipeline, it sounds like you guys have managed to maintain your time lines there a little bit better than maybe some other peers within the medical device group. I guess like how confident are you in that, I guess, since you've managed to make it through the worst of it. Guessing you're pretty confident but, I guess -- why have you been able to sustain your clinical trial pipeline a little bit better than some of your peers?

[Waleed Hassanein, executive]

I can -- well, again, it goes back to what we talked about organ transplantation. And the -- we maintained our -- we -- both clinical programs, both the liver continued access, and definitely the DCD Heart was maintained as essential during the major peak of COVID, and we expect that to continue. As you can see, we nearly doubled our enrollment rate in Q2 in the DCD Heart. So we feel very confident that we -- even despite the resurgence and the new hotspot, that we would continue to drive the clinical programs forward. And the most time-sensitive one is the DCD Heart breakthrough program, and we expect that to be completed in 2020 regardless of the -- any hotspots or even another peak. So that's that -- we were fortunate that the heart -- the leading heart centers were not in hotspot, and they have -- knock on wood, they haven't been impacted that much. And in fact, some of them actually received patients from other areas in the country that got transplant on OCS from other regions. So we expect to expect that the time lines for the DCD Heart program to be maintained, and we expect to finish the enrollment of the DCD program in 2020.

[Operator]

Next question comes from the line of David Lewis from Morgan Stanley.

[Unknown Analyst]

This is Calvin on for David. Stephen or Waleed, just kind of a follow-up on the trend question that Allen asked. Can you please comment what you're seeing in terms of the resurgence reasons impact on your business at the end of the quarter or coming out of the quarter in July, how that's impacted monthly trends sort of by organ and how those are perhaps translating into June or July kind of exit rates? And I have a quick follow-up.

[Stephen Gordon, executive]

Sure. So this is Stephen. I'm happy to take that. So as I mentioned, the -- I just want to be cautious about drawing a linear trend because it's -- we just don't feel like that's the right answer. But as I mentioned, April was very low. We did about [ $500,000 to $600,000 ] in April. And then May and June made up the difference. They were pretty similar. We didn't really see a -- it wasn't like June was way higher than May. They were pretty similar. And July is looking a little bit better than May and June. And so we feel like we're seeing that uptick in the month of July. And we hope it continues in August. But again, we're being a little bit cautious because of -- there's just a lot of uncertainty in the market. So hopefully, that helps. And I don't -- I would typically not do it by organ, but we're seeing the same trend in organ. Lung is being hardest hit. Our Heart program is doing well, and our Liver program is a little bit behind the Heart.

[Unknown Analyst]

Very helpful and just a quick follow-up. Could you just provide an update on timing for some of your key accounts, you kind of touched on this. One is just on the OCS Liver data publication, when is that expected? Are we still tracking for this quarter or later? And then for the Heart panel timing, you had mentioned that the approval timing would be 3 or 4 months following the panel. Is that kind of on track with your expectation? Or is it maybe a little delayed from what you have expected before?

[Waleed Hassanein, executive]

So Calvin, relating to the publication of the liver data, we are tracking -- we said that H2 2020 is we're going to be published. We are on track to submit it through a major peer reviewed journal in Q3, and it will take the time it takes for its review process. And so we feel very confident that H2 will hold. Relating to the Heart approval, there's no change in our sentiment. We always said it's anywhere between 2 to 4 months from the panel date. The panel date was delayed by 6 months. That's -- the difference is just that the panel date, instead of being in April -- on April 16, now it's on October 7. So we always expect it 2 to 4 months after the panel to get the final approval order. So that's -- there's no change there. It's just that the panel has been changed, just waiting for the FDA to give us that time slot.

[Operator]

Next question comes from the line of Suraj Kalia of Oppenheimer & Company.

[Suraj Kalia, analyst]

Can you hear me all right?

[Stephen Gordon, executive]

We can hear you just fine, Suraj.

[Suraj Kalia, analyst]

Perfect. So Waleed and Stephen, thanks for the information just in terms of the cadence as you all move through Q2. Waleed, given the 2- to 4-month time line that you have laid out post panel for approval, it is safe to say that the FDA is not going to throw a wrench at the last minute and say, we want additional data from, let's say, the DCD -- X number of implants from the DCD -- ongoing DCD program. Is that a safe assumption?

[Waleed Hassanein, executive]

Suraj, we never predict or assume to predict what FDA will and will not do. We have not heard a request like that. So that's all I can comment. But we have not been told or hinted to about a linkage between the DCD program and the ongoing PMA review. They are 2 completely different indications. So -- that's all I can answer, Suraj. We're not aware of any linkage between the 2 programs.

[Suraj Kalia, analyst]

Got it. Fair enough. And Waleed, one of the things that keeps coming up in repeat client conversations is -- let's say you are beyond making the technology argument. Then the question becomes how do you jump-start growth post COVID? How do you jump-start growth? How do you get these centers on board so that you can reduce this imbalance between demand and supply of solid organs? I'd love for you to -- as you think past COVID to just sort of give us an idea about your strategic layout. Is it working on guidelines post-approval? Is training -- is -- what are the critical elements in your opinion, as you lay out the future post COVID that will help in jump-starting growth for OCS, for any indication for that matter, heart, lung, liver? Just overall, an umbrella viewpoint would be greatly appreciated.

[Waleed Hassanein, executive]

Thank you, Suraj. I think without -- I think that it's an excellent question. I think we have not made it any secret how excited we are about our national service initiative and removing all the logistical barriers to adoption. I think there's a reason why we're leaning forward into the COVID pandemic. There's a reason why I thanked our clinical support team that was actually on the front line supporting live supporting cases on the field during the COVID pandemic and continues to do that today. So I think that's really a critical part of, not just regaining growth, but really establishing ourselves during the pandemic to be a reliable partner during the pandemic and post pandemic. We're redefining the standard of care, Suraj, as you know. And this is -- the COVID pandemic, we believe, underscores the huge need for a better and new way to do organ retrieval for transplant, and we believe it's going to be the OCS way through our national service initiative. I think that's a big part of our strategy. So that's the foundation that we're driving the growth with.

[Operator]

[Operator Instructions] Your next question comes from the line of Josh Jennings from Cowen.

[Joshua Jennings, analyst]

Just 2 from our team. On the heart submission and panel, are there any post panel steps need to be completed? And also, could you provide an update on how you'll manage the access program between now and when the system is formally approved for the heart indication? I just have one follow-up.

[Waleed Hassanein, executive]

Sure. Thanks, Josh. So the only follow-up for the panel is really finalizing the post-approval post-market registry. We have a robust design. There was some several question -- back and forth questions with FDA that we feel this needs to be finalized, and finalizing the labeling language. These are usually the 2 major topics that needs to be finalized. So that's what we're expecting, Josh. This will be our third post-approval, post-market registry program. So we've used our knowledge from the previous 2 to kind of lessen the back and forth, and we feel pretty good where we are. And I think the FDA also have seen that improvement.

The second part of the question was…

[Joshua Jennings, analyst]

Just on the cash flow. Sure. Just an update on just how you manage the access program between now and when…

[Waleed Hassanein, executive]

Sure. So the DCD program is active, the CAP is active and we expect that to continue to be active even once we enroll the DCD program, we will file a continued access program. So we have all the heart centers involved in some OCS activities until hopefully the PMA approval order is in hand.

[Joshua Jennings, analyst]

Excellent. And then just a follow-up on the liver submission. Can you just share your expectations in terms of the time line for the review? And is it a fair assumption based on the data in prior panels, for OCS technology, this review will not involve an ad com panel?

[Waleed Hassanein, executive]

To be honest with you, Josh, we are assuming an ad com panel conservatively because we always assume that conservatively. We've highlighted in our submission a strong argument why does -- why does this application may not require an ad com panel given the superiority in outcome. But obviously, we're always going to assume the conservative assumption that it will take 12 to 14 months because we assume an ad com meeting. We have to wait and see where FDA is at during our October meeting and we'll ask the question explicitly. But so far, we have not received any indication one way or another, whether it's going to be subjected to an ad com or not.

[Joshua Jennings, analyst]

Understood. And with the ad com panel assumption, any guidance you can provide just in terms of the submission and the review time line and when we could potentially see an approval? Obviously, saw with the Heart filing that there's a COVID pandemic that threw things off, but assuming there's nothing disruptive to that degree.

[Waleed Hassanein, executive]

Well, that's an excellent question, Josh. The 12 to 14 months, that's assuming that -- the ad com. If the FDA agrees with our analysis and our recommendation for no ad com, it should be shorter than that. So we always assume more conservative assumption, the 12 to 14 months that's baked in an ad com meeting.

Relating to if COVID or something related to COVID, I think now the FDA is at least they're more prepared and more comfortable doing virtual meeting. At least on the device side, we're aware that the OCS Heart panel is going to be the first ever panel for approval in CDRH that was done virtually. So we're trailblazing there. And I think there are a couple of others that are after us. And hopefully, if we need a virtual panel for the liver, I don't think it's going to be something that the FDA will take that much time to decide on because now the FDA is accepting virtual panels as sort of the new way of doing business.

[Operator]

[Operator Instructions] And next question comes from the line of [ William Goldstein ] of Millennia Capital.

[Unknown Analyst]

I was wondering if you can expand a little bit more on the service offering. Am I justified to believe that you're going to have teams that go out and harvest the organ and then accept reimbursement from payers and from the -- from CMS?

[Waleed Hassanein, executive]

I think the service offering is nothing but a mechanism by us providing the same type of service that we provide today, supporting transplant programs. And it will have -- the biggest part of it is the technology. So the technology expense or cost is the same. And we're just providing additional logistical support and management of the perfusion service to support the technology in the field. The same reimbursement mechanism apply. There's no difference there. So that's -- on a high level, that's how the service model would work. There shouldn't be any different mechanism for billing or different mechanism for reimbursement, it's the same mechanism. We're just providing support to the technology utilization.

[Unknown Analyst]

So the transplant centers will send out their own team of surgeons or practitioners to harvest the organ, and you'll just continue to provide support. But the company won't be getting actually vertically integrating into actually taking the regress.

[Waleed Hassanein, executive]

No, no, no. We can't -- no, we can't do that. That's not the service model that we're talking about. We are only supporting the management of the organ on the technology for an organ that is allocated to a transplant program in the normal allocation and normal transplant fashion.

[Operator]

[Operator Instructions] And there are no further questions at this time. Presenters, you may continue.

[Waleed Hassanein, executive]

We want to thank everybody for participating in the call. And we're looking forward to our next call.

[Operator]

Thank you so much for our presenters and to everyone who participated. This concludes today's conference call. You may now disconnect.