Q4 2023 Transmedics Group Inc Earnings Call

Participants

Waleed H. Hassanein; President & CEO; TransMedics Group, Inc.

Suraj Kalia; Analyst; Oppenheimer & Co. Inc.

Presentation

Operator

So yes. And then yes, in a moment, I'm not that expert.
All right, then.
Okay, good afternoon, and welcome to the TransMedics Fourth Quarter and Full Year 2023 earnings conference call. At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today's call. 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.

Thanks, operator. Earlier today, TransMedics released financial results for the fourth quarter and full year ended December 31st, 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 our 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. And 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 27th, 2023, and 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 26th, 2024.
With that, I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Waleed H. Hassanein

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 fourth quarter performance represents a need 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 three 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 2020 and a 22% sequential growth from 3Q 2023. For the full year of 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 2020 to the full year 2023. Our gross margin was 64% compared to 70% in 22. I know Steven is going to detail this in his section of today's presentation. However, I want to take this opportunity to give you my perspective on this important topic of TransMedics gross margin, 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 that 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 a 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 three organ markets in 23 compared to 22. Our OCS Lung case volume grew by approximately 11%. Our OCS Heart case volume grew by approximately 82%, and our OCS Liver case volume grew by approximately 199%, almost tripling from 2020 to 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 OCSK. volume in the US 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 three 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 analyses during the upcoming transplant conferences in 2024 to unequivocally demonstrate the improved clinical outcomes achieved using OCSNOP. in the US. Again, I want to stress a key point. The success of OCSNOP. program is based on better clinical economic and operational outcomes experienced by the transplant centers and not based on anything else in Q4. We buttressed the NOP clinical staffing by adding 37 new clinical specialists and four procurement surgeons.
Now let me share the impact of our OCS technology and NOP on the overall national transplant volume in the US for the first time in nearly eight 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 OCSK.'s 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 US. 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 US. This will be fueled further by our unique ability to also expand the overall national growth of transplant volumes in the US to help patients who are desperately in need for life-saving transplant procedure. Our vision is that by the time we reach that 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 transparent 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 a 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 aircrafts. Their role is simply to contract a charter flight and accrue from a local or 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 first-hand experience that the brokered charter flight model has 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 Oregon allocation laws and the use of OCS technology. And it's an NOP.s capability to go longer distances to increase utilization of donor organs for transplant to significant shortage of charter planes availability for 24 seven to cover the growing demand for transplant missions. This resulted in the loss of approximately 20% to 30% of donor retrieval emissions 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 than one plane and multiple crews to complete a single mission, which sometimes doubled the transportation bill paid by the transplant center for lack of control over the starting location of the aircrafts 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 outside of these contracted local or regional operators flying 2030 year old aircrafts. In fact, our own NOP. clinical and surgical teams experienced a few near catastrophic events on brokered aircrafts in 22 and 23, fix an inefficient route round trip cost model, even if the donor organ is not procured for transplant or if the 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 aircraft, the operator of 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 middleman. Importantly, it is also severely it also severely limits the ability to grow transplant volumes due to the two shortage of dedicated aircrafts. And we cite as a roadblock 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 needs the current and future needs for growth of the transplant markets in the US, while providing significant operational and cost efficiencies to the transplant centers.
Let me share with you our vision and our goals that we've actually achieved to date. One, we set out to maximize donor organ 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 for 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 algorithms 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 the 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 were only operational for approximately four to five weeks in 3Q. The average number of active TransMedics aviation planes were approximately seven planes in 4Q compared to approximately 3.5 in 3Q. We ended the year with a total of 11 owned aircrafts that will become fully operational in early 2024. Approximately 98 transplant programs in the U.S. use TransMedics logistics service in 4Q compared to approximately 36 programs in 3Q. This is an important metrics to unequivocally show that operational availability, cost efficiency and high safety standards enabled us to disrupt the inefficient historical truck 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. case 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 mission so far, we are humbled and proud by these early results. We are continuing to expand our air fleet and crew to operate 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 and Andover at the end of December, and we are now fully operational 24 seven three 65 from this state of the art facility. This dispatch center is designed to maximize operational availability, efficiency and efficient routing of our NOP. resources to match to minimize plain repositioning costs 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 NOPK.s 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 21st, riding 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 staff. This letter contains serious accusations, which are grossly inaccurate unfounded. And based on wrong information, let me repeat again, this letter contains serious accusation, 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 by 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 one Q 2020 24 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 NOPK.s volume in all three market segments by driving both growth in the overall TransDigm volume and take share of existing volumes. We will initiate a new clinical program trial 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 US 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 represents 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.

Thank you, Wally. 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 2020 to the 22% sequential increase from last quarter to $81.2 million included $1.1 million related to our flight school and $1.4 million related to Summit Aviation's legacy business. So a total of 2.5 million that is non-transplant related. So 1.4 million of legacy business is not continuing and is expected to be zero 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 up over 100, 159% from the fourth quarter of 2022. And the US grew 26% sequentially from last quarter, and this included the 9.2 million of transplant TransMedics logistics revenue. The organ breakdown on U.S. revenue was 54 points, $54.7 million of liver 17.6 million of heart and 2.9 million of low organs growing substantially over Q4 of 2022. We did see a modest sequential decline in lung revenue while liver and heart continues 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 US 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 blood.
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, including air and ground services. 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 that non-transplant 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, while drilling down one 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 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 IT just to repeat the service. 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 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 O. 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 159% 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. This compared with an operating loss of 6.8 million in Q4 of 22 and a net loss of $6.7 million in Q4 22. Total cash at the end of the year was $394.8 million as of December 31st, 2023, which equates to cash usage of $32.3 million from the balance at the end of Q3 of 2023 of our operating cash was a positive 8.3 million in the quarter of which was offset by the purchase of three 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. 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 loans ex U.S. was 14 million of heart, 1.3 million of lung and 0.1 million of liver. And again, non-transplant revenue for the year was $4.9 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 20 as compared to 70% in 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, up 89%. I'm $96.7 million in 2022 and included $27.2 million of one-time 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 or 23 compared to $31.4 million in 2022. And net loss was EUR25 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 logistic 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, while these earlier comment we are providing annual revenue guidance in the range of 360 million to 370 million, which represents 49% to 53% growth over the full year 2023. Also, for modeling purposes, we expect gross margins to improve throughout 2024, and we would expect to exit 2024 in the 63% to 64% range for overall gross margin. We do expect the product mix and service mix to be around 65% product and 35% service in 2024, we expense 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 H. Hassanein

Thank you, Stephen. We're very humbled by and proud of TransMedics performance. In 2023, we more than double our overall revenue. We help 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 Alsius transplants by 2028.
With that, I will now turn the call back to the operator for Q&A.

Question and Answer Session

Operator

Operator, we will now begin the question and answer session. To ask a question, you may press star and one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Our first question comes from Alan gone with JP Morgan. Please go ahead.
Hi, Dean.

Thanks for the question and congrats on a good quarter.
I wanted 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?

Yes, Alan, as far as drivers of growth. I mean, we continue to as well. Lead mentioned, we want to penetrate deeper across all three 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.

And Alan, thank you for the question from our perspective. I agree with Stephen, 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 it by going deeper into existing accounts by adding more RDCD. and DBD. organs across all three 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 you know, adding more DBD. to our heart franchise. We are we are just in the beginning of this commercial ramp-up and the other impact is the indirect or direct impact of operational efficiency with TransMedics logistics, it may even drive more growth into the actual case volume and the overall revenue growth from the logistics aspect of our business. So it is it's a we monitor and drive both sides of our business. The disposable income product as well as the service and the synergies that exist between the two will also have an important catalyst two adoption of the disposals.
Got it.

And then just as a quick follow-up, we had seen the letter that you sent in response to the congressional letter. So I won't dive more into that, but there also was an article out I'm kind of talking about a more thorough investigation of OPOs as a, you know, 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 trends by end market? And how should we think about the longer-term impact on TransMedics.

Thank you.

Thank you. Alan. As you said, what was announced today in the Washington Post is just a continuation of what's been ongoing for several years for them. I'm trying to disrupt or revamp the OPO network in the US. The bottom line is is the following. Transmedics went out alone and developed a unique model for 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 until 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 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. And so again, it's unfortunate what's going on. But as you said, it's been going on for several years. And 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.
Next question operator.
Next question comes from Josh Jennings with TD Cowen. Please go ahead.
Good evening.

Thanks for taking the questions and congrats on the strong finish to a remarkable year. Wanted to just ask about the congressman Slattery provided us a strong rebuttal, proving every every accusation allegations from well, if you think there could be any short-term disruption to the business of these headlines flying around at our sense is that you've added so many transplant program, just customers that are all aware of the business model don't seem to have any issues with it. But just wonder any any short-term disruption potential into any next steps that you expect from this inquiry, whether Congressman?

Thank you, Josh. Josh, the first part of your question on this and no one has always to assume some level of confusion.
Okay? This letter came out of left field and it was not supported by any fact it was complete completely unfounded I am sure for members behind this is going to try to use that letter to tried 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 and fairly so we're not going to be standing still. We're going to tried to minimize that disruption as much as we can do. We expect distraction?
Absolutely, because now it's natural. As far as the next part of the question, I really don't know, Josh, and I don't I don't know. I don't know where this letter how this letter came about other than it appears that there are some misinformation being propagated, but our response is pretty strong and it was designed as such to make sure that if anybody wants to, I'll 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 that what the next steps are other than we have responded on time and in a comprehensive fashion. And we are we are propagating our positions too and all the right people around TransMedics and on in Congress as well.

Thanks for that. And just a follow-up. Just you mentioned will lead about the plan to present some data analyses, demonstrating improved clinical outcomes on U.S. transplants by using or transfer centers using the NOP and you'll see us within the NOP, any metrics you can you can share with us that we should be looking for? And then how impactful do you think these data analyses can be in terms of driving the increased demand and adoption trends for NOP and MCS. Thanks for taking the questions.

Thank you.
Thank you, Josh. I think are 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 grades of PGD. primary graft dysfunction, early allograft dysfunction we're looking at patient and graft survival, both at six and 12 months. So these are the metrics we are. 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 and transplant program in each market. So these are the metrics will be at discussing at ISHLP. and ATC. and ILT.
Our next question comes from Bill Plovanic with Canaccord. Please go ahead.
Great. Thanks. Good evening.

Thanks for taking my questions. A 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.

Thank you.
Bill, I think I think there's you know, several reasons and frankly, several expected reasons for that. We all know that liver transplant procedures are nearly double or even 2.5 times the heart transplant procedures and 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. And so 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 two or three years. The heart will get up there as we continue to demonstrate growth in the overall transplant volume and we will get the number of procedure up. We will see the long-term effect of OCS as we will start and reporting that at the next I-6 will peak. And we are extremely confident that a heart will pick up the pace. And more importantly, we're going to go out on a limb and say that over the next couple of years, we should see the lung. It's 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 three organs to be contributing close to each other.

Great, thanks.

And then my second question, if I could, is just aviation ramp has gone a lot faster than we expected from your 13 planes now if you said you get to 16 to 20, how do we? And 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? Is 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 would be 30%, you're already surpassing 35 and thanks for taking my questions.

Thank you, Bill. As always, the last questions, the first, the first aspect, we we hope to be fully operational at the scale of doing 75, 80% of our transmissions with our own fleet. When we surpass 20 operating TransMedics flights. We are aircrafts, which means we're talking sometime second half of 2025. So that's number one.
And the second part of the question was remind me again, Bill, please or that the price for the average price permission, I we can't comment on that until we are completely dispersed equally across the the two 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 you know, it's early. I think we are going to be in the 30s and I will leave it at that for now. And then we will we'll see how we are executing going forward.

Yes, that's great, though.

I would just add, you know, as I mentioned, we do expect modest improvement over the 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 aviation fund.

Great, thanks.
Next question comes from Ryan Daniels with William Blair. Please go ahead.
Your guys.

Congrats on the strong quarter and year and thanks for the questions. Steven, maybe 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 that 65, 35 stay the same as it ramps towards 80%, given that you're only at 35% today, just trying to square that up?

Yes.

I think it's important, though, 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 some overhang from non transplant related revenue that's going to go away in Q2 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 or if it will change a bit in Q1 and then it remains to be seen how we pass is with how we go through the rest of the algorithm go through the rest of the year. But generally speaking, I think 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.

Okay.

That's very helpful color. And then maybe a broader strategic question. Obviously, with the growth in dynamic opportunity here a ton on your plate, but you 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 two or three 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 banks?

Brian, thank you for the question, and we're planning to detail all these in our next earnings call. But very important, we are doing all of the 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.

I look forward to that.

Thank you.
Next question comes from Suraj Kalia with Oppenheimer & Co.

Suraj Kalia

Please go ahead, please.
Can you hear me?
All right. We can hear you just fine size.

Perfect, gentlemen. Congrats on an excellent quarter. So really two 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 lightly, especially given your performance in the last two years and how The Street starts building things in and rough math is telling us based on the FY 24 guide, you're looking to get somewhere close to 25% to 30% share in Harbin livers and 10% to 15% lungs. And of the approximately right in our math and can you give us some additional granularity? How are you thinking through DBDD. city or site movement? I guess just strip down the the three 63 70 million guide a little more for us, if you could.

Yes, Suraj, this is Steven. So I don't think we can give you where we expect share to be. We definitely expect share to improve from where we are today. As we said, we we looked at it on an annual basis and we were kind of back 16% to 70% 17% share in in the heart and liver, and we certainly expect to improve that as we go into 2024.

And your next part of your question, Suraj, remind me just in terms of any additional color, how you're thinking about DBE. versus DCD. and also the bell curve distribution. I guess just trying to understand, is that how you're targeting or getting getting to the numbers?

Yes, Suraj, let me let me let me address that one and thank you for the question. I think, Suraj, the way we approach. This is very it's very broad. I mean, we look at our case distribution and here's what we expect. We expect if we are heavily used in DCD., we expect that to continue, and we expect to continue to drive that forward across all three organs. But we're not going to stop here. We are going to find ways to invigorate DBD utilization. And we do that through a variety of different programs and mechanisms to drive adoption in that area to drive overall national transplant volume. And so at number three, we look at areas that are quiet or relatively quiet or lower up lower penetration like the lung and we find ways to reinvigorate the lung and it doesn't matter at that point whether it's DVD or DCD., can you imagine if we are, you know, more than where we are in the lung and near heart, at least? And what would that do to our revenue mix and penetration overall would be great. And after that, you know, as far as the transplant programs is concerned, you know, again, our service is and Universal Our service has been proven and two 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 TransDigm programs to decide whether or not they want to be, as you know, 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. And 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 TransDigm programs. We'll be contributing part of our growth going forward because we are contributing to their growth. So and if I could not, it's not it's not a one-size fits all. We have to be dynamic. We have to be flexible. We have to tackle it in a broad range across all the organs across the two different types of donors and be creative on how we pulled the levers to achieve our goals. And again, we are very early given the penetration rates we discussed FairPoint's will lead.

If I could quickly ask a follow-up. Very nice sequential jump in the number of sites using TransMedics aviation. Similarly, as it normally happens, right, even at our site visit. One of the comments you had made was like we want to make it like a one-stop shop attach, TransMedics aviation to everyone. So you go to site is the 98 sites you talked about in Q4. What has been the reception? And I'm trying to understand is that like you all went to, I don't know, pick a number 200 sites, 98 are in board. The remaining one or two 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 role. Congrats again. Thank you for taking my questions.

Thank you, sir.
Thank you very much, Suresh. 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 and again, our approach to these programs is very, very simple. When we get coal for an NOP. case, we provide them the option to use our transmix logistics. We provide them a price quote, and it's up to them to decide and whether they want to use us or not some centers like using us to came back and ask Tamara and André 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 out to them participate in this is cost effective or efficient model or not?
I hope I addressed the question and I'm sorry, I can't give you more granular detail than that at this early stage of launching logistics only one quarter. So it's only one quarter, Suraj, so fair enough. Thank you.
Conference back over to Waleed Hoffmann for any closing remarks.
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.
The conference has now concluded. Thank you for attending.
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