Ladies and gentlemen, greetings, and welcome to the Oncology Institute Second Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Hueppelsheuser, General Counsel at TOI. Please go ahead.

The press release announcing the Oncology Institute's results for the second quarter of 2025 are available at the Investors section of the company's website, the oncologyinstitute.com. A replay of this call will also be available at the company's website after the conclusion of this call. Before we get started, I would like to remind you of the company's safe harbor language included within the company's press release for the second quarter of 2025. 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 and free cash flow. Reconciliation of these non-GAAP measures to 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 are our CEO, Dan Virnich; and our CFO, Rob Carter. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Dan.

Thank you, Mark. Good afternoon, everyone, and thank you for joining our second quarter 2025 earnings call. I'm pleased to report another strong quarter of performance for TOI on our path to profitability, driven by the contributions of our over 650 outstanding clinicians and teammates. The strong momentum we saw in the first quarter continued into the second quarter with year-over-year revenue growth of more than 20%. Our second quarter revenue of $120 million was driven by monthly records set in our pharmacy business as well as 10% year-over-year growth in our fee-for-service business, driven by strong organic growth performance in Florida and Oregon. Our value-based contract pipeline remains equally strong with contracts effective in Q2, adding over 50,000 capitated lives in Nevada and California. We anticipate new value-based partnerships to continued strong momentum in the second half of the year through several new contracts, which I will provide more detail on shortly. At this point in the year, we remain confident in achieving positive adjusted EBITDA in the fourth quarter. Adjusted EBITDA loss of $4.1 million in Q2 represents a $4.6 million improvement compared to the same quarter last year, reducing the EBITDA loss by more than half, which was primarily the result of organic fee-for-service and pharmacy revenue growth, discipline in clinical payroll and SG&A across higher volumes as well as improving drug margins across IV and pharmacy as TOI leverages its increased buying power and distributor relationships. Turning first to our patient service business. We delivered several new capitated contract wins and expansions in the second quarter and continue to work through a robust pipeline of future opportunities, which will go effective in Q3 and Q4. In addition to the 2 contracts, which went effective in Q2 in Nevada and California, on July 1, we went effective…

Thanks, Dan, and good afternoon, everyone. I want to echo Dan's enthusiasm about our solid second quarter results. In the quarter, we've seen continued momentum across our business, demonstrated margin expansion and improved working capital, all while making meaningful progress on achieving adjusted EBITDA and free cash flow positivity by year-end. I'll start today with a review of the Q2 results and then close my prepared remarks by reviewing our financial outlook. Consolidated revenue of $119.8 million increased 21.5% compared to Q2 of 2024. Patient services revenue, which represents 47% of total revenue this quarter, was $55.9 million. This growth represents a 7% increase compared to a year ago, driven by fee-for-service revenue and a 5% sequential increase driven by CA and fee-for-service revenue. Pharmacy revenue of $62.6 million increased 41% compared to Q2 of last year and 27% sequentially and now represents 52% of total revenue. This strong growth was driven by increases in both our capitated and fee-for- service lives and improved performance of our retail and MID pharmacies. Clinical trials and other revenue was $1.3 million in the quarter. Recall that we outsourced our clinical trials business to Helios in the middle of the second quarter. Moving down the P&L. Our gross profit in the quarter of $17.5 million increased 34% year-over-year and 1.5% sequentially. Gross margin of 14.6% increased 140 basis points year-over-year, driven by the expansion in our dispensary gross margin, partially offset by a slight decline in patient services gross margin. Within patient services, TOI saw a decrease in margin on capitation revenue and an increase in margin on fee-for-service revenue. As a reminder, when a new capitation contract begins at several mid in 2Q '25, we tend to experience lower margin as TOI generates value in our risk business through discrete and active…

Thanks, Rob. In closing, in the second quarter, we delivered solid top line growth in all lines of our business while driving meaningful year-over-year reduction in EBITDA loss. We made meaningful progress expanding our capitated partnerships, saw strong growth in our pharmacy and fee-for-service business, reduced SG&A over 12% from the same quarter prior year and set a path for further efficiencies in our cost structure as we scale through technology enablement. We anticipate these efforts will continue to gain momentum through the rest of the year and remain on track to deliver adjusted EBITDA positivity in Q4. Operator, at this point, let's open the call to questions.

[Operator Instructions] Our first question comes from David Larsen with BTIG.

Congratulations on the very good quarter. Can you talk a little bit about the dispensing gross margin? That looked like it was up a lot year-over-year, maybe almost 600 basis points. Just any thoughts on like what's driving that? Are there any specific drugs? Is it Part B? Or is it Part D? Is it -- so just any color there would be very helpful.

Dave, it's Rob. Yes. So Q2 of last year was the worst impact from the EARP clawback. And so that's the quarter specifically where we took a 2023 data service reduction. And so dispensary margin in Q2 of 2024 was, I would say, artificially low because of that. Even normalizing for that, though, you're looking at double-digit growth year-over-year. That actually has a lot to do with the way in which we're procuring drugs at this point. Our scale at this point is providing new opportunities for us, including incremental rebates as well as some other pricing considerations that's just yielding better rebates and margin overall.

Are these infused oncology medications dispensed in the office as part of like Part B as in boy?

No. Dave, it's Dan. No, we're talking about Part D medications, so primarily oral specialty or self-injectables where they can be compliantly given under Part D.

Okay. Great. And then just any thoughts on like the potential impact for drug pricing reform, the Inflation Reduction Act, most favored nation comments. Just any thoughts on how that would impact your business, if at all?

Yes. We continue to follow that very closely, and we continue to believe that it's going to be net positive for TOI for a couple of reasons. One, reduction in pricing on our capitated business is obviously favorable for capitated margins and for our patients. And then on the fee-for-service side of the house, which is what most practices in the country are doing exclusively, we believe there will be some sort of make-whole through rebates or another mechanism to help keep those practices afloat. So in totality, those 2 forces will be net positive for TOI.

Okay. And then just like Option Care as an example, they've been talking about a certain drug like STELARA. There are some changes in pricing for that medication. It's not even an oncology drug. I think that's more like in the gut. But that one drug, changes in pricing for that one drug is having a significant impact on Option Care's EBITDA. Is there anything like that in your book of business that investors should be aware of as we get to the back half of the year or into 2026? Are there any 1 or 2 or 3 drugs that might be going like biosimilar with one manufacturer? So any thoughts there would be helpful.

No, not that we forecast. We've looked very extensively at our current drug portfolio. I think oncology benefits from the fact that within any given class, there's multiple different options that can be clinically equivalent, including biosimilar and non as well as other combinations. And within that, we see no situation where we have a single drug that is placing substantial risk on TOI's portfolio related to that sort of situation.

And then just one more quick one for me before I hop in the queue. Can you just talk a little bit more about the pressure on the gross patient service margin? Like how much of that gross profit is, we'll call it, capitated versus how much is fee-for-service? And then how much time will it take for that margin to kind of pick back up?

Yes. It's primarily related to the cap margin. And so we had a pretty sizable contract launch in March. This is in our Florida oncology network. We are barely through the continuity of care period where patients are remaining with the existing provider before moving over to TOI -- and so it wasn't a surprise at all. It's at this point where we expect to see the patients being transferred over to us. The margin will correspond and pick up over the next 3 months. So no surprise there, and that's one of the main catalysts for future margin progression is these new cap contracts maturing as they age.

So I think what I heard you say is you are now responsible for those members, you're collecting the PMPM rate, but they're getting their care where they had been originally and they haven't yet transferred their care into the TOI clinics. And once they do that, then we'll see the margins improve. Did I hear that correctly?

That's right.

Our next question comes from Yuan Zhi with B. Riley Securities.

Congrats on a good quarter. I got a couple. So first, one of your value-based care peers experienced the highest level of oncology spend in history and continued to forecast high level of spend in the second half of 2025. What was your observation in 2Q 2025? And will you be able to continue managing the cost at a relatively low level in the second half of 2025?

Yes, it's Dan. Thanks for the great question. Yes, I mean, 2025 was no surprise in the sense that we saw another year of huge increases in drug cost trend. driven by, again, lower utilization as well as just increase in costs overall for procurement. So that benefits TOI in the sense that there is more opportunity for us to provide value to our payer partners. We, as a whole, have seen our MLR remain relatively stable. And again, that's due to a couple of different things. One is our ability to narrow networks to drive care to lower cost sites of care and the high degree of control that our UM program provides over ensuring NCC and compliance, but also value-based therapeutic decision-making. So while the overall oncology-wide cost trend went up, again, that provides opportunity for us to engage and provide more value to payer partners. And then internally, when we look at our drug cost trend, it's been stable.

Got it. Can you quickly comment on this time line of this opportunity with [indiscernible] in Florida? I think it starts in 4Q. Can you recognize revenue in 4Q or it's more in first half 2023?

Yes. So we are tracking towards Q4 at this point, and that's when we would start recognizing revenue.

Got it. And one last question from me, maybe related to the prior question from David that some PBMs are shifting infusion drug from clinic to their own pharmacy as a way to shift margin basically from provider administered drugs to -- from medical benefit to pharmacy benefit coverage. Did you notice that? And will that be a negative impact to you for any oncology infusion drug?

Yes. Are you referencing -- you said PBMs is the game, but are you saying is that an opportunity for TOI to fill under pharmacy benefit versus Part B as a way to manage our risk? Or am I misinterpreting the question?

Yes. So some of the PBMs are shifting infusion drugs, which are provider administered and medical benefits to their own pharmacy benefit coverage. So it could be to your pharmacy, but it could also be, for example, CVS pharmacy out there. I'm just curious, have you noticed such trend? And will that impact your -- have a negative impact on you?

Yes. So almost without exception, our risk contracts are Part B as in boy risk only. So shifting drugs from Part B to Part D would shift them out of risk. So that would remove cost that was at risk to TOI that would be net positive for us, assuming you could compliantly fill a medication under Part D in the PBM drove that change.

Our next question comes from Robert LeBoyer with NOBLE Capital Markets.

Congratulations on a very nice quarter. I had a question about the new patients that are coming on from the contracts that you had previously announced as well as the ones that you mentioned for the second half. And I was wondering if you could give any details about the ones that are online and getting the monthly payment compared with those left to go from the first half or contracts signed in the first half and the ones that will be coming on in the second half, just to get an idea of the additional patient lives that will be added going forward. And who was the -- who are the start-ups at the higher cost compared with who's going to be in the continuing care at the slightly improved costs?

Robert, it's Dan. Thanks for the great question. So yes, so our growth in the second half of 2025 is primarily occurring outside of California. It's across -- it's primarily Medicare Advantage, but then we also just, as we discussed, started a new Medicaid risk contract outside of California. Because of the nature of utilization outside of California being much higher across product lines, these are at higher utilization, therefore, higher PMPM still generating substantial savings for our payer partners. So you would expect on a per member basis, higher revenue contribution.

Okay. Great. And you mentioned Florida and the expansion there. Is there any percentages of the new people compared with continuing patients? Or any sense of how much expansion in the number of lives that they will be in Florida or in the entire network?

Yes. I mean just broadly speaking, we project that Florida will end the year for TOI with right around 100,000 Medicare Advantage lives for Medicare Advantage that we're taking risk on. We have some non-Medicare Advantage risk in that market as well versus current is about half that. So that's a substantial amount of growth just within Florida. If you look at the total number of lives that TOI has under risk right now, we're right around 1.9 million. So that 50,000 in Florida that we're going to see in the second half of this year represents an incremental 2.5% on our total portfolio roughly.

Our next question is a follow-up from David Larsen with BTIG.

Can you talk a little bit more about your -- you used the phrase fully delegated risk arrangements. Like what does that mean? Are you taking full risk for all services being provided to those members, including non-oncology care?

No. Great question, David. Thanks for bringing it up. Now when we say fully delegated, what we are saying specifically is we are taking risk for Part B for oncology, medical and radiation oncology spend, but the delegation part of that refers to TOI is now given authority by our payer partner for 3 services: utilization management, not just for TI employed physicians, but on behalf of the physicians in our network outside of our employed 4 walls, so the independent oncologists who are providing care for those patients. Two is network design, meaning we work closely with our payer partners to get high-cost centers out of the network to show poor clinical care, poor utilization and align more closely with providers that have a value-based orientation. But ultimately, that contract exists between TOI and the independent provider, not the payer and the provider. And then three, claims adjudication. So TOI is getting prepaid capitation for the risk that we're taking, and then we are paying the claims for those non-TOI employed providers in the network. So it gives us a great degree of control over oncology spend across broader populations. It allows the faster, more cash-efficient scalability of our MSO model. And as we develop that MSO, it allows us to provide value to those independent practices and TOI by engaging with them not just on value-based care, but also engagement with our pharmacy services and clinical trials support. So it's a much more robust model in terms of being able to provide scaled value-based care than the legacy model in California, where we simply have a narrow network. TOI is the only oncology provider in the network, and we're not delegated. We're just given risk and managing our 4 walls and frankly, better for patients and our payer partners.

So what I'm hearing is you've been doing a really good job for the plans. So they're giving you more lives and more responsibility to continue to manage the care for those lives. And you also have the power of prior auth, I'm assuming, and the ability to narrow the network and influence formulary. So you have a high level of control, more control over the care that will be delivered over this expanded base, right?

That's absolutely right.

Okay. So it's not like an Agilent, for example, where that stock has been under enormous pressure because they're bearing risk for everything in the world, you're focused in on oncology where you know how to basically drive margin and improve clinical care.

Yes. Sorry, just one last comment on that. Yes, we're taking the exact same risk or just giving additional tools to help manage that risk and drive performance.

At this time, there are no further questions. The conference of the Oncology Institute has now concluded. Thank you for your participation. You may now disconnect your lines. Thank you.