Oncology Institute Inc

NASDAQ:TOI

Earnings Call Analysis

Improved Financials and Strategic Growth

The company ended 2023 with a reduced loss from operations at $77 million, a $5 million decrease from 2022, and a decreased net loss of $83.1 million. Efforts to eliminate cash burn were reflected in the lowest SG&A percentage of revenue since IPO. Priority strategies include expanding capitated contracts, radiation oncology, and specialty pharmacy services in legacy markets, alongside new market penetration, as evidenced by a fully capitated contract and MaxHealth agreement. The focus remains on becoming the preferred oncology practice through value-based care, leveraging opportunities like the Carrum partnership and aiming to mitigate macro pressures such as DIR fees and drug margin compression for revenue growth.

Revenues on the Rise Despite Gross Profit Slip

The company's Q4 2023 top-line performance showcased a robust 20% year-over-year revenue growth to $85.8 million, complemented by a sequential 4.6% uptick from Q3 2023. Nevertheless, gross profits dipped by 8% in the same quarter, largely due to increased DIR fees. The company's dedication to overhead control led to a 3.6% reduction in SG&A expenses from Q4 2022, hitting $29.7 million, though this was offset by a $7.7 million hike in net loss due to valuation changes in financial instruments, despite an increase in gross profit.

Annual Financial Guidance Met with Higher Revenues and Lower Expenses

For the full fiscal year 2023, the company surpassed its revenue guidance, with a 28% jump to $324 million over the previous year. Commendably, the annual gross profit grew by 14% to reach $60 million. The mindful expense management further manifested in a $4.4 million drop in annual SG&A to $120 million, a significant reduction of 1,200 basis points as a percent of revenue from the year before.

Net Loss Narrows as Operational Losses Decrease

The consolidated net loss for 2023 receded remarkably by $83.2 million to a loss of $83.1 million. Loss from operations also saw a decrease, improving by $5 million compared to 2022. Despite these positive trends, the adjusted EBITDA remained in negative territory at -$25.8 million. The company finished the year with solid liquidity, boasting $83 million in cash, cash equivalents, and short-term investments after effectively remedying past weaknesses in financial controls.

Strategic Priorities Steering Toward Margin Growth and Market Expansion

The leadership outlined four key strategic priorities for The Oncology Institute. They've achieved the lowest SG&A as a percent of revenue since going public and are aggressively working to eliminate cash burn. The company's focus remains on growing and improving margins in lucrative legacy markets and aggressively expanding in new markets like Florida. Their strategy includes broadening value-based contracts, increasing volume in radiation oncology, and leveraging new specialty pharmacy services to serve patients more effectively. The overarching goal is to solidify its position as a leader in value-based oncology care.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, and welcome to The Oncology Institute's Fourth Quarter 2023 and Full Year 2023 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Mark Hueppelsheuser, General Counsel at TOI. Thank you. You may begin.

[Mark Hueppelsheuser, executive]

The press release announcing The Oncology Institute's results for the fourth quarter and full year 2023 are available at the Investors section of the company's website, theoncologyinstitute.com. A replay of the call will also be available at the company's website after the conclusion of this call.

Before we get started, I would like to remind you of the company's safe harbor language included in the company's press release for the fourth quarter and full year 2023. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.

For a further discussion of risks related to our business, see our filings with the SEC. This call will also discuss non-GAAP financial measures, such as adjusted EBITDA. Reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC and available on our website.

Joining me on the call today is our CEO, Dan Virnich; and our CFO, Mihir Shah. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Dan.

[Daniel Virnich, executive]

Thank you, Mark. Good afternoon, everyone, and thank you for joining our fourth quarter full year call. To start, I'm pleased with our performance during 2023, including several important milestones which will set us up to drive value to our shareholders in 2024 and beyond. As always, none of this would be possible without the contributions of our many physicians, clinical staff and teammates who deliver outstanding care to the patients that we serve each day.

Our strong performance led to year-over-year revenue growth of 20% in Q4 2023 versus Q4 2022 and 28% for the full year 2023. We exceeded the high end of our annual revenue guidance range by over $4 million, with both patient services and dispensary segments contributing to our outperformance. Gross profit came in at the low end of our annual guidance range, primarily due to the negative impact of unusually high direct and indirect remuneration or DIR fees on our Part D drug margins.

Our experience with pharmacy benefit managers' or PBMs' generated DIR fees in the fourth quarter is being felt across the oncology industry and is related to the point-of-sale DIR mandates that went into effect on January 1. Importantly, we expect to help offset this margin compression in 2024 as our California pharmacy and medically-integrated specialty drug dispensaries across markets have been significantly outperforming expectations on fills and revenue contribution.

For 2024, we are forecasting our California pharmacy to generate over $30 million in incremental revenue, and we expect full year growth of approximately 50% in our Part D business. The strong revenue performance we have generated so far in Q1 gives us confidence that we will achieve our gross margin target for Part D fills.

On that note, I want to provide some encouraging updates about the growth of our value-based contracts as we begin 2024. First, demand for our services has never been stronger, leading to a highly successful start to the year for our business development team. We have signed or are near completion on 6 new full-risk contracts in Q1. These new relationships will benefit several existing and new markets and include risks that extends beyond our historic Part B medical oncology capitation to include Part D and radiation oncology services.

Due to the higher utilization patterns we see outside of California as well as the predominance of Medicare Advantage-only contracting opportunities, many of these new relationships have a significant improvement in economics on a per member basis versus the highly competitive rate environment in California.

In an effort to provide more clarity to analysts and our shareholders on our performance, we have moved from reporting value-based members to reporting revenue per value-based member. We believe this change is important because we are evolving our business to take on adjacent specialty risk and establishing more Medicare Advantage-only contracts outside of California. This will provide a clearer picture of the impact of incremental contracts signed and growth across markets on a quarterly basis.

Now I would like to highlight a few operational achievements since our last call. On January 1, we started our first capitation contract in Florida with a health plan that is a member of the Elevance network. This relationship is off to a very good start, and we are encouraged by the strong operational and clinical performance from serving their members.

During Q1, we signed our first 3 independent practices to our MSO model in Florida as we scale our ability to provide value-based oncology services to patients outside of our employed clinic model. In the fourth quarter, we added 7 new employed physicians primarily in Southern California, bringing our total employed physician and advanced practice provider count to 119.

We successfully acquired and launched our California-based pharmacy in December and have already completed over 1,300 specialty medication fills. We recently announced a new partnership with MaxHealth in Florida to take on medical oncology Part B and D and radiation oncology cost of care risk across 5 Florida counties for their Medicare Advantage members. This will be a service fund contract.

We also announced a partnership with Carrum Health in Nevada on our new prospective bundle payment model for breast cancer patients, which is our first partnership to serve patients on behalf of employer groups. Finally, before I turn it over to our CFO, Mihir Shah, I would like to walk you through our 2024 guidance.

For the full year 2024, we expect revenue of $400 million to $415 million, representing 23% to 28% growth over full year 2023. This growth is driven by several factors, including our dispensary business, particularly our pharmacy as well as the continued expansion of our value-based contracts and organic growth, especially in Florida. We expect gross profit in the range of $68 million to $79 million and adjusted EBITDA in the range of negative $18 million to negative $8 million, reducing our EBITDA loss in the range of 30% to nearly 70%.

Finally, while we've been impacted by the recent Change Healthcare cyber attack, which has caused disruptions to health care companies across the U.S., our team has been actively collaborating with our practice management vendor to swiftly establish alternate channels for transmitting claims to payers. Significant progress have been made in successfully submitting claims to commercial payers, and we've completed applications for Medicare and Medicaid agencies to accept our claims through a new intermediary, which is pending approval.

It's anticipated that the delays in claims submissions will lead to an increase in our days sales outstanding, DSO, and temporarily impact our cash flow in the first and second quarters of 2024. Nevertheless, we do not believe the impact to be material and remain confident in our ability to resolve these challenges.

Now I'll turn the call over to our CFO, Mihir Shah, to provide additional details on our fourth quarter and 2023 financial results.

[Mihir Shah, executive]

Thanks, Dan, and good afternoon, everyone. I will start with our quarterly results. Consolidated revenue for Q4 2023 was $85.8 million, an increase of 20% compared to Q4 2022, and a 4.6% increase compared to Q3 2023. Gross profit in Q4 2023 was $14.4 million, a decrease of 8% compared to Q4 2022. This decrease is attributed to the increase in DIR fees Dan previously mentioned.

We are continuing to see the results of our reduced overhead which produced SG&A, including depreciation and amortization, of $29.7 million in Q4 2023, a decrease of 3.6% compared to Q4 2022. As a percentage of revenue, SG&A was 35% in the quarter, down 8.5% from Q4 2022. Loss from operations for Q4 2023 was $15 million, a decrease of 9.8 million compared to Q4 2022. Net loss for Q4 2023 was $18.8 million, an increase of $7.7 million compared to Q4 2022, primarily due to the change in the fair value of conversion options, derivatives and earn-out liabilities offset by an increase in gross profit. Adjusted EBITDA for Q4 2023 was negative $6.3 million.

Moving to full year results. I'm pleased to report that we have achieved the financial guidance for the year while outperforming on revenue. Revenue per capitated member was $40 per member per year at December 31, 2023, an increase of 10.5% compared to 2022. Consolidated revenue for 2023 was $324 million, an increase of 28% compared to 2022. Gross profit in 2023 was $60 million, an increase of 14% compared to 2023. SG&A, including depreciation and amortization, of $120 million in 2023, a decrease of $4.4 million compared to 2022. As a percentage of revenue, SG&A was 37% in 2023, down 1,200 basis points from 2022.

Loss from operations for 2023 was $77 million, a decrease of $5 million compared to 2022. Net loss for 2023 was $83.1 million, a decrease of $83.2 million compared to 2022, primarily due to the change in the fair value of conversion options, derivatives and earn-out liabilities offset by an increase in gross profit. Adjusted EBITDA for 2023 was negative $25.8 million. Further details on how we define non-GAAP financial measures can be found in our Form 10-K and press release.

As of year-end, our cash and cash equivalent balance was $33 million, and we had $49 million in short-term investments for a total of $83 million of cash, cash equivalents and short-term investments. Finally, we have remediated previously disclosed material weakness in Internal Controls over review of Complex Accounting Transactions and concluded that our Internal Controls over financial reporting were effective as of December 31, 2023.

I will now turn it back to Dan for closing comments.

[Daniel Virnich, executive]

Thanks, Mihir. I want to close our call by providing an update on progress towards our 4 key strategic priorities at The Oncology Institute. Priority one, eliminate cash burn. In the fourth quarter, we reported the lowest SG&A as a percent of revenue since going public.

Net cash and cash equivalents used in operating activities decreased 49% in the second half of 2023 compared to the first half of 2023, following our restructuring at the end of Q2. Since we are a rapidly growing business and margins remain fluid, we will continue to carefully manage our overhead as we scale to ensure we have enough capital to continue funding our long-range growth plan.

Priority number two, grow and drive margin in our legacy markets of California, Nevada and Arizona. Grow high-value capitated contracts. Despite some of the pressure on capitated rates in California, we continue to have several near-term growth opportunities for medical and radiation oncology, which will expand our already dominant footprint as a value-based oncology provider in these markets.

Expansion of radiation oncology. Expanding radiation oncology provides enhanced continuity of care for patients requiring radiation, is a differentiator to pure-play medical oncology practices and drives margin on our fee-for-service business. We continue to see growing patient volumes at our 6 radiation oncology centers as well as the opportunity to add capitation to this important service line.

Expansion of our ability to serve patients through our new specialty pharmacy in California. As noted, our pharmacy has been outperforming expectations on fills and is helping drive convenience, fast fill times and affordability to our very important Medi-Cal patient population.

Priority number three, proving new markets. As announced on our last earnings call, we started our first fully capitated agreement with a national payer in Florida on January 1. So far, it has been a very successful partnership, and we followed this up with our recent announcement of our expanded agreement with MaxHealth, which is another key milestone for TOI.

We have several other near-term follow-on growth opportunities in the very important Florida market and other new markets where we are seeing substantial opportunity to drive value due to higher utilization and the opportunity to work directly with health plan partners.

Priority number four, leading the value-based oncology market. We remain the largest value-based oncology physician group in the country by lives served and revenue under value-based arrangements. We strongly believe we can continue to advance this lead by being an employer of choice for oncologists and driving innovation in community-based cancer care for the patients and payers that we serve.

We look forward to updating you on our continued progress toward our key priorities on our next earnings call. With that, we're now ready to take your questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from Jack Slevin with Jefferies.

[Jack Slevin, analyst]

Congrats on the quarter and all the announcements. Maybe to kick it off, thinking about the 6 opportunities you discussed, can you give a sense for sort of what these look like, and maybe sort of pushing that against the most recent things that you've announced, being the contract in Florida on the MA side, the Carrum Health announcement and then the expansion of the MaxHealth agreement.

Using those 3 areas and the 6, what do you think are the biggest opportunities going forward sort of across the board? Is it more MA deals, and that's primarily it? Or should we expect to see sort of a wide variety of things?

[Daniel Virnich, executive]

Thanks so much for the question, Jack. Yes, so we see a couple of things. One is increased opportunity to grow our business through new value-based contracts as top line pressure from risk-bearing primary care groups and health plans seek better partners for community-based oncology care.

Overall, our strategy is to be obviously the oncology practice of choice for both plans and delegated medical groups, and the way that we do this is by not just running great medical oncology services in community but also expanding to radiation oncology. So as we noted in our script, we're seeing opportunities to, when possible, take on as many of those services as we can, preferably under capitation or risk agreements. And that covers the majority of the opportunities we see in the pipeline.

We also did announce the partnership with Carrum, which is our first employer-based partnership model. And again, that opens up a whole new channel of opportunities for us that we see as expansion opportunities over the next couple of years.

[Jack Slevin, analyst]

Got it. I appreciate that. And then maybe turning to the guidance and looking at gross profit, in particular. I guess the DIR challenges and some of the things in the quarter all make sense when you think about the low end and the high end of the guidance.

Is the right way to think about it sort of in the low end is sort of a continuation of the pressure you're seeing, and then the unlocking further upside comes mostly from sort of alleviating some of that pressure on the pharmacy margin? Or maybe if you could just walk me through sort of what gets you to the high end versus the low end of the gross profit guide, that would be helpful.

[Daniel Virnich, executive]

Yes, absolutely. That's a great question. So in general, the low end of our range assumes no improvement in some of the macro issues that are facing oncology right now related to DIR fees and margin compression on drugs throughout the rest of 2024 as well as no additional growth beyond our kind of high certainty opportunities that we're seeing in Q1.

And then everything upside to that is driven by both improvement in some of those macro headwinds on the drug side, which there's obviously not a great deal of certainty on timing on right now, strategic efforts we are taking internally specific to TOI to drive margin to counteract those macro pressures and then additional acceleration in growth beyond what's baked into the high certainty pipeline for Q1.

[Jack Slevin, analyst]

Awesome. And then last one for me. The free cash burn rate sort of coming down to below $5 million by my math looks really nice in the quarter. Understand sort of Change creates some noise in the first half. I just want to make sure I got all that right.

So is the right way to think about it that you'll sort of see drag on DSOs in Q1 and Q2, but the thought process is all of that should reverse in the back half? And maybe more broadly, how should we think about the progression on free cash going forward?

[Daniel Virnich, executive]

Yes, absolutely. That's another great question. I'll let our CFO, Mihir Shah, address that one. Mihir?

[Mihir Shah, executive]

Perfect. Jack, I think the -- as you [ call out ] the right math, our Q4 was the lowest cash burn since we went public, around $5 million Q1, calling out the DSO issues. And I also want to point out there are some Q1 cost-related pressures related to the payroll taxes and other pieces, so that's an anomaly that happens in Q1. But outside of that, the trajectory of cash burn being low compared to the prior -- each prior quarter is what we are targeting as well.

[Jack Slevin, analyst]

Congrats again.

[Daniel Virnich, executive]

Thank you so much, Jack.

[Operator]

That does conclude our question-and-answer question. I would like to turn the floor back over to Daniel Virnich for closing comments.

[Daniel Virnich, executive]

Yes. Thank you so much. As I mentioned, we'd like to thank all of our providers and employees for a phenomenal 2023 and strong start to 2024 as well as all of our investors and folks that joined the conference call today and the great questions you received. We look forward to updating you in future quarterly earnings calls as we progress through 2024. Thank you so much.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.