Premier, Inc. (PINC) Earnings Call Transcript & Summary

[Audio Gap] Reversal protective equipment and logistical challenges of protecting frontline healthcare workers, I think, is kind of front of mind. And I could go on and on, but with that, I'm going to turn it over to Susan. Thanks.

Thanks so much, and thanks, everybody, for being here. I don't know how much you know about Premier, but Premier is a healthcare improvement company. So we work with providers all across the country. We're domestically oriented, and we really work with them to drive cost improvement, quality improvement, safety improvement, outcomes improvement. We've got a great track record of revenue growth, strong EBITDA, cash flows and a very healthy balance sheet. When we think about the emerging healthcare trends, it is all about how do we move this healthcare system from fee-for-service to new payment models. There's a ton of experimentation going on right now. We are in the middle of all of it in Washington, D.C. We're in the middle of it with our health system customers. We are also focused on reducing the cost of pharmaceuticals. We have a group purchasing organization, and we have a lot of activities around the drug shortage problem and how to make healthier pharmaceutical markets. When you talk about health care, the underlying big problem is not only clinical outcomes but total cost. And so total cost management and all the technology and services and GPO and capabilities that we bring to the table are designed to really help deal with the overall total cost of care. More recently, we have been working directly with employers. Historically, we've done all of our performance improvement for the benefit of providers to improve themselves. We are now taking that data and those analytics and that network of providers and pivoting to working directly with employers and providers in direct contracting. We have a ton of data. It's all SaaS-based technology, sits on a cloud-based platform, and we are integrating all of the data sets we have, and we have data in a variety of arenas on over 1,000, sometimes 2,000 hospitals and healthcare systems. Everybody is focused on the coronavirus, and we are focused on that as well. Because we're a supply chain organization and because we have 4,000 hospitals and health systems, the needs for protective attire and equipment are very high right now. I would say that many years ago, we actually saw that this dependence on China could be a real issue. And when you think about all the masks and gloves coming from China and Southeast Asia, and you think about all of the underlying raw materials for API and drugs, 80% of it coming from China, it's -- we're way too dependent. So we actually acquired a company called S2S. It's a direct sourcing contract manufacturing company, so that we would have some diversification. We've moved some of that contract manufacturing for commodity goods out of China into other countries. There are a couple of manufacturers in the U.S. that we are working directly with but we're the place our health systems call because we have all the distributors on contract, all the suppliers on contract, and we have our own direct sourcing company. And what I would say is that this is a nasty flu bug. This is going to take time to work itself out. China has restricted supply of product coming into the country. We are working with our health systems in 2 ways. One is for them to optimize the inventory they have. And depending on what you're talking about, they have anywhere from 2 or 3 weeks to 4 to 6 months of inventory in supply in their healthcare systems. Because we have such a big footprint, we actually built a technology years ago to dynamically allocate product, meaning if there are needs in one market that has an outbreak of the coronavirus and not in other markets, we can actually, through and with our health systems, try to prevent them from hoarding and overabundance of supplies and actually help them move it around to the markets where it's needed. And so we have a safety institute as well where we are publishing everything we know clinically about the coronavirus and how to protect workers and to protect employees and individuals. Similarly, we started about a year ago, a company called, ProvideGx, and this is a company that was in response to significant shortage of life-saving drugs. There are about 150 drugs on the shortage list. We've been working for years to deal with about 50 or 60 of those drugs. Since the launch of this company, we've now launched 18 more drugs, 16 of which are domestically manufactured. And so when you think about Premier, think about us as performance improvement and supply chain, but also think about us as a critical strategic partner for healthcare systems as they deal with things like coronavirus or drug shortages. We've also formed a company recently and hired in a team of people to enable us to take all this data we have and go directly to employers. We launched last quarter, a pilot with a large -- very large national employer to go to work on maternal-child health. We bought a company called Stanson Health, about 1.5 years ago, and this is a company that actually takes all of our analytics, and will take all of our analytics into the electronic health record and the workflow. If you think about a physician who needs to make decisions real time, you got to have that analytic data inside the electronic health record. We are now, and have just launched in Hawaii, a technologically automated prior authorization. So if you've ever been a patient, and you needed a procedure, and you have to wait the 3 days and go through the rigmarole to get an authorization, this attempts to automate that. It's good for the payer. It's good for the provider, and it's good for the patient. Just in the last few weeks, we've launched a new technology module for maternal child health. So again, you can see the U.S. has some of the worst outcomes in the developed world around maternal and infant mortality. We've built technology to measure and to build in the best practices and the process improvements to actually lower mortality rates. And so when you think about Premier, think about us as a supply chain company, a performance-improvement company, but a company that takes real focus with technology and services at a national footprint on problems in the healthcare industry. All of our healthcare systems are facing tremendous cost pressure, financial pressure, there's a lot of consolidation of insurance companies and providers, they have to reduce costs, they have to improve quality and outcomes, and they have to be able to assume risk for patient populations. That means they need technology, they need integrated technology, they need wraparound services, they need clinical knowledge. They need financial expertise and they need experience in how do you actually succeed in these risk-based or value-based new payment models. So ton of experimentation going on in the country with multiple kinds of new payment models. And so Premier is uniquely positioned right in the middle of all of that. We say, we have 100 billion data points, we have supply chain data. We have cost, labor productivity, total cost data. We have quality and safety and infection surveillance data. We have pharmacy data. We have data around these new payment programs like accountable care organizations and bundled payments. And we're using that data for the benefit of providers, many of our providers have health plans as well. We're at -- we're now using that data directly with employers. And we also do research with pharma companies and medical device companies. So this is a multifaceted set of capabilities. We have 4,000 healthcare hospitals and healthcare system members. We have data on 45% of the patients in the country. We have over 175,000 other providers of care, meaning, we are helping health systems from their acute care hospitals to their nursing homes to their ambulatory sites, their surgery centers. We run about $61 billion of purchasing volume through our GPO contracts, and we have a huge footprint. We have most of the -- and a higher number of the large integrated delivery systems. They tend to be the consolidators. They tend to be the acquirers of other health systems. And we have relationships that are really different from a typical customer-vendor relationship. These are 20-, 25-year relationships, they're strategic in nature. Many of our large integrated delivery system customers are also equity owners in Premier. And so this is viewed by them and by us as a very strategic alignment. We, most recently, last quarter, announced the acquisition of a regional GPO. It was owned by the Greater New York Hospital Association. It was called Acurity. They also had a consulting company. They decided that they wanted to sell both of those companies. They are and were our largest customer, and so we were interested, one, in retaining them as a customer and not having somebody else buy them. Two, the Nexera business brought to us supply chain consulting and outsourcing capabilities, which is a key part of our strategic vision going forward for supply chain, actually managing the whole supply chain. So we were able to get 100 FTEs with that capability through this acquisition. There's about $15 million run rate synergies. And probably, most importantly, we were able to get direct relationships with the over 300 providers that were a part of these organizations. Historically, we dealt with the Greater New York Hospital Association, and they served those customers. So we view this as a very strategic opportunity as well as a synergy opportunity as well as a derisking opportunity of the long-term relationships with those individual health systems. We report in 2 segments, the Supply Chain Services segment and a Performance Services segment. 70% of our consolidated revenue comes from supply chain. That's in the form of both our group purchasing organization. And our direct sourcing company, which is that company I described earlier that does contract manufacturing directly. Performance Services is where we have all of our HIT assets, our informatics and data analytics, our consulting capabilities and something we call, performance-improvement collaboratives, and think of that as bringing together multiple customers and members and working on common problems together using our technology and consulting services. So it's sort of 70% Supply Chain Services, 30% Performance Services, significant cash flow, clearly, from the Supply Chain Services side of the equation and good margins on the Performance Services side. We have multiple business models and multiple levers inside the business. In Supply Chain Services, we get administrative fees that are paid by suppliers. And we also have direct contract manufactured sales running through our P&L. In Performance Services, it's cloud-based, SaaS-based subscription and license fees, fee-for-service consulting, and then we get paid subscriptions for these collaboratives that I described. We have very high visibility into our revenue from year to year. And we have extremely high retention rates in both the GPO and Performance Services. I talked a little bit about the platform. We think what's unique about our platform is that it's vendor-agnostic and payer-agnostic. So if you have 2,000 health systems using various analytics tools, you have to be able to take data from all of their source systems, and they all use different electronic health records, ERP systems, revenue cycle systems, labor management systems. And we take all of that into our cloud-based platform. We standardize it, normalize it, cleanse it, and then we help them improve based on the insights that come from all of that data, and we wrap people around it. And you can see over the years, we've been building multiple domains so that if you're a healthcare system's CEO or CFO or COO, you have visibility into enterprise analytics, and you know where to go to drive cost improvement or revenue improvement or quality and safety improvement. For every one of our customers, we show them the ROI on their investment in Premier every year. We show different ones every time we make a presentation. And typically, the ROI, excluding their equity ownership is in the 12 to 15 to 1 range. So the biggest circle on the page is always savings. And every year, we're basically talking about what your supply chain savings targets, your labor savings targets, your quality improvement targets and how are we going to use our technology and services to help you get there. If you look on a consolidated basis, historically, and just look at the last 3 years, compound annual growth rate in revenue of 8%, compound growth rate in non-GAAP adjusted EBITDA, 8%, and non-GAAP adjusted fully distributed EPS of 18%. So we have a lot of different growth drivers, highly visible and recurring revenue, very high retention rates. The core chassis on both sides of the business is built. So the GPO infrastructure and the platform technology infrastructure is built, and we just keep adding capabilities to those 2 chassis. Strong balance sheet, lots of free cash flow, very little debt, lots of debt capacity and 60%, 61%, 62% free cash flow. This gives us the flexibility to invest organically. It also gives us the flexibility to deliver value back to shareholders. And to acquire and continue to build the capabilities that we need to build. So when we think about capital allocation, we think about it in terms of continuing growth and expansion. We have a long-term strategic vision. And we have capabilities on both sides of the business that we continue to invest in organically and inorganically. We want to maintain the flexibility in our balance sheet, but we have a lot of debt capacity, at least up to $1 billion now and even beyond that. And we've been returning capital to stockholders in the form of buybacks for the last couple of years. When you isolate and look at just Supply Chain Services, we've had historically since fiscal '16, compound annual growth rate on the top line of 11% and on the bottom line of 8%. Those percentages are affected by that direct sourcing company, which has product revenue running through it and product cost running through it. And therefore, it has a very different margin profile than the GPO business. What we're doing in supply chain is driving more volume into our contracts, driving more compliance to the contracts with our members, recruiting new members. We announced CommonSpirit, which is a huge merger in the provider space, just recently. We're leveraging all of our analytics on the Performance Services side to differentiate us on the GPO and Supply Chain side. And we are very focused on moving ourselves from GPO technology and people, keeping all those things but now actually managing the supply chain or comanaging the supply chain inside the healthcare system. We think that will drive more admin fees, it will drive more savings, it will drive more compliance. And so this is sort of what that enterprise end-to-end strategy looks like. We've been building and buying all these pieces and parts, putting them together, and now we want to co-own the whole supply chain with our healthcare systems. Today, we do about $61 billion in purchasing volume with our various portfolios of contracts. We think that if we expand that portfolio and drive more and more compliance that there's $120 billion of spend to go after. And if you add purchase services spend to that which is a whole additional bucket, it's $200 billion. So there's a lot of runway in compliance, new contract categories, purchased services. We just announced the acquisition a quarter or 2 ago of Medpricer. That's a technology that's going to enable us to benchmark and do more and more contracts in the purchased services space. In Performance Services, we have historically had mid- to high single-digit growth rates for the most recent couple of years with the change in administration and sort of the slowdown in momentum of all the value-based care, population-based models of -- coming from Medicare and Medicaid. We have seen slower growth, 3% on the top line, 5% on the bottom line from a compound annual growth rate perspective. Our goal is to get back to the mid- to high single-digit growth rates. We are making investments, acquiring capabilities and pivoting some of our assets to new markets in addition to the provider market, the direct employer market, the payer market, the life sciences market. We have several strategic priorities in this space. But what's important is that we're not just taking our provider assets and selling them to somebody else. We're actually looking for the sweet spots between providers, payers and employers and life sciences where we can add value to all of them. So for example, we acquired a company called Stanson, in that top left, we're taking our analytics and clinical data into the electronic health record and the workflow. If you look at the bottom one, we're taking the -- we're using Stanson to identify patients for clinical trials at the point of care. If you look at top right, where we're technology-enabling prior authorization, which is beneficial to payers and providers. And so we're taking the assets and the technology and the data we have, and we're figuring out what are those sweet spots where we can actually deliver data analytics and services to multiple customers that benefits multiple customers. So I'll just close with, we have a compelling financial model. We have terrific cash flow. We have a wonderful balance sheet. We have all kinds of optionality and flexibility. We have really unique customer relationships, 80-plus percent of our customers would describe us as an extension of them or a strategic partner. And so these are not normal vendor relationships where somebody says, "What's the price?" You tell them the price, and they change vendors based on the price and the functionality. These are long-standing strategic relationships. We've had a disciplined growth strategy. We have a framework for evaluating all of our acquisitions and all of our investments. We have a differentiated technology platform. We have been transitioning for years from a point solution technology company, which is, you just have to look at HIMSS to know thousands of point solution companies to this idea that we need to be a platform company with our multiple point solutions connected and integrated and an enterprise analytics capability. And I think we have full-time folks in Washington, D.C., and we are very focused on being responsive to the very real trends in the healthcare industry and trying to stay 2 and 3 years ahead of those trends. And you can look at the non-GAAP reconciliation tables on your own. So I think we're ready to go for ...

We've got 5 minutes here.

Questions.

Sure. I do think the market was a little confused by the deal to keep your collapse on your GPO, it was dilutive. So maybe a little more on the financial logic of that deal. And what would have been the case if you had not done that? What was the downside of not doing that? Because you paid a little bit of a price to do it.

Yes. It's a great question. And what people might not remember is that a couple of years ago, we acquired alternate-site GPO that was co-owned by Premier and Greater New York. So this is a 20-, 25-year relationship with them. When they decided to sell it, the question is, do you lose the revenue stream of your largest customer? And can you get it at a reasonable price? We thought the multiple was a reasonable price. We got our fairness opinions, did our work, did our due diligence. We also thought there were some synergies. So we thought there was $15 million of synergies in duplicated costs. And we were very interested in getting those 100 people in the Nexera business. Because of the unusual accounting treatment with the rebate that greater New York decided to pay their members, we have to take this amortization of prepaid expense on our P&L, which makes the numbers more complicated. But from our perspective, it was strategic, it was offensive with where our supply chain strategy is going, and it was defensive to not have that business be acquired by someone else. And we strongly believe that given the margin profile of the GPO, that, that business would have been acquired by somebody else.

So the inevitable coronavirus question. You guys have done some really good work and have been very transparent, and I compliment you on that sincerely. Maybe an unfair question, but on a 1 to 10, how would you say -- how would you assess the risk of the following? And this is what we've written about and worry about, that we start testing more. We find more cases, we get a full-on freakout. ERs are overwhelmed with people who probably shouldn't be there. And frontline workers don't have enough protective gear, particularly the mask, but also Cardinal with the recall of the gowns, HCA flagged mask and gowns as the 2 most hazardous categories. Of course, we source 80% from China. There's some disagreement about the stockpiles, the [indiscernible] thinks it's $45 million, the Wall Street Journal said $12 million of these N95 mask. So just some -- I'd love some high-level comments on a 1 to 10, how worried do you think we should be about all that?

Yes. So one, I think it's real, and I think we should worry about it. Two, I would say, with the N95 masks, the normal sort of annual usage of those masks is something like 25 million. The orders are for 60 million already, highly dependent on other manufacturers. They -- in China, they have shops -- stopped shipments. I would say our members would say they have 2 or 3 weeks of supply of masks, they have anywhere from 4 to 6 months. Supply of some of the other protective attire. We have been -- we had already started moving manufacturing to other parts of the world. And there are 2 domestic manufacturers who have the ability to open up lines and make more of these things. It will take them 30 to 60 days to get that in process, and then it'll take time to get it done. And so I think the challenge we have, to your point, is a timing challenge. It's not ultimately, can we figure out treatment? Can we figure out a vaccine? Can we figure out supply and logistics? It's, will the timing coincide with the reaction? So part of what we're doing, as I said, is we have a technology that dynamically allocates. So we've basically got all the demand, historical normal demand, and we are monitoring with the CDC and the FDA regionally where the pockets of outbreaks of this are and how fast. Evergreen is one of our health systems in Washington State. And what we're attempting to do: one is educate everybody about what the facts are, what the myths are; two, we're trying to convince them at scale, not to hoard; and three, we're doing that through our technology dynamic allocation, so that even if they order 3x what they normally have ordered, they're only getting their fair share. And then the idea is that as it breaks out in certain regions of the country, we can shift that allocation to the places where the breakouts are occurring. So I feel like we're doing everything we can possibly do. We have all the distributors on contract. We have all the suppliers on contract. We have our own contract manufacturing but it's real. And luckily, the death rate is very low. So this is a question of how do you take care of people through this process.

You had a slide that provides just about the drug shortage.

Yes.

I'm assuming that was prior to this virus.