Transmedics Group Inc

NASDAQ:TMDX

Earnings Call Analysis

TransMedics Fourth Quarter and Full Year 2023 Earnings Highlights

TransMedics achieved record performance in Q4 2023, with total revenue reaching $81.2 million, a 159% increase from Q4 2022. Full-year revenue was $241.6 million, doubling year-over-year. The introduction of TransMedics logistics services was successful, contributing $9.2 million in Q4 revenue. Gross margin for 2023 was 64%, with plans to improve over the next 12-18 months. OCS case volume saw significant growth, promising a bright future. The company aims for 10,000 U.S. OCS transplants by 2028, showing substantial market expansion potential.

TransMedics Ends 2023 on a High Note with Significant Revenue Growth and Operational Success

TransMedics has achieved a landmark year in 2023, with fourth-quarter revenues reaching $81.2 million, a 159% surge from the same quarter the previous year and a 22% jump from the third quarter of 2023. The full-year revenue for 2023 stood at an impressive $241.6 million, marking the second consecutive year where the company doubled its revenue. The impressive performance in the fourth quarter, especially, lays a solid foundation for continued growth into 2024. The newly operational TransMedics transplant logistics services contributed $9.2 million to the quarter's revenue.

Growth Across All Organ Markets with Profitability Milestones

Growth was not limited to financial metrics alone, as TransMedics also expanded its case volumes across all three organ markets: lung, heart, and liver. With significant boosts of 11% in lung, 82% in heart, and almost tripling liver transplant case volume, the company closed the year with 2,300 OCS transplants in the U.S., well on its way to the goal of 10,000 U.S. transplants by 2028. The NOP rate stood at more than 98% for transplants across all organs. Furthermore, TransMedics achieved an operational breakthrough by turning in its first GAAP operating profit in the fourth quarter, with $2.6 million in operating profit and $4 million of net profit.

A Shift from the Historical Brokerage Model to a Scalable TransMedics Logistics Service

To combat inefficiencies in the traditional charter brokerage model, TransMedics innovated a more scalable and efficient system that's tailored for the growing transplant market in the U.S. With this new model, the company is developing a fleet of modern jets dedicated to transplants, aiming for increased fuel efficiency, reduced maintenance costs, and minimal downtime. This network leverages modern technology for dispatching and command, ultimately providing cost efficiencies to transplant centers. The company ended 2023 well-positioned, with 11 owned aircraft that will be fully operational early in 2024 and ambitions to increase this fleet to 15-20 by the end of 2024 or early 2025.

Strategic Plans for 2024: Focused Investment and Clinical Program Initiatives

TransMedics is set to continue its aggressive growth trajectory into 2024, with plans to invest further in its logistics services, thereby increasing operational leverage. The company aims to grow its NOP case volume across all organ segments, drive growth in total transplant volume, and capture a larger share of existing transplant volumes. A particular focus will be on reinvigorating lung transplant activities in the U.S. Additionally, investments are planned for the next-generation OCS technology platform, which is expected to be more aligned with NOP workflow. The company envisions these strategic initiatives helping to propel overall U.S. transplant volumes and enhance TransMedics' market position. For 2024, it has provided an annual revenue guidance forecasting a growth of 49% to 53% over the previous year, targeting between $360 million to $370 million.

Margin Confidences Despite Temporary Declines

While the company's gross margin for the fourth quarter decreased to 59% from 66% in the previous year, and the full year margin dipped to 64% from 70%, the management expressed confidence in increasing margins over the next 12 to 18 months. They highlight several leverage points that are not yet reflected in their models. In particular, they have been able to achieve a gross margin of 35% for their services business, which exceeded early projections. This is seen as just the beginning of a pathway to ramping up gross margin and achieving scalable operations.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, and welcome to the TransMedics Fourth Quarter and Full Year 2023 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 Brian Johnston from the Gilmartin Group for a few introductory comments.

[Brian Johnston]

Thanks, operator. Earlier today, TransMedics released financial results for the fourth quarter and full year ended December 31, 2023. 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, including during the question-and-answer portion that include forward-looking statements within the meaning of federal securities laws. 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, 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 and guidance and/or expectations for revenue, gross margins and operating expenses in 2024 and beyond are based upon 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 on our Form 10-K filed with the Securities and Exchange Commission on February 27, 2023. Our subsequent Form 10-Q filings and the forward-looking statements included in today's earnings press release, all of which are available at www.sec.gov and on 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, February 26, 2024.

With that, I will 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' Fourth Quarter and Full Year 2023 Earnings Call. As always, joining me today is Stephen Gordon, our Chief Financial Officer. .

Our fourth quarter performance represents a new high watermark for TransMedics business. We ended the year on a very strong note, laying a solid foundation for continued growth. Also, the fourth quarter was the first quarter that we had TransMedics transplant logistics services operational during the full 3 months of the quarter. Although it is early -- although TransMedics logistics is in its early innings. I am thrilled to report on the early successes of the logistical services. We successfully executed on every front and overcame early operational challenges as we continue to expand our footprint and team.

Let me share the summary of our results for Q4 and full year 2023. Total revenue for 4Q grew to $81.2 million, representing 159% growth from 4Q 2022 and a 22% sequential growth from 3Q 2023. For the full year '23, total revenue was $241.6 million, representing 159% growth over 2022. So for the second consecutive year, we delivered on and even exceeded our aspirational aspirations to double revenue year-over-year in the first years of OCS commercial launch. TransMedics logistics services revenue for 4Q was $9.2 million, up from $2.1 million in 3Q. We are proud of this success in the first full quarter of operations. Based on everything we know today, we are growing extremely confident and bullish on the significant potential positive impact of TransMedics logistical services to help us grow the use of NOP platform. We fully expect our integrated NOP and logistics services to enable TransMedics to deliver an end-to-end seamless, efficient and safe solution to transplant programs across the U.S.

Simply stated, providing a world-class service through a highly cost-efficient model. Our overall gross margin for 4Q was 59%, down from 66% in 4Q 2022. The full year 2023, our gross margin was 64% compared to 70% in '22. I know Stephen is going to detail this in his section of today's presentation. However, I want to take this opportunity to give you my perspectives on this important topic of TransMedics gross margins. Please remember we are still very early in our commercial ramp and more so with our logistics services.

There are several leverage points, I repeat, there are several leverage points for both product and service revenues that are not fully reflected in our models yet. Based on everything we know today, we are extremely confident that we will be able to ramp the gross margin up over the next 12 to 18 months as we achieve more leverage of scale in our operations.

In the meantime, we are thrilled that we achieved a 35% gross margin for our service business faster than we had projected, exceeding our early expectations. Again, it is just the beginning. We also achieved critical profitability milestone in 4Q as we delivered our first GAAP operating profit quarter. Specifically, we delivered $2.6 million of operating profit and $4 million of net profit in the fourth quarter. This marks a critical step forward as we strive to reach and sustain positive cash flow in the very near future. Before moving on, I'd like to take a moment to recognize that these exceptional results were only possible through the hard work of the entire TransMedics team.

Let me send the message to Team TransMedics. We are grateful for your world-class effort commitment and creativity in navigating every operational challenge of our rapidly growing business in 2023. Importantly, I want to make it crystal clear that we are now gearing up for another strong year of execution in 2024. Now let me move on to provide my perspectives on some important trends and what do they mean for our business. In line with our growth strategy, we grew our case volume across all 3 organ markets in '23 compared to '22.

Our OCS Lung case volume grew by approximately 11% and our OCS Heart case volume grew by approximately 82% and our OCS Liver case volume grew by approximately 199%, almost tripling from 2022. For the full year, we have transplanted approximately 2,300 OCS transplants in the U.S. compared to approximately 1,000 transplants in '22. We plan to report our annual OCS case volume in the U.S. going forward as a benchmark towards the stated goal of performing 10,000 transplants in the U.S. by 2028.

In terms of NOP contribution, as we predicted, NOP represented the lion's share of OCS transplants in the U.S. We ended the year with an overall NOP rate of more than 98% across all 3 organs. We are confident that this sustained growth and success of NOP is based solely on the operational efficiency to grow transplant volumes, highest level of clinical care of donor organs and the overall cost efficiency experienced by transplant programs across the United States. Importantly, we are planning to present several data analysis during the upcoming transplant conferences in 2024 to unequivocally demonstrate the improved clinical outcomes achieved using OCS NOP in the U.S. Again, I want to stress a key point. The success of OCS NOP program is based on better clinical, economic and operational outcomes experienced by the transplant centers and not based on anything else.

In Q4, we bought [ trust the ] NOP clinical staffing by adding 37 new clinical specialists and 4 procurement surgeons. Now let me share the impact of our OCS technology and NOP on the overall national transplant volume in the U.S. For the first time in nearly 8-plus years, both liver and heart transplant volumes grew by 12% nationally in the U.S. Based on our OCS case number and donor mix, we are confident that our OCS technology and NOP services were primary drivers for this annual transplant volume growth. The overall national growth came from both increased use of DCD donors, driven by OCS use as well as a modest increase in DBD donor utilization. This is a great first step to prove the ability of the OCS and NOP to grow the overall U.S. transplant market.

We are looking forward to continuing this trend in '24 and hopefully, seeing similar growth in lung driven by OCS and NOP over the next few years. Now let's discuss the percent percentage penetration of the OCS use in each Oregon market segment nationally in the U.S. We ended 23 with the OCS case volume representing approximately 17% share of the national liver transplant volume, approximately 16% share of the heart national transplant volume and approximately 4% share of the lung national transplant volume in the U.S. For anyone who may be assuming that TransMedics has maxed out on our growth potential, these data provided crystal clear evidence that we have a long way to go to continue to grow our market share in the U.S.

This will be fueled further by our unique ability to also expand the overall national growth of transplant volumes in the U.S. to help patients who are desperately in need for a life-saving transplant procedure. Our vision is that by the time we reach the 10,000 U.S. OCS transplants that this number, 10,000 would represent a portion of the overall U.S. transplant market and not the total addressable U.S. market. Now let me turn to a more detailed discussion on our transplant logistics service strategy and review its early performance in late 2023.

I want to start by highlighting our strategy and value proposition. Please allow me to share some important facts and background on this important topic. One, historically, for cold preservation and organ transport transplant center relied exclusively on charter flight brokers and local small operators. I repeat, transplant center relied on charter flight brokers and/or local small charter operates. These brokers typically have used what they promote as an asset-light model meaning they don't own or operate any aircraft. Their role is simply to contract a charter flight and a crew from a local or a regional operator when a donor mission is needed. When TransMedics first deployed the NOP program, you all remember, we too relied on the same network of charter brokers. Unfortunately, we quickly learned through firsthand experience that the broker charter flight model had significant limitations to help grow the transplant volume in the U.S. and was becoming a huge bottleneck for our NOP program. This regional charter brokerage approach was very operationally inefficient and added significant costs to the transplant centers due to: one, fragmented local and regional operators using older aircrafts that were not capable of covering the new longer-range donor missions now afforded by the new U.S. national organ allocation laws and the use of OCS technology and an NOP's capability to go longer distances to increase utilization of donor organs for transplant. Two, significant shortage of charter plane availability for 24/7 to cover the growing demand for transplant mission.

This resulted in the loss of approximately 20% to 30% of donor receivable missions for NOP in '22 and early '23. Three, the lack of control over the planes and pilots by most charter brokers often resulting in the use of more and multiple crews to complete a single mission, which sometimes double the transportation bill paid by the transplant center. Four, lack of control over the starting location of the aircraft led to use of highly inefficient routes, which added even more costs in order to reposition the aircraft. Five, lack of control over air safety standards of these contracted charter -- sorry, of these contracted local or regional operators flying 20-, 30-year-old aircraft.

In fact, our own NOP clinical and surgical teams experienced a few near catastrophic events on brokered aircraft in '22 and '23. Six, an inefficient round-trip cost model, even if the donor organ is not procured for transplant or if a DCD donor never progressed to become a donor. Finally, a very complex cost structure with multiple middlemen that paid with associated profit margins for the owner of the aircraft, the operator of the aircraft and the broker of the chartered flight. All these added significant and unnecessary cost burden to the transplant centers. So while this asset model might be light for the broker, it is clearly a very heavy financial burden to the transplant centers and payers who ended up paying multiple middlemen. Importantly, it is also severely -- it also severely limits the ability to grow transplant volumes due to shortage of dedicated aircraft, and we saw it as a road block to our stated goal and commitment to growing the U.S. transplant volume.

To address these significant inefficiencies, safety issues and capacity constraints in the historical model above TransMedics created a new, more scalable model that meets the current and future needs for growth of the transplant markets in the U.S. while providing significant operational and cost efficiencies through the transplant centers. Let me share with you our vision and our goals that we've actually achieved to date. One for the utilization for transplants by building and operating a modern fleet of jets that can go longer distances. This fleet is dedicated to transplant missions and not charter flights, using newer model aircraft allows us to use less fuel, so we can be environmentally responsible, reduce maintenance costs and reduce downtime to maximize availability to conduct transplant missions. Two, our goal was to maximize operational efficiency, which will reduce cost on the transplant centers. Three, our goal is to maintain the highest level of air safety for our staff our clinical users and the precious donor organs we are caring for. four, maximize logistics availability to ensure that we reduce the waste of donor organs that do not get used due to lack of plain availability. And finally, leveraging the unique NOP network and proprietary modern dispatching algorithm with a digital command and control center structure to significantly reduce cost burden of DCD donors that don't progress to become a donor. The NOP network infrastructure created by TransMedics has given us a unique ability to share our cost efficiencies with our transplant center users. Now with above background, let me share with you some important early performance metrics for TransMedics transplant logistics service, which encompasses aviation and ground logistics for NOP missions. As mentioned earlier, revenue from transplant logistics service alone was $9.2 million in 4Q compared to $2.1 million in 3Q as we are only operational for approximately 4 to 5 weeks in 3Q. The average number of active TransMedics aviation planes were approximately 7 planes in 4Q compared to approximately 3.5% in 3Q. We ended the year with a total of 11 owned aircraft that will become fully operational in early 2024. Approximately 98 transplant programs in the U.S. used TransMedics logistics service in 4Q compared to approximately 36 programs in 3Q. This is an important metric to unequivocally show that operational availability, cost efficiency and high safety standards enabled us to disrupt the inefficient historical model and take market share relatively quickly. We were able to cover only approximately 35% of our NOP flights needs in 4Q using TransMedics aviation planes compared to 13% in 3Q. At scale, we are hoping to cover 80% of the NOP cases using our TransMedics logistics service for both air and ground transport. We will use carefully selected highly reliable and safe operators for supplemental lifts to support our missions. So far, we are humbled and proud by these early results. We are continuing to expand our air fleet and crew to operate the aircraft. We are hoping to have 15 to 20 aircraft operational by end of '24 or early '25. We opened the digital command and control -- I'm sorry, command and dispatch center in Andover at the end of December, and we are now fully operational 24/7/365 from this state-of-the-art facility. This dispatch center is designed to maximize operational availability and efficient routing of our NOP resources to minimize plane repositioning cost on the transplant programs. Again, based on everything we know today, we are extremely confident and bullish on the potential positive impact of transplant logistics services on the growth of our NOP case volume and a more efficient utilization of our clinical resources.

Before I leave the TransMedics logistics section, I want to share some perspective on a matter that recently entered the public domain. Many of you may be aware that a letter was e-mailed to TransMedics from a member of the U.S. Congress on February 21. The writing in his capacity as an individual member of Congress regarding TransMedics business practices. Prior to receiving this letter, we had never communicated with this congressman nor with any member of his task. This letter contains serious accusations, which are grossly inaccurate, unfounded and based on wrong information. Let me repeat again. This letter contains serious accusations, which are grossly inaccurate, unfounded and based on wrong information. Rest assured, TransMedics has responded to this letter with the same level of seriousness with factual evidence to set the record straight. Our formal response is posted publicly on the Investors section of our website. It is clear that what TransMedics is doing in the area of transplant logistics is disrupting this antiquated charter brokerage model for organ transplantation. This is creating some competitive dynamic in this area by some of our historical -- some of the historical brokers that are struggling to compare or to compete with our operationally efficient and cost-effective logistical capabilities. Finally, let me give you a bird's eye view of our growth strategy in 2024 and hope to detail these initiatives in our 1Q 2024 call in May.

Our goal in 24 is to continue to invest in building out our TransMedics transplant logistical services throughout '24 to give us more operational leverage and efficiencies. We will focus on growing our NOP case volume in all 3 market segments by driving both growth in the overall transplant volume and take share of existing volumes. We will initiate a new clinical program to try to reinvigorate the lung transplant activities in the United States. Finally, we are investing in our next-gen OCS technology platform that will be more optimized for NOP workflow and streamline the support process on our clinical staff to maintain the highest clinical management quality and achieve better product leverage. We are humbled by our success in '23. However, we are not standing still. We are laser focused on our execution plan for 24 to help drive growth in the overall transplant volumes in the U.S. and for TransMedics business. That being said, we need to be balanced -- we need to balance our bullish plans with potential scalability and competitive challenges. We are providing an annual revenue guidance between $360 million to $370 million which represent 49% to 53% growth over 2023.

With that, let me turn the call to Stephen Gordon to cover the detailed financial results for the quarter.

[Stephen Gordon, executive]

Thank you, Waleed. I will now provide some additional detail on the Q4 results and other financial information for the quarter and the year. So starting with revenue. For the fourth quarter of 2023, our total revenue was $81.2 million. This is an increase of 159% from the fourth quarter of 2022, the 22% sequential increase from last quarter. The $81.2 million included $1.1 million related to our flight school and $1.4 million related to Summit Avation's legacy business to a total of $2.5 million that is non-transplant related. The $1.4 million of legacy business is not continuing and is expected to be 0 in the first quarter of 2024.

So that leaves $78.7 million of transplant-related revenue worldwide. In the U.S., transplant revenue was $75.2 million. U.S. revenue also increased over 159% from the fourth quarter of 2022, and the U.S. grew 26% sequentially from last quarter, and this included the $9.2 million of TransMedics Logistics revenue. The organ breakdown on U.S. revenue was million of liver, $17.6 million of heart and $2.9 million of lung, all organs growing substantially over Q4 of 2022.

We did see a modest sequential decline in lung revenue, while liver and heart continued strong sequential growth in Q4. Ex U.S. revenue was $3.5 million, a 51% increase from Q4 of 2022, but also a sequential decline from Q3 of 2023. As we have stated in the past, our revenue outside the U.S. may not be consistent due to the nature of transplant and the lack of reimbursement outside the United States. The OUS organ breakdown was $3.2 million of heart and $0.3 million of love. Next, I will cover the product and service revenue. Our service revenue includes the added amounts we charge for the surgical procurement and organ management and now also includes the amount we charge for organ procurement and transplant logistics. In Q4, product revenue was $51.9 million and service revenue was $29.3 million. So the service portion was 36% of the total in Q4, and that includes the nontransplant service revenue. Gross margin for the fourth quarter of 2023 was 59%. This was down from 66% in the fourth quarter of 2022 and reflects the higher NOP service component of our business which was still in the early stage in Q4 of 2022.

Now drilling down 1 level, the product margin was 73% in Q4, and service margin was 35%. We did experience an unfavorable impact to product margin of about 300 basis points that will not repeat in Q1, which was related to the end of year inventory cleanup and adjustments. We have made changes to our processes, so we will not see this type of quarterly anomaly in the future. On the service side, we are pleased that we were able to deliver 35% service gross margin in our first full quarter of providing our logistics service. And just to repeat, the service portion of the business includes the NOP clinical service as well as air and ground logistics. So this achievement gives us confidence that we will be able to provide this service with the mid-30s service gross margin or better as we grow our footprint and the utilization of aviation.

As a reminder, all costs related to aviation, including fuel, pilots, maintenance and depreciation are included in the service cost of goods sold. Total operating expenses for the quarter were $45.3 million, 65% above Q4 of 2022 operating expense. And this expense growth was driven by investment throughout the organization, including 87% growth in R&D related to investments in new products, development and NOP tools and 59% growth in SG&A for both NOP support and overall corporate infrastructure. The growth in operating expense of 65%, while growing revenue by 15% and allowed TransMedics to deliver its first GAAP operating profit of $2.6 million and net profit of $4 million for the fourth quarter of 2023.

These compared with an operating loss of $6.8 million in Q4 a net loss of $6.7 million in Q4 of '22. Total cash at the end of the year was $394.8 million as of December 31, 2023, which equates to cash usage of $32.3 million from the balance at the end of Q3 of 2023. However, operating cash was a positive $8.3 million in the quarter. which was offset by the purchase of 3 additional planes in the quarter for about $39 million. Basic weighted average common shares outstanding for the quarter were $32.6 million, and diluted weighted average common shares outstanding for the quarter were $34.2 million.

Now let me share some summarized information on the full fiscal year 2023 results. For the full year, total revenue was $241.6 million, again a 159% increase over the prior year. And the U.S. Organ breakdown for the full year was $151.5 million of liver. $59.4 million of heart and $10.5 million of lung. Ex U.S. was $14 million of heart, $1.3 million of lung and $0.1 million of liver. And again, nontransplant revenue for the year was $0.9 million. Product revenue for the year was $176.1 million, and service revenue was $65.6 million.

Gross margin for the full year 2023 was 64% compared to 70%, it's up 2022. Again, this is a result of the higher portion of NOP service revenue. Product margin was 77% and service margin was 29% for the full year of 2023. Total operating expenses were $182.5 million for the full year 2023, 89% from $96.7 million in 2022 and included $27.2 million of onetime acquired in-process R&D related to our acquisition of technology from Bridge to life and $2 million of acquisition-related expenses from our acquisition of Summit, both in the third quarter of 2023.

Our operating loss for the year was $28.7 million for '23 compared to $31.4 million in 2022 and net loss was $25 million in 2023 compared to $36.2 million in 2022. Overall, 2023 was a tremendous year for TransMedics as we demonstrated the potential to grow our business while helping to increase the overall number of transplants. By adding logistics services to our NOP offering, we can now provide a true turnkey solution to our transplant center customers, we continue to be extremely optimistic about our opportunity to continue to grow in 2024 and beyond. To repeat Wally's earlier comment, we are providing annual revenue guidance in the range of $360 million to $370 million, which represents $49 million to to 53% growth over the full year of 2023. Also for modeling purposes, we expect gross margins to improve throughout 2024. We would expect to exit 2024 in the 63% to 64% range for overall gross margin. We expect the product mix and service mix to be around 65% product and 35% service in 2024. We expect expenses to grow in 2024, likely in the 30% to 40% range.

Now I would like to turn the call back to Waleed for closing comments.

[Waleed Hassanein, executive]

Thank you, Stephen. We're very humbled by and proud of TransMedics performance in 2023. We more than doubled our overall revenue. We helped grow the national U.S. heart and liver transplant volumes by double-digit numbers. We launched a new TransMedics logistics network to drive more operational and cost efficiency for our clinical users, and we achieved our first GAAP operating profit quarter for the business. In totality, we set a solid foundation for sustained growth of our business and our mission of growing transplant volumes to help patients in need for an organ transplant. Now we are laser-focused on our 2024 operational plans and on our path towards achieving 10,000 OCS transplants by 2028.

With that, I will now turn the call back to the operator for Q&A. Operator?

[Operator]

[Operator Instructions] Our first question comes from Alan Gould with JPMorgan.

[Alan Gould, analyst]

Congrats on a good start. I want to start off diving a little bit deeper into your guidance. You provided the gross margin outlook by disposables versus service, but I think a big question that we still have is when we think about your disposables versus service on the top line. How should we think about the drivers of the growth that you're expecting to see?

[Stephen Gordon, executive]

Yes, Alan, as far as drivers of growth, I mean, we continue to -- as Waleed mentioned, we want to penetrate deeper across all 3 organs, and we want to deliver a clinical program in lung that will help increase the lung later in the year and the impact of the logistics business is not just for the growth in logistics, it's also to grow the case volume, which we expect to happen.

[Waleed Hassanein, executive]

Alan, thank you for the question. From our perspective, I agree with Steven, but let me give you a little bit more granular response. We're nowhere close to being done, growing in transplant volume. We will grow our transplant volume by growing by going deeper into existing accounts. by adding more DCD and DBD organs across all 3 organs by reinvigorating the lung program by adding new accounts in areas where we don't have enough accounts like the lung program as well as adding more DBD to our heart franchise. We are just in the beginning of this commercial ramp-up. The other impact is the indirect or direct impact of operational efficiency with TransMedics logistics may even drive more growth into the actual case volume and the overall revenue growth from the logistics aspect of our business. So it's -- we monitor and drive both sides of our business. The disposable and product as well as the service and the synergies that exist between the 2 will also have an important catalyst to adoption of the disposals.

[Alan Gould, analyst]

Got it. And then just as a quick follow-up. We've seen the letter that you said in response to the congressional letters, so I won't dive more into that, but there also was an article out kind of talking about a more thorough investigation OPOs as a kind of a continuation of the investigation that's been ongoing over the last few years. How should we think about the potential for that to disrupt the underlying transplant market? And how should we think about the longer-term impact on TransMedics? .

[Waleed Hassanein, executive]

Alan. As you said, what was announced today in the Washington Post is just a continuation of what's been ongoing for several years. trying to disrupt or revamp the OPO network in the U.S. The bottom line is the following. TransMedics went out alone, and developed a unique model called the NOP. We build it, we executed it, and we delivered results to grow transplant volumes in this country by double digits numbers that hasn't been seen in almost a decade. We are going to continue to do that. And we are proud of what we've accomplished. We don't think what's happening with the OPOs or what's been announced earlier today has anything to do with us. But we are here and we are proud to show anybody who cares to know how to grow transplant volumes in this country. We've already done it, and we will continue to do it. So again, it's unfortunate what's going on. But as you said, it's been going on for several years. In the meantime, we are focusing on our business. We're focusing on driving more organ transplants in this country successfully with excellent results using our NOP service and now our logistics service. .

[Operator]

The next question comes from Josh Jennings with TD Cowen.

[Joshua Jennings, analyst]

Congrats on the strong finish to a remarkable year. I wanted to just ask about the Congressman's letter. You provided a stronger bundle fruiting every accusation allegation. Willy, do you think there could be any short-term disruption to the business or these headlines going around in our sense is that you've added so many transplant programs as customers. They're all aware of the business model. I don't seem to have any issues with it. But just one, any short-term disruption potential. And then two, any next steps that you expect from this inquiry by the Congressman.

[Waleed Hassanein, executive]

Josh, to the first part of your question, listen, one has always to assume some level of confusion, okay? This letter came out of left field. It was not supported by any facts. It was complete completely unfounded. I am sure whomever is behind us is going to try to use that letter to try to distract from TransMedics business. But what they're not counting on or what you guys should expect is TransMedics is not going to stand still. We are going to defend our practice, our success -- our goal to grow transplant volumes, our ability to support these transplant institutions to deliver the best clinical support for their organs and for their patients. as we have been doing for the past 25 years. And we all -- you all know that TransMedics defend our positions very vigorously and fairly. So we're not going to be standing still. We're going to try to minimize that distraction as much as we can. Do we expect distraction? Absolutely, because it's natural. As far as the next part of the question, I really don't know, Josh. I don't know. I don't know where this letter -- how this letter came about other than it appears that there's some misinformation being propagated but our response is pretty strong, and it was designed as such to make sure that if anybody wants to go down the same path that they need to know exactly the facts before they come and levy these accusations against TransMedics. And of course, we're doing that with a full coordination of our senior advisers and legal team in Washington, D.C. But we don't know what the next steps are, other than we have responded on time and in a comprehensive fashion. And we are propagating our positions to all the right people around TransMedics and -- in the Congress as well.

[Joshua Jennings, analyst]

And just a follow-up. Just you mentioned Welled about the plan to present some data analysis, demonstrating improved clinical outcomes in U.S. transplants using or transplant centers using the OP and the OCS within the NOP. Any metrics you can share with us that we should be looking for? And how impactful do you think these data analysis can be in terms of driving increased demand and adoption trends for OP and OCS.

[Waleed Hassanein, executive]

Thank you, Josh. I think our key metrics are the ones we've been monitoring all the time. We're looking at both short and long-term definitive outcomes. We're looking at rates of PGD, primary graft dysfunction early allograft dysfunction. We're looking at patient and graft survival, both at 6 and 12 months. So these are the metrics we -- these are the metrics that transplant programs are measured by. And also we're looking at penetration and growth of the case volume within each transplant program in each market. So these are the metrics we'll be discussing at ISHLT and ATC and ILPS. .

[Operator]

The next question comes from Bill Plovanic with Canaccord.

[William Plovanic, analyst]

Very strong quarter. It looks like, especially in the liver, and I'm just curious, I mean, by our math, it looks like the liver procedures were probably up about 20% sequentially and almost triple year-over-year. I was just kind of -- if you could help us understand what is kind of the really driving the liver adoption because it seems to be going much faster than the heart, which looks like it was up sequentially, but just not at the scale and pace at which liver is.

[Waleed Hassanein, executive]

Thank you, Bill. I think there's several reasons and frankly, several expected reasons for that. We all know that liver transplant procedures are nearly double or even 2.5x heart transplant procedures. So that's number one. Number two, liver transplantation is a dedicated service at transplant programs versus heart transplant is always adjunct to regular open heart surgery and cardiothoracic surgery in general.

That's number two. I think we are confident that the heart will pick up. liver will always lead the way just because of the sheer number of procedures. I think over the next 2 or 3 years, the heart will get up there as we continue to demonstrate growth in the overall transplant volume, we will get the number of procedure up we will see the long-term effect of OCS as we will start reporting that at the next IHOP, and we are extremely confident that the heart will pick up the pace. And more importantly, we're going to go out in a limb and we say that over the next couple of years, we should see the long starting to really become more contributing to our overall growth. Again, not at the same level of liver because of the sheer number of procedures, but that's our goal is to get all 3 organs to be contributing close to each other.

[William Plovanic, analyst]

Great. And then my second question, if I could, is just aviation ramp has gone a lot faster than we expected. Your 13 points now, you said you get to 16 to 20. How do we -- I think you gave us the metric of 80%. When do you expect to hit the 80%? And then how should we think about average revenue per case for aviation as you got a little more information, you're getting deeper into this. And then how do we think about that service gross margin longer term? Because I think originally, you thought it'd be 30%. You're already surpassing 35%.

[Waleed Hassanein, executive]

As always, [indiscernible] questions. The first aspect we hope to be fully operational at the scale of doing 75%, 80% of our transplant missions with our own fleet. When we surpassed operating TransMedics flights or aircraft, which means we're talking sometime second half of 2025. So that's number one. The second part of the question was, remind me again, Bill, please the price per -- the average price per mission. We can't comment on that until we are completely dispersed equally across the 2 sides of the United States, the East and West because the mix is different, and that will happen hopefully as we exit 2024. And then finally, as far as the margin is concerned, I think it's early. I think we are going to be in the 30s, and I will leave it as that for now. And then we'll see how we are executing going forward.

[Stephen Gordon, executive]

I would just add, as I mentioned, we do expect modest improvement over the year as we -- really, what's important as we ramp the number of hours on the planes that we have and cover more of the fixed cost of the aviation plan. .

[Operator]

The next question comes from Ryan Daniels with William Blair.

[Ryan Daniels, analyst]

Congrats on the strong quarter and year. Stephen, maybe I wanted to start with on the margin front. It's more revenue related actually. This quarter, it looks like about 34.5% of your sales came from the logistics, and that's with you only covering about 35% of your NOP cases with your own logistics solutions. So why would that percentage the 65-35 stay the same as it ramps towards 80% given that you're only at 35% today. Just trying to square that up.

[Stephen Gordon, executive]

Yes. I think it's important to note that, that mix today, that's not just logistics, that's all of the NOP service. So we only had $9 million of logistics service, which is a smaller percent of the total. And so as we grow this business, a couple of things are different. One is part of the service revenue this quarter was some overhang from non-transplant related revenue. That's going to go away in Q1. So that's a little bit coming out of the service. The other thing is we expect international to kind of come back to where it was last quarter. And so that is higher product revenue. So both of those are kind of skewing the service product mix in the wrong direction. I would say, in Q4, it will change a bit in Q1. And then it remains to be seen how we pass how we go through the rest of the year. But generally speaking, I think the service portion is going to be in the mid to kind of maybe slightly upper 30% range. I don't think it ever gets to like 40% of our business.

[Ryan Daniels, analyst]

Okay. That's very helpful color. And then maybe a broader strategic question. Obviously, with the growth and dynamic opportunity here a ton on your plate, but you've also got bridges to life technology acquisitions, new product development, you're really building out the logistics business, hiring a lot of clinicians to support your growth targets. I'm curious if you could perhaps outline maybe 2 or 3 of the largest strategic initiatives that we should be keeping an eye on in 2024, not to set the platform as much for this year, but really to set that platform getting to the 10,000 cases.

[Waleed Hassanein, executive]

Ryan, thank you for the question. We're planning to detail all these in our next earnings call. But very important, we are doing all of above. And we are looking forward to sharing more specific and granular details about our goals in '24 and beyond in our next earnings call. .

[Operator]

Next question comes from Suraj Kalia with Oppenheimer & Company.

[Suraj Kalia, analyst]

Congrats on an excellent quarter. So only 2 questions. First, our math as you exited Q4 with liver heart and lung market shares of approximately 25%, 20% and 4%. You guys do not put out guidance slightly especially given your performance in the last 2 years and how the Street starts building things in? And rough math is telling us based on your FY '24 guide, you guys are looking to get somewhere close to 25% to 30% share in hard and levers in 10% to 15% lungs. Are you approximately right in our math? And can you give us some additional granularity? How are you thinking through DBD DCD or site movement? I guess just strip down the $370 million guide, a little more for us, if you could.

[Stephen Gordon, executive]

Yes, Suraj, this is Stephen. So I don't think we can give where we expect share to be. We definitely expect share to improve from where we are today. As we said, we looked at it on an annual basis, and we were kind of at 16% to 17% share in heart and liver, and we certainly expect to improve that as we go into 2024. And your -- the next part of your question, Suraj, remind me?

[Suraj Kalia, analyst]

Just in terms of any additional color how are you thinking about DBD versus DCD and also the telco for site distribution. I guess just trying to understand is that how are you targeting or getting to those numbers?

[Waleed Hassanein, executive]

Suraj, let me address that one, and thank you for the question. I think, Suraj, the way we approach this is very broad. I mean we look at our case distribution. And here's what we expect. We expect if we're heavily used in DCD, we expect that to continue, and we expect to continue to drive that forward across all 3 organs. But we're not going to stop here. We are going to find ways to invigorate DBD utilization. We do that through a variety of different programs and mechanisms to drive adoption in that area to drive overall national transplant volume. So number three, we look at areas that are quiet or relatively quiet or lower penetration like the loan. And we find ways to reinvigorate the lung and it does matter at that point, whether it's DBD or DCD. Can you imagine if we are more than where we are in the lung and a near heart at least, what would that do to our revenue mix and penetration overall, it would be great. After that, as far as the transplant program is concerned, again, our service is universal. Our service has been proven to results in every promise that we set to achieve or every hypothesis or value that we set to achieve.

And now it's up to transplant programs to decide whether or not they want to be thriving and growing in the future of being a leading transplant program. And that is the way every transplant program should look at OCS and NOP and transmits logistics. This is the future. And we know that. We've proven it. And we are standing by our commitment to transforming the field. And we welcome and expect many of the transplant programs will be contributing part of our growth going forward because we are contributing to their growth.

And it's not a one size fits [indiscernible] we have to tackle it in a broad range across all 3 organs across the 2 different types of donors and be creative on how we pull the levers to achieve our goals. And again, we are very early given the penetration rates we discussed.

[Suraj Kalia, analyst]

Fair points. Waleed, if I could quickly ask a follow-up very nice sequential jump in the number of sites using TransMedics aviation. So we leave as it normally happens, right, even at our site visit, 1 of the comments you had made was like, look, we want to make it like a one-stop shop, attach TransMedics aviation to every run. So you go to sites, the 98 sites you talked about in Q4 what has been the reception? And I'm trying to understand, is it like you all went to, I don't know, pick a number, 200 sites on board, the remaining 1 or 2 are resisting for whatever reason, just set the stage for us to slice and dice how aggressive TransMedics is or lack thereof. Gentlemen, you guys are on a roll. Congrats, again.

[Waleed Hassanein, executive]

Thank you very much, Suraj. Unfortunately, I might disappoint you by saying, I cannot give you more granular detail other than to remind you that there are not 250 programs out there that we would go to. Again, our approach to these programs is very, very similar. When we get called for an NOP case, we provide them the option to use our TransMedics logistics we provide them a price quote and it's up to them to decide whether they want to use us or not. Some centers like using us to came back and asked Tamer and Andre for a long-term contract. Some centers are -- we don't require that, but some center wanted to do that, and we are there to help them achieve that goal. The bottom line for us is we know and we are confident that we are providing an operationally scalable and the most efficient cost structure in transplant logistics in the United States. And it's going to get better from here as we have more leverage and more plane and more capacity to meet many of these cases. And it's up to the transplant program to participate in this cost-effective or official model or not. I hope I addressed the question, and I'm sorry I can give you more granular detail than that at this early stage of launching logistics. It's only 1 quarter. It's only 1 quarter, Suraj.

[Operator]

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

[Waleed Hassanein, executive]

Thank you, operator. Thank you all very much for being with us this evening, and we look forward to speaking again in May. Have a wonderful evening. .

[Operator]

\

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.