Good afternoon, ladies and gentlemen, and welcome to the TransMedics Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Greg Chodaczek of Investor Relations. Please go ahead, sir.

Thank you. Earlier today, TransMedics released financial results for the quarter ended June 29, 2019. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to 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 includes expectations for growth in our organization, regulatory approvals and reimbursement, guidance for revenue, gross margins and operating expenses in 2019, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our final prospectus related to our initial public offering that we had filed with the Securities and Exchange Commission. TransMedics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 7, 2019. And with that, I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Thank you, Greg. Good afternoon, everyone, and welcome to TransMedics second quarter earnings call for 2019. Joining me today is Stephen Gordon, our Chief Financial Officer. Our Q2 results continued the positive momentum that we've experienced in Q1. Let me highlight the 4 drivers of this momentum. First was revenue. We reported $5.7 million net revenue for the quarter. This is off of $6.2 million of gross revenues. This represents an increase of 94% versus the same period last year. Our revenue growth was fueled by our U.S. programs on all 3 organs: OCS lung, heart and liver. Second, the OCS Lung U.S. commercial status. We're encouraged by the pace of the commercial conversion of U.S. lung centers in Q2 based on our second FDA PMA approval. As we stated during our first quarter's call, our goal is to convert the majority of the OCS lung centers that were involved in our trials to become a commercial center by the end of 2019. Third, our OCS Liver program or OCS Liver Trial. OCS Liver Trial sustained another high enrollment rate status in Q2, making -- marking the third consecutive quarter of increasing enrollment and clinical use of our OCS Liver System in the U.S. Fourth, our OCS Heart program. The OCS Heart program is ramping up nicely in the U.S., and we expect this program to continue to contribute to our sequential growth on 2 fronts: first is the OCS Heart EXPAND continued access protocol or CAP; and second, in the form of the U.S. DCD heart program that we are anticipating to start enrolling in Q3 of 2019. Looking forward, as we've experienced in some previous years, our third quarter performance could be impacted by summer vacations that may slow down transplant activities in some geographies. However, we believe…

Thank you, Waleed. I will go ahead and review the financial results for the second quarter of our 2019 fiscal year. As I've done in the past from sharing revenue results, I will provide both gross revenue, which is the amount we invoice from customers, as well as net revenue, which nets out certain clinical trial and data collection costs that we pay the clinical centers involved in our trials. For the second quarter of 2019, gross revenue was $6.2 million, a 90% increase over the second quarter of 2018. And our Q2 net revenue was $5.7 million, a 94% increase over the second quarter of fiscal 2018. As Waleed mentioned, the strong increase in sales was primarily driven in the U.S., with strong growth across the board from OCS Lung commercial sales, OCS Heart sales for our continued access program and from OCS Liver sales into our liver PROTECT Trial. On a year-to-date basis, our gross revenue is now $11.5 million or 91% growth, and the net revenue is $10.3 million, representing 90%. And just a little more color on our Q2 net revenue, of the $5.7 million, $2.2 million was lung, $2.6 million was heart and $0.8 million was liver. The geographic breakdown was $4.3 million in the U.S. and $1.4 million ex-U.S. Gross margin for the second quarter of 2019 was 59% compared to 40% in the second quarter of 2018. And for the 6-month period, gross margin was 57% compared to 39% in the first half of 2018. We are continuing to see a modest and steady improvement in gross margin as a result of higher sales volumes and the higher mix of both commercial sales as well as U.S. sales. Total operating expense of $11 million in the second quarter of 2019 grew by 74% compared to $6.3 million in the second quarter of 2018. In the 6-month period, operating expense was $19.6 million, a 63% increase from $12 million in the first 6 months of 2018. This increase was heavily driven by SG&A due to both the investments to support sales growth as well as public company costs. In addition, R&D also increased from 2018, supporting our clinical trials as well as new product development. Our operating loss was $7.7 million in the second quarter of 2019 compared to $5.2 million in the second quarter of 2018, and 2019 year-to-date operating loss of $13.7 million compares to $9.9 million in the first half of 2018. Our net loss for the second quarter of 2019 was $9.2 million compared to $6.1 million in the second quarter of 2018. And for the first 6 months, net loss was $16.1 million versus $11 million in the first 6 months of 2018. Finally, cash, cash equivalents and marketable securities were $96.2 million as of June 29, 2019, reflecting the proceeds from our May IPO. With that, I would like to turn the call back to Waleed for closing comments.

Thank you, Stephen. We're encouraged by our results for the first half of 2019, and now we're laser-focused on executing our plans to drive broader adoption and growth for our OCS technology platform. In Q2, we've witnessed the disruptive potential of the OCS technology platform on organ transplantation. I would like to reference Dr. David Klassen's quote from his -- from our press release. Dr. Klassen is the Chief Medical Officer of the United Network for Organ Sharing, the government contractor that regulates organ transplantation and allocation in this country. He said, "The successful transplantation of donor lungs that traveled over 4,700 miles and were maintained functioning for approximately 20 hours outside of a human body is a remarkable achievement and ushers a new era in thoracic organ transplantation." In conclusion, TransMedics has created this new paradigm in organ transplantation, and we're committed to maintaining this leadership position for a long time to create significant value for our shareholders, our clinical users and patients. We are focused on executing our plans to harness this significant opportunity and address any challenges in the process. Transforming the market and an industry is never easy. However, we have the track record and knowledge to overcome challenges and capitalize on this great opportunity. Again, thank you so much for being on this call, and now we can open for questions. Operator?

[Operator Instructions]. Your first question comes from the line of David Lewis of Morgan Stanley.

A few questions from me. Maybe, Stephen, just start with you. Just based on your commentary around third quarter seasonality in international. Is the way to think about the third quarter more absolute dollars being stable into the third? Or do you expect some sequential growth in the third quarter?

Yes. David, thank you. Yes, we do expect some sequential growth in the third and the fourth quarter going forward.

Okay. And Waleed, I wonder if you could share with us just given the earlier approval, the expanded lung. What impact has the earlier approval or the expanded lung approval had on kind of standard utilization, for commercial activities around lung broadly? And I had one more follow-up.

Sure. Thank you, David. We're encouraged by what we're seeing in Q2. If you remember, when we talked about this in the previous call, we were expecting to see sort of a steady transitioning that hopefully would culminate in full conversion by Q4. We are encouraged by the higher rate of conversion that took place in Q2. We're not done yet. We -- but we're very encouraged, and we attribute that to 2 things. One, getting this approval early alleviated all these clinical confusion that was existing in the U.S. market about indication and how broadly and readily OCS can be utilized. And two, to the effort that Tamer and the commercial team are doing to rapidly convert these centers. So we're very encouraged. And again, we're not fully converted yet. But I think we absolutely are in good trajectory, and we attribute the second PMA coming early to help us achieve that conversion rate.

And Waleed, can you give us sort of any sense of how many centers right now you would sort of deem to be up and running? And any sense about where relative level of kind of organ conversion sits? Do you think you're running at 5% to 10% of volumes at those particular centers? Or are you 10% to 20% at those centers?

I think, David, I do not want to -- as I stated in my -- the previous call, I think it's too premature to start looking at the conversion rates within the centers. I'm right now at a much higher cut level, where we're tracking the number of centers that converts from clinical to commercial. And right now, out of the 17 lung centers, 12 have converted so -- and have IRB approval and gone through training and what-have-you. So let us keep moving down that path. And hopefully, by Q4 and early next year, we'll start seeing that depth of penetration at a meaningful level to be able to discuss it. Right now, it's too premature, I think, for us to talk about it. The numbers are too small still. But I'm encouraged that we have 12 out of the 17 already converted in Q2.

Okay. And Waleed, I appreciate the update on interim liver data. Can you just give us an update on what we can expect, 12-month heart data? And then just your commentary around the panel for heart in the fourth quarter, do you have a sense that, that could slip into the first quarter or you're still relatively focused on the panel in the fourth quarter?

Well, to be honest with you, David, we're preparing as if we're going to have a panel meeting in Q4. But everybody in this call knows that it's not in our hands to determine when that is. We are ready. If the FDA decides to have the panel in Q4, we're ready. If the FDA decides to have the panel in early Q1, we're ready. We want this to be driven by FDA, and according to their time lines, we're ready to meet that time line whether it's early or late. The guidance that we discussed earlier that we expect that approval in the first half of 2020 and whether it's a panel in December or a panel in January, it really doesn't impact the overall time line for that approval. And from our perspective, we're ready whether it's a panel in December or January. We're awaiting the FDA sort of logistics and time line. And with the Q4 being heavy with holidays, I have to wait for them to give us a clear indication on that.

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

This is actually Christian on for Robbie. First one I want to touch on was really encouraging news last week about the long-distance retrieval of donor lung from Hawaii going all the way to Duke. I want to kind of give you a chance of how should we be thinking about this initiative longer term in terms of the opportunity for you here to facilitate these longer-term transplantation and whether and when we'd be able to see some kind of follow-up data set on how these lungs are performing after long-term transplantation, yes.

Thank you, Christian. I think we were very clear that we envision, giving the capabilities of the Organ Care System, to significantly expand the availability of donor lungs and organs in general that there's an opportunity for TransMedics to help facilitate the logistical aspect of that increased donor organ availability in the U.S. by providing service to transplant centers to concentrate the clinical expertise on the organ transplant procedure while applying our expertise in managing donor lungs in the OCS. So we expect and we envision that we will continue to be investing in this program. We believe it's an important long-term growth opportunity for TransMedics. We were very clear on that. And these 2 early cases are very encouraging given the length of time that we achieved. As far as long-term data, we expect that I think there would be a cohort of data hopefully by April of 2020 at the ISHLT meeting, International Society for Heart and Lung Transplantation meeting, that we will be reporting on this particular program and clinical outcomes. Regarding the first 2 cases that were transplanted in North Carolina and Arizona, those patients have done very well and been discharged from the hospital, and we're anxiously waiting next organ on deck here.

Great. And then just one follow-up. I think it was helpful that you addressed your competitor's public commentary, that is investor directed, which you have cleared up on the call today. But have you found that same competitor has been going out to the market and talking to hospitals and doctors? And are you seeing any impacts from that misinformation going out there?

I appreciate that, Christian. And listen, guys, I'm not in the business of addressing competitors' comments on my earnings call. The bottom line is we feel very strongly and extremely confident in our team, in Tamer's team and our clinical adoption team's ability to commercialize the OCS Lung. From our perspective, we do not believe that there are any competitor that can stand against our superior data that we've shared, that was published in The Lancet paper. We were not aware and we've never heard of these statements made in the clinical market per se. However, we were very surprised and frankly disappointed that this misinformation was circulated during an earnings call to -- obviously in response to analyst questions. But from a market perspective, from a clinical understanding, our data is crystal clear, and we stand by our data. And it's -- we don't see that competitor in the marketplace either in the U.S. or outside of the U.S.

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

I was hoping to start, Waleed and Steve, just to ask about any underlying trends that you're seeing with this administration in terms of supporting increases in organ availability. I think there was a CMS-proposed hospital outpatient -- within the Medicare Hospital Outpatient Prospective Payment System and a proposed rule just to revision the organ procurement organization condition through certification. I think the two senators, Warren and Blumenthal wrote a letter to the Department of Health and Human Services around oversight of organ procurement organizations. But I mean my basic question after that big preamble is, I mean, do you feel like the administration is putting a stake in the ground to increase organ availability similar to what the Trump administration has done for kidney care? I just wanted to hear your thoughts on that.

Sure. Thanks, Josh. From our perspective, this has been an ongoing process even during the previous administration, and we were close to it then. The bottom line is, as we've always said, I'll address it more on a fundamental basis regardless of the administration or regardless of the recent efforts. What we're seeing in the public media and coming from the White House and coming from Congress is really a confirmation of how important organ transplantation is, how cost-effective organ transplantation is to manage this very complicated chronic end-stage organ failure condition, how underutilized the donor availability and donor organ availability is. And by having these initiatives, it only improves our ability coming with the Organ Care System technology to really address the fundamental problem in the field of organ preservation. It's water to our mills. We help them. They help us. And the bottom line is the patients and the health care system are the ones that actually reap all that benefit. So we're encouraged by these initiatives. Of course, as any major initiatives like this, it takes time, but definitely it's in the same vein that TransMedics is focusing on, which is improving organ availability, pushing patients towards an organ transplant compared to dialysis to get these patients off the waiting list and getting transplanted successfully to give them best quality of life and longest life expectancy. So I hope I'm addressing your question, Josh. We see nothing in the initiatives, whether from CMS or from the White House, that gives us any -- it all are -- they all are great initiatives to help anybody who's involved in organ transplant.

That was helpful. And maybe just -- I may have missed this on the call, but can you just review for us what is required, I guess, next steps or final steps for the U.S. pivotal trial design for donor after circulatory death heart transplant for that to get kicked off and the trial design to be approved?

Sure. The trial design has already been approved, Josh. However, we prioritized the initiation of the continued access protocol to make sure centers have clinical experience with the OCS Heart before they jump into the DBD program. This is the first of its kind in the U.S. We want to make sure it goes without a glitch. And we expect that the first 2 or 3 centers could be enrolling patients here at tail end of Q3, beginning of Q4. But from an FDA or trial design perspective, the IDE is approved, and we're ready to roll really as soon as the clinical centers are ready to push the trigger. And we expect that to happen in late Q3, early Q4.

And then just lastly, INSPIRE 5-year data, it seems to be around the corner. Can you just remind us what we should be looking for? Should we be expecting it to be made public before the end of this year? And then could that serve as a catalyst for OCS Lung adoption on top of all the other positive tailwinds that are in play?

Sure. Thank you, Josh. No. I think the last set of patients that meet the 5-year endpoint is later this year. What this means, Josh, that we need at least 6 months to get all the data cleaned, adjudicated and the statistics to be analyzed. So as we've stated before, the earliest we would have access to the fulsome data set, whether in the form of a publication or a formal presentation, will be Q4 of 2020. From our perspective, of course, we're looking forward to the results of the 5-year outcome of INSPIRE. But from our perspective, by Q4 of 2020, all the momentum that we're seeing with the expanded criteria, with the service model, with the centers now experiencing the value of OCS in both routine and expanded criteria lungs, that should take over as the catalyst for adoption of the Organ Care System. If we luck out and statistics are in favor, of course, it would help. But I think Q4 2020 will have a completely different cadence to the OCS Lung adoption than where we are today, where we're just still in the early stages. And I think the second PMA is critical. The clinical experience of the centers in their own hands and in their own microcosms is critical. And if we can expand that service model and truly alleviate these logistical issues, that could play a very exciting catalyst for growth even ahead of our expectation as a long-term catalyst. I hope that makes sense, Josh.

[Operator Instructions]. Your next question comes from the line of Jason Mills of Canaccord Genuity.

Waleed and Stephen, can you hear me okay?

Yes.

Earlier in the call, I think David asked a question I didn't hear the answer to. So I wanted to -- if I missed it, I'm sorry. With respect to plans for a release of liver data, do you have a time line venue or any details with respect to that, that you can share?

Yes. I think the earliest that we will see the fulsome liver data will be at the ATC in May of 2020. I think that is the -- it's the American Transplant Congress. I believe it's May 2020. I don't remember where is it going to be, Jason, but we'll -- obviously, we'll be announcing that on our website once that's closer. But that's where we envision the release of the final results of the liver trial.

And I wanted to follow-up on the discussion with respect to the full-service model, the long-distance model, and congratulations on those 2 transplantations. Is this -- I understand it's a pilot program. But is this a program that is continually in play? Will we see -- and have you planned, or is it something that can be planned to see more of the long-distance patients transplanted within this pilot program from Hawaii over the course of the next several weeks or months? And then when will you push the button with respect to this program in other geographies? I think you've mentioned Puerto Rico in the past.

Sure. Thank you, Jason. I think definitely from our perspective, we fully expect that this program is continuously at play. Obviously, we are at the mercy of the availability of donors in Hawaii. Remember, this is an island and a remote location that donor lungs and heart allocation from the Hawaii, from the Hawaii area has almost been forgotten for many, many years. So we're going through an education process to the local organ procurement organization. I would say that by Q4 of 2019, we will make an assessment. If we see the donor rate is recovering, and we are -- we expect to see multiple patients between now and then. The good news is, as we announce these 2 cases and it became public knowledge within the community, we have been approached by several locations within the continental U.S., and Tamer is actively engaged with these discussions, to potentially early 2020, maybe we start a smaller program on the continental U.S. to provide that service. So it doesn't necessarily have to be remote. It doesn't necessarily have to be Hawaii or Puerto Rico. It could include all of the above. But again, we like to talk about these things when we have bigger data sets and more visibility on these discussions. But definitely, what happened with these 2 lungs proves the concept, proves the feasibility, demonstrate the magnitude of the technology and frankly TransMedics' ability to overcome a very complicated, sophisticated logistical management of these organs to deliver it to the center, turnkey, where they perform their final assessment exactly as they do today. And it resulted into 2 successful transplants that these lungs would have otherwise been thrown away.

Got it. That's helpful color, Waleed. Last question from me, and I'll get back in queue. On OCS Lung and specific to expanded criteria, you mentioned you've got IRB approval in 12 centers now. Curious with respect to your volume within the United States with OCS Lung, I know it's early, but can you give us some sense for the volume of expanded criteria lungs on the OCS Lung System that was done in the quarter? And any trend data that you've seen with respect to uptake with that expanded indication in the -- or very early days?

Sure. It's very early days, Jason, and I want to preface it by that. So numbers are small, but from a trending perspective, we've doubled our lung cases in Q2 over Q1. And from a mix perspective, I would say it's about 50-50. Even though the expanded indication was approved in early Q2, at the end of the quarter, I would say 50 -- it was a 50-50 blend, and we're seeing that uptick in rate of conversion continue in the first 6 weeks in Q3. And we hope that we will be reporting a similar trend in Q3. But we're encouraged by that trend.

And just as a follow-up, is that 50-50 in total use of OCS Lung or 50-50 with respect to the growth Q2 over Q1?

It's the total use, Jason, that means 50% was standard, and 50% was...

Yes. 50% -- of the lung use, 50% was standard, 50% was expanded criteria.

I'm showing no further questions at this time. I would now like to turn the conference back to the presenters.

Thank you so much for your time, and we look forward to speaking again in Q3.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect. Presenters, please hold your line.