The Oncology Institute - Earnings Call - Q4 2024

Executive Summary

• Revenue grew 16.9% year over year to $100.267M, essentially flat sequentially (+0.4%), driven by record dispensary revenue; net loss improved to $(13.182)M and operating cash flow was positive for a second straight quarter at +$4.186M.
• SG&A fell 12% YoY and to 24.8% of revenue (from 32.7%), reflecting cost controls; however, Adjusted EBITDA declined YoY to $(7.828)M (vs. $(6.252)M in Q4’23) due to mix and non-cash items.
• Initial FY2025 guidance: revenue $460–$480M, gross profit $73–$82M, Adjusted EBITDA $(8)–$(17)M, and free cash flow $(12)–$(21)M; management targets positive EBITDA and cash flow breakeven in Q4 2025; Q1 2025 Adj. EBITDA expected at $(5)–$(6)M on seasonal headwinds.
• Strategic catalysts: signed/lauched value-based contracts (~250k+ lives added across H2’24; more in early 2025), improved drug supplier terms to lift drug margins, Florida delegated network launch, facility amendment (removed $40M minimum cash covenant) and $16.5M private placement to bolster liquidity.

What Went Well and What Went Wrong

• What Went Well

  • Positive operating cash flow for a second consecutive quarter (+$4.186M), aided by improved receivables, inventory and payables management; CEO: “reduce our cash burn and generate positive cash flow from operations”.
  • SG&A down 12% YoY (to 24.8% of revenue), reflecting streamlining, outsourcing and attrition; CEO highlighted “operational management, increased efficiencies”.
  • Dispensary set a record quarter; new drug distributor agreement added volume-based discounts and better payment terms, supporting margins and working capital.

• What Went Wrong

  • Adjusted EBITDA worsened YoY to $(7.828)M vs. $(6.252)M, with CFO noting a one-time ~$3M reduction in fee-for-service revenue unrelated to Q4 dates that weighed on results.
  • Patient services revenue fell 10.6% YoY due to a lost contract mid-2024, partially offset by new wins that will ramp over time.
  • Full-year gross profit declined 9.4% on margin compression (Part D reimbursement dynamics, DIR fee impacts), and equity fell materially YoY given cumulative losses and liabilities.

Transcript

Operator (participant)

Good afternoon and welcome to The Oncology Institute's fourth quarter and full year 2024 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 Hueppelsheuser, General Counsel at TOI. Thank you. You may begin.

Mark Hueppelsheuser (General Counsel)

The press release announcing The Oncology Institute's results for the fourth quarter and full year 2024 are available at the investor 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 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. For 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 Virnich, and our CFO, Rob Carter. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Dan.

Daniel Virnich (CEO)

Thank you, Mark. Good afternoon, everyone, and thank you for joining our fourth quarter and full year 2024 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 2025. 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. 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 2025 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 million for Q4 and $180 million for the full year, representing annualized growth of 73%. 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 multi-year agreement with our primary drug distributor, which drove substantial margin improvement starting in December, including volume-based discounts, which optimized our cost positioning. Part of this revised agreement also improved our payment terms and credit parameters, which was a key contributor to the working capital management that supported our positive cash position in Q4. 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 TOI 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&A 12% in Q4 2024 versus Q4 2023. Our ability to grow top line while reducing SG&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. 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 have 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 million 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 2025. In February 2025, we successfully amended and restructured our facility agreement, including a $20 million principal paydown of our outstanding debt. Through this amendment, we removed certain financial covenants, most notably permanent elimination of the $40 million 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 paydown on our facility agreement, we have entered into agreements for a $16.5 million private placement of common equity. In addition, Deerfield converted $4.1 million of its outstanding debt to common equity on the same terms as the cash equity raise. 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, strengthens our financial position and provides 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 million at year-end to $86 million. The additional cash reserve will support our rapid organic growth, including implementing technologies 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.

Robert Carter (CFO)

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 2024 was $100.3 million, an increase of 17% compared to Q4 2023. The increase is driven primarily by our dispensary revenue due to our California-based pharmacy, which continues to exceed fill expectations. 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 2024 was $14.6 million, an increase of 2% compared to Q4 2023. This increase is attributed to the contribution of our dispensary segment.

We were able to decrease our SG&A in Q4 2024 by 12% as compared to Q4 2023, despite the strong growth in our top line, which is a testament to our commitment toward driving operational efficiency and our goal towards profitability. As a percentage of revenue, SG&A, including depreciation and amortization, was 26% in the quarter, a decrease of 8% as compared to Q4 2023. Loss from operations for Q4 2024 was $11.9 million, an improvement of $3.4 million compared to Q4 2023. Net loss for Q4 2024 was $13 million, an improvement of $5.6 million compared to Q4 2023. Adjusted EBITDA for Q4 2024 was -$7.8 million compared to -$6.3 million in Q4 2023. Contributing to the Q4 loss was a $3 million one-time reduction in fee-for-service revenue unrelated to Q4 dates of service.

As Dan noted, net cash from operations for Q4 2024 was a +$4.2 million, and our cash and cash equivalents increased $2.3 million compared to Q3 2024 due to working capital management and non-cash expenses in excess of operating losses. Moving to our full year results, consolidated revenue for 2024 was $393 million, an increase of 21.3% compared to 2023, driven by the contribution of our California-based pharmacy. Gross profit for 2024 was $54 million, 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&A, including depreciation and amortization, is $114 million in 2024, a decrease of $5.6 million compared to 2023. As a percentage of revenue, SG&A was 29% in 2024, down 800 basis points from 2023. Loss from operations for 2024 was $60 million, an improvement of $16.9 million compared to 2023. Net loss for 2024 was $64.6 million, a decrease of $18.4 million compared to 2023. An adjusted EBITDA for 2024 was -$35.7 million. 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, as of the end of Q4 2024, our cash and cash equivalents balance was $49.7 million. This represents an increase of $2.3 million of cash and cash equivalents compared to Q3 2024, 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 $4.1 million 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. As mentioned, the annualized revenue of the new capitation deals starting between Q3 2024 and the second quarter 2025 is approximately $50 million, with only 2/3 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 million-$480 million, representing 17%-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 million-$82 million, an increase from $54 million in 2024, representing a 214 to 336 basis point increase in margin over 2024. We expect adjusted EBITDA in the range of -$8 million to -$17 million, of which we expect $5 million-$6 million of the loss to occur in the first quarter, with an expected progression to profitability in the second half of the year.

Q1 of 2025 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 TOI 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. 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 million and one-time expenses and add-backs of $5 million. As such, we are guiding to free cash flow in the range of -$12 million to -$21 million for full year 2025, with anticipated cash flow break-even in the fourth quarter of 2025. With that, I'll turn it back to Dan for closing comments.

Daniel Virnich (CEO)

Thanks, Rob. As mentioned earlier, subsequent to year-end 2024, we strengthened our balance sheet through two key initiatives: a debt paydown 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 reflects confidence in our business model and long-term growth prospects. 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 sustained cash flow positivity and profitability in the second half of 2025. With that, we're now ready to take your questions. Operator?

Operator (participant)

Great, thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tool will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question is from Yuan Zhi from B. Riley Securities. Please go ahead.

Yuan Zhi (Analyst)

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

Robert Carter (CFO)

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 hitting our targets. We also have organic growth planned for both fee-for-service and dispensary. 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.

Yuan Zhi (Analyst)

Yeah, got it. Yeah, we will get into that in a moment. 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?

Robert Carter (CFO)

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 and 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.

Yuan Zhi (Analyst)

Yeah, got it. 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?

Daniel Virnich (CEO)

Yeah, absolutely. I'm happy to take that one. We continue to grow in California, which is our oldest market. 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 payer 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 the senior population versus commercial and managed Medicaid, which predominates in addition to Medicare Advantage in California.

Yuan Zhi (Analyst)

Got it. 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?

Daniel Virnich (CEO)

Yeah, so our California clinics are below 90%. They're about 75%. There's opportunity for additional capacity in California. In Florida, we've got much greater capacity. We're currently operating about 40%, depending on the clinic, across our clinics in five counties in that market. We've got the opportunity just in those five counties to add significant contribution to our P&L. There's also other high-priority markets in Florida that we don't currently have clinics where we've got near-term expansion opportunities through capitation.

Yuan Zhi (Analyst)

Yeah, 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 get there in 2026?

Daniel Virnich (CEO)

Yeah, 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.

Yuan Zhi (Analyst)

Yeah, 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?

Daniel Virnich (CEO)

Yeah, absolutely. I think all of the general macro trends that we see in the oncology industry are favorable for The Oncology Institute. The big changes which have been discussed, although it's debatable as to how fast they would take place, would be changes related to the IRA. Any reduction in the more expensive oncology drugs will definitely benefit The Oncology Institute since we're capable of managing in a value-based construct, and we've been doing that for 18 years. That would be harder, obviously, on a pure fee-for-service oncology business, but we believe that would be favorable for us.

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

Yuan Zhi (Analyst)

Got it. Yeah, thanks for the helpful color. I will hop back in the queue.

Operator (participant)

As a reminder, if you'd like to ask a question, it is star one. Next question is from Robert LeBoyer from Noble Capital Markets. Please go ahead.

Robert LeBoyer (Analyst)

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.

Robert Carter (CFO)

Hi, Robert. Yeah, 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.

Robert LeBoyer (Analyst)

Okay, great. Thank you.

Operator (participant)

Once again, as a reminder, if you'd like to ask a question, it is star one. If no further questions, this concludes the question-and-answer session. This also concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.