The Oncology Institute of Hope & Innovation ($TOI)

A winner of a major shift in the US oncology care system

This write-up is about a long-standing issue in the US and how one public company is bringing the right incentives together to solve it. TOI isn’t your typical value play where cheapness jumps out right away, but the value proposition is strong and backed by 18 years of steady sales growth. Profitability has been tough to reach because of a lack of sufficient scale and a bumpy road to getting there, but I think we’re hitting a real turning point in terms of profit generation. The market doesn’t seem to be recognizing this yet, especially given recent comparable deals and the company’s considerable free cash flow potential. Instead, the focus has been on short-term challenges—which were real—but misses the bigger picture of where this business is headed.

TOI was founded in 2007 as a collection of oncology practices in California. Today, it operates as an oncology benefit manager with the care delivery infrastructure of both a provider and a pharmacy. The company partners with managed-care providers and other risk-bearing entities, mainly insurance companies (payors), to treat cancer patients.

Its model is based on gain/loss sharing or capitation contracts, where payors pay a fixed per-member-per-month (PMPM) fee. TOI’s network consists of 66 clinics owned by affiliated physicians, 14 independently owned clinics, and several unaffiliated clinics. Most are physician-owned because, in most states, laws require physician-related treatment companies to be owned by physicians. TOI actively manages both its patients and its clinics.

The oncology treatment model in the U.S. has been flawed for decades. It relies on a Fee-for-Service (FFS) system in which providers are reimbursed per service delivered. This structure added to the recent surge of oncology treatment costs to unsustainable levels has created a national problem that TOI directly addresses.

The Market Problem

The U.S. oncology market is roughly split 50/50 between hospitals and community clinics. Of the latter, about 40% of the market remains unconsolidated.

The flaw lies in drug prescriptions. Roughly 75% of oncology costs are attributable to drugs, and providers can earn a 6% margin on them—creating an incentive to overprescribe. Oncologists are reimbursed on a “cost-plus” basis, meaning the higher the price of the drug, the higher their earnings, regardless of whether it is the most appropriate treatment for the patient.

Major players such as AON, OneOncology, and USOncology allow their physician partners significant autonomy and depend heavily on the 6% markup on drugs. Their business growth is driven by physician referrals, while TOI, in contrast, secures patients directly through payors.

By introducing fixed-payment contracts and actively managing medical costs, TOI removes the incentive to overprescribe. One might assume this would reduce quality of care, but in practice, the opposite is true. Evidence-based treatment and close patient management are more efficient and effective. TOI follows the National Comprehensive Cancer Network (NCCN) guidelines, which are strictly evidence-based.

Instead of relying on physician referrals, TOI wins contracts directly from payors, securing populations of patients.

Why TOI’s Model Works

TOI’s model aligns incentives across all stakeholders:

• Payors benefit from gain/loss sharing contracts, which typically evolve into capitation contracts once trust is established. These arrangements transfer the risk of cost overruns from insurers to TOI, making the model attractive to HMOs and insurance groups.

• Patients receive closer care management, resulting in higher satisfaction.

As a result, payors—including Anthem, CareMore, Heritage Provider Network, and OptumCare—are steadily shifting from traditional FFS to value-based care. More than 50% of TOI’s 2024 revenue came from payors, with TOI serving as the exclusive or preferred provider for many of them. Its largest customer accounts for 13% of revenue.

The company’s recent expansion into Florida has validated its model, driving strong revenue growth over the last four years. Medicare, its primary customer in Florida, offers higher reimbursement rates and greater flexibility than Medicaid in California, making Florida a more profitable and attractive market.

The system is working at a very rapid pace. They have gain up to 13% of their client base in a single quarter.

In contrast, FFS providers often hire third-party benefit managers to review and authorize treatment requests. However, these managers lack the tools and alignment to achieve cost control on the scale TOI provides. Only a value-based culture established at the physician level can consistently align costs and care.

As TOI explains:

“We distinguish ourselves from other managed oncology practices and specialty benefit managers in our ability to align incentives across the care continuum, including physicians and payors, in delivering high-quality care at lower costs. We believe there are currently no other value-based oncology management companies of meaningful scale in the U.S.”

Although roughly 50% of patient services revenue still comes from FFS contracts, TOI is steadily transitioning them to value-based models.

On top of that, TOI also has the pharmacy revenue source. As you might expect, patients will normally go to your pharmacies, if you have them, because of convenience.

As mentioned, while FFS models encourage overprescription because of drug margins, TOI’s pharmacy business remains strong even under evidence-based prescribing, since patients still purchase medications from TOI-owned pharmacies. This creates a healthy correlation between patient services revenue and pharmacy revenue. In fact, in Q2 2025, pharmacy revenue exceeded patient services revenue, though historically the ratio has been closer to 0.9:1.

Clinical trial revenue remains immaterial and is being shifted to equity method accounting, so it will no longer appear in P&L results.

History and Financial Background

Despite steady revenue growth, TOI has faced financial turbulence.

In 2018, it secured outside funding, and in 2019, investor and board member Brad Hively became CEO. The company began expanding aggressively, particularly in California. In 2021, TOI entered Florida, though 90% of revenues still came from California at the time. SG&A expenses ballooned, forcing the issuance of $110 million in convertible senior secured debt in August 2022.

The debt carried strict covenants: minimum quarterly annualized net revenue of $200M in 2023, $300M in 2024, and $400M in 2025, as well as a minimum cash balance of $40M.

Continuous expansion efforts into Texas and Florida in 2023 drove OPEX higher due to new clinic buildouts and marketing. That year, Dan Virnich, replaced Hively as CEO and became Chairman. Hively moved back to the board. The change reduced costs tied to having both a President and CEO.

Meanwhile, revenues and gross profit continued to grow, while SG&A began to scale down. In Q3 2023, TOI announced its first full-risk capitated contract in Florida with a national payor, a major validation of its model.

In 2024, cash burn reached $10–20M per year, but management maintained a clear path to profitability, with revenue growing more than 20% annually. Although rising drug prices pressured pharmacy margins and lower utilization in Florida hurt patient services, revenues still increased 24% YoY. Cash fell to $46M by mid-2024, raising covenant concerns and driving the stock down.

In early 2025, TOI paid down $20M of the convertible debt to renegotiate and remove the $40M cash covenant, and raised $16.5M in equity. With default risk reduced and management guiding for positive adjusted EBITDA and free cash flow (FCF) in Q4 2025, investor confidence has returned.

Notably, revenue growth never slowed during these challenges.

Why the Opportunity Exists

At ~$325M market cap, TOI does not appear optically cheap. It is expected to generate ~$480M in revenue in 2025 with around negative $13M in adjusted EBITDA.

The opportunity lies in scalability. For years, high SG&A relative to revenue has kept TOI unprofitable and forced shareholder dilution. Today, diluted shares stand at ~120M, including convertibles maturing in 2027.

Yet revenue growth has remained strong, and payors continue to trust TOI. Q4 2025 will mark the company’s first quarter of positive adjusted EBITDA and FCF. From then on, TOI will prove that value-based oncology care works at scale, unlocking significant margin potential.

When TOI enters a new market, capitation margins take time to materialize. During the transition, PMPM fees are received, but services may still be provided by the legacy provider, limiting cost control. Margins improve as TOI gradually takes over care management, so early results understate long-term profitability.

• Pre-inflection: SG&A remains high while new contracts ramp.

Financials

• Post-inflection: SG&A drops to 10–15% of revenue, and margins expand.

Florida alone could add $300M in revenue if TOI achieves penetration levels similar to California. Given the existing trust with payors, future growth should remain robust.

Management has suggested an 8% adjusted EBITDA margin by 2028 is achievable, even while maintaining growth investments. With $800–850M in projected revenue by then, EBITDA could reach $64–68M. At 10–15x multiples, TOI could be worth 2–3x its current valuation.

Comparable transactions support this view:

• June 2023: TPG acquired OneOncology at 19x EBITDA.

• August 2024: FCS sold its Management Service Organization division for ~$7M per practitioner, implying ~$900M valuation for TOI.

• PRVA, a comparable care provider, currently trades at ~15x.

Investment Thesis

The case for TOI is not only about growth and profitability, which seem increasingly likely as scale takes hold. More importantly, TOI represents a new model of cancer treatment that aligns incentives between patients and payors.

While legacy health providers struggle under rising costs and FFS-driven incentives to overprescribe, TOI offers an evidence-based, cost-efficient model that benefits all parties. This positions the company at the forefront of a major shift in U.S. oncology care.

The content of this webpage is not investment advice. It is for general purposes only and does not take into account your individual needs, investment objectives, and specific financial circumstances. Investment involves risk.