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

Good afternoon, everyone, and welcome to the JPMorgan Healthcare Conference. My name is Annie Samuel, and I'm the health care technology and distribution analyst here at JPMorgan. We are thrilled to have Premier here with us. Presenting today will be CEO, Mike Alkire; and CFO, Craig McKasson. They're going to do their presentation. Following that, we'll do a Q&A session. [Operator Instructions] So with that, let me turn it over to Mike.

Thank you, Annie. Appreciate you having us here today. If we could put up Slide #1, just very quickly before I begin, I just want to remind you to review our cautionary statements and a description of our non-GAAP financial measures, which we will be referring to throughout our presentation today. If you could go to Slide #2. So for those of you that are new to our story, our mission is to improve the health of the communities. And we do that by working very, very closely with our member health care systems, other stakeholders to include our suppliers and advisers to leverage our services capabilities and technology solutions to really help drive improvement in health care by improving the quality and reducing the cost. We do that by co-innovating with our health care systems, and I'll talk a little bit about that in a second in terms of the very unique relationships that we have with our members and how we work very, very closely together. Most importantly about our purpose and our mission, it was truly validated over the last 1.5 years or so of the pandemic and in terms of us working very closely with our health care systems to help them, from a technology standpoint, to understand how the virus was spreading into their communities as well as providing them the necessary PPE to actually protect their caregivers. If you could go to the next slide, which is Slide #3. I talked a little bit about this, but our relationship with our health care systems are very, very unique. They're very, very long standing. In some cases, it's been more than 30 years. We've been working very, very closely with them on a variety of very, very strategic areas of focus as it relates to health care, from the time back in early 2000s to figure out ways to drive standards of quality through the early 2010s to new payment models to now creating resiliency and working through labor issues and working with -- through supply issues. The way that we do that is by part and parcel to the way that we're structured. We have a number of committees that we work with, more than 30 committees, including our Board as well as our Board Advisory Committee, which is made up primarily of our health care systems executives, where we sit down with them on a couple, 3 times a year basis and talk to them about our strategies and the areas that they would like us to focus in terms of helping them provide better health care, doing it in ways that are more profitable, doing it in ways that obviously can deliver high-quality, regardless if it's in the middle of a pandemic or not. So we're constantly leveraging that channel and we're co-innovating with our health care systems. We're co-investing. A very, very unique part of our model is that we literally have the ability to pilot various initiatives or offerings with a subset of our health care systems before we decide that we potentially may want to invest in something new, or we learn about new innovations or new technologies because we're working alongside of our health care system, where somebody might be leveraging AI or machine learning capabilities. In one part of the country that has a fantastic solution, oftentimes, we want to take that solution, industrially strengthen it and then broaden that out to the rest of the community. So we sit in a very, very unique space to really help our health care systems drive improvement again from a quality and a cost standpoint. Interesting enough, many people talk a lot about AI and machine learning especially as it relates to health care. I will tell you, very few organizations have the data set, have the technology and the infrastructure that Premier has to actually build out machine learning and AI algorithms to actually help support our health care systems, or just as importantly, have partnerships with the big EMR organizations, Epic and Cerner and Athena, where we're literally leveraging a lot of our natural language processing and natural language technology to actually enhance the way that care is being provided, and to the extent that it makes sense, embed protocols into the electronic medical records where we can drive higher levels of performance in support of our health care systems. If you can go to the next slide, Slide #4. So from an organizational standpoint, we are broken into 2 segments. We have a Performance Services segment, which has the brands there that you see, our PINC AI brand, which is our clinical decision support and our technology for the most part that supports our health care systems operations. That's underpinned by our consulting organization, where they take that data and that technology, that control tower, if you will, and they work through opportunities for improvement, working with our health care systems to help them drive improvements in the way that they're providing care, so that's the PINC AI. The Contigo Health offering, which is all about helping our health care systems work more closely with employers, both at a national level and in their markets. And Contigo has an underpinning right now of fairly strong TPA capabilities around centers of excellence. And it's also been building out a high-value network of care that standardizes care to support national -- large national employers to ensure that care is being delivered consistently across all of the needs of those employee populations. And then finally, Remitra, which is our e-invoicing and e-payables platform, and I'll get into a little bit more about that later in the presentation, but that's also part of our Performance Services segment. And then on the supply chain side of the business, we work with about 2,800 acute care hospitals, more than 225,000 nonacute settings and then non-healthcare businesses as well. And our focus there for the most part is really driving cost reduction vis-à-vis leveraging our scale to get best prices for products for all of those entities. We've also developed a direct sourcing business called S2S Global. We did that about 10 years ago. And really, we built that out as a leverage point in the negotiations process to the degree that we didn't think we were getting the kind of value we needed from a price standpoint. We would literally leverage that technology to go out and contract manufacture for products. So that S2S Global was something that was obviously very needed over the last number couple of years during COVID as it was able to source products to support our health care systems and protect our caregivers as they were caring for COVID patients. If you go to the next slide, Slide #5. And this really begins to build out this very, very uniqueness of our model, where we are truly embedded with our health care systems, both from a Performance Services standpoint and a Supply Chain standpoint. And that not only means that we're able to do innovation with them, but it also means that we're able to leverage their data to help identify opportunities for improvement and to share data across those entities so that they can benchmark against one another and again, drive best practices in terms of improving, call it, quality and reducing care. That capability also, obviously, or that relationship also allows us to continue to build out that Contigo Health initiative, which is driving that standardization of care that goes across all of the country just because of the sheer scale of Premier. Finally, our technology platform that we've been building out over the years is a platform that's very, very scalable and very agile. And it allows for us to build out multiple -- different kinds of use cases that not only help us help our health care systems drive performance improvement but also, it helps us bridge into new markets, into adjacent markets. And again, I'll get into a bit more of that in a couple of slides to talk to you a little bit about some of the details that we're working through. But that whole technology platform that we characterize as sort of PremierConnect where we do a lot of that knowledge sharing and best practice sharing and those kinds of things is all underpinned by our PINC AI capabilities. If you go to the next slide or Slide #6. This really talks about the culture that we've been creating at Premier and our value orientation to the culture of integrity and innovation and passion for performance and focus on people. That has been sort of a trademark of this organization since I've been here for 18 years. I will tell you, as I've kind of come into the role of the CEO, there are some additional things that I also have asked the team to really think about as they think about evolving those values. And that one is growth. I'm certainly very, very focused on figuring out ways to leverage all of our scale and leverage our assets and innovate and find new opportunities to create growth and thereby delivering long-term shareholder return discipline. And that really is all about focusing on those areas of the business that we think could drive the most amount of value to our shareholders as well as our stakeholders. And then accountability, which is this focus on truly, execution and ensuring that we do what we say we're going to do not only from a financials standpoint or from a guidance standpoint but also in terms of meeting our health care systems objectives as well. At our recent Investor Day, we introduced Joe Machicote, who is our Chief Diversity Officer, and Joe spoke quite a bit around how we're using our whole DEI&B initiative to really underpin that whole concept of growth that I just talked about. So let's go to Slide #7. So this just reiterates that Premier is in very, very strong financial and a very, very strong financial position. We have a very strong and flexible balance sheet that generates strong free cash flow, and we have a very, very balanced approach to capital deployment to both invest in growth both organically and inorganically to return the appropriate levels of capital to shareholders. If you go to the next slide, Slide #8. This is our focus on the growth that I was just talking about. This slide really comes down to 3 or 4 real key tenets. The first is that we want to continue to grow within our supply chain organization by leveraging our technology and our capabilities really to focus on driving deeper levels of penetration of our contracts. So looking at our analytics, looking at our data, looking at our technology and figuring out where are we not contracting for various categories and take that data and then work with our health care systems and our committees to actually build out contracts that can drive into those areas that aren't covered today. Second, we want to invest organically and through acquisition to enhance our technology and our enterprise-wide capabilities as we see where there's opportunities for strategic growth, and again, leveraging that PINC AI platform. Third, we want to continue to innovate products and services and use cases and other capabilities built upon that technology and that data platform to create capabilities that our members will utilize to help them on their journey as they're moving to more pay for performance and pay for value. And then fourth, as I've been saying, our focus really is in the whole Performance Services is not just on helping our health care systems drive performance improvement, but it's also focused on expanding into adjacent markets. And those markets include life sciences. Those markets include prior authorization. Those markets include the Contigo initiative, which is focused on the employer as well as our Remitra, which is the area focused on e-invoicing and e-payables. And we believe that we're going to be successful because we have that really strong underpinning of that loyal network, the great data, the great technology, the right levels of investments that we've been making over the past really to help our health care systems drive performance improvement but then also being able to expand into new markets. Okay. If you go to Slide #8, again, growth strategy is, again as I think I just covered Slide 8 so that was that whole penetration and those kinds of things. Slide #9, getting into a bit more detail on Performance Services. Our focus in, as I've been talking about, is really all about helping our health care systems drive this higher levels of performance, move to new payment models, really help them as they're moving towards pay for value and those kind of things, as they're building out partnerships with health plans to take more risk from a delivery standpoint, in some cases, from a financial standpoint. But also then in those adjacent markets, we want to continue to grow into areas of life sciences. So in the past, we've provided retrospective data slices and those kinds of services to life sciences organizations. More recently, we've been focused in on building out real-world evidence and working with them post-drug approval and helping them identify and understand how therapies are working post-drug approval. And then most recently, we've been focused in leveraging our PINC AI technology, our AI and machine learning in identifying patients for trials. So as a patient is sitting down with that clinician at the point of care and they're understanding what the alternatives are to manage that care, we're able to tee up looking at lab values and screens and other things, whether or not somebody would be a perfect candidate or a good candidate for a trial. And so we're really, really excited about the future of our life sciences practice and what we're able to do there. In Contigo Health, our focus is, as I said, is continuing to evolve our TPA in support of our focus on centers of excellence, building out the high-value networks of care. But we also want to continue to evolve our network. So today, we have fantastic coverage from an acute setting. But we want to continue to look for other ways to build that network out through partnerships with large physician groups and other providers. So we're really, really excited about the future of Contigo. And then finally, Remitra, which is all about e-invoicing and e-payables. And that focus, again, really is an issue that our health care systems has been dealing with for basically ever, which is really managing these invoices that come into the health system. And as our health care systems become more complex, and I always use an example where you have a system that has 20 hospitals. They may have 50 or 60 nonacute facilities as well. They may have hundreds of clinics. Well, we want to be able to provide the technology underpinning for them to actually centrally manage all of that invoicing and payables as opposed to all that being done disparately. And we believe that there's going to be a ton of synergies that they're going to be able to drive through leveraging a technology platform like that. And then on the supplier side, on the Remitra offering, we believe that through building out supplier portals that we're going to be able to provide more value back to the suppliers for them to understand what's being sold into a health system, what's being invoiced, what kind of trunk stock is out there that they're not really aware of, but we believe that the technology will also support our suppliers in a very meaningful way as well. All right. So if you go to Slide 10, as we dive a little bit deeper in the supply chain, I think for those of you who have been following our story, our focus has been to, in the acute GPO side of the business, is to drive more and more of our health systems into our performance groups. Those are our ASCEND and our SURPASS performance groups, where they drive higher levels of commitment and they're driving, obviously -- because of driving higher levels of commitment, they're able to yield better pricing and see that benefit of lower supply chain costs. So focus there is really how do we continue to do that. It's also building out technology to help our acute health care systems really get after things like performance services -- I'm sorry, purchase services and really understand what the purchase services opportunities are for improvement, building out contracts where it's necessary, creating analytics so that they understand that things need to be locally negotiated. They have price points that they can bump against to determine what the right pricing they should be paying for services are and those kinds of things. Then we've got that -- obviously, that focus in the non-acute setting as well, which is really, again, understanding all the spend that's happening in the non-acute area, building out contracts where it makes sense, providing analytics where it makes sense to help our health care systems manage the spend in the non-acute area. And then our continued focus on direct sourcing, which is really focused on vertically integrating the supply chain. And as many of you have seen, we've been making investments domestically to vertically integrate the supply chain for N95s and KN95s or the mask area. For isolation gowns, we created partnerships with gloves. We've also created partnerships for generic drugs. So we believe that -- we've got to make sure that we're creating more resiliency in that supply chain. And one of the ways to do that is literally by making those investments in our direct sourcing programs. So in conclusion, Premier, we believe Premier is a leading technology company with some of the most strategic and comprehensive and impactful assets and data in the entire health care industry. We're incredibly confident about the future of our business and the mission that we provide to our health care system and the opportunities for growth that working alongside of them provides. So with that, I will turn it back, Annie, to you for Q&A.

Perfect. And thanks so much for that very informative presentation. It's great to see the different growth drivers. [Operator Instructions] I'll take the first one. At your recent Investor Day and in your presentation today, you've talked about your forward growth strategy is driven by a combination of things, so bolstering your existing capabilities, expanding into adjacent markets. But I was hoping if we could start with bolstering your existing capabilities. Where are you really focusing your time? And what are you hoping to get out of maybe some of that investment?

Yes. So I'll start. Leigh, I'd love for you to add in. So by segment, let me start with Performance Services. So as we think about bolstering our existing capabilities, so we've built out pretty significant capabilities using AI and machine learning, working with our health care systems to help them through PAMA regulations, which is all about getting reimbursed for high-cost images. Very quickly, we took that platform and we're continuing to use it to support our health care systems, but we took that platform also and we're beginning to utilize it in prior authorization for a very similar use case, which is high-cost images. Where we want to continue to bolster that is continue to build that up for various constituencies that happen to be our acute settings, our physicians and our payer partners. But we want to continue to evolve that, right? So next, we want to get after diagnostics, that we want to get after pharmaceuticals and those kinds of things. So when we talk about bolstering, especially as it relates to Performance Services, the focus is how do you take that technology, that AI machine learning and natural language processing and continue to extend that into additional use cases, which obviously will drive value to the membership? Leigh, I don't know if you have additional adds to that.

Thanks, Mike. And really consuming additional data sets, right? If you think about where we are now, we have a ton of acute care data. Our goal really is to include operational data, financial data, employer data with Contigo. We're really investing in a couple of key areas, which are real-time analytics around margin improvement as well as real-world evidence in life sciences. So if you think about where we're going for growth, it's really the provider market and then the life sciences and pay buyer market. And that's really where we're putting a lot of energy, again, to Mike's point, real [indiscernible] is one example.

And then we want to continue to double down as you think about our capabilities in the high-value network for Contigo, we want to continue to add additional parties or partners to our high-value network and work with them to make sure that they're providing the same level of quality as their peers that are part of the Contigo initiative. And then as we think about Remitra, our focus right now is on invoicing, but we want to double down and continue to build out the payment side as we believe there's a lot of value there. So that's on Performance Services. And then as you think about Supply Chain, our focus in Supply Chain is obviously as I said, we want to continue to evolve our capability and drive higher levels of members into our committed programs. And then also, obviously, we want to continue to evolve our direct sourcing business, which is today, been focused on a lot of PPE in some cases, generic drugs. But where we want to take that also is more so the next iteration of sort of medical supplies. So outside of just the core commodities but some other capabilities where we think there's a lot of value that can be generated by us sourcing in those areas.

That's great. And then maybe on some of these adjacencies or adjacent markets, could you rank order maybe those areas that you think might have the most impact?

Yes. I will tell you, I think that first and foremost, so the non-adjacent markets, the health care system will always be our sort of primary bread and butter. I think life sciences shows a huge opportunity for us in terms of where we are positioned today. I think that life sciences organizations are continuing to look for more heterogeneity in terms of data -- or I'm sorry, in terms of patients for their trials. I think we have a very, very unique capability in the market that identifies those kinds of patients that can be utilizing a potential trial. And so I see huge upside there. I see, obviously, huge upside in the Contigo initiative as well, not just because of the Contigo business model as well as we sort of think about the large employers using centers of excellence and building out that high-value network. But I also see it as sort of a leverage point to really help -- it actually provides us an opportunity then to work more closely with our health care systems for them to drive higher standards of care so that they can participate either as a center of excellence or as part of a high-value network. So I would say that those 2 plus probably 2 and 3 years out and Craig, you certainly can add in if you're interested. But 2 or 3 years out, I believe our Remitra offering is going to provide us a pretty significant upside as well.

Yes. The only comment I would add it's hard to force rank because they're really critical needs in different markets. So I think Mike described it but it's hard to say one over the other because they're solving important pain points in different aspects of the health care landscape.

That makes sense. Maybe just on the topic of Remitra, how has that been received by your customer base? And how is that integration going?

Yes. So first of all, I think it's been received very well. As I said in my presentation, we actually -- and the way that we find a lot of innovations or companies to actually work with, we actually find them through working with our health systems. And so a number of our health care systems we're working with the prior company, IDS, that we rebranded. And they were utilizing it obviously to really get their invoicing and capabilities really managed more effectively. And so we saw a huge opportunity because we started to see that a number of our very, very large systems were either kind of wet labs for them or prototyping new capabilities and new functionality for them. And we thought that, that was a huge opportunity then to sort of step in and bring them under the fold. But the net of everything is things are progressing quite well. We are working with suppliers, obviously, to bring them into the network. We've created these groups of executives where they actually are helping us sort of with the integration of the asset in terms of where is the areas or where are the areas that we need to deploy capital to create functionality to meet their needs in the shortest period of time, but then also can further our business model in terms of getting more SaaS, SaaS-based revenue as well as transaction fees. But the net of everything is I think it's going very, very well. Leigh, I'm not sure if you have anything to add as you are a little bit closer than I am.

No, Mike. I think that it's been operationalized exactly according to plan. The key thing for us, right, is just being able to scale that to the finance side of this as well. And it's not just moving the data, it's taking the next step. So as Mike sort of kicked off the conversation, it's execute according to plan and then grow on the invoice automation piece as well as supply chain finance piece and working on that right now.

That's great. Maybe just turning to the supply side of the business. Inflation has been something that's really been pressuring everybody. I was hoping you could talk about how that's impacting your business and maybe some of the things that you were able to do to offset that. I know some of your contracts are fixed pricing, but what's going on there?

So Craig, I'll start and then I'll turn it over to you. So Annie, you said it. We have a number of our contracts that -- or most of our contracts -- well, first of all, let me just step back. We are sort of been designed, over the years, to actually combat inflation. I mean, that was one of -- a primary driver of creating Premier years ago. So everything we do is really focused on trying to eliminate inflation as much as possible and to understand when real innovation is occurring to put a value on that from a product standpoint. But as you think about inflation, as you said, we -- almost all of our contracts have a language in there that protects the pricing. So it's fixed pricing and that if, in fact, a supplier wants to try to get an increase, that they have to actually come to a committee of health care systems to pretty much state their case. But in answer to your question, how is inflation impacting us today? I will tell you, I'm taking more and more calls for executives that are dealing with inflation not only from raw goods but due in large part to labor issues as well. And then the way that we deal with that is we take it to the committee -- our committees that actually are jurisdictionally responsible for those product categories and then they make the end decision as to whether or not that they're going to give an increase based on a couple of things: one, how competitive is the category; two, what's the viability of the suppliers in terms of -- are they -- would they still be able to sustain themselves if they weren't going to get the increase; three, profitability of those suppliers always plays into it. But there's a number of things that they sort of think about before they just agreed to an increase in price. Craig, I don't know if you have things to add.

Yes. Just a couple of comments. Thanks, Mike. First of all, as Mike just articulated, I would say that the evaluation of whether we allow price increases on our contracts is a data- and fact-based assessment where the manufacturers provide information to really support the background and the rationale for the price increase and why it's warranted. We have had some price increases that have been approved, although it has not materially changed our business performance as a result of that. And then the last thing I would just highlight because it also does impact our direct sourcing business, which actually is similar and akin to a supplier, any other supplier, and so our direct sourcing business actually goes through that same evaluation criteria with the member committees as any other supplier. And so that's an area that we're continuing to monitor and has the potential to be a headwind to our direct sourcing business to the extent that price increases weren't granted there similar like you would see with other suppliers. But overall, Anne, not a material impact to our performance to date, although we do continue to live obviously in unprecedented times with what's happening.

That's really helpful color. And you guys are in a good position. Not everyone is so well protected. I was hoping maybe you could talk about the Performance Services business. It has been a really, really strong performer recently. What do you think are the key drivers of that? Maybe it's clicking or something for your customers. But what's really driving that outperformance recently?