One to hold, one to book

The Oncology Institute

TOI reports next week. I’m long and have slightly changed how I view the oncology value-based care model.

Long term, I still think it’s going to be a very big trend. At scale, oncology VBC players get enough operating leverage to absorb drug-pricing volatility, which matters most in oncology, where that exposure is huge. A single bad drug year sinks a small book but barely dents a large one. I think TOI is well positioned to get there, as it’s starting from attractive markets (mainly thinking about Florida) and I’d expect further expansion, maybe to be announced in the Q2 call next Thursday.

The LT case is about operating scale, enough volume to spread volatility. The ST problem is actuarial credibility, individual oncology books are just too small to be statistically reliable. Small denominators create noise, disease heterogeneity is high, and drugs dominate the spend. That’s why demand flows toward episode based and pathway/drug-management models rather than pure per-member risk, which favors $TOI’s pathways and dispensing over raw risk-taking. We’ve seen this with ridiculous growth in TOI’s dispensary segment.

But the ST limitation doesn’t worry me because it’s self-correcting. The demand that outruns full capitation today (payers desperate to delegate oncology as drug trend inflates) is what delivers the volume that makes capitation work tomorrow. Delegation pulls volumes forward. It’s a flywheel, and while it plays out, the dispensary business just prints FCF and grows fast.

On FY26 guidance TOI screens as barely profitable, adjusted EBITDA of $0 to $9M on ~$640M revenue, at $560M EV. The business runs three lines: low-margin FFS, capitation that keeps a medical-margin spread at a blended MLR in the low 80s, and an owned specialty pharmacy carrying an 18% GM because TOI retains the Part D drug economics rather than passing scripts through. Blend those company margins on a mature mix of roughly half pharmacy, thirty percent capitation, twenty percent FFS and gross margin lands near 17%, a figure that reconciles to the reported ~16% today. The key is that a capitated life is the acquisition event, not the profit, since the capitation rate barely moves ($50 to $54 PMPM over three years) while scripts per cohort climb from 1.0 to 3.2, tripling attached pharmacy revenue and lifting gross profit per 1,000 capitated lives ~68%, from $9,949 to $16,685, with no rate increase. Pair that with the operating leverage already visible, SG&A down from 30% of revenue in early 2024 to 19% by Q1 2026, and a normalized EBITDA margin of ~5 to 6% (about $35M on the current base) is sensible. Of course, with further scale, operating leverage will keep improving. That gives us a multiple of ~16x normalized, for a business still guided to grow revenue near 20% a year. A further squeeze by the IRA on the pharmacy margin will only increase the demand for capitation, improving the operating leverage of the business.

I’m pretty sure researching while on a cabin in the woods boosts returns

TVA Group

I recently wrote it, so feel obliged to say that I closed my TVA position yesterday (+35% in 25 days).

The business income statement was being dragged down by a money losing national French language NHL sublicense. The market was anchoring on the top line and missing that the loss-making deal was rolling off with the 25/26 season. Once it was gone, revenue would fall and that would be good news, because the bleeding stopped with it.

I’m not sure why but I like to play a lot of these revenue shrinks-EBITDA inflects plays. The market re-rates once it stops reading the headline number and starts looking at profitability and the new economics of the business. I did it with BELFB on a huge size and going to share another idea shortly where I’m seeing the same situation.

I mentioned as well that there was optionality via a plausible take private by Quebecor, and an unresolved NHL rights question where non renewal of the bad contract was the bullish outcome.

The NHL rights overhang substantially resolved. The old national sublicense was confirmed on its way out; for 26/27, TVA Sports keeps the Canadiens games while the older national deal expires.

Second, the Q2 print on Thursday announced revenue falling sharply YoY on the sublicense roll-off, which read as ugly, but adjusted EBITDA moved the right way, extending the favorable swing already visible in Q1.

Quebecor is still a strong take private, and I expect further margin recovery, but that is more speculative and longer in duration, while holding a not so good business. So of to the next one.

Not investment advice. Do your own work.