Conference Transcript - STLN 2026-09-08

Operator

Well, everybody, appreciate you all joining us today. And Dan and Rob, appreciate you guys joining. I know we're the last window here before the cocktail party, so we'll be efficient. But otherwise, appreciate everyone joining today.

Dan Virnich, CEO

We've got a handful of questions that we'll take through today.

Operator

And otherwise, I think we'll open it up towards the end for some Q&A to the extent anyone has questions that wait till the end. But otherwise, we'll go ahead and hop into it. So, Dan, it's been an interesting couple of years now in value-based care. You've seen managed care and a lot of the industry struggle over the past 18, 24 months or so. Can you talk about how Starling has operated as a business and what's enabled you guys to deliver your first profitable quarter and continue to deliver profitable growth from an MLR perspective?

Dan Virnich, CEO

Sure, absolutely. Well, thanks for having us today. I'm Dan Vernick. I'm the CEO of Starling Oncology. This is Rob Carter, our chief financial officer. For those of you that don't know us, we're the largest value-based oncology platform in the U.S. We have a hybrid care delivery model, so we have both an employed physician group and a network of independent providers, and we currently operate across five states. We've been a public company now for five years, and we've been in operation for over 19. How we're differentiated, we take Part B risk on oncology spend for over 2 million patients across those five states, And we've been showing for the last 19 years that you can do so delivering high-quality outcomes for patients, better care in the community through migration of high-level services into the community in our clinic settings, and by doing the right thing in terms of making drug choice for patients, drive significant savings. So really, our story over the last five years as a public company has been expanding into markets where we capitate with health plans, not just risk-bearing medical groups. And we've shown predictably that because of our scale, both in terms of our proprietary utilization management model, as well as our ability to buy drugs at scale, and control networks in terms of setting the contracted rates that we pay providers around our employed clinics and our network, drive better MLR performance.

Operator

Excellent. Now, you recently rebranded from the Oncology Institute to Starling Oncology. Can you talk about the thinking behind the timing of the rebranding and the reason for the new name?

Dan Virnich, CEO

I mean, this year has definitely been an inflection point for us as a public company. It's our first fully profitable year that we've got into. We also just recently executed a balance sheet transaction and restructured our legacy convertible preferred note with Deerfield Healthcare with a new note with Orbamed. And so it felt like the time was right to rebrand. We've been hearing feedback for many years that our legacy name, the Oncology Institute of Hope and Innovation, caused a lot of confusion, not just with investors, but also with patients and our payer partners. People sometimes confused us for a faith-based organization or a palliative and hospice organization or a research clinical trials organization. We chose to really get a new name, which captured the value that we provide to patients and to our payer partners. Starlings are a bird that fly in coordinated patterns, which we felt symbolized our coordinated care model. And then the star has a very positive connotation as an anchor part of the word. So we landed on starling oncology.

Operator

I love it. Double-clicking on cost trend for a second. Oncology has been one of the biggest cost drivers across the payer landscape for quite some time. A lot of folks have been pointing to mid-'90s MLRs. You guys reported MLRs last quarter in the mid-'80s. Can you talk about why the fully delegated model at Starling allows you to deliver these results, and what's that secret sauce that, you know, is driving you to do it differently?

Dan Virnich, CEO

Yeah, absolutely. So the first thing that's important to understand is oncology is the most expensive specialty that payers have to deal with in their network, and that's all driven by the costs of the drugs that are prescribed. And while those drugs can be life-saving, they can also be incredibly expensive, and the way they're reimbursed for most oncology practices typically drives over-utilization or off-label use of drugs. The legacy solution to that was really kind of a benefit manager model where there were platforms that implemented utilization management strategies to help control spend. The problem with those models is they had limited efficacy because they were not employing physicians, they were not procuring the drugs. So really, the differentiator for us as a business is we have a state-of-the-art utilization management program, but we're also procuring the drugs that we take risk on at scale, and that gives us tremendous buying power and allows us to drive down the unit economics of those drugs that we're taking risk on. And then we're also employing providers that are part of the larger network of care delivery, and that gives us tremendous control over the care that's delivered, both in terms of the quality and the predictability that those providers have in terms of adhering to our value-based regimens. All that put together means that we've shown that we can drive an industry leading MLR in the mid-80 range, which really stands out for oncology.

Operator

Makes a lot of sense. Business has been growing very quickly across both lines of business, your capitated side of your business as well as your pharmacy. How do you balance being a growth company while continuing to stay focused on execution and profitability as you push through breakeven and beyond?

Rob Carter, CFO

Yeah, I think a really nice aspect of the way we're growing is how we're able to do it. So capital light. So when we grow via our delegated market, excuse me, our delegated contracts, we aren't going to set out by putting dots on the map. We're going to evaluate the market and then make strategic moves by putting clinics and doctors on the map where it makes sense for us and where it benefits our overall MLR on the contract. The second piece is we've seen significant growth in our pharmacy business. That also is a capital light business, one in which it doesn't require significant investment. And so those two areas continue to be our primary areas of growth. As we've laid out previously, we expect overall growth of over 20% over the next several years in top line. And that growth is being driven by those two segments. And so if we're able to maintain cost discipline, you're going to see, you know, direct contribution to overall adjusted EBITDA from those two segments.

Operator

Excellent. Now, switching gears, the business has had a lot of momentum over the last 12 or 24 months. You've been picking up a lot of new contract wins. And even recently, you know, you had three new delegated wins starting on October 1st. There's a couple new wins taking place outside of Florida. You picked up exclusivity on one of your largest partners in California. Stepping back, for those in the audience who are less familiar with your story, can you give them a little bit of color on how those new wins came together and what's driving this influx of success?

Dan Virnich, CEO

Yeah, I think it's really two fundamental things. I think first and foremost is access and quality of care. That definitely speaks to the exclusivity we gain in California with one of our largest partners, as well as the ongoing expansion of our relationship with several health plans in Florida. At the end of the day, we've proven that we can provide better access in the community to the patients that we serve, better coordinated care and communication to the primary care physicians and referring specialists that are kind of key stakeholders to those health plans in terms of folks that they delegate their membership down to, and that is what we lead with. Second is really value because we've got this hybrid care delivery model and the drug procurement aspects that I mentioned as well as our ability to manage the network and set rates. We can really price our contracts at a much more competitive level than our competitors. So in addition to the high quality and accessible care, it's really winning on price and value for those care partners.

Operator

Historically, Starling has been a California-centric model. A lot of your historical relationships were many of the large IPAs. More recently, a lot of the growth has been coming in Florida. Can you talk about the ability of the platform to port outside of Florida and move into new markets?

Dan Virnich, CEO

Yeah. Yeah, I think that's really the beauty of Starling Oncology is that we now have products that can grow in literally any state. So when I joined this business in 2020, it had a very successful model that was based in California. And really, one customer type, which was medical groups that had a RKK and took global risk from health plans. So they were used to and have been doing this for many decades in California, capitating specialists directly themselves. The problem is that outside of California, as well as maybe a little bit of Nevada and Arizona, health plans will delegate financial risk down to medical groups, but not control of network and claims. So we had to develop a second product type, which is our delegated capitation model. And that's really where we've seen just tremendous growth over the last 18 months. There, our customer is the health plan. We are contracting on health plan paper and the delegated term refers to the fact they are delegating control of UM as well as payment of claims and control of the network to us. So it becomes a very powerful construct in the sense that in addition to UM, we're also deciding who is in or who may not be in that network and then paying claims and setting the rates of payment for that network outside of our employed clinics. So it gives us additional levers of control over care quality as well as utilization the great thing is that that model the new product applies to basically the other 47 states in the country so the TAM is massive and we're really excited about that as far as moving beyond not just Nevada and Oregon but to successive states with that new model TAM is much larger but as you think about California versus the other 47 states from a pricing perspective do you see any differential there as well yeah a massive difference in pricing and the reason is that and again fairly in the weeds but in California medical groups typically take risk not just on Medicare Advantage but also on commercial HMO and Medi-Cal managed Medicaid in California outside of that state you know we're specifically talking about Medicare Advantage at this point in time so and it's also states that are much less or much newer in terms of evolution of managed care strategies so much higher benchmark market utilization. So the capitation rates can be literally 10 times as high as what you'll see in California.

Operator

That's great. On the California win, you recently added 230,000 capitated lives. I think it was an incremental $6 million on an annualized capitated from a revenue perspective. Can you help us think through the revenue and margin profile on the Florida delegated book and where the pharmacy pull-through comes from?

Rob Carter, CFO

Sure. So we've made a number of announcements so far this year detailing our growth in capitated lives. So the first was a full-state Florida expansion. We announced that in Q1, followed with the announcement that you're referencing of 230,000 lives in California. In addition to that, we referenced new delegation contracts in both Nevada and Oregon. So the combination of those It's really what's driving our 2027 guide of 100% capitated revenue growth. So going from $150 million to $300 million of capitated revenue, the basis of that is those deals, which obviously represents a tremendous upside next year as there's additional deals in the pipeline as well. And so to your point, when we launch these deals, there is always 100% of the time pharmacy attachment associated with that. And it's quick, quite frankly. Patients are coming into our door after about 90 days, and after that time period, we start to see attachment. And so the overall impact to Starling beyond just the $150 million of incremental growth is quite significant.

Operator

Can you speak to the role of the owned clinic and a partnered MSO clinic as it relates to the attachment rate and the pull-through you see there?

Rob Carter, CFO

So currently, our pharmacy revenue is attributed to owned clinics only. And so that's an important designation. All of the tremendous growth we've seen in the last couple of years is from our own providers and our own patients. Through the delegated networks and the networks that we're building, there is the potential for us to also add our network providers as well. Our new product, Starling Nexus, will aid in that. It's not something that we've guided to specifically, but it is certainly upside.

Operator

So that would be all upside as you think about your financial model today. Shifting gears a little bit, next year you're talking about capitated revenue more than doubling. How do you think about the glide path of that growth and how much of it is contracted and how much of it is still go-get in the pipeline today?

Rob Carter, CFO

Yeah, I gave that away a little bit earlier. The majority of that has been announced to date. the vast majority of it. And so we're in a really great position. Our pipeline is incredibly robust. The demand for our services has never been stronger. And so, yeah, the bulk, again, of the $300 million is from the contracts already announced.

Operator

Fast forwarding the clock, 12, 18, 24 months, do you ever see Starling becoming 100% fully delegated?

Rob Carter, CFO

That's an interesting question. I think it makes sense in a lot of different ways. What I will say is that we have density in markets like Southern California. It's our legacy market. We've been there for almost 20 years, and I don't think it makes sense, at least now, to convert those providers sort of into a delegated construct. But as it relates to net new growth outside of what we've already talked about. Absolutely. I think that the vast majority of that will be delegated.

Operator

Shifting gears to the pharmacy side, especially pharmacies now north of 60% of your revenue. Last quarter, it grew 60%. Gross margins are up 300 basis points year over year. Can you talk about what is driving that growth and speak to the importance of scale and the role of scale in the incremental margin you're seeing in the pharmacy business?

Dan Virnich, CEO

Yeah, absolutely. So we've had a couple step, you know, jumps in growth in the Part D business. The first came when we opened our California pharmacy now three years ago and started to recapture some of the Medi-Cal Part D fills, which we lost to Medi-Cal RX. This past year, really what we saw from year over year perspective is just increased operational discipline around driving down leakage. Leakage being defined as scripts filled outside our clinics that we could fill with our own pharmacies or MIDS, and we've gotten very good at that. So that is reflected in our investor deck in terms of our attachment rate, which is the scripts filled per thousand clinic encounters. We feel that we're at a fairly mature state with that at this point. So going forward, the growth in Part D is still going to be there. It's going to be aligned much more towards overall encounter growth, which ties to expansion of our cavitated business, as well as engagement with our network providers. In terms of, you know, how our size drives margin economies on Part D, it's important to remember that we're procuring 95% of the Part B and D drugs that we that we administer and are now one of the largest non-distributor owned oncology entities in the country. So that gives us tremendous negotiating power with our distributor partners in terms of driving down the unit economics of drugs in special situations where drug pricing changes dramatically, getting in front of it, whether through spec buying or negotiating directly with manufacturer to get favorable economics. And that's only going to increase as we continue to grow.

Operator

This next one's a little bit nuanced. You mentioned leakage and Rob, you spoke a little bit about this as well. Can you talk about the pharmacy attachment rate? Where is, where are they going if they're not going to you guys?

Rob Carter, CFO

Yeah, so there's a couple of other scenarios at play. So one is that the payers themselves do have the ability to dictate that it goes to their preferred pharmacy and oftentimes it's their own. Interestingly oftentimes you know we're contracted with with large national payers who own you know PBMs and pharmacies that you've heard of and they don't dictate that and so some do some don't. That would be a scenario where we're simply not able to fill that script. The only other scenario would be PBM specific and that's gotten smaller as we've gotten larger so at this point it is you know in terms of the total quite small what role does provider education play in closing whatever gap remains it's a really good question I mean and that has been a part of the story so far yeah I think that it's something we'll stay on top of continual reminders also the technology behind the pharmacy is a huge portion of that, making it easier for them to fill those scripts. So again, I think that there's a little bit additional room to grow, a little more juice to squeeze, if you will, but we're certainly getting there.

Operator

That's great. Now, Rob, one for you here on finance. You recently refinanced the Deerfield convertible notes with a $75 million term loan with Orbamed. Maturities have now been pushed out past 2031. You recently put in a $25 million revolver. How do you think about capital structure here as you look to finance, Starling?

Rob Carter, CFO

Yeah, I can say it's gotten much more fun than it used to be. So with operating losses dwindling, and obviously we've guided to full adjusted EBITDA profitability in 2026, it really becomes like, you know, what does it take to keep the lights on it at Starling and quite frankly it's it's quite minimal obviously we have working capital needs and as I mentioned before there is a very very small amount of startup costs associated with our delegated contracts and networks but we are going to use our funds to grow the business strategically and so right off the bat comes where do we have opportunities to buy in for specific drugs to maximize margin that's been a huge part of our story this year We had 21.6% pharmacy gross margins in the second quarter, over 20% in the first quarter. That's far ahead of the market, and that's due to our specific efforts around procurement on specific drugs. Beyond that, I think it's really interesting to start looking at ways we can grow the business non-organically, as we have the ways and means at this point to do that. And I guess I'll leave it there and say more to come.

Operator

That's helpful. Wonderful. Shifting the industry a little bit. We talked earlier about some of the challenges in the industry as a whole. If Medicare Advantage rates continue to stay under pressure, particularly as we look out to 2027 rates, can you speak to the role that may play on your business? And is that a headwind or is that a tailwind for your business?

Dan Virnich, CEO

Yeah, that's a great question. This is one that frequently comes up in investor meetings as a point of misunderstanding. Medicare Advantage rates do not impact our revenue. They do impact the degree to which our partners want to work with us in the sense that when there is a down cycle in reimbursement, it drives pressure on margins for the health plans and medical groups that we work with, and they have to make up that margin somewhere. So if anything, it makes them want to work with us more aggressively to help manage their MLR and spend since oncology, again, is the most expensive specialty at this point and can make up anywhere from 8 to 11 percent of total premium for a Medicare Advantage population. So having said, a down cycle in Medicare Advantage reimbursement actually helps us from a growth perspective. That's not to say that when there is a good year in Medicare Advantage reimbursement, they're any less likely to want to work with us. They still have to manage their MLR, but our success is not correlated to MA rate changes.

Operator

So it's fair to say in your time as CEO of the company, you've seen good MA markets and you've seen some bad MA markets. Did you notice a material difference in the conversations you had with your partners, particularly over the last 24 months?

Dan Virnich, CEO

Absolutely. Yeah, I mean obviously our HealthLand partners had a rough kind of go of it for the last last couple years. A lot of that being related to MA reimbursement and risk adjustment.

Operator

Again, we've just seen increased fervor with which they want to partner with us to help manage their spend so that they can remain solvent didn't participate in it that makes sense pharmacy uh regulation has been a hot topic over the last 24 36 months um you know most favored nation tariffs inflation reduction act a lot of acronyms um what has been your approach to manning drug costs historically and and how does that differ across your capitated book and how does that differ for your fee-for-service book yeah i'll start by saying that we're not differentiating care between the two at all.

Rob Carter, CFO

I think our secret sauce as it relates to drug procurement and the success we've seen, as I called it, the pharmacy margins earlier, has to do with the relationship between our own procurement team and our utilization management team. So essentially finance and our providers working together, looking at real-time drug data to make the best choices as it relates to UM strategy and formulary choices we also have the advantage that we're growing really really quickly and so we have the attention of the wholesalers at large as we mentioned before we're the largest independent at this point you know non-health system and so part of the reason we were able to raise our free cash flow guidance earlier in the year relates directly to that our ability to go back and use that leverage or that scale towards additional leverage and so we will continue to watch the market closely and where applicable we'll take advantage of price movement in our favor that's been quite successful so far in mitigating some of the exposure to the ira uh with improving us specifically in 2026 um you know we're very very nimble and so we're in active negotiations with the manufacturers who are behind the 2027 IRA drugs. And we've guided publicly to date that we don't expect any price erosion because of those drugs either.

Operator

When drug prices rise, as they have for many years, can you talk about how the diversity of your business allows you to, in some cases, offset some of those drug price increases?

Dan Virnich, CEO

And conversely, if drug prices moderate or drug or price increases you know reverse how your business would handle that as well happy to yeah first thing I would say is that you know we build the number of features into our risk contracts to mitigate a couple things one is the you know annual increase in drug cost trend so that comes in the form of annual escalators which we negotiate with our payer partners the other thing is we build in risk corridors specifically for our plan contracts to ensure that you know if things out of our control for example a dramatic shift in benefit design that drives prevalence through the roof in a given year happens that we're protected on the downside so that helps us manage our overall risk contract structure on an individual basis and then of course course each contract accrues to a larger pool of 2 million lives which gives us nice stability in terms of the MR performance the other thing that's really important about us and unique about starting oncology is our mix of part B and D. We're taking risk on Part B, but we also have our Part D engine which is now 54% of revenue and we don't take risk on Part D drugs. So we have great data showing that we can feel faster, more convenient, and cheaper for patients when they do need a Part D drug, but it does offer a nice P&L stability in terms of we're not a business that relies only on capitated revenue for our success and that'll continue kind of going forward.

Operator

Wrapping up, Dan, big picture, as you look out over the next three to five years, what does success for Starling look like? And for the investors in the room, what are the things you would guide them to focus on to point them to the success that you're having today?

Dan Virnich, CEO

Yeah, absolutely. I mean, I think the really exciting thing about Starling Oncology is we are not a business that is stagnating for growth anytime soon. We exist in an industry that spends over $300 billion a year. We're currently in five states and frankly under penetrated in those five states. So the ability for this business to grow is really unlimited. We've had tremendous kind of year over year growth for the last several years and that's not going to slow down anytime soon. So we are a business that can maintain kind of narrow focus on what we've been doing best for the last 19 years and continue to drive excellent results for investors. The sort of flip side of that is we're also a very interesting business in the sense that we do have ancillary services that we can extend to our now network of providers that is 300 plus in headcount, as well as the ability to capture the massive amount of drug procurement we're doing and lateralize that into other specialties over time, potentially. So it's going to be an exciting several years. This is a business that will be a multi-billion dollar platform soon. I'm sure of that. And looking forward to investors kind of staying tuned.

Operator

Excellent. Opening up to the floor here, any questions from the audience from today's conversation? All right. Well, thank you all for the time today.