Q3 2022 Oncology Institute Inc Earnings Call
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Good afternoon, and welcome to the oncology Institute's fourth quarter 2022 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 Mark Harper How's the General counsel. Thank you you may begin.
Before we get started I would like to remind you of the Companys Safe Harbor language 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 a 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 reconciliation of these non-GAAP measures. 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 , Brian <unk> and our CFO Mihir Shah following our prepared remarks, we'll open the call for your questions with that I'll turn the call over to Brad.
Thanks, Mark and thank you to everyone joining the call today, where we'll discuss our third quarter results.
We're pleased with our overall results in Q3, as we continue to execute our growth strategy. We added five new clinics in the quarter, including the acquisition of Dr. <unk> to Las Vegas clinics.
The acquisition of the Fort Lauderdale, Florida practice, Broward oncology associates and de Novo openings in California, and Texas.
This growth expands <unk> network of over 100 specialty trained physicians and advanced practice partners to 60 clinics across five states.
Our unique model for oncology care is gaining traction in our expansion markets signaling an increased need and desire for a more cost effective solution like ours, we continue to experience a steady increase in referral volume for.
Our gain share contracts in Florida and interest in expansion from current payer partners in California and in new markets.
As mentioned, we recently opened our 14th market with our expansion into South, Florida with the acquisition of Broward oncology associates and the announcement of a new de Novo clinic in plantation opening in December .
These two practices play a critical critical role in our strategy in Florida and will serve as the cornerstone of growth in this critical expansion market.
In the coming months, we plan to expand in Broward and Dade County, with four additional clinics.
All in advanced stages of planning.
Our business development team has a robust pipeline of payer partners to accelerate growth in this market.
The clinics in South, Florida, we will offer a comprehensive medical oncology services designed to expand access to state of the art oncology care for area patients.
I will now provide some additional highlights on our progress this past quarter.
<unk> received a $110 million strategic investment from Deerfield management on August 19, 2022 in the form of convertible notes. This.
This investment enhances our ability to continue our aggressive growth trajectory.
Second Toi received the agency for healthcare research and quality certification as an accredited patient safety organization. We're very proud of this certification is one of our key company tenants is creating the culture of safety, where our teammates feel empowered to provide input to.
To continue to elevate patient quality and care.
Third we're making good progress working through remediation of issues related to Sox compliance as we continued to strengthen our public company infrastructure and procedures.
And fourth we welcomed several new leaders to toi, including Christina Green as Vice President clinical research and fill a breaker in the newly created Chief Information Officer role, both Christina and Philip will play critical roles in our growth strategy as they lead our clinical trials business and IP strategy respectively.
Overall, we're pleased with the progress we've made over this past quarter and we continue to be optimistic about the expansion opportunities for our unique model of care.
We are making important strides as we continue to expand we have experienced slower than expected revenue growth primarily related to delays in closing acquisitions.
We are being disciplined about our M&A activity and certain deals we had projected to close early in the third quarter did not close.
As a result, we are updating our full year 2022 guidance, which mahir will outline in more detail.
To ensure that our cost structure remains aligned with our revenue growth. We are taking a multi pronged approach to controlling costs, including reduction of vendor and contract spend and a difficult but necessary workforce reduction.
These steps will allow toi to remain a highly competitive industry leader as we will continue to invest in growth.
We expect to become even stronger over time and capitalize on new opportunities to innovate for our patients and the overall U S health care system.
Now I'll turn the call over to hear to provide additional detail on our third quarter financial results.
Thanks, Brad.
Starting with the income statement.
While our topline we generated $65 million of total revenue in the third quarter of 24, 3% increase year over year.
And at six 7% increase compared to Q2 2000. Thank you too as we discuss our 2021 year end conference call. We made the strategic decision to terminate a large payer contract in late 2020.
And this impacted our growth in the third quarter absent determination, our revenue growth would have been 27, 3%.
For the third quarter gross profit was $13 million or 13, 8% increase over the prior year period gross margin was 20% on a GAAP basis, our net loss was $3 million for.
For the quarter for the quarter, our adjusted EBITDA was negative $6 7 million.
Our adjusted EBITDA calculation includes provider startup costs as well as acquisition costs further details on how we define adjusted EBITDA can be found in our 10-Q.
Now moving to balance sheet at.
At quarter end, our cash and cash equivalent balance was $61 million and we had $87 million in investments.
Expect this capital to be sufficient to support operations and enhance our growth for the next 24 months now turning to guidance, we are lowering our full year.
Topline guidance to a range of $245 million.
<unk> $250 million, primarily due to delay in closing of acquisitions.
Guidance does represent 21% from 31% growth over 2020 one.
Additionally, while we have seen our gross margin improved throughout the year gross profit is coming in lower than original guidance due to lag and David.
Therefore, we are lowering our gross profit guidance to a range of $1 $45 million $15 million and our adjusted EBITDA guidance to the range of negative <unk> 5 million to negative.
Thank you.
Despite this near term headwinds, we have continued to invest in our business supporting our long term growth trajectory.
As a reminder, in January 20th 90, 290, <unk> implemented a new policy regarding the endorsement of pharmacy services.
Although the policy was not intended to change the way physician administered chemotherapy drugs.
Under the medical benefits are reimbursed and the early part of the year. The medical managed care plans. Nevertheless began to transition. Some of this plan is to be paid as a pharmacy benefit the California Department of health care services.
<unk> clarifying guidance at all medically necessary prescription drugs administered in our allocation offices continue to be available through medical benefit during the first three quarters of 2022, we saw minimal impact in our IV chemotherapy drug it investment.
Respect to O&M expenses, we have historically this fence oral on Olympics.
And many conversations and some of the scripts are now being covered under medical Rx insurance Richie.
We are not currently able to fill.
We estimate this will translate into an induction of dollars 6 million in revenue in 2022 compared to what we would have otherwise generated we continue to actively assess opportunities to mitigate the impact on our business going forward, including launching or acquiring or pharmacies. We will update you once more info.
Our mission is available.
With respect to SG&A, we are on track with our spend so far in 2022.
To make targeted investments in corporate infrastructure in particular, those related to public company costs and supporting our growth trajectory.
I want to reemphasize that we are not adding back P&L costs.
And EBITA.
Are we adding back any startup costs related to new sites on Newco winders.
I will now turn it back over to Brett for some summary remarks.
Thanks Meyer.
In summary, Toi continues to make important strides in our efforts to be the nation's leading value based oncology group by expanding into new markets and completing several acquisitions in the quarter. We are continuing to make good progress in bringing our unique model of care to more patients and more communities.
Our expanded gained share and value based agreements show that there is continued demand amongst our partners and with the recent $110 million investment from Deerfield, we have more resources and tools to execute on our growth strategy.
We look forward to making additional progress in Q4, and providing an update on our next earnings call and with that I'll turn it back over to the operator to open it up for questions.
Thank you Sir.
Ladies and gentlemen, we will now be conducting a question and answer session.
So I would like to ask a question. Please press star and then one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May proceed.
And then two if you would like to remove your question from you.
Again, Please press star and then one.
I'll ask a question.
First question is from Brian <unk> from Jefferies.
Hey, good morning, guys or good afternoon guys.
Thanks for all the color that you shared in your prepared remarks, I guess, Brad I'll start by asking first as I look at the capital revenue number that you reported for the quarter.
Down year over year is there anything to call out as to why that is.
Yes.
We haven't we haven't lost any contracts some of our partners have lost some membership, but we haven't lost any contracts.
Yes.
Okay got it and then as I think about.
The myth in a way right.
Sided delayed acquisition closings is that just basically pushing that out to next year as a way to think about it so.
As I think about modeling for 2023, and obviously youre, putting some cost cuts in place how are you thinking about.
Where potential earnings power is versus your three Q3 view.
If those are the moving parts.
Yeah.
Good question Brian .
I think we will we will most of the way catch up to where we wanted to be by the end of the year. So our exit trajectory will be most of the way caught up but not all the way caught up.
As I mentioned, we're trying to be very disciplined.
Our M&A strategy.
We could have paid more than acquired more.
Practices, but we've been disciplined in.
As a result.
The amount of acquired revenue has fallen below our expectations. So we will mostly catch up I think on an exit trajectory, but not completely.
Got it and then I guess as.
As I think about free cash flow here right I mean, obviously with.
It was EBITDA.
The guidance cut.
EBITDA coming down guys got here I mean should we be thinking about.
Your free cash generation outlook or your cash burn is that worsening as well.
With the cuts in earnings.
Yes, so it's certainly something we focus on.
Like like a laser here.
Yes.
When we lowered the adjusted EBITDA targets that does mean, we are burning a little bit of additional.
Cash versus our previous estimates, it's a relatively small change to our free cash flow.
When you look at the amount of cash and cash equivalents, we have on the balance sheet versus.
$3 million to $5 million change in adjusted EBITDA guidance.
It's a pretty small impact to cash runway.
Feeling really good about cash runway.
It will be.
The amount of cash and equivalents, we have on our balance sheet. So we feel like we can execute on everything that we needed to want to do right now with with the cash we have today.
Got it and then last question for me here as I think about interest expense going forward, just maybe any guidance you can give us.
Any help you can give us into modeling that and also just any comment on hedging strategies that you've put in place.
So let me answer the first question on the interest I missed the last part so I'm going to come back to it in the second.
For interest, it's mostly related to our financing that we completed in.
August from VIP $810 million of that has.
Interest component to it.
It is.
A nuance to it on how we do that counting it out it based upon the.
The document itself so.
So I can follow up with you all.
Offline, but overall the interest for the $110 million at 4% is how you should model the world.
Got it and then any hedges that you've put in place just to.
Help you with interest rate risk going forward.
Exactly so rehab.
As of Q3 has started investing the money. So if you look at our balance sheet, you will see the money.
Cash and cash equivalent in three different places so.
The funds are invested at current rate, which is as you know recently we are in.
Really good interesting market. So our funds are on the slide.
Slightly above where our interest rates are.
Awesome. Thank you.
Thank you Brian .
Ladies and gentlemen, just a reminder, if you would like to ask a question. Please press star and then one now.
Next question is from Sandy Draper from Guggenheim.
Thanks, very much I guess the first question is just a clarification from the prior.
Brad or me here is so am I reading it correctly. There is no more unclosed acquisition revenue assumed in the guidance is that a fair statement.
Okay.
The high and low estimates would be the.
Sure.
The difference between whether it's some of our planned acquisitions closed or not.
Okay got it that's really helpful. And then maybe just when I think about the delays I totally appreciate.
<unk>.
When I think about your ability to or the things that you could do or would want to do to try to.
Closing faster or is it basically as you look going forward.
We just need to give ourselves.
Extra time in cushion.
We learn more are there things you can control and do differently or is this really just it's totally out of our control. So we just have to make sure we give ourselves lots of cushion.
Yes, it's a good question.
One that we've talked about two things. So I do think that we are being more conservative in our timeline estimates of how long it takes to move potential acquisition from first call to closing.
That is that's a little bit out of our control, we only control half of that process, obviously, the seller controls the other half.
And so we started to become just more conservative with how long it takes us on average to move something through the M&A pipeline.
The other thing we've talked a lot about is putting more opportunities into the top of the funnel.
Because the more we put into the top of the funnel.
The more selection that we have because as we said we're trying to be very disciplined they acquire practices that really fit our model.
So the more we can get through the top of funnel, obviously gives us a greater selection.
<unk>.
So so thats, adding adding staff to our M&A team.
Doing a more rigorous outreach effort and also.
Being smarter with the data of identifying opportunities and physician practices that we think would fit our model pretty well.
Okay, great one more on the M&A side.
You think the macro environment is having any impact on the slowdown and then longer term over the next couple of years is there any reason to think that.
Practices are doctor groups will be more willing to sell or because oncology pretty insulated. Unfortunately people get cancer or did you get cancer any treatment, so they're not going to really be seen in the vicissitudes of <unk>.
Consumer spending or other stuff, but I'm just trying to get some thoughts on hasn't had any impact short term people are just sort of like I don't know whats going on not doing anything, but then longer term could it.
B something that causes things to stay slower or maybe accelerate because people want to sell their practices.
Yeah, Yeah, it's a great question Sandy.
I do hesitate too.
To comment on macro trends given my relatively small add right. So we're looking at 15 or 20 practices in our pipeline at any given time, so I'm careful to extrapolate what we're seeing in 15 physician practices to the overall market but.
A couple of thoughts for you.
<unk> it's.
Particularly with the labor market.
It's that really hits the small practices.
The small practices that are that.
I have a hard time, attracting and retaining.
Staff amidst the great recession.
And with labor costs going up.
A lot of times those small practices don't have the ability to weather those labor cost increases.
So I think those two pieces of.
The economic situation.
I think have caused some of our practices to be more excited about selling to us some of our targets would be more excited about selling to us.
The only thing with a recession if it comes or just in general now that we're starting to see the.
The employment numbers go the other way is sort of a rotation it.
It can be a rotation of commercial insurance and into government sponsored insurance and so depending on the the <unk>.
Practice mix.
Of our targets.
Those practices that tend to focus a little more on the government sponsored.
Patient populations, maybe seeing actually some growth.
That rotation those that focus more on commercial populations may be seeing some.
Some declines and so depending on the type of practice that we're looking at.
The recession.
Rising unemployment could actually have a positive or negative impact on the target.
I.
I feel like there was maybe one more piece of your question that I didn't get to but let me stop there now.
That was really helpful. Okay. No you covered all and maybe just one last question and I'll turn it over.
If I just do some simple math on the reduction in EBITDA versus the reduction in revenue. It looks like it's slightly more decremental and I'm trying to think does that suggest that particularly the acquisitions. You are buying maybe came at a slightly higher margin or it was just incremental revenue over fixed corporate costs and now that.
The revenue is not there there is fixed costs that you are not taken out thanks.
So it's a little bit of both.
That's actually it's an interesting question I don't have the numbers off the tip of my time, So I would hesitate to put any finer point on it than that but here I don't know if you can offer any additional insight on that.
No I think you summed it right, it's a combination of both.
We don't have the details enter split between both at this point.
Okay. Thanks.
Thank you.
Ladies and gentlemen, just a reminder.
If you would like to ask a question. Please press Star then one.
Closing moment to see if we have any further questions.
There seems to be no further questions at this time.
I'd like to turn the floor back over to Bob <unk> for closing comments. Please go ahead Sir.
Okay. Thank you and thank you everybody for joining our call today.
I look forward to following up with you in the coming days and weeks. We're very excited about Toi path ahead, and we look forward to updating you on our progress on the next earnings call.
Good evening.
Thank you Sir.
Ladies and gentlemen that then concludes today's conference. Thank you for joining US you may now disconnect your lines.
Yeah.
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Yeah.