Value Based Care Contracts Will Unlock Future Oncology Demand

Key Takeaways

• New value-based care contracts and expanded partnerships are driving sustained growth and enhancing recurring revenue in a shifting oncology market.
  
• Operational efficiency initiatives, including automation and clinical trials outsourcing, are boosting margins and focusing resources on higher-growth opportunities.
  
• One-time gains, clinic closures, revenue concentration, ongoing losses, and reliance on select business segments signal earnings volatility, operational risk, and uncertain long-term growth.

Catalysts

An oncology company, provides various medical oncology services in the United States.

• Acceleration of new value-based care contracts, including over 160,000 new lives added year-to-date and additional pipeline visibility, positions the company to capture increasing oncology demand driven by demographic tailwinds and higher cancer incidence, likely resulting in sustained revenue growth.
  
• Expanded delegated arrangements with payers, such as full delegation for utilization management and network in major markets, are differentiating TOI as a preferred partner in a healthcare environment increasingly focused on cost management and outpatient care, which is expected to improve patient retention and recurring revenue visibility.
  
• Robust growth in the pharmacy and dispensary segment (20%+ YoY in Q1), paired with increasing attachment rates to oncology visits, capitalizes on longer treatment durations and higher diagnosis rates in cancer, supporting margin expansion and top-line growth.
  
• Focused SG&A discipline, including technology-based process automation and the absence of prior-year reimbursement headwinds (e.g., DIR fees), is driving improving operating leverage and is expected to further expand net margins as revenue scales.
  
• Strategic outsourcing of the clinical trials business and filling capacity in newly entered secondary and underserved markets are set to accelerate operational efficiencies and allow greater focus on scalable, high-growth core segments, positively impacting future earnings and cash flow generation.

Oncology Institute Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Oncology Institute's revenue will grow by 17.1% annually over the next 3 years.
• Analysts are not forecasting that Oncology Institute will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Oncology Institute's profit margin will increase from -13.1% to the average US Healthcare industry of 4.6% in 3 years.
• If Oncology Institute's profit margin were to converge on the industry average, you could expect earnings to reach $29.6 million (and earnings per share of $0.27) by about July 2028, up from $-52.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.3x on those 2028 earnings, up from -5.1x today. This future PE is greater than the current PE for the US Healthcare industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Oncology Institute Future Earnings Per Share Growth

Risks

• Margin improvement in Q1 2025 was partly due to a one-time distributor rebate ($1.5M), which is not expected to recur in future quarters; removal of this temporary benefit may lead to less robust margin and gross profit growth, pressuring net earnings and margins over time.
  
• The number of clinics declined from 87 to 81 year-over-year due to the closure of underperforming locations, and fee-for-service revenue only grew 2% year-over-year; this points to potential challenges in expanding patient volumes organically, which could limit long-term revenue and market share growth.
  
• The recent outsourcing of the clinical trials program to Helios will reduce reported revenue by $5 million annually, and while management expects other segments to offset this, reliance on pharmacy and capitation growth may increase business concentration and introduce risk if those segments underperform, impacting total revenues.
  
• Despite progress, the company is still operating at an adjusted EBITDA loss (negative $5.1 million in Q1, with full-year guidance remaining negative and only reaching profitability possibly by Q4 2025), indicating ongoing operational risk and potential need for future capital raises, which could affect free cash flow and dilute shareholder value.
  
• Top three payer contracts constitute roughly 20% of capitation revenue, and with the recent loss/termination of a large contract in 2024, there is ongoing risk of revenue concentration and potential vulnerability to payer negotiations or discontinuations, which may cause earnings volatility and pressure on recurring revenues.

Valuation

• The analysts have a consensus price target of $7.0 for Oncology Institute based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $647.1 million, earnings will come to $29.6 million, and it would be trading on a PE ratio of 31.3x, assuming you use a discount rate of 6.4%.
• Given the current share price of $2.97, the analyst price target of $7.0 is 57.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.