Oncology Institute Q4 2024 Earnings Call Transcript

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March 25, 2025

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to the Oncology Institute's Fourth Quarter and Full Year twenty twenty four Earnings Conference Call. Today's call is being recorded and we have allocated one hour for prepared remarks and questions and answers. At this time, I'd like to turn the conference over to Mark Heppelheiser, General Counselor at TOI. Thank you. You may begin.

Speaker 1

The press release announcing the Oncology Institute's results for the fourth quarter and full year 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 fourth quarter and full year 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 and free cash flow. 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 Bernick and our CFO, Rob Carter. 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 fourth quarter and full year twenty twenty four call. Today, we will discuss 2024 results and will focus our attention on the positive developments that began in 2024 and have continued through the beginning of this year, all of which give us confidence that we can cross the line to profitability and positive cash flow by the end of twenty twenty five. Although our overall financial performance in 2024 did not meet our expectations, I'd like to highlight several notable developments that were key building blocks for 2025 and beyond. First, our revenue increased 21% over the previous year.

Speaker 2

Inside of this headline number were several significant factors. Our historically highest growth business, value based patient services, is finishing the year on stronger footing following the launch of six new contracts totaling over 270,000 lives across the third and fourth quarters. We also achieved an important strategic milestone by proving our model outside of California with two new contracts signed in Florida during Q4, totaling over 200,000 lives and over 80,000 additional lives already signed in the first quarter of twenty twenty five through four separate agreements across markets. Importantly, one of the 2025 wins includes 42,000 additional lives in Florida in our first fully delegated model with a health plan partner. Pharmacy and medically integrated dispensaries also grew rapidly in 2024 with $48,000,000 for Q4 and $180,000,000 for the full year, representing annualized growth of 73%.

Speaker 2

While increased revenue is an important part of the story, we are acutely aware that the growth in the top line must lead to profitability and positive cash flow in the near term. During 2024, we took several steps to accelerate our path to positive cash flow and profitability. On profitability, we saw sequential improvement in adjusted EBITDA in the second half of the year through our acceleration in capitated contract growth and quarterly drug margin improvement. During the fourth quarter, we entered into a new multiyear agreement with our primary drug distributor, which drove substantial margin improvement starting in December, including volume based discounts, which optimize our cost positioning. Part of this revised agreement also improves our payment terms and credit parameters, which was a key contributor to the working capital management that supported our positive cash position in Q4.

Speaker 2

We have more work to do and are continuing to diligently pursue cost optimization opportunities across our supply chain, including the creation of secondary pharmaceutical and medical product suppliers that will allow QI to continue to grow while benefiting from a cost structure proportionate to our scale. Lastly, we maintain tight controls of our internal cost structure, reducing SG and A 12% in Q4 twenty twenty four and versus Q4 twenty twenty three. Our ability to grow top line while reducing SG and A expenses is a testament to our focus on operational excellence and strategic execution. This decrease is a direct result of our ongoing efforts to streamline operations, improve efficiency and optimize our overhead resourcing. Through selective outsourcing, planned attrition and modest downsizing, we have been able to lower operating costs without compromising the quality of care and service we deliver.

Speaker 2

Also importantly, we have reduced overall overhead costs while continuing to selectively recruit and promote top talent within our organization. By recognizing, retaining and attracting best in class performers within the healthcare ecosystem, we believe that we've been able to continually do more with less through a high performance culture. We saw a sequential quarterly reduction in cash burn in the second half of the year as a result of our disciplined approach to working capital management. Improvements across receivables, inventory and payables generated over $4,000,000 of cash in the fourth quarter, our second consecutive quarter of positive cash from operations. We also have taken significant steps to improve our balance sheet, which has led to two notable recent developments in early twenty twenty five.

Speaker 2

In February 2025, we successfully amended and restructured our facility agreement, including a $20,000,000 principal pay down of our outstanding debt. Through this amendment, we removed certain financial covenants, most notably permanent elimination of the $40,000,000 minimum cash covenant. Strengthening our balance sheet remains a priority as we continue to enhance financial flexibility and position the company for sustainable growth. Finally, we are happy to announce that following the principal pay down on our facility agreement, we have entered into agreements for a $16,500,000 private placement of common equity. In addition, Deerfield converted $4,100,000 of its outstanding debt to common equity on the same terms as the cash equity raise.

Speaker 2

The capital raise included a combination of management, board members as well as existing and new outside investors. This transaction, in addition to our ongoing cash management efforts, strengthened our financial position and provide TOI with greater flexibility to execute on its strategic priorities. In the aggregate, the outstanding principal balance of the debt has been reduced from $110,000,000 at year end to $86,000,000 The additional cash reserve will support our rapid organic growth, including implementing technology that the company believes will drive improved efficiency and margin expansion. Now I'll turn the call over to our CFO, Rob Carter, to provide additional details on our fourth quarter and full year 2024 financial results along with 2025 guidance and additional operational and strategic updates.

Speaker 3

Thanks, Dan, and good afternoon, everyone. Coming off my first quarter as CFO of TOI, I'm more excited than ever to be part of this incredible team and working with all of them as we continue to execute our strategy and drive long term value. Let's begin by reviewing our financial performance for the fourth quarter and full year 2024. Consolidated revenue for Q4 twenty twenty four was $100,300,000 an increase of 17% compared to Q4 twenty twenty three. The increase is driven primarily by our dispensary revenue due to our California based pharmacy, which continues to exceed Phil expectations.

Speaker 3

As Dan mentioned, we expect to see more normalized levels of growth in the dispensary business going forward now that a full year of operations has lapsed. Gross profit in Q4 twenty twenty four was $14,600,000 an increase of 2% compared to Q4 twenty twenty three. This increase is attributed to the contribution of our dispensary segment. We were able to decrease our SG and A in Q4 twenty twenty four by 12% as compared to Q4 twenty twenty three despite the strong growth in our top line, which is a testament to our commitment towards driving operational efficiency and our goal towards profitability. As a percentage of revenue, SG and A including depreciation and amortization was 26% in the quarter, a decrease of 8% as compared to Q4 twenty twenty three.

Speaker 3

Loss from operations for Q4 twenty twenty four was $11,900,000 an improvement of $3,400,000 compared to Q4 twenty twenty three. Net loss for Q4 twenty twenty four was $13,000,000 an improvement of 5,600,000 compared to Q4 twenty twenty three. Adjusted EBITDA for Q4 of twenty twenty four was negative $7,800,000 compared to negative $6,300,000 in Q4 of twenty twenty three. Contributing to the Q4 loss was a $3,000,000 1 time reduction in fee for service revenue unrelated to Q4 dates of service. As Dan noted, net cash from operations for Q4 twenty twenty four was a positive $4,200,000 and our cash and cash equivalents increased $2,300,000 compared to Q3 twenty twenty four due to working capital management and non cash expenses in excess of operating losses.

Speaker 3

Moving to our full year results. Consolidated revenue for 2024 was $393,000,000 an increase of 21.3% compared to 2023, driven by the contribution of our California based pharmacy. Gross profit for 2024 was $54,000,000 a decrease of 9.4% compared to 2023. The loss in gross profit is largely attributable to lower infusion drug margin in Part B due to drug price inflation outpacing reimbursement as well as higher clinical payroll as TOI built its care infrastructure around anticipated growth in new contracts that we are now seeing materialize as we exit the year. SG and A including depreciation and amortization is $114,000,000 in 2024, a decrease of 5,600,000 compared to 2023.

Speaker 3

As a percentage of revenue, SG and A was 29% in 2024, down 800 basis points from 2023. Loss from operations for 2024 was $60,000,000 an improvement of 16,900,000 compared to 2023. Net loss for 2024 was $64,600,000 a decrease of $18,400,000 compared to 2023. And adjusted EBITDA for 2024 was negative $35,700,000 Further details on how we define non GAAP financial measures can be found in our Form 10 K and press release. Moving to the balance sheet.

Speaker 3

As of the end of Q4 twenty twenty four, our cash and cash equivalents balance was $49,700,000 This represents an increase of $2,300,000 of cash and cash equivalents compared to Q3 twenty twenty four, which is a result of efforts to maximize efficiencies in working capital, particularly in inventory management. Additionally, as mentioned in our last earnings call, we received a cash inflow of 4,100,000 as a result of a favorable legal settlement in Q4, which strengthened our balance sheet and added to our liquidity position. Our private placement will further bolster this cash position in this quarter. Before I turn the call over to Dan for closing comments, I would like to walk through our 2025 guidance. The cornerstone of our 2025 guidance is the execution of several recent capitation contracts, which are expected to deliver significant improvement in our profitability in 2025 and beyond.

Speaker 3

As mentioned, the annualized revenue of the new Capitation deals starting between Q3 twenty twenty four and the second quarter twenty twenty five is approximately $50,000,000 with only two thirds of that to be recognized in 2025 due to staggered start dates of the contracts. We are well positioned to handle substantial growth in the markets we serve without needing to add more providers or increase overhead costs. For the full year 2025, we expect revenue of $460,000,000 to $480,000,000 representing 17% to 22% growth over full year 2024. This growth is driven by several factors, including our dispensary business, particularly our pharmacy, as well as the continued expansion of value based contracts and organic growth, especially in Florida. We expect gross profit in the range of $73,000,000 to $82,000,000 an increase from $54,000,000 in 2024, representing a two fourteen basis points to three thirty six basis point increase in margin over 2024.

Speaker 3

We expect adjusted EBITDA in the range of negative $8,000,000 to negative $17,000,000 of which we expect $5,000,000 to $6,000,000 of the loss to occur in the first quarter with an expected progression to profitability in the second half of the year. Q1 of twenty twenty five will be our worst quarter due to seasonal factors such as New Year drug price increases and lower encounter volumes. However, we anticipate a steady improvement in drug margins as reimbursement aligns with price adjustments and as encounter volumes grow organically. A key value based contract in Florida launched in March with several more contracts set to launch in Q2. The margin contribution from these contracts will increase throughout the year, driven by QI and our payer partners directing more patients to our provider network, which helps reduce leakage costs, which reduce the capitation payment received by TOI as we are typically responsible for external oncology spend.

Speaker 3

As a result, we expect a gradual reduction in losses over the course of the year, ultimately achieving positive EBITDA in Q4. In an effort to provide more clarity on cash use and runway, we are providing free cash flow guidance for 2025. In the first half of the year, we expect cash burn from operating losses with progressive improvement as the year progresses. Working capital is expected to generate cash through reductions in fee for service DSOs and improved inventory management. In addition to the burn associated with operating losses, we expect modest capital expenditures of $2,000,000 and one time expenses and add backs of $5,000,000 As such, we are guiding to free cash flow in the range of negative $12,000,000 to negative $21,000,000 dollars for full year 2025 with anticipated cash flow breakeven in the fourth quarter of twenty twenty five.

Speaker 3

With that, I'll turn it back to Dan for closing comments.

Speaker 2

Thanks, Rob. As mentioned earlier, subsequent to year end 2024, we strengthened our balance sheet through two key initiatives, a debt pay down and a successful capital raise. We remain committed to reducing leverage and improving our financial flexibility. This new capital strengthens our balance sheet and positions us to execute on our strategic priorities. We are pleased with the strong interest from investors and broad support from the Board, which requests confidence in our business model and long term growth prospects.

Speaker 2

As we enter 2025, we will continue to build on our momentum through strong operational management, increased efficiencies and strategic market expansion and expect a near term path to sustain cash flow positivity and profitability in the second half of twenty twenty five. With that, we're now ready to take your questions. Operator?

Operator

Great. Thank you. We'll now be conducting a question and answer session. Our first question is from Yuan Zhi from B. Riley.

Operator

Please go ahead.

Speaker 4

Thank you for taking our questions. I have a couple of them, if I may. Rob, for 2025 guidance, what are the significant moving factor there? Do you need to sign new contracts to get the revenue and the gross profit goal there?

Speaker 3

Hi. Yes, thanks for the question. Yes, several things contributing to the growth on 2025 guidance. Among them, as you mentioned, growth in cap contracts, yes, is integral to us hitting our targets. We also have organic growth planned for both fee for service and dispensary.

Speaker 3

We'll need to hit on all of those in order to hit that target. But the combination of those are how we're viewing growth in 2025. Beyond that, as mentioned a little bit in the section that I just went through is a reduction in our clinical payroll as a percentage of revenue. As mentioned, we incurred expenses in 2024 in terms of putting in clinics and doctors in our growth markets, particularly in Florida. And we're now in the position where these incremental lives from these value based contracts will fill the clinics, thus reducing the overall cost of clinical payroll as a percentage of revenue and the cost per visit.

Speaker 4

Yes, got it. Yes, we will get into that in a moment. So maybe a quick follow-up there. How do we think about the contribution from the patient service segment and or dispensary? Will patient service be a meaningful growth driver there in 2025?

Speaker 3

Yes. The CAP segment being a part of patient services will be the primary and most significant driver of our improvement of overall profitability. We expect organic growth in fee for service to continue at sort of market rates and levels, but the main contribution from the Patient Services segment will be within the cap.

Speaker 4

Yes, got it. And either Rob or Daniel, can you provide more operating or operation metrics comparing the new territories such as Florida versus established market in California and what's the goal there in 2025?

Speaker 2

Yes, absolutely. I'm happy to take that one. We continue to grow in California,

Speaker 3

which is our oldest market.

Speaker 2

However, there are several things about Florida and other new expansion markets, which are very attractive to TOI and makes our value proposition even stronger with care partners and patients. One, we see benchmark oncology utilization much higher than California in new markets. So the opportunity to provide value against that much higher benchmark is significant. The other key difference is that almost all markets outside of California are pure Medicare Advantage risk markets, which creates a much higher opportunity given the higher prevalence rate and spend associated with senior population versus commercial and managed Medicaid, which predominates in addition to Medicare Advantage in California.

Speaker 4

Got it. Just maybe some specifics there. Where are we in terms of the capacity of the new clinics in Florida versus, let's say, in California, you are already in 90% or 100% capacity?

Speaker 2

Yes. So our California clinics are below 90%. They're about 75%. So there's opting for additional capacity in California. In Florida, we've got much greater capacity.

Speaker 2

We're currently operating about 40% depending on the clinic across our clinics in five counties in that market. So we've got the opportunity just in those five counties to add significant contribution to our P and L. There's also other high priority markets in Florida that we don't currently have clinics or we've got near term expansion opportunities through the calculation.

Speaker 4

Yes, got it. Especially on that, on the 40% right now, is there a goal to achieve in 2025? Are we targeting similarly to California at 75% or slightly lower but to get there in 2026?

Speaker 2

Yes. Our goal is to grow, I mean, as fast and efficiently as we can. We definitely have the clinical capacity to achieve California productivity in 2025. There are substantial contracts in the pipeline in Florida and New Markets that could bring us to those levels depending on the speed of execution beyond those which have already signed.

Speaker 4

Yes, got it. Maybe one last question from me. Any thoughts on the recent reimbursement landscape? Anything you are watching for with this new administration, including new CMS administrators in the office now?

Speaker 2

Yes, absolutely. I think all of the general macro trends that we see in the oncology industry are favorable for the oncology institute. So the big changes which have been discussed, although it's debatable as to how fast it would take place would be changes related to the IRA. Any reduction in the more expensive oncology drugs would ultimately benefit the Oncology Institute since we're capable of managing and evaluate construct and we've been doing that for eighteen years. That would be harder obviously on a fewer fee for service oncology business, but we believe that would be favorable for us.

Speaker 2

And then if anything ever happens with 340B pricing, which the Oncology Institute does not benefit from, that would push volume from hospital based infusion centers oncology practice out into the community, again, which we believe would ultimately benefit us in terms of the growth organic growth in our clinic visits as well as increased opportunity, again, working with payers.

Speaker 4

Got it. Yes. Thanks for the helpful color. I will hop back in the queue. The

Operator

Next question is from Robert Laboyre from Noble Capital Markets. Please go ahead.

Speaker 1

Good afternoon and congratulations on the quarter. I was looking at the revenue guidance and wondering if you could give any of the individual line items, the patient services dispensary and clinical trial breakout as to what the revenue expectations and growth for each of those areas is?

Speaker 3

Hi, Robert. Yes, at this point, we're not guiding to specific segments. The thought here though is, as I mentioned before, that in terms of overall contribution to profitability, cap is going to be the greatest contributor, followed by dispensary and then fee for service. We expect organic growth from both dispensary and fee for service with this robust pipeline that we have driving the cap.

Speaker 1

Okay, great. Thank you.

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Oncology Institute Q4 2024
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