TOI (TOI) Q2 2025: Pharmacy Revenue Jumps 41% as Delegated Capitation Model Scales

2025-08-13 | By EarningsIQ Research

TOI’s second quarter marked a sharp acceleration in pharmacy revenue and a step-change in delegated risk contract scale, with management reaffirming a path to positive adjusted EBITDA by year-end. The business is leveraging its delegated model to secure payer partnerships and expand its presence in high-utilization markets, while pharmacy margin gains and disciplined SG&A management are driving operating leverage. Investors should watch for the maturation of new capitation contracts and the impact of AI-enabled cost initiatives as TOI targets sustainable profitability in 2025 and beyond.

Summary

• Delegated Capitation Expansion: TOI’s risk-bearing model is unlocking larger payer partnerships and geographic reach.
• Pharmacy Margin Tailwind: Pharmacy growth and improved drug procurement are driving margin expansion and scale leverage.
• Profitability Path: Management remains committed to adjusted EBITDA positivity in Q4, underpinned by operational and contractual momentum.

Performance Analysis

TOI delivered 21.5% year-over-year revenue growth in Q2, with pharmacy revenue surging 41% and now comprising 52% of total revenue. Patient services revenue, representing 47% of the business, increased 7% year over year, fueled by organic growth in Florida and Oregon and the ramp of new capitation contracts. Pharmacy’s outperformance was driven by increased patient volumes and reduced prescription leakage, as well as improved buying power and rebate capture through scale-driven procurement.

Gross margin expanded 140 basis points to 14.6%, led by pharmacy margin improvement and disciplined cost control, although patient services margin dipped due to the early phase of new risk contracts—a typical pattern as utilization management and network optimization mature. SG&A fell 3.5% year over year (or 12% normalized for a one-time charge), demonstrating operating leverage as revenue scaled. Adjusted EBITDA loss was halved versus the prior year, reflecting both top-line growth and cost discipline.

• Pharmacy Revenue Acceleration: Pharmacy’s 41% growth and rising gross margins underscore TOI’s ability to capture value from scale and procurement sophistication.
• Delegated Capitation Ramps: Over 50,000 new capitated lives in Nevada and California, plus a July contract adding 49,000 Medicaid lives in Nevada and a pending Florida expansion that will double Medicare Advantage risk lives.
• SG&A Efficiency: SG&A as a percentage of revenue fell 580 basis points year over year, with further leverage expected as AI pilots launch in H2.

The business is now positioned with more than 1.9 million lives under risk, and the Florida capitation expansion alone will bring over 100,000 Medicare Advantage lives under management by year-end. Pharmacy AR and rebate AR are rising alongside revenue, signaling growing scale but also extending cash conversion cycles—management expects free cash flow at the lower end of guidance due to these dynamics.

Executive Commentary

Strategic Positioning

1. Delegated Capitation Model Drives Payer Partnerships

TOI’s fully delegated capitation model—where the company manages utilization, network design, and claims adjudication— is enabling deeper payer relationships and faster contract wins. This approach gives TOI direct control over oncology spend, allowing for rapid scale with lower incremental SG&A and greater ability to steer patients to lower-cost, high-quality care settings. The Florida expansion and new Nevada contract exemplify this model’s traction outside California, positioning TOI as a preferred partner for payers seeking oncology cost containment and quality improvement.

2. Pharmacy Growth and Margin Expansion

Pharmacy, now the largest revenue contributor, is benefitting from increased patient volumes, reduced prescription leakage, and procurement scale, which together are driving both top-line and margin gains. Management highlighted that enhanced supplier relationships and rebate programs are yielding higher gross margins, while the planned opening of a new Florida pharmacy will further increase fill rates and reduce medication costs for risk-bearing contracts. This vertical integration is a core lever for both margin and patient retention.

3. Operating Leverage and AI-Driven Efficiency

Disciplined SG&A management and targeted technology investments are unlocking operating leverage, with normalized SG&A down 12% year over year and as a percentage of revenue at multi-year lows. TOI is launching AI pilots in revenue cycle management, prior authorization, and call center operations, aiming to further reduce OPEX as a percent of revenue and support margin expansion as volume grows. The technology and AI enablement strategy is central to TOI’s plan for sustainable profitability and scalable growth.

4. Risk Management and Drug Cost Control

TOI’s risk management approach—anchored in utilization management and network optimization— has kept medical loss ratios stable despite industry-wide drug cost inflation. Management emphasized that rising drug costs create more opportunity for TOI to demonstrate value to payers, while formulary and supply chain management are improving drug margins. The business is insulated from single-drug pricing shocks due to portfolio diversity and the ability to shift to clinically equivalent options as needed.

5. Leadership and Governance Evolution

Recent leadership changes, including the appointment of a new Chief Administrative Officer with deep healthcare operations experience and a new board chair with extensive audit and governance credentials, signal a focus on operational rigor and technology-driven transformation. These changes are expected to accelerate TOI’s transition to a tech-enabled care delivery organization and support its scaling ambitions.

Key Considerations

TOI’s Q2 results highlight a business at an inflection point, balancing rapid top-line growth with disciplined cost control and a clear path to profitability. The following considerations will define the company’s trajectory in the coming quarters:

Key Considerations:

• Capitation Maturity Curve: New risk contracts typically start at lower margins, with profitability improving as patient management and network optimization mature over several quarters.
• Pharmacy Scale and Cash Conversion: Pharmacy revenue and AR growth signal scale, but also extend rebate and cash conversion cycles, requiring careful working capital management.
• AI Enablement Impact: The effectiveness of AI pilots in reducing OPEX and improving revenue cycle will be a critical watchpoint for margin expansion and scalability.
• Payer Partner Expansion: The ability to secure and ramp additional delegated contracts in high-utilization markets will determine TOI’s long-term growth and competitive positioning.
• Regulatory and Drug Pricing Dynamics: Management views drug pricing reform as a net positive, but ongoing vigilance is needed given the complex regulatory environment in oncology care.

Risks

Key risks include the pace of capitation contract maturation, which can pressure near-term margins if patient transitions lag, and the potential for pharmacy AR and rebate AR growth to stress cash flow if not carefully managed. Regulatory changes in drug pricing and payer reimbursement could alter the economics of both risk and pharmacy segments. Competitive dynamics, especially from PBMs shifting infusion drugs to pharmacy benefit, require TOI to maintain agility in its contracting and clinical models.

Forward Outlook

For Q3 2025, TOI guided to:

• Adjusted EBITDA of negative $2.5 million to negative $3.5 million
• Sequential revenue growth driven by new risk contracts and pharmacy expansion

For full-year 2025, management reiterated guidance:

• Revenue of $460 million to $480 million (likely to reach the high end of the range)
• Adjusted EBITDA loss of $17 million to $8 million, with a clear line of sight to the midpoint

Management highlighted several factors that support the outlook:

• Ramp of delegated capitation contracts in Florida and Nevada
• Continued pharmacy revenue and margin growth, with a new Florida pharmacy opening in H2

Takeaways

TOI’s Q2 performance demonstrates a business model that is scaling rapidly, with pharmacy and delegated risk contracts creating structural margin tailwinds. The company’s ability to manage cost and deliver value to payers positions it as a differentiated player in oncology care.

• Delegated Capitation Model as Growth Engine: The shift to fully delegated risk arrangements is enabling TOI to expand payer partnerships and geographic reach, while improving control over cost and quality.
• Pharmacy Integration Drives Margin: Pharmacy scale and procurement leverage are translating into both revenue and gross margin growth, supporting the path to profitability.
• AI and Operational Efficiency as Catalysts: Successful implementation of AI pilots and continued SG&A discipline will be key to unlocking further operating leverage and sustainable earnings growth.

Conclusion

TOI’s second quarter marks a pivotal step in its evolution from a regional oncology provider to a scaled, tech-enabled risk-bearing partner for payers. The combination of pharmacy margin expansion, delegated capitation wins, and disciplined cost management underpins a credible path to profitability and long-term growth. Investors should monitor the ramp of new contracts and the impact of AI-driven efficiencies as leading indicators for sustained value creation.

Industry Read-Through

TOI’s results highlight a broader shift in oncology care toward delegated risk models and pharmacy integration, with scale and operational sophistication emerging as key differentiators. The success of TOI’s delegated approach suggests that payers are increasingly willing to partner with providers who can manage total cost of care and deliver measurable quality outcomes. Pharmacy margin expansion, driven by procurement scale and rebate management, is likely to become a critical lever for all risk-bearing provider platforms. The industry should expect further consolidation and technology investment as players seek to replicate TOI’s operating leverage and payer alignment.

TOI Healthcare Oncology Value-based care Pharmacy Delegated risk AI enablement