Oncology Institute, Inc. Q4 FY2023 earnings call

• 2023 performance was strong with 20% Q4 revenue growth y-o-y and 28% full year growth, exceeding annual revenue guidance range. Gross profit was affected by DIR fees but expected to improve in 2024 with California pharmacy's performance. - In 2024, forecasting $30 million incremental revenue from California pharmacy and 50% growth in Part D business. Signed or near completion of six new full risk contracts in Q1, moving from reporting value based members to revenue per value based member. - Operational achievements: Started 1st capitation contract in Florida on Jan 1, signed 3 independent practices to MSO model in Florida, added 7 new employed physicians in Southern California, acquired and launched California pharmacy with over 1,300 specialty fills, announced partnerships with MaxHealth in Florida and Carrum Health in Nevada. - Strategic priorities: Eliminate cash burn with lowest SG&A as % of revenue since going public; grow and drive margin in legacy markets with near-term growth opportunities; prove new markets with successful Florida partnership and more opportunities; lead value based oncology market as largest such group by lives served and revenue under value based arrangements.

In Q4 2023, consolidated revenue was $85.8 million, an increase of 20% compared to Q4 2022. For the full year 2023, consolidated revenue was $324 million, an increase of 28% compared to 2022. Gross profit in Q4 2023 was $14.4 million, a decrease of 8% compared to Q4 2022. Gross profit in 2023 was $60 million, an increase of 14% compared to 2022. Both patient services and dispensary segments contributed to the outperformance in revenue, while gross profit was impacted by high DIR fees. The California pharmacy and medically integrated specialty drug dispensaries are outperforming expectations on fills and revenue contribution.

• 2024 full year revenue expected to be $400 million to $415 million, 23%-28% growth over 2023. - Gross profit expected in range of $68 million to $79 million. - Adjusted EBITDA expected in range of negative $18 million to negative $8 million. - 2024 forecast California pharmacy to generate over $30 million incremental revenue and Part D business full year growth of approx 50%. - Strong Q1 revenue performance gives confidence to achieve Part D gross margin target. - Signed or near completion of six new full risk contracts in Q1.

• Impacted by recent healthcare cyber-attack causing disruptions to claim submissions, leading to increase in days sales outstanding (DSO) and temporary impact on cash flow in first and second quarters of 2024, but impact not believed to be material.

Q: Congrats on the quarter and all the announcements. Maybe to kick it off, thinking about the six opportunities you discussed, can you give a sense for sort of what these look like? And maybe sort of pushing that against the most recent things that you've announced being the contract in Florida on the MA side, the Carrum Health announcement and then the expansion of the MaxHealth agreement. Using those three areas and the six, what do you think are the biggest opportunities going forward sort of across the board? Is it more MA deals and that's primarily it? Or should we expect to see sort of a wide variety of things?

A: Yes, so we see a couple of things. One is increased opportunity to grow our business through new value based contracts as top-line pressure from risk bearing primary care groups and health plans seek better partners for community based oncology care. Overall, our strategy is to be obviously the oncology practice of choice for both plans and delegated medical groups. And the way that we do this is by not just running great medical oncology services in community, but also expanding to radiation oncology. So as we noted in our script, we're seeing opportunities to when possible take on as many of those services as we can, preferably under capitation of risk agreements. And that covers the majority of the opportunities we see in the pipeline. We also did announce the partnership with Carrum, which is our first employer based partnership model. And again that opens up a whole new channel of opportunities for us that we see as expansion opportunities over the next couple of years.

Q: And then maybe turning to the guidance and looking at gross profit in particular, I guess the DIR challenges and some of the things in the quarter all make sense. When you think about the low end and the high end of the guidance, is the right way to think about it sort of in the low end is sort of a continuation of the pressure you're seeing and then the unlocking further upside comes mostly from sort of alleviating some of that pressure on the pharmacy margin? Or maybe if you could just walk me through sort of what gets you to the high end versus the low end of the gross profit guide?

A: Yes, absolutely. So in general, the low end of our range assumes no improvement in some of the macro issues that are facing oncology right now related to DIR fees and margin compression on drugs throughout the rest of 2024, as well as no additional growth beyond our kind of high certainty opportunities that we're seeing in Q1. And then everything upside to that is driven by both improvement in some of those macro headwinds on the drug side, which there's obviously not a great deal of certainty on timing on right now. Strategic efforts, we are taking internally specific to TOI to drive margin to counteract those macro pressures and then additional acceleration in growth beyond what's baked into the high certainty pipeline for Q1.

Q: And then last one for me. The free cash burn rate sort of coming down to below $5 million by my math looks really nice in the quarter. Understand sort of change creates some noise in the first half. I just want to make sure I got all that right. So is the right way to think about it that you'll sort of see drag on DSOs in Q1 and Q2, but the thought process is all of that should reverse in the back half? And maybe more broadly, how should we think about the progression on free cash going forward?

A: Yes, absolutely. That's another great question. I'll let our CFO, Mihir Shah address that one. Mihir? Mihir Shah: I think as you call out the right math, our Q4 was the lowest cash burn since we went public around $5 million Q1, calling out the DSO issues. And also want to point out there are some Q1 cost related pressures related to the payroll taxes and other pieces, so that's an anomaly that happens in Q1, but outside of that the trajectory of cash burn being low compared to the prior, each prior quarter is what we are targeting as well.