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

Good afternoon. My name is Lisa Gill, and I'm the health care technology and distribution analyst at JPMorgan. Welcome to the JPMorgan 39th Annual Healthcare Conference. With me this afternoon, I have Premier, Inc. Presenting for Premier is CEO, Susan DeVore. Joining us for the Q&A session will be Craig McKasson, CFO; as well as Mike Alkire, COO. Welcome, Susan, and thank you for so much for joining us virtually this afternoon.

Thanks so much, Lisa, and thanks, everybody, for joining us. I hope you'll follow along the presentation. I'll try to call out the page numbers so that we can both stay in the same place. Many of you know, Premier, but for those that don't, Premier is a performance improvement company. And we are focused, as a mission, on improving the health of communities. It's never been more important than it's been actually over the last 9 or 10 months. We do it with technology, we do it with data and insights. We do it with wraparound services. We have a massive footprint. We have very differentiated relationships with our customer base. We have a lot of activity in Washington, D.C. from an advocacy perspective, which was also very important during the pandemic. And we think we're well positioned to really capitalize on all that and lead to the growth projections that we have previously put out to the market. If you'll go to Page 4, you can see a graphic illustration of the scale that we have. We work with 4,100-plus hospitals and health systems across the country, hundreds of thousands of other providers of care. We have data and insights on 45-plus percent of the patients and discharges in the country. We are now capturing $67 billion of supply chain spend, which gives us a ton of insights around the high cost of supplies in health care systems. And we have, obviously, thousands of GPO contracts and suppliers. If you go to Page 5, what's really unique about our member relationships, our customer relationships, is that we're actually viewed as a strategic partner or an extension of themselves. Meaning we're not viewed as a vendor by almost 90% of our health systems. We have very high retention rates, 98%, 96% in the GPO and in the SaaS-based institutional renewal of our technology products. We're really proud to have achieved a 72% Net Promoter Score. That's on par with many of the world-class companies, and very proud of the relationship that we have with our customer base. We, as many of you know, went through a long restructuring process that occurred at the same time that the pandemic was raging. And I think both are just sort of a testament to the fact that we could get such a high percentage of our member owners to re-sign with us for 5-, 6-, 7-year agreements. We involve, we co-innovate, we co-develop with our member customer base. Our products, our services, they are sounding boards. We have 140 health systems, which encompasses lots and lots of hospitals within our geographic footprint to really help us map our path forward. If you go to Page 6, we manage the business, and we report in 2 segments, a Supply Chain segment and a Performance Services segment. The Supply Chain segment includes, obviously, our group purchasing organization as well as our direct sourcing company. The direct sourcing company was critical to our ability to help our health systems get the PPE and the drugs and the kits and supplies that go around the vaccine in their hands and in their markets. In Performance Services, we have 65%, 70% of that segment is our technology, SaaS-based and license-based technology products. We have wraparound consulting services and collaboratives. And all of it is managed through an embedded field force. And so what we like to say is that we're actually trying to change health care and help these health systems from the inside out. We're sitting there virtually or in person side-by-side with them to drive cost improvement, quality improvement, safety improvement and to help them get ready for value-based care and risk-based models. All of it is foundationally underpinned by technology. And this is vendor-agnostic, payer-agnostic, future state, AI-enabled natural language processing-enabled technology on an integrated platform. If you'll go to the next page, which is Page 7, we have very deep longitudinal data. You can see there on the slide we've got supply chain data, revenue cycle data, financial data, clinical data, outcomes data, claims data, and we wrap our services around that, and we're able to take solutions then in the big cost areas and the big clinical areas of our health systems. But in addition to that, we're also able to take that data and apply it to sweet spot problems of other parts of the health care ecosystem, meaning we can work with payers and providers. We can work with employers and providers. We can work with life sciences companies and providers. And we're doing all of that, and a lot of that is behind our growth plan going forward. If you go to Page 8, we've had a very successful 7-plus years since we took the company public. You can see the double-digit growth rate in net revenue and in adjusted fully distributed EPS. We have many growth drivers. The chassis on both Supply Chain and Performance Services are both built. We've been acquiring, we've been investing organically in both segments to continue to build the capabilities. We have highly visible revenue, recurring revenue, very high retention rates, as I mentioned earlier. And we have a very strong and flexible balance sheet with very little debt. That gives us a lot of optionality, and it gives us a lot of opportunity to continue to invest in the long-term vision for the company. If you go to Page 9, you can see there, I talked about our capacity. We have very little debt, $150 million. I think we've paid off $50 million of that. And we target internally the opportunity to get up to 2 to 3x adjusted EBITDA with available debt. We could even flex to 4x if we needed to. We have a very disciplined process for taking that free cash flow, investing it appropriately and looking at organic opportunities as well as inorganic opportunities. We launched a dividend with the restructuring. And so we're balancing the needs we have for long-term growth and long-term growth and stockholder value and have all channels of mechanisms to actually deliver that value. If you go to Page 10, when we think about what's going to happen going forward, we isolate sort of the 5 big trends. The first one is cost management. The impact to health care systems of this pandemic has been significant. And so our health systems are focused on continuing on a going-forward basis to manage their costs, and they need technology and they need benchmarking and they need analytics, and they need consulting. They need performance services. They need GPO contracts in order to do that. We also believe that the new administration will continue to push forward the idea of diversifying our supply chain so that we never find ourselves in this situation again. And that means bringing some of the supply chain, PPE, shortage drugs onshore. We've done some joint ventures to -- in certain areas, alongside of our health system customers to really start to bring more of that manufacturing back to the U.S. We think that will continue. We also think that provider IT infrastructure as well as federal and state government health care infrastructure is really critical. And the pandemic exposed the inability to sort of aggregate at a federal and state level a lot of different data sets. And so we have a lot of data, a lot of technology. We've built capabilities around COVID, around clinical and financial performance. We're using advanced algorithms and advanced technology capabilities to really predict what's happening and then drive actionable insights and improvement from there. So that will be a megatrend that we see over the next 3 to 5 years. We also think the incoming administration will try to get back on track with the ACA. Given the close margins in the House and the Senate, we're not thinking there will be big, big moves, but we do think there will be significant moves towards value-based care models, risk assumption by providers. Telemedicine will continue, investments in IT infrastructure, support for domestic manufacturing. And so Premier is well positioned to lead in all of those areas and to be a solution for providers, for government and also for other parts of the ecosystem. And you can see there in sort of trend 5, we started a couple of years ago a pivot that, in addition to serving providers, we would find those sweet spots between payers and providers, employers and providers, life sciences and providers, and grow those businesses. And we've been growing those businesses and see those growing at a faster pace on a going-forward basis. Talked a lot so far even about the pandemic. But if you go to Page 11, we organized a public-private coalition that worked with government agencies as well as private sector companies, our competitors and distributors and manufacturers, to really try to accelerate our collective response to the pandemic. We built new technology that actually does surveillance for COVID patients way before they kind of show up with COVID for a hospitalization. We have, through our direct sourcing company, seen very significant growth in the buying patterns, obviously, for PPE and some of those critical products. On our last earnings call, we actually said that we thought Q2 would step up by $40 million in terms of revenue. We're actually thinking that's going to be more like $60 million. That may increase from there in the third quarter and not start to really step down until you get to fourth quarter. So we're in the process of closing second quarter and hope to have more clarity when we get to our earnings call. If you go to Page 12 and you think long term, our strategic priorities are: on the Supply Chain side, to get to technology-enabled end-to-end supply chain, where we can actually impact every dollar of supply chain spend, purchased services spend and shared services spend that our health systems are managing. On the Performance Services side, it's all about enabling clinical improvement with data, with technology, with advanced capabilities, and then actually bringing those capabilities to bear not only to providers but to life sciences, employers and payers. We do think that this acceleration of value-based care models is likely to pick up steam as the administration gets fully in place. If you go to Page 13, some have asked us, "So how do you get to that mid- to high single-digit growth rate in both of your segments? What's your road map?" And you can see here on Page 13, we're at $67 billion today in terms of purchasing volume. The spend of our members, if we didn't add one more member today, the total spend is $200 billion. And so our road map is through our high compliance portfolios, through our purchased services technology, through our physician preference clinical analytics, how do we get to impacting 100% of the spend in sort of a co-managed, co-owned way with our health care systems. And you can't get there unless you have significant technology enablement. And you know if you've followed us for the last 7 years, we've made significant investments there, and we'll continue to do that. On Page 14, you see the road map for Performance Services. We're starting from what has historically been largely a provider-based services and technology capability, almost $350 million in revenue in 2020. And you can see the building blocks, working together with payers and employers and providers on automating prior authorization; working together with life sciences companies and providers on identifying patients for clinical trials and evaluating, for example, the effectiveness of the COVID vaccine; and then working directly with employers through our Contigo organization to really drive clinical improvement and cost improvement. And we've acquired Health Design Plus, which you know about, and that really helps us implement the centers of excellence programs with employers and with providers. So the road map is higher growth rates in some of these adjacent markets while we continue to grow and invest in the support that we're providing to providers. If you go to Page 15, you see that we take sustainable business practices, diversity, inclusion, pay equity. All of those things are very important to us. We've had long-standing programs in all those spaces. We've recently hired a new Senior Vice President of Diversity, Inclusion and Belonging. He's a part of the executive team. He reports directly to me. And we will continue to have a voice and to drive our values through our supplier diversity program, our employee resource groups. We've got sustainable purchasing programs. And so you can see here all the different ways that we plan to continue those activities. If you go to Page 16, and you kind of boil it all down, we're providing differentiated value to our health care systems. We have deep data sets. We have forward-looking technology. We were there for them in the pandemic. We're trying to stay 2 or 3 years ahead of what's happening in Washington, D.C. and help get them ready and help them be proactive there. And all of it is technology-enabled solutions with wraparound people who live inside the health care systems to really partner with them to drive their results. So from a customer perspective, that's what our value proposition is. It generates strong free cash flow. We've got ample debt capacity. We've got all kinds of optionality as it relates to capital deployment and delivering value to stockholders. And we're well positioned for long-term growth. We don't think there are companies out there that actually have the combination of technology and data and consulting services in the provider space with the kind of relationships and retention levels and Net Promoter Scores that we have. So we just plan to capitalize on all that and take it forward and get ourselves to that mid- to high single-digit growth rate in each segment on the top line and the bottom line and on a consolidated basis. So Lisa, I will stop there, and Craig and Mike can join, and we will open it up for questions.

Great. Thank you so much, Susan, for all your comments in the presentation today. One of the things that really hit me was just your comments about the next administration. And I know that you knew the Obama administration well, especially around value-based programs and what they were trying to do. You said we're trying to get our customers ready for what's going to come in the future. And so I think everyone's anticipation is that first 100 days will be all about the pandemic for President-elect Biden. But post that, we haven't really heard a lot of directive around the expectations on the health care side. They haven't named the Head of CMS, the Centers for Medicare and Medicaid. But maybe if you can just walk us through your initial thoughts around value-based care, how you can help hospitals get prepared for that and what that means financially for Premier. So how will you benefit from that perspective?

Yes. Thanks, Lisa. So what I would say is job #1 is pandemic, and it may take more than 100 days to get this under control with the variant, with the vaccine distribution. We're very involved in helping our health systems get that done. I think with the slim margins that the Biden administration has, as I said, I don't think there'll be great, big moves like public option or Medicare for All. I do think there will be significant moves, though, in value-based care, bundled payment programs, capitated payment programs. Medicare trust fund is going to have a big financial problem. And so the focus is going to be on cost and the focus is going to be on more predictable payment models. And we're kind of uniquely positioned for that. We have a lot of solutions in the ACO space, the bundled payment space, the clinical data, technology. And so those have all stayed in place even with the Trump administration. And I think that they will grow in a Biden administration. We also think they'll continue to support telemedicine, but they will see that they need to make significant IT infrastructure investments, and they need to require providers to have a lot more interoperability and transparency. And again, because we have a platform, technology platform that's payer-agnostic and vendor-agnostic, we are uniquely able to really help them build the IT infrastructure they need to assume risk, and they need to respond to what we think will be increased regulatory requests. We've already built a technology that automates the supply chain for any current pandemic or future epidemic in an automated way. We've already built the technology that prevails for COVID or any future pandemic, epidemic or even clinical condition you're trying to improve and get in front of it. So we think all of that is going to be on the agenda for whomever they put in place. And the Biden administration is going to have a lot of historical relationships, and with the control of Senate and House, should be able to get people in place pretty quickly.

Now Susan, you have talked historically about many of your clients or customers waiting to know the outcome of the election, feeling a little bit frozen before they go out and they make a buy decision. We don't want to talk about the quarter. I don't want to make Craig upset with me asking specific quarter questions. But are you starting to see where you're having more discussions, okay, now we know who the administration is. We have an idea of some of the things that they're going to put forward. So now let's bring back in and have that discussion with Premier around how they can help us from a technology standpoint? Or is it that they're just focused on the pandemic today that it'll still be pushed out a little bit from a decision-making process?

So I would say, historically, it's been -- COVID has pretty much consumed them. And secondly, I would say that we all believe, and I think they believe that no matter which administration is in place, there's a cost challenge. There's a quality challenge. There's a safety challenge. There's an IT infrastructure challenge. And so we feel good about the pipeline and the opportunities that we have. And we think in a Biden administration, it may just accelerate some of those things because I do think that they probably share the view we have that in a Biden administration, some of those things I talked about will become back on track. I don't know, Mike, if you have anything to add there?

Well, I think another big area, Lisa, is helping them get back to normal. Whatever the new normal is, it's -- we want to -- they're asking us to look at their corporate overhead cost. How do we become more agile in terms of how we actually provide services out to our patients from a corporate overhead standpoint. And then as they think about becoming more normal, as Susan said, where are these opportunities for them to drive cost efficiencies, number one. But two, how do we stand up very quickly, ways to standardize how we're providing care across our health care ecosystem, our complex ecosystem of where we're providing care. So those seem to be the big opportunities for us. And as Susan said, the implication to us is that they're needing our technology and our wraparound advisory services to help them do that.

And it isn't lost on them that health plans have done very well in the pandemic and providers have had a more difficult time. And so I think this movement to value-based care and health plan-like models and payviders, where they're combined provider and payer, I think all of that will accelerate.

And if I could add one more thing to that.

Yes, please.

I'm sorry, Lisa. Because the Contigo, I think this is where Contigo plays a pretty big role, right? So as our health care systems are continuing to drive this transformation, and as they're looking to create more efficiency, more transparency in terms of how they're providing care, I think working directly with employers and understanding how they want to bend their health care cost curves, they're, at the end of the day, the ones that have the -- they're right in -- they're signing the check. I think understanding that at some level of specificity, either through them wanting to be a center of excellence or being part of a high-value network, is also going to be critical going forward. I'm sorry for interrupting you.

No. Contigo was part of my next question because if I look back at last quarter, your Performance Services actually performed better than what we were anticipating. You raised guidance around that. So that tells me that perhaps people were starting to think about what are the things that we need to have in place with the pandemic, post pandemic? And then secondly, Mike, I was just thinking about the pandemic. And when we think about Contigo, is there a selling season specifically to that? So has the pandemic weighed on that this year? So that will really be more of a calendar '22 rather than really having a big benefit to calendar '21?

Yes. So we've had some success this year. But to your point, the pandemic did impact the sort of the benefits here. We are looking forward to, obviously, a very, very strong calendar year '22. It does not mean that we haven't been innovating, though, along right with them. So it's really interesting. I think what the pandemic really did sort of play out, especially in the Contigo model, is what are those services that we need to be thinking about being part of the centers of excellence or being more regional in nature or being more local in nature. And I think it's creating that blueprint in terms of what Contigo needs to be as it continues to evolve and to help our health care systems attach more directly with those employers.

I do think just quickly, Mike, the other thing, the pandemic affected, Lisa, was the center of excellence program in certain cases with reduced travel due to the pandemic. And so once we do get the vaccination -- vaccines in place and people can travel to those sites, there will be opportunity for growth in the Contigo Health business as well.

One of the other things, Susan, you made the comment when you talked about your growth rate about the $67 billion that goes through your business today, but there's $200 billion that sits out in the marketplace. I think a question that we get pretty regularly is when we think of that $200 billion, are those all products that could come through Premier? Or is there some sense of that, that will always go direct because the manufacturer wants to have their rep there to show the doctor something around their product? So how do we think about what the opportunity is? Is that $200 billion only what could go through Premier today?

So that is their total spend in terms of all their purchase services, their shared services, their supply chain, their drugs. There will always be some suppliers who will say, I don't want to go through a GPO. But I think our view of it is it's not just the GPO. So we have a direct sourcing company. We have a GPO. We have all these clinical analytics. We have consulting, and we are going to help them impact that spend in a variety of ways. So part of it will be GPO contract. Part of it will be direct sourcing. Part of it will be technology analytics. Part of it will be consulting wraparound. But we want to be -- we want our health systems to say to us, you're my supply chain partner for the whole thing. And I want you to own with me the improvement in that entire number, and we have diversified the business such that we can get there a lot of different ways. And we think we can do that in ways our competitors can't do that because we've made so many investments organically and inorganically over the last several years.

And Lisa, it's funny, it's really interesting. Your use case, the way you describe how some of the money might be kind of going around because they -- some suppliers would like the more direct contact with the clinicians is the whole reason behind the e-invoicing offering. And so we are really keen on trying to understand all the invoices that come into the health care system. And if to the degree that you're paying one price in one location for an implant versus another, we want to capture all that information and work with our health care systems to try to drive standardization but, most importantly, to drive transparency on what they're paying for various products.

Right. Even if the rep is still coming in or wants to show the physician, et cetera, you can still help them to get to the right price that they should be paying across the board, right?

And you have to -- it has to be automated and it has to be able to be connected to disparate ERP systems because they all use different systems or many different systems. And so it's really that layer of supply chain business intelligence that you have when you see the invoices, the payables, the clinical outcomes, the GPO contracts, the direct sourcing capability. I mean, we're building this massive sets of data that are technologically automated, and then we put a front-end e-commerce technology on it as well to make the buying easier. And so this is a long-term vision, but that's how we get to impacting that $200 billion.