Value Based Oncology Expansion And AI Deployment Will Transform Long Term Earnings Power

Catalysts

About Oncology Institute

The Oncology Institute delivers value based community oncology care supported by an integrated pharmacy and technology enabled platform.

What are the underlying business or industry changes driving this perspective?

• Rapid expansion of delegated capitation contracts, including the doubling of Medicare Advantage lives with Elevance Health in under a year, is positioning the company to address a much larger market and generate recurring, higher visibility revenue.
• Pharmacy operations are scaling quickly, with roughly 57 percent year over year dispensing revenue growth, higher script attachment and new sites such as the Florida pharmacy, which should continue to lift total revenue and pharmacy gross profit dollars.
• The company has demonstrated an ability to manage oncology risk, with stable MLRs in the high 60s across models and improving margins on new delegated contracts as they mature, supporting sustained improvement in gross margin and, over time, stronger net margins.
• Agentic AI deployment across revenue cycle, prior authorization and call center functions is expected to reduce processing times from minutes to seconds and generate operating cost savings, directly supporting improvements in adjusted EBITDA and earnings.
• Growing national interest from payers in value based oncology arrangements, combined with TOI’s hybrid employed and affiliated provider network and community based access to advanced therapies such as radiopharmaceuticals, supports continued top line growth and the potential for long term free cash flow expansion.

Assumptions

This narrative explores a more optimistic perspective on Oncology Institute compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Oncology Institute's revenue will grow by 24.1% annually over the next 3 years.
• The bullish 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 -11.9% to the average US Healthcare industry of 5.5% in 3 years.
• If Oncology Institute's profit margin were to converge on the industry average, you could expect earnings to reach $48.0 million (and earnings per share of $0.4) by about December 2028, up from $-54.7 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 24.6x on those 2028 earnings, up from -6.8x today. This future PE is greater than the current PE for the US Healthcare industry at 23.7x.
• The bullish 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 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• New delegated capitation contracts initially carry low medical margins with MLRs starting above mature levels. If rapid membership growth continues without corresponding improvement in care management efficiency, the company could face structurally higher medical costs that weigh on gross margin and delay a sustained inflection in earnings and net margins.
• The business model is increasingly concentrated in pharmacy and value based oncology arrangements. Long term shifts in drug pricing policy, rebate structures and payer behavior could compress pharmacy spreads or capitation rates, limiting top line growth and constraining expansion in revenue and operating margin.
• The company remains reliant on key technology vendors and complex back office systems, as illustrated by the recent cybersecurity incident that temporarily halted fee for service billing. Similar disruptions or longer recovery cycles in the future could impair collections, elevate bad debt, and pressure both revenue and free cash flow.
• Despite improving adjusted EBITDA, the company still operates with negative operating cash flow and meaningful convertible debt maturing in 2027. If capital markets tighten or growth investments fail to deliver expected scale benefits, refinancing or dilution risk could rise and weigh on net income and earnings per share.
• The model depends on maintaining favorable partnerships with large payers and MSO networks in markets like Florida and California. Any deterioration in contract terms, inability to secure PMPM escalators in line with rising oncology utilization, or loss of exclusivity could slow capitation and patient services growth and limit improvements in revenue visibility and gross profit dollars.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Oncology Institute is $8.0, which represents up to two standard deviations above the consensus price target of $6.5. This valuation is based on what can be assumed as the expectations of Oncology Institute's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $5.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $880.9 million, earnings will come to $48.0 million, and it would be trading on a PE ratio of 24.6x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $3.78, the analyst price target of $8.0 is 52.8% 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.