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

Great. Good morning. My name is Donald Hooker. I am the analyst here at KeyBanc, who covers Premier as well as the broader healthcare IT and biopharma software and services space. Today, it's my great privilege to host a discussion with representatives from Premier. We have CEO, Mike Alkire; CFO, Craig McKasson; and Head of IR, Angie McCabe. For the investor audience out there, as a reminder, the hope here is that this will be interactive. So if you have any questions, you can anonymously submit them through the Keybanc Conference portal, and I can relay them on your behalf to the Premier team. So with that, Mike, Craig, Angie, thank you for attending our conference. We super appreciate your time. We know you're busy, and I look forward to having a nice conversation for 30 minutes here.

Thanks for having us, Don.

Yes, sure. So maybe to start high level, of course, a lot has changed over the past 18 months in U.S. health care. We've had a COVID outbreak, of course, and we've had a change in presidents, of course. And as we stand today, what -- as you look at the broader, what do you think the top perhaps 3 -- or 2 or 3 strategic imperatives of U.S. hospitals and position perhaps those executives are today as we look into 2022 and 2023? Let's start there.

Yes. I think at the highest level, it's all about returning to normalcy. One of the things I think that COVID-19 really identified was the need for health systems to be a lot more focused on rightsizing their infrastructure. So think about their corporate overhead and those kinds of things. And given what was happening with hospital volumes, I believe it provided an opportunity for these health systems to truly understand what were those mission-critical parts of their corporate overhead, and what were the things that they could potentially cut back on a little bit. So you think about one of the acquisitions we made, which was in the past 60 days, which was IDS, and we're calling -- it's falling underneath a company called Remitra. It's really all about helping to drive standardization in the e-invoicing and e-payment process, which we think obviously will drive efficiency. So the first thing is this notion of rightsizing corporate overhead, corporate infrastructure. Second, we think health systems are going to -- I think there was a lot of lessons learned from COVID. I think that they're going to be thinking of ways to expand in the non-acute setting as quickly as possible. So think of more ambulatory services, more primary care and those kinds of capabilities where they're really meeting the patients outside of the footprint of the hospital. That also lends obviously itself to some virtual care. And we can get into some of the details on that, Don, if you want to a little bit later on. Because they're going to be thinking about all these different ways to provide care to the potential patients, it's going to be really important that they provide a high level of quality and they're following evidence, no matter where the care is being provided. So we call that clinical standardization. So I think there's going to be a big push towards driving clinical standardization across the entire health care systems. And then finally, this whole area of resiliency within the supply chain. So one of the things that COVID, I guess, identified was that we had -- the U.S. health care system had very narrow supply chains and was very, very dependent on PPE coming from Southeast Asia, specifically China and, in some cases, a lot of generic drugs and APIs and those kinds of things. And I think it really highlighted the fact that we've got to create more resilient supply chain solutions to include more domestic and nearshore manufacturing of important PPE as well as generic drugs. So those are probably the 3 or 4 things I'd say that are going to be the big priorities going forward.

Got you. And I guess the other question I'm sort of asking folks is the Biden administration rolled out here every week and month. Any surprises kind of that would result -- any kind of surprises from a regulatory political front? Or any kind of need for tactical changes to what you're doing? It doesn't seem like there's probably strategic changes, but tactical, any kind of things we should be aware of?

Yes. Not so far. So I think that COVID is sort of job number one, right, getting as many shots in arms as possible. And so we're helping identify where there are some gaps from a supply chain standpoint to the administration. So you're hearing a little bit about needles and syringes and those kinds of things. But let's -- I think, number one, they're just trying to get as many shots in arms as possible. Given that there's a narrow margin of democratic control, we don't expect a lot of sweeping changes that's going to happen from an administration standpoint, at least in the near term. There are, I'll tell you some, I guess, early warnings, if you will, of what we're seeing from the administration in terms of their support for domestic manufacturing. We love that, obviously. So we've been providing them insights around how to support domestic manufacturing and make it easier for manufacturers to produce products here in the U.S. And we also have a sense that there is an interest to modernize technology at a national level for health care. So in 2 ways: One, I think COVID exposed the fact that we do not have a syndromic surveillance capability in this country, and it's very critical. We believe that we do, in fact, do that. Fortunately, Premier has been developing that kind of capability where we're using natural language technology, natural language processing, looking at unstructured data in the electronic medical record in real-time to highlight where there's the prevalence or a surge and a disease at a ZIP code level, and that's going to be really critical, I think, going forward. And then secondarily, there are technologies that we think can be more appropriately utilized to manage supplies in the event of another natural disaster or pandemic. So one of the issues I think that was an outcome of COVID is that you had this incredible supply demand imbalance where everybody was trying to get product at the same time. So the government, the national federal government trying to stockpile the states, the IDS, clinicians. We do believe there's a technology solution there, which can identify inventory levels and then dynamically allocate critical products where it's needed the most.

Great. So maybe just diving then now into the specifics of the Premier story itself. The -- I did wanted to jump immediately, you alluded to the recent acquisition, I guess, of Invoice Delivery Services. I guess, this is a company that you had worked with in the past. So -- but just for folks online, I think, it will be helpful to kind of clarify the sort of the financial implications of that. It's not a small outflow of cash. So maybe kind of any financial implications of that acquisition from a revenue and bottom line standpoint? And also, maybe a couple of thoughts incrementally around how this fits in the broader vision around e-commerce that you guys have for U.S. health care?

Yes. Craig, I'll -- let me talk about the broader vision for e-commerce. And then you can add some of the ideas around numbers. So from an e-commerce standpoint, we've been talking about this, Don, for the last couple of years, that we want to technology enable the health care supply chain. We've been building out an e-commerce platform for the last 18 months or so. And the whole idea is to give our health care systems access to products in sort of an omnichannel way. They can do it through the GPO, they can do it through distributors. But we wanted to create a platform where those health systems and those clinicians knew those products were reliably sourced. And I think that's really, really critical about that e-commerce platform. And it's that front-end ordering platform as well for many of our IDNs. During COVID, we had a lot of nursing homes and other facilities that historically had not utilized Premier in the past, take advantage of that to get access to PPE and other products. So we want to continue to evolve that. IDS fits into the story, or that e-invoicing and e-payables fits into the story a little bit further down the e-commerce procure-to-pay platform. What we're doing with the e-commerce and e-payables platform as it sort of sits on the back of the ERP capability that we have, and it really helps our health care systems centralize how invoice processing is being done. And so what we liked about IDS, obviously, it has some really cool advanced optical character recognition technology. It has some technology to centralize all the invoicing and help with prioritization and those kinds of things. And then it leads it right into an e-payment platform, which allows for sort of that seamless connection of invoicing to payment. And so we think this is obviously going to help our health care systems become a lot more efficient. But we also think that it's going to help the supplier partners as well, become more efficient as we more accurately understand what the invoices are and if there are lost invoices and tracking them down, all of that will be automated, whereas today in many of our health systems, it's not automated. Craig, I'll flip it to you.

Yes, Don. So from an acquisition standpoint, obviously, an important strategic acquisition for the enterprise. From a current financial profile standpoint, the IDS business has been and is more nascent because it has been in the process of establishing and building the network that's been established with the few hundred hospitals that are currently participating as well as the thousands of suppliers that are on that network. But as we think about it moving forward, we think this has the capability to deliver $50 million to $100 million in revenue over the next 3, 4, 5 years, and deliver the sort of double-digit return on invested capital that we target for our acquisitions. We generally try and target achievement of that on a run rate basis by the 3rd year. We do think this may one take us to the 4th year given some of the ongoing investments we'll have to make to integrate and actually further the capabilities along our technology-enabled supply chain strategy.

Okay. Great. And then maybe shifting gears to another topical area on Contigo Health. It's sort of a topic that comes up in your -- routinely in your conference calls. Maybe just a quick recap here. Contigo Health, I assume, it seems to be mainly centers of excellence for employers and their employees rather than narrow networks or maybe I'm contemplating concepts here. Can you walk through kind of the various case studies and opportunities for Contigo Health more specifically? And have you all sized the revenue there at all? I think you bought Health Design Plus a while ago, and that was -- I think it bought about $25 million of revenue, but that's part of Contigo. Is there a broader revenue there that we should look to?

Yes. So first, let me just talk a little bit about the business models and the functionality. But to answer your question specifically, there is more revenue, obviously, than just the TPA. And I think, Craig, if you would -- wouldn't mind adding that at the end, I'd appreciate it. So Contigo has, we think 3 pieces of functionality that are really, really critical. And number one, just for all the investors, it is a capability that we've been developing over the last couple of years to help health care systems interact more closely with employers. And so we wanted to build a full suite of capabilities to actually help them do that. Don, you mentioned centers of excellence. So yes, when we bought Health Design Plus, they are a TPA to drive centers of excellence for companies like Walmart and Amazon and other organizations that are fairly innovative in the way that they're providing health care to their employee base. So number one, it's the centers of excellence. Number two, we are building out capabilities that create a high value network. We had a very large employer that came to us when we created Contigo and said, "Look, there's a lumpiness associated with how health care is provided to our employees." So the way that health care is provided in Sioux Falls is not the same as it's being provided in Fargo, North Dakota even. And they said, "We would like a consistency for our employee base." And so because we've got a long history of working with health care systems at scale, driving clinical standards and helping them all drive the higher levels of standards of quality, this large employer said, "We'd like you to build this high-value network out." So we, in fact, are building out that capability of that high-value network, working with health care systems and knitting that together as we speak. So that's sort of in the very, very, very early innings, and we have that by region. And so we're partnering, for example, with a very large employer in Dallas or in Phoenix, to build out those care models and then we'll expand those to the rest of the country. The third area that we're focused on is this whole area called clinical advantage. And we think using machine learning and artificial intelligence that we can inform the way care is being provided at these around the country. And so we want to have this whole technology backbone that is using appropriate care protocols in terms of treating patients and those kinds of things. So those are the 3 areas that we're going to focus Contigo on right now.

Yes. And I think to tack on to that from a financial perspective, Don, you appropriately articulated Health Design Plus sort of a $20 million to $25 million revenue business. Generally, about 2/3 of that on the TPA side, about 1/3 of that on the center of excellence side was sort of the composition and makeup of that business. When we launched Contigo Health, we talked about the fact that, that was a longer-term strategy and would probably take us until the 2022-2023 time period to really start to get some legs, given the nature of employer benefit programs being on annual cycles, et cetera. We did see a little bit of a pause or a slowdown over the past year from our original expectations given the pandemic as employers weren't necessarily focusing on some of those changes. But we feel very good about the double-digit growth that we think that we can deliver in that part of our business on a priority basis moving forward.

Sure. And I guess -- and that's totally fair. This is definitely a longer term -- we understand this is a longer-term vision, important as Premier evolves those, so we're tracking it closely. You referenced, I think, Craig, on the last call, there was a 25% increase in managed lives. Is that kind of a proxy for revenue growth for you guys in that area? Or is that not a proxy for revenue growth?

It's directional. I wouldn't say it's an exact proxy, but I think it's a directional proxy for the adoption of the program, which will convert to revenue over time.

Sure. And another sort of growth here kind of emerging area for Premier that we've talked a lot about is the life sciences area. I think there's a number of areas in parts of sort of the life sciences business model where Premier can have an impact. And you referred to -- I think you guys referenced clinical trial recruiting, value-based contracting for drugs, observational studies. Can you kind of maybe break it out like which of those sort of case studies? Or are there others that are sort of more indicative of the opportunities in the life sciences area?

Yes. So a couple of different things. First of all, I think you identified a couple of really critical areas. We do think that there's a huge opportunity for patient identification at the point-of-care for trials. We do have some pretty cool technology that as patients are sitting down with their clinicians, and the clinicians have lab values or screens or those kinds of things that they can serve up that they're -- depending on what the disease is, they can serve up the trials that are occurring. And that's a much needed capability, especially for pharmaceutical companies that want a more heterogeneous population for participation in trials. It's also an opportunity for our health care systems to brand themselves a little differently, right, to get access to some of these products and innovations before others. So we're excited on behalf of the health system. So we're also excited on behalf of the patients. Because as you know, depending on where you live in the country, you may get access to the various trials and some don't. And so we want to make sure that we're serving those up with a high degree of quality across the entire country. So that's just sort of a quick backdrop on that whole area of patient identification. I think a couple of areas that we want to continue to focus on and grow, the whole area of real-world evidence. So that's -- and why that's so important. So you go through the trials, you launch therapies. The pharmaceutical companies really want to understand how those products are actually performing in the real world. And so just because of our makeup, right, because of our footprint, because of our data, because of our capability to standardize working with our health care systems, how to standardize, giving therapies and managing diseases, it's really important that -- for pharmaceutical companies that you can drive that level of consistency, and we then provide all that information and insight back to the pharmaceutical companies in terms of how those products are actually performing in the real world. So that's number one. And then number two, we will continue to do retrospective and prospective research projects, working with pharmaceutical companies, just based upon the amount of data we have, right? And our ability to actually, again, work with health care systems to standardize how to actually use a therapy and track the therapy and manage the patient with the therapy. So we're going to continue to build out those capabilities for pharmaceutical companies as well.

Sure. And have you -- I guess I'll push my luck here a little bit. I'm not sure if you guys have -- I understand it's a small business, it's sort of an up and coming business, which is why I wanted to kind of bring it to light here. But have you guys sized that for investors in terms of where you're at in terms of revenues? Obviously, a huge opportunity, but are we -- how early are we there?

It's early innings for that business. We don't typically break out the pieces, but you should think about that as sort of in that $20 million to $25 million range today in terms of revenue for that business as well.