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

All right. Good morning. For those of you who don't know me, my name is Jamie Stockton, I'm the digital health analyst at Wells Fargo. We are very pleased to have with us this morning the management team of Premier. We have the company's CEO, Susan DeVore; and CFO, Craig McKasson, with us. I'm sure most of you are already familiar with Premier, but if you're not, it's a company, this year, it's going to be about $1.2 billion of revenue, it's about $4 billion market cap. They have a variety of services and technologies that help health systems to control their cost structure and also improve the quality of care that they're providing. So we're going to do a fireside chat format here.

I've got a bunch of questions, but if anyone in the audience has a question, please just hit the raise your hand feature, and I'll get to you as soon as I can. I thought we might obviously start out talking about the GPO business, the group purchasing organization business. You guys don't explicitly break this out, but I think it drives about 2/3 or maybe a little more of your profitability. So it really is kind of the -- driving the boat. One question that I get frequently from investors is around how heavily utilized GPO models are by health systems and how much runway there is incrementally. It doesn't seem like there's a lot of share shift that happens within the industry necessarily. So then it becomes a question of, well, how compliant are health systems to using these contracts. So if you could just give us some sense of kind of where things have trended, where you think they could go, that would be great.

Almost all health systems have a primary GPO, and basically, they run $67 billion of their spend today through Premier and Premier contracts. So it's a pretty significant level of their spend, and I think that will continue. I think there is a lot more spend and a lot more runway to get though. And so the way we look at it is that we have $67 billion today in member spend. If you take all of their physician preference spend and their technology spend and their specialty spend and their full pharma spend, it's more like a $120 billion. And if you add to that purchase services, which are all those services that they use, we have contracts for some of that, but not all of that, it's a $200 billion spend sort of total addressable market, and that's just for our existing customer base. And so our strategy is designed to keep adding additional product categories, to keep adding additional members through our recruiting process and to drive compliance. And Jamie, you know we have the high-compliance portfolios, 2 different ones, to continuously drive that penetration to higher levels. So we actually think there's a lot of runway there still.

Susan, you mentioned the high-compliance piece, which is something you guys, I guess, maybe have been pushing more overtly, I feel, like for the last year or so. You've also talked about how you essentially want to co-own the supply chain or co-manage the supply chain with your health systems. And one thing that, that always elicits, in my mind, is the question of, okay, does that mean at some point, you're going to embed people in these health systems, that they're going to be there on a permanent basis, maybe not just a consulting model, but kind of a hybrid outsourcing model. Can you talk about -- are you doing that today? Do you see that as a significant piece of kind of what the future looks like?

So today, Jamie, we have a field force and some embedded people that are serving the accounts as sort of account managers. That will not change. That will continue. We also, as you said, have consulting and advisory engagements where we'll have teams of people in there for a period of time, and then they leave. What we're talking about here in co-management is not a traditional outsourcing model, don't see us in that vein at this point. I think what we're talking about is embedding technology, embedding the contract portfolio and the high-compliance portfolios, embedding potentially some leadership management expertise, and then bringing in subject matter experts from the consulting group as needed. And the goal is how do we get to impacting that entire supply chain. You've got to have visibility to it first, and that's where the technology comes into play. We acquired an ERP company. We are building technology. We are interested in technology that gives us visibility to the entire workflow, and then embedding management folks and subject matter experts but not in a traditional outsource the whole supply chain function and all the people get rebadged sort of way. So we are doing that in some places today. We do think as the pressure continues to intensify in supply chain, there will be more interest in that. And I think that we've always wanted to co-own the supply chain outcome with our members, and this just keeps moving us down the path of impacting the total spend and owning that total outcome.

Okay. So one other topic that I wanted to touch on GPO is just consolidation within the health system landscape. It's a theme that has been there it feels like for a long time. You continue to see headlines about health system consolidation, maybe they're not as frequent as they used to be. How is that impacting your business? A question that I frequently get from investors is, well, okay, if you have 2 huge health systems that combine, are they more likely to just try to do stuff like supplies, cost negotiation internally versus relying on a GPO. So just if you could touch on that theme and how it impacts your business, that would be great.

Yes. So consolidation has been good for us. I think today, we have more of the very large IDNs who tend to be the acquirers across the country. We were successful at CommonSpirit, we were successful at Advocate Aurora, we were successful at Bon Secours Mercy, successful at Ballad. And so our view of it is that consolidation is an opportunity because you're bringing together 2 very complex organizations who have to try to get to supply chain savings quickly. It's usually one of the big dollar targets of savings in any kind of a merger or an acquisition. And I think some of them do have some of their own infrastructure, but our philosophy is we're going to meet them where they are. We're going to co-own the entire supply chain with them and the outcomes metric. We do custom contracting. We have high-compliance portfolios. We have voluntary portfolios. We have technology and analytics. And so while it's both an opportunity and a risk, for us, at least, in the last 7 years since we've been public, it's been very much an opportunity for us. We do think that consolidation will continue, and we do think pressure on cost will continue. And so I think it just reinforces and accelerates our strategy initiatives toward this end-to-end own the whole supply chain with them as an extension of themselves.

Okay. Maybe one more question on GPO, which is just -- this is an industry where there aren't that many competitors, right? It's fairly consolidated itself. Maybe 3 larger entities. And so, I guess, I would be curious how you think things are going to evolve from here. I mean is it truly a situation where there's not a whole lot of client churn, not going to be a lot of new entrants, 3 very kind of well-established players that are essentially just going to hold the line on a go-forward basis. What do you think is going to happen?

Our perspective is you can't ever stay the same. You always need to be innovating and inventing and creating. And with the way technology is advancing, our view is not to compete with GPOs. Our view is how do we compete with clinical supply chain management in the whole. And so if you look at our acquisitions and our organic investment, having a direct sourcing company, having all the clinical analytics over on the performance services side, having the ability to do comanagement, owning an ERP kind of capability, having decision support where, long term, we can embed supply chain analytics into the electronic health record workflow for decision-making. And so our mission, our journey is to create a total supply chain management capability and have competitors that actually can't compete with that value proposition. And so we've been investing for many years away from kind of the traditional GPO capabilities. We have those capabilities. It's a fantastic sort of economic business model. We want to maintain all that. We just want to keep adding spend to it and adding other capabilities so that we can own the whole supply chain. I don't see today our competitors making those kinds of investments. And what keeps Craig and I awake at night and everybody else is who are those other disruptive competitors that may decide to come into this market. And how do we build a big enough moat around us and how do we embed ourselves so completely inside those health care systems that it's hard for disruptive players to compete as well. So that's how we think about it. We don't think about it in sort of the pure-play GPO competitive market today.

You mentioned direct sourcing, which is, it's about 1/4 of your revenue, I think, but it's a very thin margin business. So maybe less than 5% of profits, you guys don't break it out, but that would be my guess. I guess the first question on it is, has the pandemic really proven that while this might not be a good profit generator, it is a good business for you to be in because it enhances what you're able to do for health systems?

It's very strategic for us. It is a low-margin business, but it's very strategic, and it's strategic in a couple of ways. One, we recognized many years ago that we were, as a country, way too dependent on Southeast Asia and other countries for our critical to operations kind of products. And so we thought we needed an alternative to that, which COVID sort of proved that we, in fact, did need. And we were able to help our health systems in ways that other GPOs and even distributors weren't able to help health systems get as much as they needed. So very glad we had that asset. But the other role that, that asset plays for us is it allows us to create competitive friction and have transparency to the true cost of critical or drug shortage products. So to the extent that we can make minority investments or to the extent that we can run product through our direct sourcing company, we will have, through contract manufacturing, real transparency and visibility to cost. And so that allows us to have a better negotiating position with suppliers in the GPO, and it allows us to find the floor for pricing and actually deliver that savings, which keeps those customers sticky and retention rates as high as they are. So for us, it is a low-margin business. We do have a philosophy of passing through increased costs to our member customers, but we're transparent about that. And so it's kind of a different model and very strategic for us. And so we -- I think we're glad we have it, and I think we'll continue to grow it.

Maybe just 2 quick follow-ups on that. One, safe to say it will always be low margin, I guess, is -- that would be one question. I think the answer is probably, yes. And then the other, you kind of have seen a bolus of business this year as a result of what you've done for health systems around the pandemic. I think you guys said that, that's probably going to continue for a couple more quarters into what is your fiscal year ending June of next -- 2021. Will we see the business come down to a more normalized level after that and so maybe there will be a little bit of a difficult comp or you've talked a lot about the domestic partnerships around manufacturing like could something ramp up that would replace what has been elevated COVID-related demand?

So Craig, why don't you give some insights about how we're thinking about the financials for direct sourcing.

Yes. So Jamie, as you said, we talked about on our fourth quarter earnings call that we had outsized demand due to the kind of surge in personnel protective equipment needs. And so we had about $50 million of incremental demand in the fourth quarter. We talked about the fact that we now have visibility to see a need and a likely continuation of that through the first half of fiscal '21. We don't have visibility beyond that at this point, which was part of why we were not being positioned to issue specific guidance for fiscal 2021 at this point. But to answer your question, I do think that we -- currently, if things stay on the path that we have visibility to, we would see this continued outsized demand in the first and second quarters of our fiscal 2021 and then would see things taper back down. I think the way to think about the business overall is in a normalized environment, it is more of a high single to low double-digit growth business. We did about $190 million of revenue in that business in fiscal '19. We were guiding to 11% to 15% growth in fiscal '20 before the COVID implications. And so I think if people think about sort of backing off that incremental outsized demand for those couple of quarters and continue to grow the business in that fashion, that's the way that we would think about it.

And from the margin -- go ahead, Susan.

Oh, sorry, I was going to say to your other question about, is there anything that's going to be big in some way that pops that or replaces that COVID revenue? I do think our philosophy around some of our investments like in Prestige is minority investments that come along with member commitment, which really gives security to that supply chain at a competitive price point. And so we don't see big moves like that, that would change what Craig described as the trajectory for revenue.

Yes. And I think you were going to ask about margins. Jamie, I would say, we do envision that continuing to be a low to mid-single-digit EBITDA margin business. We are taking time into the project. We do feel importantly, our reason for existence is to help reduce the cost in health care. So we do not want to have pricing that is or would ever be perceived as gouging to our members. We will sell products at a profitable margin, but for all the strategic reasons that Susan articulated.

Okay. I wanted to talk about Performance Services, which is -- it's the other, let's call it, 25% to 30% of your profitability, something like that, and a similar percentage of revenue. This is the business that I think if we were to rewind the clock, how many years have been, 7 since the IPO, investors expected it to be a higher growth business. It hasn't quite grown at the level that people thought it would. The business itself, I think, is roughly 2/3 or maybe a little more software and 1/3 consulting. And so I would love to just get your thoughts around what's a realistic expectation for growth here? And what the growth drivers are really going to be? And so maybe just from a realistic expectation for growth standpoint over the long run, when you guys sit around and think about the mid to high singles overall growth that you talked about recently for the company, like what does the Performance Services piece of that look like?