The Oncology Institute, Inc. (TOI) Earnings Call Transcript & Summary

Hi. Good morning, and welcome back to the UBS Healthcare Conference. My name is Andrew Mok. I'm the health care providers analyst at UBS. And joining me on stage is CEO of the Oncology Institute. Brad, welcome to -- Brad Hively. Brad, welcome to the stage and welcome to the UBS Healthcare Conference.

Thanks, Andrew. It's a pleasure to be here with you. I appreciate the invite and the interest.

Absolutely. And Brad, to start, why don't you give us a little bit of background on the company and help us understand how you're differentiated versus a traditional oncology practice.

Yes, sure. So TOI is a large community oncology group, and we're the nation's leading value-based oncology group. So what that means is we get better outcomes for our patients at lower cost of care. Don't think of us as a network of independent oncologists, think of us as a collection of employed clinicians. So we employ our doctors, own our clinics. We have about 90 oncologists in mid-levels employed across 60 locations in 5 states, California, Arizona, Nevada, Florida and we're just opening in Texas. And we have a value-based model both clinically as well as financially. So financially, we take risk on populations of patients, we take capitated contracts as well as gain sharing contracts underneath payers and at-risk providers. And clinically, there's really 3 levers to think about that we pull on to improve outcomes and lower costs. So number one is making value-based decisions on chemotherapy regimen selection. Because as you know, over 80% of the cost in oncology are drugs. So making value-based decisions on what drug is prescribed is really important. Number two is appropriate transitions to palliative care and hospice because over 1/3 of costs in oncology are delivered to patients in the last year of life. So preventing unwanted or futile care at the end of life is really important to our patients and also helps prevent in lower cost. And lastly, it's preventing unnecessary hospitalizations and ED visits. So if you think about it, cancer patients go to the hospital for predictable reasons, generally side effects of chemotherapy, so pain, nausea, vomiting, dehydration. And we have good supportive care medications for all those symptoms. So good symptom control is about making sure patients have access to those medications, know how to take them, know when to take them. And if they do all that, and we help them do it, that will help them stay out of emergency rooms and hospitals. So we do all that. We can generate 25% improvement in cost while also improving quality. So that's a quick overview on who we are, what we do.

Great. And given that you just mentioned that you're expanding into Florida and Texas this year, why is that a priority for the company? What do you find attractive about those markets in particular?

Yes. So for a lot of reasons. Our mission is to be the nation's leading value-based oncology group. We already think we're the furthest along of any oncology group, but if we're only in a handful of states, it's hard to say where the nation is leading anything, right? So we've got to bring our care model to more patients around the country and where to start. The good thing is that we have interest from essentially everywhere. Everywhere we go, we talk about our model and payers or at-risk primary care groups say, yes, we love this, please come here. So we had to pick where to start. So Florida and Texas are good places to start for a bunch of different reasons. One is they're big, there's a lot of population. And two is they're managed care mature. So the managed care entities and infrastructure in those markets are mature. So the understanding and ability to do value-based contracting is further along in those states than in many other states. So that's why we picked Florida and Texas.

Got it. A couple of follow-ups there. A common characteristic you just mentioned is that those markets are mature -- are more mature managed care markets desirable to you, and should we view less mature markets as a potential barrier to your expansion into new markets?

Yes. I think that's one way to look at it, but I look at it slightly differently. So the best places to start are where the managed care markets are more mature. The nice thing is that the entire industry is moving from fee-for-service to fee-for-value, right? So there's a ton of tailwinds on that trend. Different states are moving at different speeds. So we can build multibillion dollar businesses in Florida and Texas alone. So we want to start there. And by the way, we'll end up in a few other states along the way because we're opportunistic about where our partners ask us to go. But by the time we're done building in Florida and Texas and elsewhere, the whole industry will have moved along and there'll be another dozen states that are then now more mature and ready for us.

Got it. And a common criticism of value-based care models generally is that health care is local and proof of concept in one market doesn't always translate to replicated success in other markets. Clearly, you've shown that the model works in your home markets in California, but what gives you that confidence that this will work outside of your core markets given health care is so local and specialized at times?

Yes. That's a good question. So let's compare in contrast for a second. So the at-risk primary care groups, they take risk on a population of patients and they're at risk for all costs of the entire population. The amount of care they control in their clinics is relatively small. The amount of care that exists in the community outside of their control is very large. And as you suggest, every market you go to has a different set of factors, different health systems, different hospitals, different specialists, et cetera. So the ability to replicate the primary care model is quite difficult because so much is out of their control. So you compare and now contrast that to our model. What we're at risk for generally occurs inside the 4 walls of our clinic. And whether you're a patient in a California TOI office or a Florida TOI office or an Arizona TOI office, you get treated the same way. That's by design, evidence-based clinical pathways, you get the same treatment no matter which one of our clinics you walk into. So our ability to replicate our care model is actually much -- it's much easier for us to replicate our care model versus, as you mentioned, some of the primary care groups that have had a harder time with that replication.

Got it. That's helpful. And when we think about those primary care models, very clinic-oriented, capital-intensive. Maybe compare the capital intensity of those models versus what you do, and the J-curve associated with those models.

Yes. So our -- we don't build the sort of the big mega clinics that a lot of the primary care companies do. And that's because -- in part because we're trying to improve access for patients in local communities. So we prefer to have more smaller offices, easier access, more convenient to more patients versus some of the larger mega clinics that you've seen other groups build. For us, it's interesting. The J-curve for the primaries, they get a cohort of patients in, and it takes them a while to assess those patients, code them properly, create care plans and interventions that lead to profitability, right? So it's a while for them to become profitable in cohorts of patients. For us, it's different. Cancer is more an acute disease, right? So cancer happens, then you're treated, hopefully, you get better and then you move into survivorship mode. So for us, the clinical outcomes are there almost overnight. When we enter a market, as soon as patients start coming to us, our clinical model is working just like it should and just like anywhere else. For us, the J-curve is about volume, right, because when we start in a market, we don't have a full complement of contracts yet, we're building. And so the J-curve for us is just getting enough patients into the clinics to cover the fixed cost of clinician salaries and rent and stuff like that. So both J-curves but for different reasons.

Got it. That's helpful. When you think about the competitive landscape in oncology, who are your competitors? And how do you differentiate yourself against that competitive set?

Yes. So there's a lot of great oncology groups in this country, and we appreciate what all of them do. We just have a unique focus. We're really the -- by far, the leading value-based oncology group, if you measure it by number of patients managed under capitated or value-based contracts. And so how is it that we got so far ahead? And why isn't the rest of the industry catching up. And a lot of that is because it's different focus. So most of our competitors and most of the oncology groups that many of you in this room have heard of generally focus on PPO patients and Medicare fee-for-service patients. And that's one set of demographic. And we focus on Medicare Advantage, commercial HMO, managed Medicaid. Different demographics. Because the market is so big and so fast growing that all the rest of our competitors are focused on PPO and fee-for-service, and they're all prospering. And they're all profitable. And there's no economic imperative for them to change their focus to Medicare Advantage, managed Medicaid commercial HMO. That's where we got our start. We were born in Southern California, serving CareMore and Optum and Heritage provider network. And -- so we've always served that population. That's what's allowed us to get so far ahead where everybody else just focuses on different population.

Got it. And I guess given those kind of perverse incentives, what are the -- what do you see as the barriers to -- or resistance to value-based oncology if the fee-for-service model seems to be working well for those that are practicing it?

Yes. So I think the resistance to value-based oncology is that it's hard to do. So it takes a lot of effort and resources and education to do it well. And when there is -- when the model is not broken, nobody wants to fix it. So if you're a payer in one of the 45 states that TOI is not in, you're having a tough time finding oncology groups who work with you in a meaningful, value-based way because those groups are just saying, look, my model is working. I like the fee-for-service model.

Got it. And maybe describe the value-based contracts that you've entered into? How do they compare? And what kind of variation do you see in those value-based contracts?

Sure. So big picture, think about 2 types of value-based contracts, population risk and patient-specific risk. So when we are -- when TOI is treating the preponderance of the patients in a population, we can go at risk for the entire population. And we can do a PMPM rate. That's a capitated contract or subcapitated underneath somebody where we take risk for all of the oncology cost of a population. In newer markets where we may not have enough clinics or enough doctors to provide the preponderance of the care to a population, we can't go at risk for an entire population if we're only treating 10% of that population. But what -- so what we do in those cases and what we've shifted to and we've talked about publicly are gain-sharing contracts, which are patient-specific risk, which assess the patients we treat, compare them to the other patients in the community that we didn't treat. And if we can demonstrate improved outcomes and lower cost, then we can share in some of those savings we create. So patient-specific and population.

Got it. And what are the financial implications of that change from value-based to gain-sharing arrangements?

Yes. So we believe that the margin profile is actually going to be quite similar. So the margins we generate in gain-sharing contracts should be fairly similar to the margins we generate in cap contracts. The revenue profile is a little bit different. It's going to take -- depending -- we're still early on the gain sharing. So these estimates are not -- there's not 10 years of history in forming these estimates, but we think it's going to take about 3x as many gain-sharing patients to equal the same level of revenue as a cap contract. So margins will be similar, but if we have 100,000 capitalized, we'll have to have 300,000 gain-share lives to have equivalent revenue.

Got it. And earlier, you mentioned your ability to take capitated and sub-capitated risk on oncology. Is that sub-capitated risk done through primary care -- value-based primary care practices?

Yes, that's right. So a big part of our strategy is attaching ourselves to the risk-bearing primary care groups, becoming their oncology solution and growing wherever they grow.

Got it. So the growth that we're seeing in value-based care -- primary care and value-based care more broadly, that is potentially an indicator of the level of growth that we should see from TOI.

Absolutely.

Got it. That's helpful.

Yes.

New therapies in oncology typically come with an expensive price tag. Under a capitated arrangement, how do you protect yourself financially from bearing the cost of new oncology drugs as they're approved each year?

Yes. So that's a question a lot of people ask. And we cheer every time a new drug is approved because it's good for science, it's good for patients. And so we're -- all of us are thrilled. From a financial impact to us, it varies depending on the contract. But for the -- there's a couple of like step back, high-level things to consider. While about half of our patients are covered under value-based contracts, the other half are covered under plain vanilla fee-for-service contracts. The market is just not advanced enough anywhere where we can be fully value-based. The economics of those 2 patient populations are almost complete inverse, right? So what's good for fee-for-service profitability is bad for capitated profitability. What's good for capitated profitability is bad for fee-for-service profitability. That's actually a nice hedge for us. So what's good for one side of the business is bad for the other and vice versa. So we don't have to get too focused on trends one way or the other because they offset, and we're roughly 50-50 right now. The other thing I would say about that in -- if you think about many of our contracted partners have far fewer lives than us. So we're entering into risk-based contracts with groups that have 20,000 lives, 50,000 lives, 70,000 lives, and we have 1.6 million. So if you're a group -- a primary care group that has 50,000 lives, you're really worried about a 1 in a million cancer case that's going to be super expensive, and that's going to blow up your budget for the year. We're actually talking to a group that has 8,000 lives right now for a capitated contract. They're very worried about a very high-cost cancer case. They said, well, you couldn't take capitated risk on 8,000 lives because we said, absolutely, because we have -- we can spread that across 1.6 million. So in many ways, we're better equipped to take risk for the 1 in a million type cases than our partners are. So it's great. They can put that risk on to us. We can spread it across the larger patient population, and everybody wins there.

Got it. And as you expand into new markets, how do you suspect that business mix will evolve over time?

What do you mean the business mix?

The 50-50 fee-for-service versus value-based?

Yes. So big-picture trends are moving the market towards value. So CMS' called letter recently is setting expectations for all of the health plans to put more of their providers at risk and value-based contracts, all the tailwinds are moving towards value. But there's a sort of offsetting trend within our business, which is acquisitions. So as really the only oncology group that has sort of meaningful capitated contracts, every time we do an acquisition, I mean none of the companies that we're acquiring have capitated contracts like this, right? So every time we do an acquisition, it essentially comes with all fee-for-service business. So it sets us back a little bit. So industry tailwind is pushing us towards value. Our acquisitions are every time we do when we move backwards. Depending on the pace of acquisitions, we actually might move backwards a little bit on the fee-for-service versus value. We might skew a little bit more towards fee-for-service for a while as we do these acquisitions. And then when we layer those value-based contracts onto our acquired practices, then we'll sort of go back in the other direction.

Got it. And what sort of time line does it take to typically overlay those value-based contracts on to those acquired practices?

Yes. Sometimes we can do it right away. So for example, in Florida, we layered value-based contracts on very quickly because we had sort of some anchor partners who had said, hey, we want you to come to this market, and we had already been working on a value-based contract, so it was pretty quick. So in general, it doesn't take that long to get the first one, but we've got to stack them on top of each other, right, until we get to the really mature clinics, we've got to have 3, 4, 5, 6 value-based contracts all feeding into a market. So how long it takes us to get to that maturity, it's a little bit longer, but the first one can come really quickly.

Got it. That's helpful. One of the things I want to ask about is the missed screenings during the pandemic. We saw a lot of patients miss their cancer screenings because they couldn't see their doctors and then they were subsequently diagnosed with later-stage cancers. How did that impact your business?

Yes. First of all, just from a patient perspective, that's a tragedy when there's a cancer that could have been caught early that wasn't and then it becomes a later stage and the prognosis is not as good. So it's been tough on all of our team and our doctors and clinicians when we see patients coming in with later-stage or further progressed cancers. We have seen it ebb and flow. It's actually -- it's a little bit hard for us to tease out the -- in the very beginning of COVID, we could very clearly see it, like visits dropped quite a bit. Now in 2022, it's a little bit harder to tease out. Are we in a bounce-back stage? Are we not? Because we're growing. If we were just a stable group in one market with like one contract, we could see more easily the seasonality of it because we're growing quickly and entering new markets. It's a little bit harder to tease it out, the impact of COVID. In general, COVID is not going to have a meaningful impact on our business because of the give and take of the fee-for-service and value-based incentives. So if it -- what helps one side of the business hurts another. It's -- so in general, it's not going to have a material impact on our business.

Got it. And then just taking a step back, what are the latest trends you're seeing in cancer screenings? Are you experiencing an increased level of screenings and maybe compare that to pre-COVID levels, if you can.

Yes. I mean the great thing about cancer screening is, in general, and studies have shown outcomes are better and costs are lower when cancer is caught earlier, right? So everybody wins when cancer is caught earlier. We are working right now. Generally, we are downstream from the screening and prevention. With the exception of our survivor patients who have already been to see us that we were monitoring them to make sure cancer doesn't come back. The screening and prevention that are done on otherwise healthy patients happens really more at the primary care level, a little bit at some of the other specialties. But oncologists traditionally have not been involved in the screening and prevention. We kind of wait until somebody finds something, and then we get involved. So we're starting to have conversations with some of our partners about could we help you do more on the screening and prevention because like I said, everybody wins when we catch it early.

Got it. want to shift to the margin profile of the business. Your gross margins expanded nicely to over 22% in the first quarter. What were the drivers of that gross margin expansion?

So there's a couple of things. So our biggest cost item are drugs. So improvements in drug purchasing are one of the quickest ways to drive margin improvement. And we've been doing a lot of work internally on matching our finance team and our UM teams together so that we can quickly identify opportunities, for example, for rebate optimization. So all the drug manufacturers have run rebate optimization programs periodically. And so somebody will run a special if there's 3 drugs in a therapeutic category that are all equivalent, one. Manufacturer will say, "Hey, if you can prescribe this one more than the other one, there'll be rebate opportunities." And so if we're really good at our finance and our UM teams connecting and taking advantage of things like those rebate opportunities, that was some of what drove the improved purchasing in the first quarter. There's actually more room to go. So the way drug purchasing works is the more you purchase, the better discounts you get. So every time we grow, every time we make an acquisition, we get closer to the next tier and the next threshold of discounts in our drug purchasing. So you're going to continue to see improvements as we grow there. The last thing I would say is that we had slightly better-than-expected utilization under our cap contracts in the first quarter. So a combination of better drug purchasing and slightly better-than-expected utilization under cap contracts produced the 22% margin, which we were really pleased with. That was -- it was one of the best quarters we've had.

Got it. And how does the gross margin break down between your fee-for-service and value-based portfolio? Is there a meaningful differential there?

Yes. So in general, we make a little bit better margins on our value-based contracts than we do on our fee-for-service contracts. So if you took the midpoint of the gross margins, value-based is going to be above 22%, fee-for-service is going to be below 22%. We haven't put a fine point on exactly what those numbers are, but in general, value-based is -- we make a little better margins on value-based.

Got it. So as the whole industry moves towards value-based care and you're able to acquire practices and overlay value-based contracts, there should be a positive margin mix shift that should help your margins expand as you grow and increase penetration of value-based care.

Yes. That's right.

Got it. That's helpful. Core to your model seems to be finding the right oncologists who are aligned with the company's strategy. We talked about the acquisitions that you're doing. How do you source oncologists into your practice?

Yes. So we've been really pleased with the interest level from physicians nationally to join our model and our practice. We have a different way of doing physician compensation. Ours is some ways very -- more similar to Kaiser where our physicians are paid largely base salaries with bonuses for working hard and patient satisfaction and good clinical outcomes. But it's a stable type of compensation structure versus the more entrepreneurial type of compensation structure that a lot of our competitors have where you have to build your practice, you get compensated for how busy your practice is. It's a little more of an eat-what-you-kill versus ours is more stable, rewarding physicians for practicing how they want to practice, which is more and more these days, oncologists want to practice in value-based models. Oncologists oftentimes are philosophically aligned with our model. But in the fee-for-service environment, they can't practice how they want to practice because it's not financially successful to do so.

Right. And does that model attract a certain type of oncologists? Can you help us understand the experience level and profile of an oncologist who joins TOI?

Yes. So that's something that we take a lot of pride in is that we're able to take oncologists right out of fellowship all the way up to late career physicians who may be deciding to sell their practice to us, bring them in and model them into the pathways that we have the evidence-based pathways. So we've got -- we hire a lot right out of fellowship, we have a lot of mid-career doctors, we have a lot of late career. On balance, our average tenure of a physician is slightly younger than national average but not meaningfully. So we're able to recruit and train and integrate physicians with really any background.

Got it. And do you -- how is the competitive landscape for oncologists today? Is that going to be a limiting factor to your growth over the next 2, 3 years?

Yes. So Anybody who's ever run a physician practice knows that it's hard to recruit doctors. And it's hard to keep doctors happy. So we spend a tremendous amount of time and effort working on supporting our physicians to make it easy to practice high-quality medicine at TOI. And we're feeling good about that. Our physician turnover rate is lower than the national average. So we feel great about that. There are hotspots. At any given time, there'll be one market or one county or geography where we're -- we need another doctor or 2 there. But overall, we're feeling good about our ability to recruit doctors. And importantly, we can bring doctors into our practice either by hiring them or by acquiring them. A lot of our competitors don't really hire de novo clinic doctors. They only like a USON or an AON, they're not really starting practices from scratch, right? They're just acquiring practices that exist. So -- but for us, that's not a limitation. If a payer wants us to go to a market and there's no acquisition opportunities, we'll just hire and build their own clinics.

Okay. Great. On the capital deployment front, when you look at the various ways you can invest the growth capital you raised through the SPAC, how will you deploy that capital? Where do you see the greatest opportunities as you look to invest that growth capital?

Yes. So it will be a mix of de novos and acquisitions. But probably 75% of the growth capital we raise will go towards M&A, towards acquiring physician practices. It's an accelerant for us. Historically, for the first 12, 13 years of the company's existence, we didn't have any growth capital. So we hadn't -- the only opportunity we had to grow was through de novos. Now that we have access to growth capital, we compare those 2 things together and grow a lot faster. But the majority of the capital we've raised will go towards acquisitions and the minority will go towards de novos and just general working capital.

Got it. And in those acquisitions, what sort of investment criteria are you looking at? How have transaction multiples trended over the last year or so? Just put some color on the M&A pipeline and trends there.

Yes. So the first thing that we look for is clinical quality, reputation and philosophical alignment like if we're going to acquire a practice, are these good doctors? Do they have a good reputation? And are they philosophically aligned towards value-based care? The interesting and unfortunate thing about our market is that if you are a philosophically aligned oncologist and you want to practice value-based care, and you have been practicing value-based care for the last 20 or 30 years, you probably haven't been that financially successful because our industry does not reward value-based oncology. It rewards really aggressive fee-for-service oncology. And so as a result, the practices we want to acquire are generally small. They haven't grown to 20, 30, 40 physicians. They generally don't make that much money. They don't make as much money as they could. And so that enables us to acquire them at reasonable multiples and then help them succeed in value-based care by giving them the contracting and infrastructure that they need to get rewarded for what they've been doing all along but didn't have the sort of contracting infrastructure to get rewarded for.

Got it. That's helpful. And sticking with the capital deployment theme. TOI recently received board approval for a $20 million share repurchase program.

Yes.

That's somewhat unusual for a company that's new to the public markets. What drove that decision? And what should we expect from that repurchase program?

Yes. So that was really driven by the fact that we had the 6-month lockup expiration of our de-SPAC coming up. It was -- I guess, at this point, it was -- time goes by so fast. I think it was last week. We had seen some of the other de-SPACs that had de-SPAC-ed a few weeks or months before us, have pretty significant dislocations in their stock price on the day or days following their 6-month lockup expiration. So we already think our stock is a good value, but we wanted to make sure that we had the ability to prevent or mitigate any market dislocations that might occur from a 6-month lockup expiration. So we're -- I think we're now almost 10 days past that. So, so far, so good. There have been no major dislocations. But that's why we did it. We really don't want to use our growth capital to buy back our stock but just to make sure that nothing crazy happened. Yes.

Got it. So it was more of a defensive mechanism. Okay. Great. Brad, any final comments you want to leave the audience here today?

I just really appreciate your interest in TOI. The great thing about running this business is we're doing great for patients and doing great for society. If we could wave a magic wand and apply our care model to every cancer patient across the country, outcomes would be better, cost would be lower, we could do a lot of good for the world. So your support investing in us helps us to bring our care model to more patients. So thank you.

Great. Certainly, an exciting time for value-based care and value-based oncology.

Yes. Thanks, Andrew.

Thank you so much for your time, Brad.