Earnings call: The Oncology Institute sees revenue climb, plans growth

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Earnings call: The Oncology Institute sees revenue climb, plans growth
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The Oncology Institute (TOI) has reported a significant 24% increase in revenue for the first quarter of 2024, compared to the same period last year. This growth was largely fueled by a 64% surge in oral drug revenue. Despite facing challenges including margin compression and a cyberattack, TOI signed seven new capitation and value-based contracts across three states, which are estimated to contribute $16 million in full-year capitation revenue. The company also achieved a milestone with record prescription sales and revenue from its medically integrated dispensaries and pharmacy operations.

Key Takeaways

  • TOI's revenue up by 24% in Q1 2024, with oral drug revenue jumping 64%.
  • Seven new value-based contracts signed, estimated to add $16 million in revenue.
  • Record prescription sales and revenue from medically integrated dispensaries and pharmacies.
  • Drug margin compression and the Change Healthcare (NASDAQ: CHNG ) cyberattack posed challenges.
  • The company aims to eliminate cash burn and expand into new markets.

Company Outlook

  • TOI expects improvements in procurement and seasonality to enhance performance throughout the year.
  • Management anticipates margin improvements in the upcoming quarters, despite the ongoing DIR fee issue.
  • A robust pipeline of new contracts is likely to contribute to future announcements and growth.

Bearish Highlights

  • The company faced margin compression on drugs and a $16 million accounts receivable drag in Q1.
  • Uncertainty remains around the resolution of the DIR fee issue that affects margins.

Bullish Highlights

  • TOI is optimistic about the industry-wide momentum for change regarding the DIR fee issue.
  • New partnerships and contracts are expected to bolster patient services and company growth.

Misses

  • Q1 experienced setbacks with a cyberattack impacting operations and drug margin compression.

Q&A Highlights

  • Dan Virnich from TOI highlighted the company's growth strategy and robust contract pipeline.
  • The company plans to address cash burn and margin compression issues in Q2 and Q3.
  • TOI's growth team is credited for expanding the client base and managing cost pressures effectively.

TOI's strategic priorities are set on eliminating cash burn, driving margin in legacy markets, expanding into new markets, and leading the value-based oncology market. The management team expressed excitement about the new partnerships and the opportunity to serve more patients with the upcoming contracts. They are also committed to combatting the margin compression on the drug side of the business and plan to update investors on the company's progress in subsequent quarters. Despite the challenges faced in Q1, TOI's outlook remains positive, with expectations of improvement in cash burn and margin in the next two quarters, and with Q1 possibly representing the worst-case scenario in terms of financial performance.

InvestingPro Insights

The Oncology Institute (TOI) has shown resilience with a 24% revenue growth in the first quarter of 2024, which seems to align with the company's aggressive expansion and contract signing strategy. However, the InvestingPro data and tips reveal some underlying challenges and potential opportunities for investors to consider:

  • TOI's Market Cap stands at a modest 47.49M USD, reflecting the size and current market valuation of the company.
  • The company's Revenue Growth for the last twelve months as of Q1 2024 was a robust 25.3%, indicating a strong upward trajectory in sales.
  • Despite the growth, TOI's P/E Ratio (Adjusted) for the same period is -0.82, suggesting that the company is not currently profitable.

InvestingPro Tips highlight critical aspects of TOI's financial health and stock performance:

1. TOI is trading at a low revenue valuation multiple, which might attract investors looking for potentially undervalued opportunities.

2. Despite the recent growth, analysts do not anticipate the company will be profitable this year, which could be a concern for those looking for short-term gains.

For investors interested in a deeper analysis, there are 13 additional InvestingPro Tips available on TOI's profile at https://www.investing.com/pro/TOI. These can provide further insights into the company's financials and market performance. Remember to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.

Full transcript - DFP Healthcare Acquisitions (TOI) Q1 2024:

Operator: Good afternoon and welcome to The Oncology Institute's First Quarter 2024 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 would like to turn the conference over to Mihir Shah, Chief Financial Officer at TOI. Thank you. You may begin.

Mihir Shah: The press release announcing The Oncology Institute's results for the first quarter of 2024 are available at the Investors section of 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 included within Company's press release for the first quarter 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. 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. A reconciliation of this 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. Following our prepared remarks, we will open the call for your questions. With that, I will turn the call over to Dan.

Dan Virnich: Thank you Mihir. Good afternoon everyone and thank you for joining our first quarter 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 first quarter of 2024 saw TOI hit some significant milestones related to growth with seven new capitation and value-based contracts signed across three states, our highest number ever in a quarter. Full-year capitation revenue related to our seven contracts signed in Q1, is estimated to be in the range of $16 million and includes expansion of our risk business in both medical and radiation oncology. We’re expecting termination of one legacy capitation contract in California in Q3 which we believe will be offset by better than expected, new capitation contract starts 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 sales and revenue through our medically integrated dispensaries and pharmacy with over 4,500 fills representing over $39 million in revenue in Q1. Oral drug gross profit in the segment remains on track to expectations at $31 million 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 million from this location from full year 2023. Despite top-line outperformance, the first quarter 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 to collections due to the Change Healthcare cyberattack, 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 first quarter, 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. And have already started to see improvement in margin in April by 70 basis points. We’re 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’d like to highlight a few operational achievements since our last call. We added seven new clinicians, primarily in Southern California bringing our total employed physicians and advanced practice provider count to 126. We opened two new clinics in South Florida, bringing our total clinic count to 73. One of our new capitated contracts will bring us to a new market Oregon with a legacy capitation partner. We expect to commence clinic operations there in Q4. All issues related to the Change Healthcare cyberattack 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. 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 will turn the call over to our CFO, Mihir Shah to provide additional details on our first quarter financial results.

Mihir Shah: Thank you, Dan and good afternoon, everyone. Consolidated revenue for Q1 2024 was $94.7 million, an increase of 24.2% compared to Q1 2023 and a 10.3% increase compared to Q4 2023. Gross profit in Q1 2024 was $11.97 million, a decrease of 16.8% compared to Q4 2023. This decrease is attributed to the lower IV, and oral reimbursement Dan previously mentioned. SG&A remains flat despite the strong growth in our top-line. SG&A, including depreciation and amortization was $29.9 million in Q1 2024, a decrease of 50 basis points compared to Q1 2023. As a percentage of revenue, SG&A including depreciation and amortization was 31.6% in the quarter down 300 basis points from Q4 2023 and 790 basis points from Q1 2023. Loss from operations for Q1 2024 was $18 million, a decrease of $14.9 million compared to Q1 2023. Net loss for Q1 2024 was $19.9 million an improvement of $10.1 million compared to Q1 2023, primarily due to goodwill impairment charges of $16.9 million in Q1 2023 that did not occur in Q1 2024. Offset by gains in the fair value of earnout and derivative liabilities of $4.2 million in the prior year quarter that did not occur in the same quarter of the current year. Adjusted EBITDA for Q1 2024 was negative $10.9 million. As of end of Q1 2024, our cash and cash equivalent balance was $36.1 million and we had $29.7 million in short-term investments for a total of $65.8 million of cash, cash equivalent and short-term investments. The impact of Q1 operating losses, the Change Healthcare impact and AR lag in our new pharmacy resulted in reduction of cash and cash equivalents of $17 million related to Q4 2023. Thanks to our swift response to Change Healthcare situation and work around pharmacy collections we project the cash flow impact to be simply one-off timing without full year impact on cash flow. I will now turn it back to Dan for closing comments.

Dan Virnich: Thanks, Mihir. I want to close our call by providing an update on progress towards our four key strategic priorities at The Oncology Institute. Priority number one, 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&A down, as a percent of revenue following our restructure last year. Priority number two, grow and drive margin in our legacy markets. Our newly signed medical and radiation oncology contracts in California and Nevada represent important new partnerships, an 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 one terminating contract to mitigate margin compression. Priority number three, improving new markets. 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’re 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 rate seen in this market. Priority number four, 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. 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 session. [Operator Instructions] The first question comes from the line of Jack Slevin with Jefferies. Please go ahead.

Jack Slevin: Hi 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? 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. I am 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? I just want to understand what the way of thinking is.

Dan Virnich: Hi, Jack. Thanks for the great question. I think there is 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. 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 are 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 is 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 are trying to control the factors we can and expect the remaining three quarters of the year to drive improvement in those margins, but it is hard to say at what pace that DIR fee issue will resolve itself.

Jack Slevin: Got it. That's really helpful. And next Mihir I want to ask on the Change impact. Is the right way to think about that sort of the just over $16 million of AR drag that you saw in the first quarter. Should we just see a reversal of that? 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.

Mihir Shah: Yes. So we -- about $15 million of that, we believe will be timing. Couple of million 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.

Jack Slevin: Okay. Got it. Really helpful. And then next, I appreciate all the commentary on the new cap contracts. And it sounds really good. It sounds like there is one incremental one to -- when we last spoke on the 4Q call. Maybe just -- I heard the $16 million of annualized revenue. It sounds like a great number. I just want to make sure I got all the commentary on the pacing of how those should launch those seven 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?

Dan Virnich: Yes. Another great question, Jack. So the contracts were all signed and executed -- the seven in Q1. The pacing of start on those contracts, the majority of them are Q3 timing for go-live. And that is 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. So we've got a lot of good stuff in the near-term pipeline which we expect to continue to announce over the rest of the year 2024. And I think, there is 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 [indiscernible] has resulted in groups that are taking risks, finding other ways to try and drag 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 the exact number for second quarter, but we’re seeing a pretty tremendous pipeline ahead of us.

Jack Slevin: Okay. That's great color, Dan. And then last one for me here. I think, all things considered, the cash burn looks really strong. The performance there considering Change. Normalizing for Change -- does it feel like we are sort of in the right ballpark area on cash burn? Or sort of what's the outlook at this point as we regress to the rest of 2024?

Mihir Shah: Yes. So Q1 had cash burn from the 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 or 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.

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

Dan Virnich: 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 remainder of 2024. We are 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. I would 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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