Good day, ladies and gentlemen, and welcome to the TransMedics Fourth Quarter and Full-Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Brian Johnston from Gilmartin Group.

Thank you. Earlier today, TransMedics released financial results for the quarter and year ended December 28, 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 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 risks and uncertainties associated with our business, please refer to the Risk Factors section of the final prospectus relating to our initial public offering that we had filed with the Securities and Exchange Commission and in our Quarterly Report on Form 10-Q for the quarter ended September 28, 2019, which are available on the SEC’s website at www.sec.gov. Additional information will be made available by our Annual and Quarterly Reports and other filings that we make from time to time with the SEC. 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, March 2, 2020. And with that, I’ll now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Thank you, Brian. Good afternoon, everyone, and welcome to TransMedics fourth quarter and full-year 2019 earnings call. Joining me today is Stephen Gordon, our Chief Financial Officer. 2019 was a momentum building year for TransMedics in which we build a solid foundation for growth and made meaningful progress across all three of our OCS products for heart, lung, and liver transplant. We leveraged the strength of our multi-organ, multi-region commercial presence to achieve revenue of $23.6 million for the year, which was up 81% versus 2018. I would like to share a few key highlights across our three OCS products and then turn our attention to 2020. Starting with OCS Lung product. Lung revenue in Q4 was $3 million, representing 51% growth over last year. We ended the year with 18 OCS Lung commercial centers in the U.S. Our plan is to drive deeper adoption across these centers, while we’re gradually opening up new accounts. Finally, I stated during our Q3 call that TransMedics has been working on a fundamental new initiative to help accelerate adoption of the OCS Lung technology and minimize the center-specific logistical challenges on utilization. I’m delighted to report that in Q4, we initiated the first of several OCS service model collaborations with major U.S. Organ Procurement Organizations, or OPO, and a few transplant centers. The aim of this initiative is to maximize the use of OCS technology to increase donor organ utilization for lung transplant and overcome center-specific logistical challenges by adopting the OCS Lung System. This collaboration is to augment and complement our existing commercial relationship with transplant centers across the U.S. Next, on to our OCS Heart product. We’re pleased that the FDA has formally communicated to TransMedics the date of our OCS Heart Advisory Panel Meeting to be on April 16. We’re…

Thank you, Waleed. I’ll now go ahead and provide an overview of the financial results, including a very detailed description of revenue by geography and by organ. As I have done in the past, when sharing revenue results, I will provide both gross revenue, which is the amount we invoice from customers, as well as net revenue, which deduct certain clinical trial and data collection costs that we paid to clinical centers involved in our trials. In Q4 2019, this clinical adjustment only impacted U.S. heart revenue. So for the fourth quarter of 2019, gross revenue was $6.5 million, a 67% increase over the fourth quarter of 2018 and our Q4 net revenue was $6.1 million, 71% increase over the fourth quarter of 2018. So let me break this down a little further. For the fourth quarter, U.S. gross revenue was $5.1 million, the $2.8 million was from the OCS Lung and $2.3 million was from OCS Heart. As we mentioned on the last call, we did not expect that we did not have any U.S. OCS Liver revenue since the Liver Trial had completed enrollment. So then on a net revenue basis, OCS Lung is the same as the gross revenue, which is $2.8 million and the OCS Heart net revenue was $1.9 million. Outside of the U.S., gross and net are also equivalent. So our Q4 net revenue outside of the U.S. was $1.4 million, made up of $0.2 million from Lung and $1.2 million from Heart. Key drivers of our revenue growth in Q4 was the OCS Lung clinical adoption and early implementation of our new OPO and service initiative that Waleed mentioned earlier, along with the two OCS Heart programs currently running, the EXPAND CAP and the DCD Heart trials. Gross margin for the fourth quarter…

Thanks, Stephen. Overall, we’re proud of our results and progress in 2019 and are extremely encouraged by our clear path forward in 2020 and beyond. TransMedics is transforming the standard of care in organ transplantation by creating an entirely new clinical practice for extracorporeal perfusion, optimization and assessment of donor organs for transplant. Transforming the standard of care is never easy and it takes time. We are confident in our technology, our clinical evidence and our track record to negatively – to navigate early commercial headwinds and drive towards long-term growth. We’re looking forward to a strong 2020 in which we expect to increase utilization of the OCS technology across all three of our clinical transplant markets: Heart, Lung, And Liver. Again, thank you so much for joining us on this call. And now, we will open up the line for questions. Operator?

[Operator Instructions] For your first question, we have Robbie Marcus from JPMorgan. Your line is open. Mr. Robbie Marcus, your line is open.

Hi, sorry about that. This is Allen on for Robbie. I just wanted to start off with guidance. I think, previously, you had talked about 2020 as being a year where you would be looking to, I think, it was like double your revenue base, and it looks like you’re coming in a little below that. So, I guess, like can you walk us through guidance in terms of what you expect in terms of Lung, in terms of Heart, and in terms of like benefits from clinical trial enrollment? Can you just like walk us through the bits and pieces of that and maybe what’s falling a little bit short of prior expectations?

Yes, Allen. Hi, this is Stephen Gordon, the CFO. So yes, as far as guidance by organ, we’re not going to provide guidance by organ. We talked about the drivers being the – certainly, the lung adoption, as well as the two trials in heart, two trials in liver, and then ultimately we hope to have the heart approved in the second half of the year. So, I think that’s as much guidance we’re going to give by organ at this point regarding kind of – we’ve often said that we feel like we can close to double the revenue each year, and we felt like 70% to 80% is close to doubling.

Yes. And Allen, this is Waleed. I’d like to also shed some more light in addition to what Stephen discussed. I think, we feel very comfortable in the guidance we’re issuing for 2020. Many of us expected the – there are several factors that led to the guidance being what it is. For example, we expected the heart panel to be a little bit earlier. Now, we know it’s on April 16. We could not influence the date. Now, we know what the date is, so we had to factor that into our consideration. We’re sitting here with a situation globally that pretty much resulted in us being very conservative and completely eliminating revenue that we were expecting for 2020 from China, South Korea, Hong Kong, and other Asia Pacific region. And we’ve down – we discounted a lot of our Middle East revenue that we’re expecting in 2020, which I’m talking specifically about the impact of the coronavirus pandemic. So, I think net-net, we have to be realistic. We have to put a guidance that we stand by, and we feel very confident in this guidance and we feel that it would be a significant year ahead of us in 2020, and we will continue to monitor the dynamics that are influencing our business globally.

Got it. And then when it comes to the OCS Heart approval, when you do get it approved, how should we think about the trajectory for that launch? And like, that the translation to sales, should we think about it being more modest ahead of DCD, or do you think it can still get some pretty healthy adoption even ahead of that? Thank you, guys.

Thanks, Allen. For the heart, we expect the heart adoption to be, I would say, it’s not that – it’s not linked to DCD. We expect heart adoption to go through a cycle that will be transitioning from clinical to commercial. We know this cycle has some inertia factors in it. We hope that by applying the lessons learned from 2019 dealing with the lung early adoption situation that we’ve learned a ton from that, and we kind of put together a ramp that makes sense and we assumed a lot of the key factors and we’ve addressed some of the key factors for the heart, so we expect the heart to be a little bit smoother than the lung, but we don’t link the DCD to the approval. The approved indication is categorically different. As far as DCD is concerned, I think once the DCD is approved, that would add to a heart trajectory, but we don’t look at the DCD as necessarily the main catalyst for the heart growth. We expect to see heart adoption to grow once the FDA is approved. However, we expect to go through the similar steps for transforming trial centers to commercial centers that will include the post-market registry and the like. However, we hope that the service model will address the big portion of the logistics and the infrastructure headwind that we saw with the lung, with centers were not really ready for the broad – the breadth of the OCS capabilities in the post-market setting. We hope that, that service model that we’ve established for the lung will help the heart address that specific area. So, can we go to the next question.

For your next question, we have David Lewis from Morgan Stanley. Your line is open.

Good afternoon. Just a few questions for me. Stephen, I know we’re not going to get per organ guidance per your kind of corporate practice. But just given your commentary around coronavirus, I wasn’t aware the Asia-Pac was a significant contributor in 2020. So, can you help us at all with the split between U.S. and ex-U.S. revenue, ex-U.S. is about 35% of the business in 2019. We added closer to 30% in 2020. Should we be assuming flattish ex-U.S. trends as it relates to guidance up modestly, and any help you can give us between U.S. and ex-U.S. in light of your coronavirus commentary would be super helpful? And then a couple of quick follow-ups.

Sure. Yes, I would expect ex-U.S. to be about between 20% and 25% of our revenue in 2020. So, we’ll grow, but certainly, we’ll grow modestly.

Okay, understand. The majority of that disconnect versus kind of our prior model you believe is more Asia-Pac contribution and just conservatism around coronavirus in Europe?

Well, I think it’s a couple of things. I think it’s – some of that is impacting it. First off, if you look at just the heart, which is our primary franchise outside the U.S., I would expect that to grow probably in high-single digits and maybe that’s the disconnect, maybe we have that as a high growth rate. And then I’d say, Lung and potentially Liver, those are small numbers that we will see growth there and probably double-digit growth rate, but the numbers are small. So, I think that’s probably where the disconnect is.

Okay, very helpful, very specific. And then, Waleed, just on Heart panel, have you had any conversations with the agency around the data heading into the panel, sort of question one? And then related question is, just what is assumed in 2020? Did you take a very conservative view and just pulled Heart out of 2020, or did you assume some meaningful contribution from Heart in the second-half of the year? And I just had one more quick one on Lung.

Sure. So relating to the first part, David, we have been having constant communication with FDA around the data. And we feel confident in our ability to address and we address these questions to FDA. And we feel very confident for – from where we stand today about addressing any of these questions or any additional questions relating to the data. Regarding the second question or the second part of the question, we did not assume significant contribution of the heart in 2020. We assume some modest contribution, specifically, actually, around Q4. But we have an ongoing DCD program that is going to contribute some growth this year. We did not do anything, that is super aggressive or anything like that, because we just kind of want it to be realistic and ensure that we are learning from the 2019 early adoption in – our early roll out of the heart in 2020. So that’s, I think, my response to that part. Stephen, would you like to add anything?

Yes. No, I agree. We do have certainly contributions from early in the fourth quarter from heart, I think, we’ll leave it at that.

Right. And at the end of the day, David, even if they, for whatever reason, the approval is delayed by a month or 45 days or 60 days, we don’t see that as a meaningful impact to our revenue in 2020, nor our guidance in 2020.

Perfect. Very clear. Thank you for that. And then lastly, really just Lung traction, it actually did pop up here sequentially, which was nice to see. Just give me a sense, maybe a deeper dive on these commercial initiatives, like there is the – there’s a center-specific dynamic, but there’s also the OPO-driven dynamic. I just wonder if this changes how you’re thinking about in the future? Are you just more reliant on OPOs? Are you still as reliant on donors? How many centers do you think you’re going to add in 2020, that’ll be super helpful. Thank you.

Sure. No, no, that’s clear. So, David, we look at the OPO and the center dynamic as complimentary and supportive. We don’t look at it as one way over or the other. The beauty of the OPO initiative, it is not center-specific. Now that lung allocation is a national allocation. We can take along from anywhere in the U.S. and transplant is anywhere in the U.S., which we – with the Organ Care System, which we couldn’t do before. So that helps. It also eliminates or minimizes the impact of the center-specific logistics and headcount and resources that provided some headwinds in early adoption of the OCS Lung System. So providing these service initiatives, both for the center and the OPO, we’re hoping to see the adoption of the lungs to start to streamline and the growth that we’re expecting start to materialize in the second-half of 2020 as I’ve said on the Q3 call. But that’s the initiative that I was referring to then and now it started and we expect to add additional centers, additional OPOs throughout 2020. And we expect that this will alleviate this concern about logistics – center-specific logistics and – that is causing some headwind to broader adoption of the OCS Lung System. And we’re hoping that if it works, at once we get approval for heart, or liver or any other indication that’s become sort of the platform that we start the commercial discussions from, rather than just dealing with it with the center-specific logistics alone.

Great. Very clear. Thanks so much.

Thank you.

Last question. So we have Jason Mills from Canaccord Genuity. Your line is open, Mr. Mills.

Thank you, Waleed, for taking the question. Can you hear me okay?

We’re hearing just fine. Hi, Jason.

Super. Hi, I’d like to follow-up on several of David’s points some questions. How ubiquitous is your service model in Lung? Can you gauge it in percentage terms relative to the market? Can you gauge it in percentage terms relative to the potential center base or OPO clientele that you would ultimately target? Is there a way to help us understand where you are and where you’re going there? And obviously, where you might be going in Heart and Liver, although, that’s de minimis at this point, given the approval timeframes?

Sure. Thanks, Jason, for the question. I think it’s early days, but our vision is to end 2020 fully operational in the top eight to 12 OPOs in the country, high-volume, high-performing OPOs that are located across the United States, across all regions in the U.S. And as I said earlier, the beauty of that is it enables maximum utilization of the donor pool without tying it down to a center specific dynamic, and we’re hoping to see that play out in front of us in 2020. Again, I’m a little bit cautious making any assumptions, it’s too early to define that, but that gives you an order of magnitude. We – we’re hoping that by the end of the year, we will be in anywhere between eight to 12 high-performing large volume OPOs across the major geographical area in the United States. We’re already in discussion with the vast majority of those. And we hope that throughout quarter-over-quarter, we will sign them up and we’ll see this program taking off. Ultimately, these lungs will have to be transplanted somewhere. So the centers will continue to play a key role. And the beauty about us offering this service, it’s actually started with our broad footprint in major lung transplant centers. And hopefully, once the heart is approved, heart transplant centers in this country that makes these lungs find a home for transplantation. We’re just taking the pressure of logistics and manpower and organization out of the equation.

Great. And two follow-ups to that. So for the benefit of those on the call that don’t know the extent of the OPO network in the United States, how much would this take the top eight to 12 high-volume OPOs represent in terms of the volume of lungs that are transplanted today or that might ultimately be transplanted if we were in an environment that extended criteria loans were used more ubiquitously, and there was a higher number of lungs transplant in this country. That’s question one? Question two is, I thought you mentioned something very important earlier in your prepared remarks, which was the proposal to change the post-transplant outcomes guidelines. One thing that we discovered as we talk to clinicians or transplant centers is, they’re not willing to sacrifice their level of success with respect to organ transplantation, even if they know that the patients won’t be getting donor organs if they’re older and age or extended criteria recipients sort of patient. And so could you talk – spend a minute on that specific proposal and how you think it might impact your business over the both the near and long-term? And I had one quick follow up after that.

Sure. Thanks, Jason. So for the question number one, again, without getting too granular, I think, that the top 10 to 12 OPOs we’re talking to and engage with, will probably represent the vast majority of – for the – the vast majority of organ transplants or lung transplants performed in this country are a big, big majority of that volume. The impact of this technology, as we’ve seen from our trial, I can only speak product, I can only speak from data points that was witnessed in our trial. The impact of increasing the utilization is obviously is substantial. We – we’re talking about potentially tripling or higher, the number of available lungs for transplants. And that’s that exciting point. Relating to the next – the second part of the question. We completely understand that today, centers do not want to sacrifice their long, short or long-term clinical outcomes. Because they know, if they do, CMS will disqualify them from transplant reimbursement. We don’t want that to happen either. In fact, our data, again, I can only speak for our data. Our data shows that we have the best outcome in lung transplant from lungs that otherwise wouldn’t have been transplanted with a one-year survival, hovering about 3 or 4 percentage points above the national average of one-year survival in lung transplant today in the U.S. So we don’t see this as compromising the outcome. In fact, we believe based on our data, that the OCS is one of the very few, if not the only technology, that can guarantee a safe increase in the supply of donor lungs and donor hearts and donor livers, because we know we have the highest rate of utilization, but also our clinical outcomes were not compromised. So I think, that OCS provides the answer to that question. However, the national mandates were really focusing on giving these transplant centers the license and the comfort zone to say, “Listen, transplant is a cost-effective. It’s a – it’s the treatment of choice. It’s the curative treatment for these patients that are dying at a rate of anywhere between 16% and 25% on the waiting list.” So to see that coming from CMS and HHS was very encouraging. And it’s confirmatory to our position, our strategy and our marketplace. So that’s the point I was trying to comment on.

Yes. It seems like an important one at that. So thank you for that color. And then lastly for me, David pointed it out, I don’t want to go back to it. I think it was the first quarter since your public offering that we saw you deliver growth in U.S. lung, and frankly, U.S. heart as well, but lung above our expectations and it was up nicely sequentially. On the other hand, the international business was well below expectations. So I guess, a couple of questions here. Just to – wanting to make sure we’re level studying properly as we head into modeling our quarterly for 2020. The trends in U.S. lung finally, given – you seem to have some tailwinds. I think, David asked it one way, I’ll ask it a different way. How much of that do you think came from early success with the service model? How much of it is just overcoming initial inertia post-extended criteria approval? And then internationally, did you see any sort of one-time, or different trends in the international business that caused us to be down somewhat sequentially. Was there something in there that was an anomaly, or could you talk a little bit about that? And thank you.

Sure. Thanks, Jason. So on the first part of the question, I would say, In Q4, it’s 70-30 split. 70% is just the work that our commercial and clinical team has been putting in the lung commercial initiative to overcome the early headwinds, and about 30% of the success of Q4 came from the early service model. We are expecting – we’re tracking that percentage and we’re looking forward to looking what the trend would look like as we mature in that service model and add additional OPOs and additional centers to our 2020. Relating to the second part of the question. I believe that where we are – so here’s how we see our international business, specifically in Europe. I think we – 2019 was a year, where a lot of our national reimbursement initiatives were maturing and maturing rapidly, which unfortunately caused a lot of the centers to kind of hunker down, protect their operating budgets, waiting for the national reimbursement decisions to come out anticipating that will be positive. So that was a major, how we call that dynamic that we – we’ve seen in 2019. For 2020, we’re taking the same dynamic into the year. We did not want to overestimate Europe and we’re not going to overestimate Europe until we see some major reimbursement initiatives maturing. And we’re expecting one to mature in the near-term here in the UK. And we’re hoping that another one was declared itself sometime in the second-half of this year. So that’s the – that’s what happened in 2019. We have no fundamental issues, or clinical issues or technology issues that we’re aware of, that is causing the year-over-year growth. I think our team did a great job in the previous two years and we reached a level of maturity that beyond which to grow, we need some form of a national funding. However, as Stephen said, we expect some growth albeit on a smaller scale, because the numbers are small. We are pushing forward initiatives to start releasing Liver and Lung commercial product outside of the U.S. And one of those initiatives was, obviously, in Europe but also in Asia Pacific. So, again, that’s why we’re monitoring very carefully what’s happening with the coronavirus. And the good news is in the numbers we’re sharing in the guidance we’re sharing, we’ve already taken out all the impact of any Asia Pacific sales completely out of the equation for 2020. And we hope that changes. But for now, that’s where we are.

Got it. Thank you, Waleed.

I’m showing no further questions at this time. I would now like to turn the conference back to Mr. Waleed Hassanein.

Well, thank you so much. We appreciate you taking the time to be in our earnings call for Q4 2019 and full-year 2019. We’re looking forward to our next call for Q1 2020. Thank you very much, and have a wonderful evening.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.