Oncology Institute, Inc. Q1 FY2024 earnings call

• Revenue grew 24% in Q1 2024, driven by 64% increase in oral drug revenue. - 7 new capitation and value-based contracts signed in Q1, highest ever in a quarter, full year capitation revenue from these estimated at $16 million. - Record prescription sales and revenue in medically-integrated dispensaries and pharmacy in Q1. - Challenges in Q1: drug margin compression (Part B and D drugs, DIR fees, Change Healthcare cyberattack impact, IV margin compression). - Operational achievements: added 7 clinicians, opened 2 new clinics in South Florida, new capitation contract in Oregon starting in Q4, mitigated Change Healthcare cyberattack issues, record cash collections in April. - New leadership: Chief Development Officer Jordan McInerney joined.

In Q1 2024, revenue grew 24% compared to Q1 2023, driven by a 64% increase in oral drug revenue. The first quarter saw over 4,500 fills in medically-integrated dispensaries and pharmacy, totaling over $39 million in revenue. Oral drug gross profit is on track to be $31 million for the full year. The newly acquired pharmacy in California is exceeding expectations, with incremental growth of over $45 million from full year 2023. Consolidated revenue for Q1 2024 was $94.7 million. SG&A including depreciation and amortization was $29.9 million in Q1 2024, 31.6% of revenue.

• Full year guidance not changed as new capitation contracts and oral drug growth offset legacy contract termination. - Oral drug gross profit on track for $31 million full year. New California pharmacy expected to add over $45 million incremental growth from full year 2023.

• Drug margin compression due to DIR fee changes. - IV margin compression in Q1 due to manufacturer price increases and reimbursement shifts. - Impact of Change Healthcare cyberattack on collections (intermittent disruption, deemed not material).

Q: 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'm 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?

A: Jack, thanks for the great question. I think there's 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're 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's 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're trying to control the factors we can and expect the remaining 3 quarters of the year to drive improvement in those margins, but it's hard to say at what pace that DIR fee issue will resolve itself.

Q: 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.

A: 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.

Q: Next, I appreciate all the commentary on the new cap contracts. And it sounds really good. It sounds like there's 1 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 7 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.

A: Yes. Another great question, Jack. So the contracts were all signed and executed -- the 7 in Q1. The pacing of start on those contracts, the majority of them are Q3 timing for go live. And that's 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's 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 [ D-28 ] 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 are seeing a pretty tremendous pipeline ahead of us.

Q: 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're 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 '24.

A: 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.