Oncology Institute Q2 2024 Earnings Call Transcript

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August 13, 2024

There are 6 speakers on the call.

Operator

Good afternoon, and welcome to the Oncology Institute Second Quarter 2024 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 Mark Heppelhaizer, General Counsel at TOI. Thank you, and you may begin.

Speaker 1

The press release announcing the Oncology Institute's results for the Q2 of 2024 are available at the Investors section of the 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 the company's press release for the Q2 of 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 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 Vernick and our CFO, Mihir Shah. Following our prepared remarks, we'll open the call for your questions.

Speaker 1

With that, I'll turn the call over to Dan.

Speaker 2

Thank you, Mark. Good afternoon, everyone, and thank you for joining our Q2 call. I want to start as always by thanking TOI's 126 providers and many teammates across our 73 clinics and corporate locations for another quarter of outstanding growth. The year is proving to be the most exciting in terms of growth in our history. Our services remain in high demand as payers struggle to maintain their margins in light of Medicare's B-twenty eight and increasing utilization trends.

Speaker 2

As mentioned in last quarter's call, we signed a record number of new covering 2 states and including both medical and radiation oncology services. 1 of the new capitated contracts is in our Nevada market and marks our 2nd direct to health plan capitation deal, a significant milestone for us that sets the stage for additional expansion in this important state in 2025. The broader pipeline, particularly in Florida is pacing towards a very strong second half of twenty twenty four setting the stage for Florida market profitability 2025 and broader overall TOI profitability in mid-twenty 25. Our revenue grew 23% in the 2nd quarter compared to the prior year period driven by an exceptional 76% increase in oral drug revenue. Our latest full year projection for our California pharmacy has increased to over $70,000,000 of incremental revenue as we continue to break monthly fill records.

Speaker 2

In terms of profitability, the Q2 of 2024 saw continued reimbursement pressures on IV and oral drug margin, resulting in lower than expected gross margin. Q2 oral margins have compressed by 7.50 basis points compared to Q2 2023 driven primarily by 2023 DIR fee run out and historically low reimbursement. The DIR fee run out was anticipated but was realized at record levels as a percentage of revenue. The specialty pharmacy industry attributes the historically low reimbursement net of DIR fees to the PBM's inappropriate response to the intended transparency of the Inflation Reduction Act. In light of the pressure seen year to date, we are updating our full year guidance for gross profit to $62,000,000 to $69,000,000 and adjusted EBITDA to negative $21,000,000 to negative $28,000,000 Revenue guidance remains the same.

Speaker 2

While we are disappointed by the recent pressured performance, we feel the worst is behind us. Looking forward to the remainder of the year, 2023 DAR run out is complete, IV margins in Q3 have improved and with most of the capitated contracts signed in the first half of the year going live in Q3, we expect significant improvement in our net loss and in our adjusted EBITDA in the second half of the year. The annualized revenue of the new capitation deals signed year to date is over $41,000,000 and adjusted EBITDA contribution is expected to be $13,000,000 In terms of cost management, I'm very proud of our operational efficiencies which are driving corporate SG and A for the full year of 2024 compared to 2023 in terms of absolute dollars and have reduced total SG and A as a percent of revenue by 15.1% for the same period despite growing the top line significantly. Our existing footprint and infrastructure in the markets we operate in today has the capacity to absorb significant growth without adding additional providers and overhead cost. Lastly, and very importantly, we believe our recent acceleration in growth in both our value based care delivery and pharmacy businesses brings TOI to an important intersection in our corporate journey.

Speaker 2

We remain bullish on and adamantly confident in the direction of the management, we have decided to undertake a review of strategic, financial and operational alternatives. The purpose of this review is to be transparent, fair and thorough in our consideration of all alternatives with the goal of enhancing shareholder value. As stated in our press release, we have engaged Leerink Partners to assist the Board with the ongoing review. The Board plans to proceed in a timely manner, but has not set a timetable for completion of its review. Company does not intend to provide further updates on its review until it deems further disclosures to become appropriate or necessary.

Speaker 2

Now, I'll turn the call over to our CFO, Mihir Shah to provide additional details on our Q2 financial results. Mihir?

Speaker 3

Thank you, Dan, and good afternoon, everyone. 2nd quarter 2024 results. Consolidated revenue for Q2 2024 was $98,600,000 an increase of 22.9% compared to Q2 2023 and a 4.1% increase compared to Q1 2024. This increase is driven primarily by our California based pharmacy, which went to life in late 2023. Gross profit in Q2 2024 was CAD13 1,000,000 an increase of 8.8% compared to Q1 2024.

Speaker 3

This increase is attributed to improved IV margin, which we expect to continue improving as the year progresses. In line with normal seasonality and additional deliveries are achieved through the volume based gearing in our contractual pricing. SG and A remains flat despite the strong growth in our top line. SG and A including depreciation and amortization was 29,400,000 in Q2 2024, an improvement of 220 basis points compared to Q2 2023. As a percentage of revenue, SG and A including depreciation and amortization was 29.8% in the quarter, improving 480 basis points from Q4 2023 and 7.60 basis points from Q2 2023.

Speaker 3

I'm particularly proud of the efficiencies implemented and disciplines exemplified by our colleagues in growing top line over 20% while keeping SG and A flat. This is not an easy task. Loss from operations for Q2 2024 was $16,400,000 an increase of $1,400,000 compared to Q2 2023. This is driven primarily by the impact of 2023 DIR run out and lower than expected IVM margin as Dan previously discussed. Net loss for Q2 2024 was 15,500,000 dollars an improvement of $1,400,000 compared to Q2 2023.

Speaker 3

This was from the change in the fair value of derivative liabilities of $3,000,000 in Q2 2024 as compared to Q2 2023, offset by a decrease in gross profit of $2,100,000 an increase in net interest expense of $480,000 in Q2 2024 as compared to the same quarter the prior year. Adjusted EBITDA for Q2 2024 was negative $8,700,000 As of Q2 2024, our cash and cash equivalent balance was $36,400,000 and we had $9,900,000 in short term investments for a total of $46,400,000 of cash, cash equivalents and short term investments. The impact of Q2 operating losses, deferred acquisition payments and an AR growth in our new pharmacy resulted in reduction in cash, cash equivalents and short term investments of $19,500,000 related to Q1 2024. We had a tremendous month of collections in July and have implemented a comprehensive drug purchase and inventory management process to further reduce working capital burn going forward. I will now turn it back to Dan for closing comments.

Speaker 2

Thanks, Mihir. To summarize, Q2 represented a strong quarter of growth for TOI as measured by further capitation wins across markets and further momentum in growth of our Part D business. While we are frustrated about drug margin compression related to DIR fee changes and 2023 fee hangover, a headwind affecting many oncology businesses in the space, we believe we are now through the period of fee assessments from 2023 and have positive momentum on growth and ongoing drug margin expansion efforts in the back half of twenty twenty we are confident we can achieve our path to profitability with our current level of cash generation. It is against that backdrop that we believe a thorough review of strategic alternatives will ensure we are pursuing opportunities that deliver the maximum value to our shareholders. 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 Selman with Jefferies. Please go ahead.

Speaker 4

Hey, guys. Thanks for taking the question. I wanted to start with maybe sort of bridging forward, obviously some margin pressures in the quarter and some improvement that's implied in the updated guidance. I wanted to get a sense for if you could give a little more color on exactly sort of what the building blocks are getting from where we are in the Q2 on margins in particular and then moving forward. So I guess the 3 areas I'd really be curious to hear about are sort of how big was that DIR impact and how should we be thinking about that improvement?

Speaker 4

And then IV margins and the layering on of the new cap contracts being the other pieces, but if you have a different way of thinking about bridge, open to hearing that too. Thanks.

Speaker 2

Yes. Thanks so much, Jack. Appreciate that question. Obviously, a lot to unpack there. So in quarter, the impact of the DIR fee to margin was about $2,300,000 which is obviously sizable for a business our size.

Speaker 2

And hopefully this came through in the call, but the issues we were dealing with in Q1 and Q2 were the change in assessment of the IRR fees to point of sale plus the overhang from fees assessed in arrears for 2023. That obviously won't be an issue in Q3 and Q4, plus we have the go live of all the capitation contracts we signed in the first half of this year in Q3 and Q4, all culminating in both improvement in drug margin as well as improvement in our capitated revenue in our existing sort of clinic footprint. So that's where we're seeing that fairly significant pickup in Q3 and Q4 as we look at the rest of the year.

Speaker 4

Okay. Got it. That's really helpful. And then so maybe just on the dispensary piece then, if you back out some of the DIR fees, it looks like margins perhaps getting a little better. Is that fair to say on sort of the core margin ex DIR fees in Q1 and Q2 that sort of that progression we had thought about is improving or is it still holding about the same?

Speaker 2

That's exactly right. Yes. So there's other factors as well because of DIR fees. So there's additional improvement in margin related to expansion in the actual business, Part D business itself, relating to improvement in our rebate carrying. There's seasonality effects, which hit in Q1, which then wash out in the back half of the year, all of which drive additional margin improvement in Q3 and Q4.

Speaker 4

Got it. Really helpful, Dan. Last one for me. Mihir, appreciate some of the comments you had on cash flows. I guess entering the quarter, the thought was some of that receivable impact we were seeing related to change in other disruptions might reverse.

Speaker 4

It didn't really reverse in the quarter. I just want to make sure I got your commentary right. How should we be thinking about moving cash burn forward in light of some of the working capital efforts that you highlighted?

Speaker 5

So the impact of Change Healthcare was almost all reversed in Q2. The increase in AR in Q2 is solely related to our pharmacy business, which about 90% of which is from Medi Cal, state of California Medical Rx, where the state were holding funds for about 3 weeks due to its fiscal year end, which has been those funds have been collected in the first half of July. So it was timing due to states holding funds due to its fiscal year end.

Speaker 4

Okay, got it. That's really helpful. I appreciate all the questions guys.

Speaker 3

Thanks so much, Chad.

Speaker 5

Thank you.

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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