TOI - NASDAQ

Good afternoon. Welcome to The Oncology Institute First Quarter 2023 Earnings Conference Call. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Mark Hueppelsheuser General Counsel at TOI. Thank you. You may begin.

The press release announcing The Oncology Institute's results for the first quarter of 2023 are available at the Investors section of the company's website theoncologyinstitute.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. 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, 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, Brad Hively; 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 Brad.

Thanks Mark, and thank you to everyone joining us today. We started off the year strong continuing our positive momentum from the fourth quarter. It was a record-setting quarter for fee-for-service revenue, dispensary revenue, oral drugs, dispensed and organic growth as we made meaningful progress towards refining and optimizing our model and expansion markets, specifically organic growth in Florida. The growth in our dispensary business in particular was driven by operational effectiveness in optimizing our existing dispensaries and scale in Florida. As you'll hear from Mihir, when he goes through our financial results, we generated top line growth of 38%. Importantly, our organic growth rate was 25% and our same-store sales growth was 21%. We are very proud of this growth as it demonstrates extremely strong demand for our model from both patients and payers. Our value-based lives continue to grow. And as the cornerstone of our model, I'm happy to share that we signed two new value-based contracts since the beginning of the year: one in Southern California and another in our Texas market. The recent contract in Texas is particularly notable as it marks our first value-based contract with the primary care partner in that market. And it also marks our first total cost of care contract where we take accountability for both, quality outcomes as well as Part A B and D cost. Our business development pipeline remains strong and deep, and I look forward to updating you as the year progresses. On a related note, we are excited to report that we've received data from the first performance period for one of our value-based partners in Florida. The data showed greater than 50% referral capture and greater than 30% cost savings. This is a significant milestone for TOI and a strong proof point of our model's differentiated approach and meaningful cost savings. Concurrently, we experienced significant downward pressure on our IV drug margins in the first quarter as manufacturers hedged against the upcoming Inflation Reduction Act, and as reimbursement and costs realigned with certain generic drugs becoming established in the market. Our team has been swift to respond identifying opportunities to save, including membership into an oncology-specific GPO, which began in Q2. As a result, we expect to generate additional savings on several key infusion drugs in Q2 and beyond from this membership. I'm proud of our team's ability to adapt and innovate. And I want to thank them for their dedication and effectiveness. As I've mentioned previously, Medi-Cal's 2022 policy is preventing us from dispensing oral drugs to our Medi-Cal members. We have now entered into an LOI to acquire a retail pharmacy in California, which once acquired and credentialed will enable us to dispense oral drugs to those patients once again. As you are all aware, much of the innovation in oncology therapeutics has resulted in new oral therapies. It is important for TOI to have access to dispense both oral and IV medications. Therefore, our acquisition of a retail pharmacy will be an important milestone to achieve this objective. Additional highlights from the quarter include oral drug dispensed increased 34% compared to Q1 2022; total patient visits increased 17% compared to Q1 2022; and the TOI patient was the first worldwide to be treated with a promising alternative to chemotherapy for metastatic ovarian cancer through our partnership with Tempus Laboratories. This is yet another example of TOI bringing cutting-edge treatments into the local community. Now, I'll turn the call over to Mihir to provide additional details on our first quarter financial results.

Thanks, Brad. Starting with the top line. Consolidated revenue for Q1 2023 was $76 million, an increase of 38.1% compared to Q1 2022 and a 6.7% increase compared to Q4 2022. Gross profit for Q1 2023 was $14 million, an increase of 14% compared to Q1 2022. Net loss for Q1 2023 was $30 million, a decrease of $49 million compared to Q1 2022, preliminarily due to change in fair value of earn-out liabilities and increase in operating revenue, offset by goodwill impairment charge. Adjusted EBITDA was negative $7.9 million. Adjusted EBITDA calculation does not add back provider start-up costs nor the consulting and legal fees associated with the acquisition costs. Further details on how we define adjusted EBITDA can be found in our 10-K. Of note, starting 2022 Q4, we have modified our adjusted EBITDA calculation to now include cash compensation paid to our Board of Directors. As of quarter end, our cash and cash equivalent balance was $15 million and we had $99 million in investments for a total of $114 million of cash, cash equivalents and investments. We expect this capital to be sufficient to support operations and enhance our growth through 2024. Now, talking about guidance. Our full year 2023 guidance remains unchanged, and we continue to expect to end the year with 1.75 million to 2.0 million lives under capitation. Our revenue range is $290 million to $320 million. This represents 15% to 27% growth over 2022 revenue. Our gross profit guidance ranges from $60 million to $70 million. And our adjusted EBITDA guidance ranges from negative $25 million to negative $28 million. I will now turn it back over to Brad for some summary remarks.

Thanks, Mihir. While our first quarter results were pressured by lower-than-expected IV drug margins, I am proud of how our team responded to this challenge. Overall, we expect seasonally lower adjusted EBITDA in Q1, with current year initiatives beginning to ramp, payroll taxes resetting, and new drug manufacturer price increases. We do expect adjusted EBITDA margins to trend favorably as the year progresses. As the US market leader in value-based oncology care, we continue to expand our patient base, grow the number of value-based partnerships and deliver high-quality outcomes to cancer patients. As I mentioned in last quarter's call, our top three priorities in 2023 are, first, refining and optimizing our model and expansion markets, including optimizing referral capture and transitioning gainshare contracts to population risk agreements; second, growing our legacy markets by expanding our service offerings in existing clinics and expanding to new counties; and third, reducing cash burn by improving efficiency with new technology solutions, optimizing drug margins and taking a more sustainable approach to new market entry. I look forward to updating you on our progress across these three items on future calls. With that, we're now ready to take your questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Brian Tanquilut with Jefferies. Please proceed with your question.

Hey good afternoon guys.

Hey Brian.

So I guess Brad, maybe for my first question, as I think about the total cost of care contracts, maybe if you can share with us, what you're seeing in the market in terms of appetite or interest level from other folks in similar types of arrangements.

Yes, sure. So this is -- and I'm glad you asked about it. It's an exciting milestone for the company, because it enables us to manage a larger portion of the total spend related to oncology patients. So, it expands our TAM or share wallet with our customers. And we think we can do a great job improving outcomes and cost beyond just the drug cost and physician costs associated with oncology, but also hospitalization costs related to oncology patients. We have seen an increase in interest from our primary care partners in putting us at risk for total cost of care not just the oncology drugs and oncology physician nursing services. I think that in part is because it's just a nice alignment because we manage holistically our patients and so our partners want to put us at risk for all costs. It's also I think representative of some other specialties who -- for example, nephrology where the total cost of care arrangements are more common. The primary care groups are doing total cost of care arrangements with other specialties and they're saying, hey these are working for other specialties let's try it out in oncology. So we have seen a lot of interest in that this year.

Got it. Okay. And then Brad on the oncology GPO discussion is there any way you can quantify the cost savings that you're expecting and maybe the time frame to realize them? And maybe what is in the guidance for that initiative?

Yes, sure. We have not -- we're not ready to release publicly what we -- the expected cost savings are. It was not enough to cause us to change our guidance for the year. But given that we just started participation this last month we haven't wanted to -- we want to see a few months play out before we put a stake in the ground on quantifying it. But suffice it to say we don't think it's enough to cause us to change our full year guidance.

Got you. Okay. No that's awesome. And then maybe last question for me. As I look at the one oncology deal and obviously getting closer with ABC here. Any thoughts on what that could potentially do to the industry or to your business more specifically?

Yes, sure. I mean first off I think it demonstrates substantial demand for oncologists and oncology practices and represents an interest by -- and behind the scenes we're aware of a number of participants who are -- we believe were looking at that deal. Represents a -- sort of a broad interest in owning and managing oncology practices because of how much of the spend we control. So broadly speaking I think it demonstrates strong demand for companies like ours. I think in some ways it does demonstrate that there is still a lot of money to be made in fee-for-service oncology. And that's I think demonstrated by drug distributors' interest in controlling the oncologists. We try to focus on value-based oncology. And we're trying to demonstrate that value-based oncology can also be profitable. And we're trying to convince our customers to reward us for the savings we create when we both improve outcomes and lower costs.

Got you. Okay. Awesome. Thank you, guys.

You’re welcome.

Thank you. [Operator Instructions] Our next question is from Sandy Draper with Guggenheim Partners. Please proceed with your question.

Hi. This is Mitchell on for Sandy.

Hey, Mitchell.

Hey, how is it going?

Good.

One question on guidance. So we've seen over the past several years that you've grown revenue sequentially throughout the year. And here if we look at the 1Q print and we annualize it we get to right around the midpoint of the full year guide. So just trying to understand what's embedded in that guide and any color there would be helpful.?

Yes sure. I'll start and Mihir jump in anywhere you'd like. We were very pleased with top-line growth this quarter. 25% organic growth is really spectacular. And so we started the year very strong from a revenue perspective. Mihir anything you want to add to that?

No, I think you covered it right. And also reminding the group that our guidance does not include any acquisitions for the year. So run rate from Q1 to Q4 we believe we should be able to we are comfortable with our guidance where we are.

Awesome. Thank you. That’s helpful. And then just one more just, kind of, on the broader environment. Has anything changed in the acqua-hire environment in terms of multiples? And just kind of broadly are people more or less willing to sell their practices? And just any color on the pipeline there would be helpful.

Yes sure. I I'm always cautious to draw macro insights from a small number of acqua-hire and acquisitions that we are pursuing at any one time. So while I'm cautious I would be happy to do it. We have seen -- just as the overall market has contracted a little bit I think there is some lag to sellers' expectations realigning with current market multiples. But on balance they have come down a little bit. So I think sellers are more realistic and starting to understand that some of the valuation multiples that existed in 2021 don't exist today. And so slowly with a little bit of lag we have seen those expectations come down.

Got it. Thanks. That’s all I had appreciate it.

Great. You’re welcome.

Thank you. [Operator Instructions] There are no further questions at this time. I would like to turn the floor back over to Brad Hively for closing comments.

Great. Well thank you all for joining our call today and we look forward to following up with you in the coming weeks. We're very excited about TOI's path ahead and we look forward to updating you on our progress on our next earnings call. Thank you and have a good day.