Oncology Institute Q1 2024 Earnings Call Transcript

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May 14, 2024

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to the Oncology Institute's First Quarter 20 24 Earnings Conference Call. Today's call is being recorded and we have allocated 1 hour for prepared remarks and Q and A. At this time, I would like to turn the conference over to Mihir Shah, Chief Financial Officer at TOI. Thank you. You may begin.

Speaker 1

The press release announcing the Oncology Institute's results for the Q1 of 2024 are available at the Investors section of company's website, the oncologyinstitute.com. A replay of this 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 within company's press release for the Q1 2024. 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.

Speaker 1

For further discussions of risks related to our business, see our filings with 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 Wernick. Following our prepared remarks, we will open the call for your questions.

Speaker 1

With that, I will turn the call over to Dan.

Speaker 2

Thank you, Mihir. Good afternoon, everyone, and thank you for joining our Q1 call. In Q1 2024, our revenue grew 24% compared to Q1 2023, driven by an astounding 64% increase in oral drug revenue in the same period. The Q1 of 2024 saw TOI hit some significant milestones related to growth, with 7 new capitation and value based contracts signed across 3 states, our highest number ever in a quarter. Full year capitation revenue related to our 7 contracts signed in Q1 is estimated to be in the range of $16,000,000 and includes expansion of our risk business in both medical and radiation oncology.

Speaker 2

We are expecting and continued growth in our Oral Drug business. And as a result, we are not changing full year guidance at this time. As noted, Q1 also saw TOI hitting a record amount of prescription fills and revenues through our medically integrated dispensaries and pharmacy with over 4,500 sales representing over $39,000,000 in revenue in Q1. Oral Drug gross profit in the segment remains on track to expectations at $31,000,000 for the full year due to outperformance of top line. Our newly acquired pharmacy in California continues to exceed expectations and our latest projection shows incremental growth of over $45,000,000 from this location from full year 2023.

Speaker 2

Despite top line outperformance, the Q1 came with challenges, particularly related to drug margin compression on both Part B and D drugs with the transition in direct and indirect remuneration or DIR fees to point of sale, an intermittent disruption collections due to the Change Healthcare cyber attack, which was deemed to be not material. In addition to the industry wide drug margin compression related to DIR fee changes, we historically see compression in our IV margins in the Q1 driven by manufacturer price increases and shifts in reimbursement. This year was no exception, and several of our most utilized IV medications saw decreases to reimbursement while costs increased. Our top 10 drugs saw a decline of 130 basis points in margin. This margin compression culminated in operating losses above our expectation for Q1, although as with prior years, we expect this trend to improve as the year progresses have already started to see improvement in margin in April by 70 basis points.

Speaker 2

We are also proactively making changes to our procurement strategy as it relates to our distributors, which we project to positively impact the second half of the year. Now, I would like to highlight a few operational achievements since our last call. We added 7 new clinicians, primarily in Southern California, bringing our total employed physician and advanced practice provider count to 126. We opened 2 new clinics in South Florida, bringing our total clinic count to 73. 1 of our new capitated contracts will bring us to a new market, Oregon, with a legacy capitation partner.

Speaker 2

We expect to commence clinic operations there in Q4. All issues related to the Change Healthcare cyber attack have been mitigated. This incredible effort by our revenue cycle management team has led to record cash collections in the month of April. Finally, before I turn it over to our CFO, Mihir Shah, I have some important updates regarding our leadership team at TOI. On April 1, we welcomed Jordan McInerney to oversee growth as our new Chief Development Officer.

Speaker 2

He joins our other outstanding growth executives and joins us from the value based orthopedics platform, Hopco, where he had a strong track record of driving value based agreements. We believe his deep network and knowledge of value based care, particularly in the important Florida market, will further accelerate our growth in upcoming quarters. Now, I'll turn the call over to our CFO, Mihir Shah, to provide additional details on our Q1 financial results.

Speaker 1

Thank you, Dan, and good afternoon, everyone. Consolidated revenue for Q1 2024 was $94,700,000 an increase of 24.2% compared to Q1 2023 and a 10.3% increase compared to Q4 2023. Gross profit in Q1 2024 was $11,970,000 a decrease of 16.8% compared to Q4 2023. This decrease is attributed to the lower IV and oral reimbursement than previously mentioned. SG and A remains flat despite the strong growth in our top line.

Speaker 1

SG and A including depreciation and amortization was $29,900,000 in Q1 2024, a decrease of 50 basis points compared to Q1 2023. As a percentage of revenue, SG and A, including depreciation and amortization, was 31.6% in the quarter, down 300 basis points from Q4 2023 and 7.90 basis points from Q1 2023. Loss from operations for Q1 2024 was 18,000,000 a decrease of $14,900,000 compared to Q1 2023. Net loss for Q1 2024 was $19,900,000 an improvement of $10,100,000 compared to Q1 2023, primarily due to goodwill impairment charges of $16,900,000 in Q1 2023 that did not occur in Q1 2024, offset by gains in the fair value of earn out and derivative liabilities of $4,200,000 in the prior year quarter that did not occur in the same quarter of the current year. Adjusted EBITDA for Q1 2024 was negative 10,900,000 dollars As of end of Q1 2024, our cash and cash equivalent balance was 36 $100,000 and we had $29,700,000 in short term investment for a total of $65,800,000 of cash, cash equivalent and short term investments.

Speaker 1

The impact of Q1 operating losses, the change healthcare impact and AR lag in our new pharmacy resulted in reduction of cash and cash equivalent of 17,000,000 dollars related to Q4 2023. Thanks to our swift response to change healthcare situation and work around pharmacy impact on cash flow. I will now turn it back to Dan for closing comments.

Speaker 2

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 number 1, eliminate cash burn. While we had year over year improvement in burn relative to Q1 2023, the drug margin compressions in Q1 did result in higher use of cash than Q4. We are confident that this will improve over the remainder of 2024 as a result of both our already signed and near term growth in new contracts, procurement improvement efforts and ongoing efforts to ensure we tightly manage SG and A down as a percent of revenue following our restructure last year.

Speaker 2

Priority number 2, grow and drive margin in our legacy markets. Our newly signed medical and radiation oncology contracts in California and Nevada represent important new partnerships to expansion of our risk across both radiation and medical oncology. These new partnerships coupled with outperformance on orals through our California pharmacy will continue to help drive profitability in our legacy markets. We will adjust variable staffing related to areas served by our 1 terminating contract to mitigate margin compression. Priority number 3, proving new markets.

Speaker 2

Our first full quarter of capitation in Florida with ELEVANCE has gone well as we welcomed new patients to our clinics and we anticipate several other near term capitation arrangements in this market. As already mentioned, we are also starting services in Oregon in Q4 through another new capitation deal signed this quarter. This new deal represents tremendous opportunity to improve quality and utilization versus the legacy high rates seen in this market. Priority number 4, leading the value based oncology market. Our significant uptick in new capitation contracts signed and continued momentum in our new contract pipeline represents validity of our model with payers as risk bearing primary care groups and health plans seek partnership with TOI to help manage the unsustainable cost trends in oncology.

Speaker 2

We strongly believe we can continue to advance this lead for the patients and payers that we serve, and 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

Thank you. We will now be conducting a question and answer The first question comes from the line of Jack Slevin with Jefferies. Please go ahead.

Speaker 3

Hey, good afternoon guys. Nice work on the quarter. I want to start with the DIR impacts in both IV and on the dispensary side. Just wondering if you can give a little more color in terms of how heavily that was weighted in each of those areas. Did one side see a little bit more than the next?

Speaker 3

And then maybe sort of using that as a jumping off point for how you're thinking about progression of margins throughout the year? Obviously, Patient Services margins came down pretty significantly under some of those headwinds. And just trying to get a sense for how you're thinking that's going to progress. Is it sort of more gradual? Is there a snap back in Q2?

Speaker 3

Just want to understand what the latest thinking is. Thanks.

Speaker 2

Yes. Hi, Jack. Thanks for the great question. I think there's a couple of factors that impacted drug margins in Q1 on our fee for service business that we expect to see improved throughout the course of the year. The first factor which we deal with every year is seasonality, as we commented about on our earnings call.

Speaker 2

So, we've already started to see that improve in April and expect that trend to continue to improve over the course of the year, driven by both changes in the level of sophistication we're bringing to procurement and just that seasonality impact. The DIR fee issue, which is the other major factor that we faced in Q1, which compressed margins on our fee for service drugs. Again, I think there's industry wide momentum on driving change in that throughout the rest of the year, but the time course of that is really hard to predict at this point. So again, we're trying to control the factors we can and expect remaining 3 quarters of the year to drive improvement in those margins, but it's hard to say at what pace that DIR fee issue will resolve itself.

Speaker 3

Got it. That's really helpful. And next, Mihir, I want to ask on the change impact. Is it the right way to think about that sort of the just over $16,000,000 of AR drag that you saw in the Q1? Should we just see a reversal of that?

Speaker 3

Is that a decent way to size up sort of how to think about the snapback in 2Q now that you've resolved that issue?

Speaker 4

Yes. So we about $50,000,000 of that we believe will be timing. Couple of $1,000,000 will be related to the increased revenue that we have seen. So it's just adding slightly more to the working capital for the pharmacy revenue that we added in Q1.

Speaker 3

Okay, got it. Really helpful. And then next, appreciate all the commentary on the new cap contracts and it sounds really good. It sounds like there's one incremental one to when we last spoke on the 4Q call. Maybe just I heard the $16,000,000 of annualized revenue sounds like a great number.

Speaker 3

Just want to make sure I got all the commentary on the pacing of how those should launch those 7 contracts. And then maybe if you could touch a little bit more on how the pipeline is looking. Is it still strong? Should we expect to have sort of a steady flow of announcements? Or was it a little bit front loaded as far as the 1Q deals closing for 2024?

Speaker 2

Yes, another great question, Jack. So the contracts were all signed and executed, the 7 in Q1. The pacing of start on those contracts, the majority of them are Q3 timing for go live. And that's the way to think about that in terms of impact to revenue this year versus full year. I would say on the pipeline question, our pipeline at this point is I mean, as robust as we've ever seen it.

Speaker 2

So we've got a lot of good stuff in the near term pipeline, which we expect that you need to announce over the rest of year 2024.

Speaker 3

And I

Speaker 2

think there's a lot of different reasons for this. I think one is just increasing sophistication of our growth team with sort of implementing our model in new markets, expanding our range of clients that we can work with beyond just delegated medical groups to plans and even now employer groups. And then lastly, I think a lot of the top line pressure related to V28, has resulted in groups that are taking risk, finding other ways to try and drive their MLR through finding better ways to manage their specialty costs. So again, phenomenal Q1 in terms of number of contracts signed. I can't promise an exact number for Q2, but we are seeing a pretty tremendous pipeline ahead of us.

Speaker 3

Okay. Thanks. That's great color, Dan. And then last one for me here. I think all things considered, the cash burn looked really strong, the performance there considering change.

Speaker 3

Normalizing for change, does it feel like we're sort of in the right ballpark area on cash burn or sort of what's the outlook at this point as we progress through the rest of 'twenty four?

Speaker 4

Yes. So Q1 had cash burn from AR growth related to change and increase in our pharmacy revenue and also some compression in margin in Q1 that we saw, right? We will see both of them reverse AR reverse much faster in Q2 and continue in Q3. Our margin compression should also improve in Q2 and Q3. So I would say this would have this Q1 would be potentially be the extreme scenario of our cash burn.

Speaker 3

Got it. Really helpful. Appreciate all the color guys and congrats on all the progress.

Speaker 2

Perfect. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes our question and answer session. I would now like to turn the floor over to Daniel Bonnick for closing comments.

Speaker 2

Thank you so much, and thanks everyone who joined our earnings call today. The management team at TOI is incredibly excited about the number of new partnerships that we were able to effectively start in Q1 and look forward to serving patients associated with those new contracts as they go live throughout the remainder of 2024. We're also very excited about the near term prospects in our pipeline related to growth as well as all the activities that our team is taking to again combat some of the margin compression on the drug side of the business, which we saw in Q1. We'd like to thank everyone for joining our call today and look forward to updating you on continued progress in our business in subsequent quarters. Thank you so much.

Operator

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

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Earnings Conference Call
Oncology Institute Q1 2024
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