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

All right. So, welcome to the second session of the day. My name is Jess Tassan. I'm the health care tech and distribution analyst at Piper. I am thrilled to be here with Premier. I've got the CEO, Mike Alkire; and CFO, Craig McKasson here with us this morning.

We've got a 25-minute fireside chat. So with that, I will kick it off with some Q&A. Mike, we're about 18 months into your tenure as CEO. When you stepped into that role, what were kind of the biggest opportunities you saw ahead of Premier and how has Premier executed against them so far?

Yes. First, let me just say thanks for having us. We appreciate the opportunity to share our perspective. I sort of characterize them in 4 different buckets. The first is governance. So my predecessor had a much different perspective from a Board standpoint. I'd like to deal with a smaller Board, I'm much more interactive kind of thinker. And so it's really -- it was really important for me to sort of think through what the governance structure of Premier look like. So I'd say that was #1. #2 was a focus on technology enablement. We've always had a very, very strong technology underpinning on both sides of our business. But I think we really needed to sort of strengthen that and sort of reinforce and reinvigorate our focus on technology development, and I can get into some more of those details in a second. Third, it was -- I thought we needed to sort of market the business a little bit differently. At times, I think that the Street looks at us as a supply chain entity and also a technology entity. I thought it was really important that we rebranded all of our technology assets under PINC AI to really sort of reinforce the idea that our technology is technology of the 2020 kind of realm using machine learning, natural language processing, AI and those kinds of things. So I thought it was really important to brand that. And then finally, Craig and I took sort of a decision that we wanted to bring a bit more visibility to our high-growth adjacent businesses. And so we've got some businesses that grew in excess of 30% last year, that are planned to grow somewhere between 30% and 40% this year. So those are our PINC AI business, Contigo Health, Remitra. And I thought it was really important that the Street understood sort of where we were heading with those businesses.

Just to clarify. PINC AI, Life Sciences and Clinical Decision Support, all of PINC AI.

Yes. Thank you.

So I was just going to ask that. To what extent are the businesses that you are categorizing as PINC AI kind of synergistic either with one another? Like to what extent are these synergistic with one another or with the GPO business?

Yes. So it's a great question. I think there's 3 underpinnings of the business. And if you think about the synergies. One, it's the level of relationships that we've had with our health care systems. So if you use that as the framework that we have these relationships that we're constantly innovating alongside of them, that we're building out offerings to help them either drive cost out of their business or to help them move to value-based care or deliver higher quality -- those are relationships that we're able to sort of build out additional capabilities on both sides, the supply chain and the Performance Services business. But it's because of those strong relationships. That's number one. And number two, it's the data. So you talk about synergistic opportunities. So you think about leveraging all that clinical data in our supply chain, it really helps us to get after advanced cost reduction opportunities, right? So we can look at things that in terms of utilization and tying that to clinical outcomes and those kinds of things. So the synergies exist from a data standpoint and from bringing the quality into the supply chain and really creating opportunities for improvement on that side. And then -- the last one is basically technology. So the same technologies that we use, the same machine learning, AI, algorithms that we use on sort of in our Performance Services business are the same ones that we do as we think about forecasting where we think potential shortages of products might be in the upcoming months.

Yes. The only thing I would add to that, Mike, is I think within Performance Services and those adjacent markets businesses that we have, the whole concept is to take the advantage of the synergies of the clinical data we have from providers and find the sweet spots where we can actually drive improvement with life science companies that will help clinical efficacy. So it will help a provider and drive into a growth avenue we haven't traditionally capitalized on, which is life sciences, with employers, our Contigo Health business, it's leveraging that data to actually identify opportunities for high-value network, standardized better care that will actually help the providers provide better care, but help employers reduce their cost. And then we also have our Remitra business, which is our electronic procure-to-pay business. Again, leveraging all the supply chain data we have to actually help identify opportunities to reduce the inefficient manual components of labor in the supply chain.

Among all those businesses, which of the PINC AI businesses do you expect to kind of lead growth in the segment, both from a revenue perspective and adjusted EBITDA perspective in fiscal '23? And then does that change over the next 2 or 3 years?

Sure. So within PINC AI, we've got the provider piece which we've talked about growing sort of more mid-single-digit growth, and then we have the adjacent markets that Mike described earlier, growing 30% to 40%. We don't get into individual growth aspects. But what I would say is Contigo Health continues to be a significant driver of the growth in that adjacent markets part of the business at the 25%, 30-plus percent growth rate and delivering, now moving to a positive EBITDA contribution. Longer-term, Remitra, we have a lot of promise and expectation of the growth that, that business is going to deliver as that network gets stood up and ultimately will be probably one of the largest profitability contributors to the Performance Services segment.

Got it. So of your GPO customers, what's kind of the attach rate of Remitra today?

So, no, no, it's a great question. So -- so the base core capability, there's sort of an e-invoicing capability that many of our largest systems have already been using. So the -- if you think about some of our largest systems, some of them have been using them at a regional level. So our job is really to take those and sort of build us up and actually drive it across the entire entity. But there's -- I would tell you that probably 50% of our top 10 largest IDNs use Remitra in some form or fashion today. What Craig was talking about, that network, we haven't built that network out quite yet. We're still working with building this thing out with the suppliers and adding some additional technology, but that is something we're obviously incredibly excited about the future.

Okay. Got it. So kind of during COVID and its continued hospital consolidation, supply chain bottlenecks, shortages, et cetera, how is the role and the influence of the GPO change? And kind of is the GPO more or less important net of all of these factors?

I would love for you to ask our health systems that. But I would tell you, I think in the last 3 years I think our health systems really understood the value of our offering. There were oftentimes that our health systems struggle to get PPE or thicker [ Phonetic ] drugs that were needed for intubation and those kinds of things. Because of our network, because of the work that we had been doing in different parts of the world, we were able to create points of access for products. And I think the big shift that occurred actually was this idea of co-investing in domestic manufacturing. So when you -- my first answer was going to be all about creating more resiliency, how does it really change, creating more resiliency in the supply chain and it's actually helping get access to product. And I think that that's been a significant shift especially in our strategy. But that sort of lends itself to what I was just actually talking about, which is co-investing with our health systems and domestic manufacturing for masks and isolation gowns. We actually stood up probably one of the most automated isolation gown manufacturing facilities in the world in Knoxville, Tennessee, along with roughly 34 of our health systems who had co-invested with us. We've also made some investments in some generic drug manufacturers as well.

I think the thing I would add to that is the technology enablement that we've been getting after to be able to predict and identify potential shortages. It was another big advance that came out of the COVID era, and what's actually been sustained because we're still dealing with shortages at a pretty significant level today. We began, and under Mike's leadership we were actually during COVID sort of a convener of all of the industry stakeholders, distributors, manufacturers, health systems, everybody to sort of figure out how to manage through this. We began sort of biweekly calls with all of our members to talk about that. And now we actually have been continuing that. There's actually one today, where every 2 weeks we get together with our health system still to talk about what's the issues, where are the shortages, how do we mitigate that, how do we connect dots so that people get access to product, as Mike described. So that sort of evolved and become an important part.

And if I could add 2 more things. So from a technology -- you were asking more supply chain, but from a technology, the evolution of our business has been quite profound. So during COVID there was this race for everybody to get access to products. Everybody was trying to actually build out stockpiles and get access to various products. And all it did was drive up the cost of supplies. We built a tool that basically modeled utilization trends of what was happening in New York City. And that we leveraged our data and the Hopkins data as they were forecasting where the virus was going to spread, that we layered our tool on top of that so that we could help our health systems understand the amount of product that they were going to need. That was really important for a couple of reasons. One, if folks had additional product that they weren't going to need in the short term, we could actually allocate that somewhere else. And then two, it was really important for us to give comfort that people didn't have to build up significant stockpiles if they actually had a good understanding of what the needs were going to be. So on the supply chain, that was the technology. And then on the Performance Services side, we had built out this AI natural language processing capability over the last number of years with our acquisition of Stanson Health. We very quickly pivoted that to syndromic surveillance. So if you remember in the early days of the pandemic, we actually didn't have testing. And so we built out this algorithm that if you presented to your clinician with loss of smell or yes -- taste or smell, low-grade fever, there was 7 or 8 clinical characteristics, we could very quickly identify in real time where the virus was spreading. And so that just sort of gives you an idea of how quickly we can pivot some of the base technology that we've been creating.

And I think that's really compelling and those calls were great. I used to dial in to listen. But I guess, just I'm curious to know, for example, the syndromic surveillance that you just mentioned, is that kind of embedded in the GPO offering? Or are you able to charge an incremental subscription fee for that type of a capability?

Yes. The technology that, that's based on is allowing us to do things like automated prior authorization and other capabilities. So those are all outside of the GPO. So those are additional charges. And by the way, that's not just being sold to health system. That's also being sold to payers.

Okay. That's interesting. So within supply chain services, you obviously get a really unique view into kind of health care utilization and the health care delivery system. What are you seeing in your fiscal 2Q to date?

Yes. From a utilization, and Craig, please jump in. So we're seeing acute utilization down to flat. It's very, very regional. I do want you to hear that. But we have some reasons that have sort of come back to pre-COVID level. I think there are some areas that are still struggling. We are seeing growth obviously in the non-acute area, but it's still de minimis and not quite the levels that I think us nor our health care systems are expecting.

That's helpful. And then just in terms of, like, the health of the finance, or -- sorry, the financial health of the health system. Could you just comment on that and kind of their appetite to invest in capital equipment, for example, in calendar '23?

So obviously, the health care systems are obviously going through a really tough time. I think there obviously are 2 areas that are driving this financial pain. One is labor cost. So even though the traveling nurses and traveling clinicians have gone down quite a bit, the utilization as well as the cost, it is still quite a bit higher than it was pre-pandemic. So you're talking probably 30% more on an average, but very, very significantly more. And then the supply chain aberrations, obviously are also having an impact. So this sort of the inflationary environment with labor across the board and producing products and the logistics associated to getting products to the health systems, all that's adding pressure as well. I'll tell you, in general, I'd like to say that our health systems are experiencing margin reduction typically of about 50%. So if they were like a 1% or 2% sort of operating margin organization, they're flat to losing money. If they were like a 10%, they're at half of that amount. But that's a generalization. We also have health systems that are obviously really losing significant amounts of money that will have, obviously, impact on their ability to invest in capital in other areas.

So I guess just on -- from a directional perspective, calendar '21 versus '22 and then just back half of '22 versus first half of '22, how has the financial environment for hospitals changed, if at all? Or is it equally dire?

It's gotten better.

Okay.