Oncology Institute, Inc. Q4 FY2021 Earnings Call

Good afternoon and welcome to The Oncology Institute's Fourth Quarter and Full Year 2021 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'd like to turn the conference over to Scott Dalgleish, Chief Financial Officer at the Oncology Institute. Thank you. You may begin your presentation.

Good afternoon, everyone. And thanks for joining us to discuss TOI's fourth quarter and full year 2021 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements. These statements include our future expectations regarding financial results and guidance, market opportunities and our growth. These statements, which are subject to various risks, uncertainties, and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties, and assumptions are detailed in this afternoon's press release, as well as our filings with the SEC, including a registration statement on Form S-1 that was filed with the SEC, and the form 10-K that will be filed, all of which can be found on our website at investors.theoncologyinstitute.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, free cash flow, and adjusted diluted EPS or earnings per share. We use non-GAAP measures in some of our financial discussions, as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation, or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Please note that our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of GAAP to non-GAAP measures, as well as the description limitations and rationale for using each measure, can be found in this afternoon's press release and in our SEC filings. Joining me on the call today is our CEO, Brad Hively. Following our prepared remarks, we'll open up the call for your questions. With that, I'll turn the call over to Brad.

Thanks, Scott. Good afternoon, everyone. And thank you for joining us on our fourth quarter and full year 2021 earnings call, which marks our first earnings call as a public company. I am extremely proud of our team as we took the first step on this new and exciting journey in the public markets while continuing to deliver meaningful care to our patients and communities in 2021. We successfully completed our business combination with DFP Healthcare Acquisition Corporation in November, making us the first value-based specialty provider to go public. As a result of this transaction, $130 million were retained on TOI's balance sheet to fund growth initiatives, including de novo clinics and acquisitions as we continue to expand our unique model of cancer care into new markets. Before I get into our growth strategy and our fourth quarter and full year highlights, I want to take a moment to walk you through TOI's unique and disruptive value-based oncology care model. While a value-based approach to primary care is becoming more widely accepted, our healthcare system still struggles with how to manage the rising costs of specialty care. The $200 billion plus oncology market, one of the most expensive and fastest growing specialties, is a major contributor to the unsustainable cost of healthcare in this country. Misalignment between physicians and payers, complex and variable clinical pathways, and the high cost of cancer therapies are all notable industry challenges that TOI is reimagining and rebuilding. By replacing costly, inefficient fee-for-service cancer care models with a value-based care approach that aligns physicians and payors with incentives to simultaneously enhance quality and manage costs, TOI improves outcomes and patient satisfaction while reducing costs. TOI offers cutting-edge, evidence-based cancer care to a population of approximately 1.6 million patients, including clinical trials, stem cell transplants, transfusions, and other care delivery models traditionally associated with only the most advanced care delivery organizations. Since our founding in 2007, we have provided high-quality cancer care to more than 160,000 patients. Now, with more than 50 locations across California, Nevada, Arizona, and Florida, we continue to have significant whitespace for growth. In the last year alone, we strategically grew in California and Florida. Entering new markets in San Diego and Polk County, all of which we see as exciting markets for us to grow our model of cancer care. On a broader scale, we are also expanding into new geographies with plans to enter Texas in 2022. In conjunction with this growth, we have continued to build out the TOI team to lay the foundation for our continued success. As a public company, we look forward to bringing our proven model of individualized care plans, evidence-based medicine, and symptom management to more patients throughout the nation. Some highlights on our progress this past quarter and over the full year. We recently opened our 54th owned clinic in Lakeland, Florida, our sixth clinic in Florida and 11th market for TOI. We acquired six oncology practices in 2021, closing four in the fourth quarter, including our first radiation oncology practice in Los Angeles, which is an exciting new service line for TOI. We achieved the 2021 year-end targets of approximately 1.6 million lives under value-based contracts. Overall, we cared for 50,000 unique patients in 2021 and had over 230,000 patient visits at our own clinics. Overall, we are pleased with the progress we've made over the past year and are excited about our next phase of growth as a public company and our opportunity to serve more patients with our unique model of oncology care. We look forward to updating you on our progress on our next earnings call. Now, I'll turn the call over to Scott to provide additional detail on our fourth quarter financial results.

Thanks, Brad. Since this is our first earnings call, I want to take a quick moment to describe our three operating segments. Our Patient Services segment includes our capitated revenue, where we take risk for medical oncology spend for patient populations, as well as our fee-for-service revenue where we buy, dispense, and bill chemotherapy medications for medical oncology-related services. Our Dispensary segment includes our purchasing and dispensing of oral oncolytics and related oral medications for patients at the clinic site or delivery to the patient's home. Finally, our Clinical Trials & Other segment encompasses revenue we receive for administering clinical trials on behalf of pharmacy sponsors, as well as other revenues such as payor bonuses. Further details on our segments and how we categorize revenue and expenses can be found in our 10-K. Starting with the top line, we achieved $52 million of total revenue in the fourth quarter, a 6.8% increase year-over-year. Notably, we completed four practice acquisitions and Acqui-hired in the quarter, which contributed approximately $1 million in the period. For the year, we achieved revenue of $203 million, slightly below the revised guidance range we provided in the October business update. As we have discussed, the timing of the de-SPAC transaction occurred later than we initially projected. We also made a strategic decision to terminate a large payer contract in late 2020, which was a headwind to our growth in 2021. Absent this termination, our revenue growth in 2021 would have been 14%. For the fourth quarter, our gross profit was $8 million, and our gross margin was 15.9%, a 23.1% decline over the prior year period. For the full year 2021, we achieved gross profit of $41 million and gross margins of 20.1%. On a GAAP basis, our loss was $10 million for the quarter and $11 million for the full year 2021. For the quarter and full year, our adjusted EBITDA was negative $5 million. When we talk about adjusted EBITDA, we're not adjusting our clinic or provider startup costs or acquisition costs as part of this metric. Further details on how we define adjusted EBITDA can be found in our 10-K. At year-end, our cash balance was $115 million resulting from the de-SPAC less CapEx funding for acquisitions and acqui-hires and expenses. We expect this capital to be sufficient to support operations and enhance our growth. We finished the year with no debt outstanding. I'll now turn it back over to Brad.

Thanks, Scott. Now turning to guidance. For the full year 2022, we are guiding to a revenue range of $270 million to $310 million, representing 33% to 53% growth over 2021 revenue. This is driven by several factors, including the continued expansion of our value-based contracts and volume growth in our Florida market. Our anticipated expansion into the Texas market, as well as practices in our acqui-hire and acquisition pipeline we expect to close in the first half of the year. As mentioned earlier, we added a new service line in the fourth quarter with the addition of our first radiation oncology practice, which provides a new avenue of potential growth. TOI is projecting to manage a population of between 1.75 million to 2.0 million value-based lives by year-end 2022, representing approximately 9% to 25% growth over year-end 2021 lives. One area we wanted to call out as we think about building our presence in new markets. Many of TOI's new contracts will feature gain sharing rather than full capitation. These new gain sharing contracts, which enable us to work with payers and risk-taking providers as they continue their shift to value-based care, are likely to produce lower revenue in the initial period as compared to full capitation. Once payors and risk-bearing providers in these new markets become comfortable with TOI's ability to generate savings and better outcomes, we believe these contracts will shift to capitation. We remain very excited about our new market growth and continue to have very productive conversations with payers and risk-bearing medical groups. There is a substantial total addressable market for lives and our priority expansion markets are Florida and Texas. We believe we are best positioned to help payors in managing the oncology care for their patients. I also want to call out a headwind we've been experiencing relating to California's Medi-Cal Rx program. Medi-Cal recently implemented a new policy regarding reimbursement for pharmacy services. Although the policy was not intended to change the way physician-administered chemotherapy drugs, bills under the medical benefit are reimbursed. In the early part of this year, certain Medi-Cal managed care plans nevertheless began to transition some of these claims to be payable as pharmacy benefits. The California Department of Health Care Services issued clarifying guidance that all medically necessary prescription drugs administered in an outpatient office continue to be available through the medical benefits. We believe this guidance will cause there to be limited impact on our IV chemotherapy drug reimbursement going forward. With respect to our dispensary, we have historically dispensed oral oncolytics to certain Medi-Cal patients, and some of these scripts are now being covered under Medi-Cal Rx insurance, which we are not currently able to fill. So far this year, we are experiencing fewer script bills related to Medi-Cal patients who are now covered under Medi-Cal Rx. Overall, we do expect this development to have a negative impact on our dispensary revenue in 2022. We are actively assessing opportunities for us to mitigate the impact on our business going forward, including exploring, launching, or acquiring a pharmacy. We will update you once more information is available. We expect gross profits in the range of $50 million to $60 million and adjusted EBITDA in the range of negative $20 million to negative $25 million. As we grow in 2022, we anticipate having a higher mix of fee-for-service revenue, as the practices we bring on board through acquisition typically have the vast majority of their existing reimbursement in fee-for-service contracts. These practices allow us to gain a larger presence in markets rapidly and over time we expect to shift a material portion of this revenue to value-based reimbursement, which we expect to be accretive to our gross margins. In addition, the growth of gain share contracts in new markets will mean we are initially reimbursed on a fee-for-service basis, with upside-only gain share and quality bonus payments to occur after an initial settlement period. With respect to SG&A, we continue to make targeted investments in our corporate infrastructure, in particular those related to public company costs and supporting our growth. Notably, our costs related to directors' and officers' insurance are higher than we initially anticipated. We should also note that we are not adding back D&O costs to adjusted EBITDA, nor are we adding back any startup costs related to new sites or new providers. In summary, 2021 was a pivotal year for TOI. And we are proud of the significant progress we've made in growing our footprint and reaching more lives with our unique care model. We believe the continued shift to value-based care will continue to drive momentum in our business in the near and long term and we are well-positioned to capitalize on this transition. As we look to the rest of 2022, we're excited about the opportunities ahead to further grow our business, expand our markets, and deliver excellent care to more patients and communities. And with that, I'll turn it back over to the Operator to open it up for questions.

Our first question comes from Brian Tanquilut with Jefferies.

Hey, good afternoon, guys. And welcome to the public markets. We appreciate all the comments today. So, I actually got a few questions. Number one, as I think about the recruitment of acqui-hires and just a competitive environment, anything you can share with us as we've seen more companies pop up in the last several months, that are also going to value-based oncology? So, just curious what you're seeing and how trends are going in terms of recruitment and building up capacity as you roll out into new markets?

Sure. Thanks, Brian. Appreciate the question. We're actually feeling really good about both our acqui-hire pipeline as well as our new physician recruitment pipeline. As a reminder, when we go into a new market, we generally go in using a mix of de novo clinics, as well as acqui-hires. Particularly in Florida and Texas, our pipeline for both is quite strong. Just sort of nationally, a lot of people are moving to Florida and Texas. I think we're benefiting from a little bit of that. But the acqui-hire pipeline is strong as well. We do have a couple of pockets of hard-to-staff geographies. That's just normal; there's always going to be certain geographies that are harder to staff than others. But overall, we're feeling very good about the pipeline in both Florida and Texas.

And then, as Brad, you talked about the Rad Onc strategy here or the new presence in Rad Onc. Maybe if you can help us understand how you're thinking about that strategy and how it overlays with your existing business and any differences there in the economic model or how you're thinking about your capitating that or taking risk in Rad Onc as well?

The expansion to Rad Onc is really a natural extension for us. Many cancer patients are co-managed and receive care from both medical oncologists as well as radiation oncologists. So extending ourselves into Rad Onc allows us to coordinate care for our patients even better. So we think it's a better patient experience when both of those services are provided under one roof. And also from a payor perspective, the payors are asking us to manage all oncology care for them, not just medical oncology. So this was in part, a reaction to a patient-focused decision, but also in part a reaction to the payors asking us to manage a bigger piece of the pie for them.

And then last question for me. I'd like to think about the profitability ramps for new clinics, maybe if you can just help us, kind of introduce to us or share with us how what the economic model looks like as you expand? And also, how should we think about cash burn and just paths to breakeven?

The clinical level is there's quite a bit of variation. Obviously, some of our clinics if we're opening them in existing markets and we have existing contracts, those can be profitable almost immediately, in the first quarter or two. And then clinics that we’re opening in more, call it greenfield markets or expansion markets, we would expect a ramp in the neighborhood of 12 to 18 months and a cash investment in the range of $1 million to $1.5 million for those types of clinics. So there's a bit of a range, but that's how we would think about it, sort of the existing markets and where we've got embedded capacity and embedded demand versus more front-tier markets where we're establishing ourselves and needing to drive more volume.

Our next question comes from Bill Sutherland with The Benchmark Company.

I was curious, building on Brian's question about the ramp-up of profitability. Is there a cohort analysis that could help us understand what a center looks like in its third year or any specific year you want to choose?

Yeah, we can perhaps follow up with something like that. I mean, just what I was referencing, when we look at the clinics that we've opened over the past year, we have some that are in existing markets and we have that embedded demand, we have capitation volume and those clinics ramp quickly. And then we have others where we've opened in new markets like San Diego and Tampa, which are in a cash burn situation and are still ramping. We can think about putting something like that together as a follow-up, but that lines up with what we've been seeing this past year with some of our new de novo clinics.

And then this transitioning result of the revenue headwinds last year, or for just the fourth quarter not but the declines in fee-for-service revenue. Where are you in that transition? Is that behind you or still ahead?

Yeah. I’ll take that.

Okay. Go ahead.

You know one of us, I'm sure we’re going to fit this in. Yes. So that is almost all the way behind us. Not completely behind us, we still have a little bit of runoff revenue associated with that terminated payor. But it's almost done.

So that was related not to the book of business, but to one payor fee for service transition?

Well, I guess we should clarify what exactly the question is. So, would you clarify your question, make sure I'm answering the right one?

Yeah, it's, so I’m just looking at the release. It says that the declines in fee-for-service as a result of transitioning to capitation and certain contracts was also a headwind. I see the piece here about the payor that you walked away from?

I see. Yeah, Scott, you want to take it or you want me to?

Yeah, I mean, I'll start and Brad, you can fill in. So part of the impact on our fee-for-service was that payor termination. And then another piece was transitioning payors to capitation. So we grew our capitation revenue quite substantially over the course of the year. And some of that was payors transitioning, some of it was net new volume. But that fee-for-service decline year-over-year, a good chunk of that was related to the payor termination.

Yeah, it's really a combination of both. And the one feature, I think that you're calling out, I didn't know exactly what you were referring to. But now that I just pulled up the release, I think I know what you're referring to. So sometimes, we will transition a payor from fee-for-service to capitation. We'll start serving a payor on a fee-for-service basis, we'll demonstrate our clinical outcomes, our cost savings, and then they will convert us to capitation. And so when that happens, we actually cannibalize fee-for-service revenue by converting it to capitation. That's what that line is referring to in the release.

Okay.

We celebrate that, right? Because essentially, that means that the payor’s very happy with us, we've demonstrated great outcomes and they're going to give us even more business, give us a value-based contract. So that's a celebration for us, even though it does sort of cannibalize some of our fee-for-service revenue.

And then the payer mix, just help me understand kind of where that stands and where it's headed vis-a-vis Medicare advantage in commercial and other.

Go ahead, Scott. Why don't you take that one?

So, we don't disclose our payor mix, but we serve the patients in our community or communities oncology group. So we have Medicare, we have commercial, we have Medi-Cal, Medicaid. Over the course of this year, we expect that mix in our markets in California, Arizona, Nevada to stay relatively steady. As we're looking at our growth in lives, we think that a good chunk of that growth will come from managed Medi-Cal lives that we're looking to win. But as we're looking at the expansion markets, and we're in Florida, Texas where our focus is on markets where there's a high amount of Medicare advantage penetration, so that's where we can really deliver great results. We think we can grow more when we see a lot of demand. So we think that Medicare advantage portion of our book of business will grow over time as we expand.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Brad Hively for closing remarks.

Okay. Well, thank you all for joining our call today and thank you for your interest in TOI and our mission to heal and empower cancer patients through compassion, innovation, and state-of-the-art medical care. We are very excited about TOI’s path ahead and we look forward to updating you on our progress on our next earnings call. Have a good evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.