Executive Summary / Key Takeaways

• The Oncology Institute (TOIIW) is strategically pivoting towards higher-margin value-based care contracts, particularly fully delegated models, and leveraging its rapidly growing specialty pharmacy business to drive revenue growth and improve profitability.
• Recent financial results show progress, with Q1 2025 revenue increasing 10.3% year-over-year, driven significantly by the Dispensary segment (+24.2%), and gross profit improving substantially (+44.1%), although partially aided by a non-recurring rebate.
• Operational efficiencies and cost control initiatives, including a notable reduction in SG&A as a percentage of revenue and working capital improvements, are critical components of the company's path to profitability.
• Balance sheet strengthening actions, including a $20 million debt principal paydown, removal of a minimum cash covenant, and a $16.5 million private placement, enhance financial flexibility to support organic growth and strategic initiatives.
• Management is guiding towards achieving positive Adjusted EBITDA and Free Cash Flow in the fourth quarter of 2025, supported by new contract contributions, expected drug margin improvements, and ongoing cost management, with full-year 2025 guidance set at $460M-$480M revenue and negative $8M to negative $17M Adjusted EBITDA.

The Oncology Institute: A Value-Based Care Model in a Shifting Landscape

The Oncology Institute, Inc. (TOIIW) operates as a national platform focused on delivering integrated direct care and managing costs for patients undergoing cancer treatment. Founded in 2007, the company has evolved from traditional community clinics and infusion centers to embrace a more comprehensive model that includes a specialty pharmacy and participation in clinical research. This evolution is set against a backdrop of increasing pressure on healthcare costs and utilization trends, particularly within Medicare, where payers are actively seeking partners who can deliver high-quality care efficiently.

TOIIW's core strategy centers on expanding its value-based care footprint, moving towards arrangements like capitation and fully delegated contracts. This approach positions the company to manage the total cost of oncology care for defined patient populations, aiming to improve outcomes while controlling expenditures. This model contrasts with traditional fee-for-service arrangements, where providers are reimbursed for each service rendered, potentially incentivizing higher utilization. By integrating services – from physician visits and infusion therapy to specialty pharmacy and care coordination – TOIIW seeks to capture more of the patient journey within its network, reducing costly out-of-network leakage and enhancing its ability to manage drug formularies and treatment protocols.

The competitive landscape for oncology services is diverse, ranging from large, integrated health systems and hospital-based centers to national networks of community oncology practices and specialized service providers like infusion centers and pharmacies. Larger players like McKesson (MCK), through its US Oncology Network, and Cardinal Health (CAH) leverage vast distribution networks and scale, often resulting in lower operating costs per unit. Other competitors, such as American Oncology Network (AON), focus on building extensive physician networks, while Option Care Health (OPCH) specializes in home-based infusion and specialty pharmacy.

TOIIW positions itself by emphasizing its integrated model and specialized oncology expertise. While it may not possess the sheer scale or distribution advantages of giants like MCK or CAH, its focus on comprehensive, coordinated care within its clinics and through delegated networks aims to offer a more patient-centric experience and potentially better cost management for payers. The company's in-house infusion and dispensary services, for instance, are cited as providing greater efficiency in patient throughput compared to some outsourced models. Its strategy of bundling oncology programs and patient support services is intended to enhance customer loyalty and recurring revenue, a key differentiator against competitors primarily focused on distribution or single service lines. However, TOIIW acknowledges challenges related to its smaller scale, which can lead to higher operating costs compared to larger rivals, and the need to continuously enhance its technological capabilities to match or exceed competitor speeds in areas like clinical trial management.

Technological differentiation is becoming increasingly important in oncology. TOIIW's integrated service networks, supported by underlying technology platforms, are seen as a core differentiator, enabling better patient retention and potentially superior margins by keeping care within the network. The company also highlights its capabilities in clinical trial management, aiming for faster patient enrollment. Looking ahead, TOIIW is investing in new technologies, including achieving certification for Radiopharmaceutical Therapy in its California radiation oncology clinics, targeting a December 2024 go-live with an expected Adjusted EBITDA contribution exceeding $1 million in 2025 from this service alone. This positions TOIIW among a limited number of community-based practices offering this advanced therapy, which is traditionally hospital-based. Furthermore, the company is exploring the use of Agentic AI in key workflow processes over the next 12-18 months, with the stated goal of driving greater efficiencies and reducing SG&A as a percentage of revenue. These technological investments are strategic moves aimed at enhancing the company's competitive moat, improving operational efficiency, and supporting margin expansion in a competitive market.

Performance Reflecting Strategic Shifts

The Oncology Institute's recent financial performance provides insight into the impact of its strategic focus and the challenges it has faced. For the three months ended March 31, 2025, the company reported total operating revenue of $104.4 million, a 10.3% increase compared to $94.7 million in the prior-year period. This growth was primarily fueled by the Dispensary segment, which saw revenue jump 24.2% to $49.3 million, reflecting continued success in attaching prescriptions to patient visits. The Patient Services segment also contributed to growth, with revenue increasing 1.2% to $53.1 million, driven by a 1.4% rise in Fee-for-Service revenue and a 0.8% increase in Capitation revenue from new contracts and membership growth, partially offset by terminated contracts and lower profit-sharing revenue.

Gross profit for Q1 2025 was $17.2 million, a significant 44.1% increase from $11.9 million in Q1 2024. This improvement was attributed to better revenue and margin performance in both Patient Services and Dispensary segments. Management noted that Q1 margin improvement included the recognition of a one-time rebate of approximately $1.5 million related to a new drug distributor contract, a benefit not expected to recur. However, they also anticipate drug price increases to positively impact margins throughout 2025. Direct costs for Patient Services decreased by 4.9%, partly due to lower intravenous drug costs and a more efficient clinical labor mix. Dispensary direct costs increased 21.5%, in line with the higher volume of prescriptions filled.

Selling, general and administrative (SG&A) expenses, including depreciation and amortization, decreased by 9% year-over-year in Q1 2025, falling to $27.2 million from $29.9 million. As a percentage of revenue, SG&A improved notably to 26% in Q1 2025 from 31.6% in Q1 2024. This reduction reflects the company's ongoing efforts to streamline operations and optimize overhead, a key component of its path to profitability.

Despite the top-line growth and SG&A control, the company reported a loss from operations of $9.9 million in Q1 2025, an improvement from a $18.0 million loss in Q1 2024. The net loss for the quarter was $19.6 million, compared to $19.9 million in the prior year. The net loss was impacted by higher interest expense ($5.6 million in Q1 2025 vs. $2.0 million in Q1 2024), primarily due to a $2.9 million loss on extinguishment of debt related to a partial debt prepayment, and an unfavorable change in the fair value of conversion option derivative liabilities ($3.3 million in Q1 2025 vs. zero change in Q1 2024). Adjusted EBITDA for Q1 2025 was negative $5.1 million, an improvement from negative $10.9 million in Q1 2024.

Looking back at 2024, the company experienced significant reimbursement pressures on Part D drugs, partly due to the impact of 2023 DIR fee runout and historically low reimbursement, as well as lower IV drug margins in Part B. This contributed to a decrease in full-year 2024 gross profit despite a 21.3% increase in revenue. Management indicated that the impact of the 2023 DIR runout was expected to be complete after Q2 2024, and they anticipate improved drug margins in the latter half of 2024 and into 2025.

Liquidity and capital management have been recent areas of focus. As of March 31, 2025, cash and cash equivalents stood at $39.7 million. The company used $5.0 million in cash from operating activities during the quarter.

Recognizing the need to strengthen its financial position, TOIIW undertook significant actions in early 2025. In February, it amended its Senior Secured Convertible Note facility, making a $20 million principal prepayment and, importantly, removing the financial covenant requiring a minimum cash balance of $40 million. This was followed in March by a $16.5 million gross proceeds private placement of common equity and a concurrent exchange agreement with a major lender to convert $4.1 million of debt into common-equivalent preferred stock and warrants.

These actions, coupled with ongoing working capital management initiatives (improving receivables, inventory, and payables), are aimed at enhancing liquidity and providing flexibility to fund operations and growth. Management highlighted improved cash flow from operations of approximately $9.8 million from Q4 2024 to Q1 2025, partly due to these working capital efforts.

Outlook and Path to Profitability

Management remains confident in the company's trajectory and has reaffirmed its fiscal year 2025 guidance, emphasizing a clear path to profitability and positive cash flow by the end of the year. The "North Star" for the management team is achieving positive Adjusted EBITDA and Free Cash Flow in the fourth quarter of 2025.

The cornerstone of this outlook is the expected contribution from new capitated contracts. Management projects approximately $50 million in annualized new revenue from deals signed between Q3 2024 and Q2 2025, with about two-thirds of this expected to be recognized in 2025 due to staggered effective dates. A key driver is the fully delegated Florida contract that commenced in March 2025, which is expected to provide positive margin contribution that will increase throughout the year as patient volumes are directed to TOIIW's network. The company believes its existing clinical infrastructure has the capacity to absorb substantial growth from these new contracts without a proportionate increase in providers or overhead, leading to improved efficiency and profitability.

Continued growth in the Dispensary segment is also a significant factor in the 2025 outlook. Management expects this segment's increased revenue to offset the modest $5 million reduction in full-year revenue guidance resulting from the outsourcing of the clinical trials business to Helios (HLTH) (effective May 2025) under a profit-sharing arrangement. While clinical research revenue will be deconsolidated, the partnership with Helios is expected to accelerate trials growth in the latter half of the year.

Cost management remains paramount. TOIIW is committed to keeping SG&A roughly flat in absolute dollars for 2025 compared to 2024, which, combined with expected revenue growth, will further reduce SG&A as a percentage of revenue. Initiatives in strategic procurement, formulary management, and potential future use of Agentic AI are expected to drive operational efficiencies and support margin expansion.

For the full year 2025, the company guides for revenue in the range of $460 million to $480 million. Adjusted EBITDA is projected to be between negative $8 million and negative $17 million, with Q1 2025 expected to be the weakest quarter (guided at negative $4 million to negative $5 million Adjusted EBITDA loss) due to seasonality, followed by progressive quarter-over-quarter improvement. Free Cash Flow for the full year is guided at negative $12 million to negative $21 million, with cash flow breakeven anticipated in Q4 2025. This outlook assumes continued operational execution, successful integration of new contracts, and favorable trends in drug margins.

Risks and Considerations

While the outlook is positive, investors should consider several key risks. The company operates in a complex regulatory environment, subject to laws governing Medicare and healthcare generally, which are subject to interpretation and potential future government review, fines, or penalties. Contractual relationships with payors are also complex and may be subject to differing interpretations regarding amounts due.

The company's financial performance is significantly tied to drug costs and reimbursement rates. While management believes the worst of the 2023 DIR fee runout impact is over and anticipates favorable drug margin trends, potential future changes in pharmaceutical pricing practices, including those stemming from government initiatives like the Inflation Reduction Act or potential tariffs, could impact margins. Management believes its ability to manage drug formulary provides a mitigation strategy, but this remains a material exposure.

The company's ability to achieve its growth and profitability targets is contingent on successfully integrating new capitated contracts, managing utilization and costs within these value-based arrangements, and continuing the growth trajectory of its Dispensary business. Failure to execute on these strategic initiatives could impact financial performance.

Furthermore, the company is subject to the NASDAQ minimum bid price requirement. While it expects to meet continued listing standards and plans to seek an extension if necessary, failure to regain compliance could lead to delisting, potentially impacting share liquidity and investor sentiment. The possibility of a reverse stock split to meet the requirement is a factor to consider.

Conclusion

The Oncology Institute is actively executing a strategic transformation, shifting towards a value-based care model and leveraging its integrated service offerings, particularly its high-growth specialty pharmacy. Recent financial results for Q1 2025 demonstrate progress in revenue growth and gross profit improvement, supported by new contract wins and operational efficiencies. The company has taken decisive steps to strengthen its balance sheet, enhancing financial flexibility to support its growth initiatives.

Management's guidance points towards a clear path to achieving profitability and positive cash flow by the fourth quarter of 2025, driven by the increasing contribution from new capitated contracts, expected improvements in drug margins, and disciplined cost management. While risks related to regulatory changes, drug pricing dynamics, and execution challenges remain, the company's strategic focus on value-based care, operational efficiency, and targeted technological investments positions it to potentially capitalize on shifts in the oncology care landscape. The investment thesis hinges on the successful execution of this strategy and the realization of the projected improvements in profitability and cash flow over the coming quarters.