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

Good morning, everyone. 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're thrilled to have Premier with us this morning presenting. We've got CEO, Mike Alkire and CFO, Craig McKasson. We'll do a quick 20-minute presentation. And after that, we'll open it up to Q&A. So with that, let me turn it over to Mike.

All right. Thank you. All right. Thanks, Annie. I appreciate the opportunity. Craig and I are thrilled to be here in person after doing this for the last couple of years over video. But -- we're really excited to share our longer-term strategy with you all and share some of the concepts that we have about driving health care improvement. So very quickly, I need to go over that some of the statements that we're going to be giving you were obviously cautionary, and there is a description of our non-GAAP related measures as well. So very quickly, as we get into an overview of Premier, for those of you that know the story, our focus is really all about helping our health care systems improve the way that they provide their services. So think about quality improvement, think about cost reduction. Our health care systems are migrating into new payment models. They're looking for new revenue streams as they care for patients. And all of those things that they're attempting to do, we think we play an integral part in supporting them. It's interesting, Craig and I and Andy, who sits in the front row here, who is our Chief Commercial Officer, spend a ton of time with our members, a ton of time. And yesterday, we actually were at the not-for-profit track over at the JW Marriott. And it's really interesting, the backdrop of what's happening in health care. And for those of you who had not had an opportunity to spend time at the not-for-profit track, we're coming off some pretty difficult times. I mean a number of our health -- and it's very, very regional, but still all health systems are feeling this. But health care systems from a financial standpoint are still struggling with high labor cost. The anecdote that I like to use is that nurse, an hourly nurse, and I've got very stake in the room here that could probably give this presentation. But an hourly nurse, pre-COVID was probably $80 an hour on average across our facilities. During the height of the pandemic, it went up to a couple of hundred, $250, $240, $250 an hour. It's down considerably, but it's still 25% or 30% higher than it was pre-pandemic. So our health care systems are still really facing this issue associated with labor. They're facing issues associated with inflation. So think of all the things that are occurring from an inflationary perspective. Those health care systems are still in need of critical products and other items. And so they're still facing a very, very inflationary environment. They're facing issues associated with rising interest rates. So as they think about deploying capital, those are significant issues that they're dealing with. And then finally, you think about our health care systems, many of them have fairly substantial investment portfolios. Typically, they're very, very conservative, and so they've been riding the wave of the market. So some of them have been experiencing some pretty significant loss losses that have had an impact on their balance sheet. So those are the things that we're dealing with. Those are the issues at least a macro level that we build out services and capabilities to support our health systems around. So that's the macro environment from a health care standpoint. From a supply chain standpoint, and the reason I talk about this is it's so important to our GPO business. The supply chain is still very, very tenuous, right? We're still dealing with issues as it relates to getting products overseas. We've got labor costs associated, increased labor costs associated with logistics. We still got supply chain issues. And everything that we're doing from a supply chain standpoint is to really build out that resiliency and to support our health systems as they need to get access to those products to provide the care that they're delivering. So as you think about our business model, I think there's 3 things that differentiate Premier. First, it's the relationships that we have with our members. And I want to sort of key on this just for a second. We have 4 health care systems executives that sit on our board. We have a Board Advisory Committee that's made up of somewhere north of 35 executives that we meet on sort of a quarterly basis, 2x a year in person. But the focus of that group is really to understand all the issues that they're facing and then to co-invent, to co-innovate with them solutions that can help them drive performance improvement. And so we have that Board advisory committee. We have other committees that help us with sourcing and helping us create more strategic direction around how do we think about our group purchasing organization and our direct sourcing business. So we really are this orientated around our customers, and we have this ability to actually interact with them on a very, very regular basis. So it's about the relationships. It's about the data. And you see in the middle there about the percent of U.S. discharge, 45% of all U.S. discharge data comes into our database. You see that we have more than 1 billion individual encounters that go into our database as well. So it's a very, very robust database. And I'll spend some time talking about why that's so important to Premier and the future of the organization. And then finally, we have technology, and we don't spend a ton of time talking about the importance of technology, but the technology enablement of the data, the technology enablement of helping our health care systems drive sustainable improvement from a quality standpoint and doing it at reduced cost is really important. And I will tell you, our ability to leverage our AI, machine learning, natural language processing capability and right insights into the workflow, I think, is very, very unique to this organization. And again, what that allows us to do is spend a great deal of time with our health systems and understand what are those business parameters they're trying to solve and then us come up with the algorithms and solutions that we can then ride into Epic, Cerner and Athena. So it's no longer the old days of performance improvements where we create insights and then we'd implement them. We actually take those insights, and we actually write them into the workflow, and we'd actually change practice. So it's really, really important. I think those are the 3 really critical differentiators for the organization. Just as a quick reminder, Premier has 2 segments. It has its supply chain segment, and it has our Performance Services segment. In our supply chain segment, our focus is, obviously, we've got a pretty robust, obviously, one of the industry's largest group purchasing organizations. I think the key note for that group purchasing organization is how we drive higher levels of compliance. We've got 2 fantastic programs that many of you have heard about surpass in ASCEND. It's actually AscenDrive. Those programs are driving higher and higher levels of commitment that allow for us to get better pricing for them. And the focus, again, is for us to create all these solutions and services to differentiate our health systems and their markets, how we can help them actually become the high-quality producer at the lowest cost within the markets. And the group purchasing organization is one of those critical components of that. We've also built out a direct sourcing organization over the years. We got into direct sourcing quite frankly, because we needed a little bit of a lever in the event that we weren't getting value from the negotiations. We wanted to be able to directly source products to contract manufacture products. And so fortunately, we started that program a number of years back, probably close to 10 years now. And that program significantly morphed, especially during COVID. And at the time of -- during COVID, obviously, we had significant crisis within the health systems. We didn't, as an industry, have enough resiliency in the health system way overly dependent on a couple of countries to provide PPE and other critical products. And I will tell you, our health system took notice. And what they asked us to do is to co-invest with them and produce products like think of masks and gowns, generic drugs, things that they're always going to need. Their interest was to co-invest with us to ensure that they had sustainable supplies of those products. And I'll tell you, during COVID, it really proved up because not only did we -- were we able to recover fairly quickly and provide products to our health systems, but we also were able because we had enough product to provide it to other health systems that were not Premier. And I think a lot of that was very, very critical for providing care across our communities. Again, our focus is to continue to differentiate, but when we have more than what we need, we will continue to ensure that we can help other communities as well. So that's supply chain, group purchasing and then our direct sourcing business. On Performance Services, we rebranded our technology business called PINC AI about 18 months ago. And PINC AI really is sort of made up of all of the suite of technology and data that we've been creating over the last number of years. So there's quality systems, safety systems, labor systems, supply chain systems. And there's integration points where we could provide insights on performance improvements. And as I said, that's where it sort of stopped a number of years ago, where we created those insights and then work with our health systems to implement it. Today, because of some of the investments we've made from a technology standpoint, we're able to take those insights and write them in directly into the workflow and change the way that care is being provided. So we're incredibly excited. Also part of PINC AI is we have some focus on how to ensure that our health systems are documenting Medicare patients appropriately, prior authorization capabilities that are very, very unique to our organization. We're incredibly excited and obviously, the administration came out and said that they'd like to have pretty significant prior authorization capability by 2026. We think we have a fantastic technology platform to support them to do that. So we're incredibly excited about that. And then we have a life sciences group that's part of this. So we've been dabbling around life sciences for a number of years. But what's changed since our acquisition of some of this -- or acquisitions of some of these technologies is now we can actually identify patients for trial, and that's a huge issue for pharmaceutical companies. So we're incredibly excited about the work that we're doing in pharma to bring much needed products to communities that potentially would have been underserved. So we're incredibly excited about that. Contigo Health is our business, our direct-to-employer business. The business is doing phenomenally well. We just made an acquisition there, a company called TRPN, which brought 900,000 providers into the network. So today now, we have the ability obviously, to provide TPA services. We also have the ability to do centers of excellent services for employers. But we now have the ability also to create that sort of that network now that we have those additional providers. So we're really excited about that. And if you think about that, it's the opportunity for our health care systems as they think about migrating to becoming more of a payvider, if that's an interest of theirs. We could take all of our capabilities and sort of insert that in that and become that sort of payvider side to help them on the delivery side. So we're excited about that. And then Remitra finally is our technology really to really automate the whole e-invoicing and e-payables process. We still think there's way too much manual intervention and faxes and those kinds of things that are being set between suppliers and providers, and the Remitra technology really automates that. So we're really obviously excited about the future of that business as well. Hey, before I turn this over to Craig, I did want to talk a little bit about some of the awards and recognitions that Premier has received just in the past year. We've got a fantastic [ DEI ] Leader that was recognized, Joe Machicote. We were recognized in Boston for the work that we're doing with AstraZeneca on identifying early-stage lung cancer, and we're really excited about that. And then KLAS recognized us for value-based care consulting. And so we're really excited about that. So with that, I'll flip it over to Craig for the next 7 minutes.

6 minutes. Thank you, Mike. I appreciate it. Thank you, everyone. What I'd like to do is Mike gave a very good overview of sort of the construct and the aspects of the business. What I'd like to really focus on is how are we actually looking to achieve the growth longer term and what is our strategy to accomplish that. And the way we really think about the growth of the business is across 4 pillars. So first and foremost, it's around growing and deepening the relationships that Mike articulated. We have a very large footprint 4,400 hospitals, 250,000 non-acute facilities. How can we continue to do more and be even a better partner to them? I should highlight that 90% of our health systems view us as a strategic partner as opposed to being sort of just a vendor customer relationship. These are multi-decade relationships that we really have an opportunity to advance the ball with them. And we're also now, as Mike talked about, expanding into some different customer segments, that also benefit the health systems. It's all about differentiation and how can we actually help our health care providers really be differentiated in their markets with the other partners that they have to work with payers, employers and life science and other types of companies. So it's all about the relationships. We're really looking to strengthen and build our capabilities. We do that in a multifaceted approach, organic development, looking for the areas that we can actually advance our existing capabilities through organically enhancing our technology, a very big focus on automation of manual process that our health care systems are under -- continue to undertake, and how can we actually AI and machine learning enable our capabilities to provide more advanced ability for them to improve their performance. Innovation. One of the great aspects we have given the relationships we have with these health systems and the forums that Mike talked about for us to have interaction with them is the ability to co-innovate. So a lot of the ideas we get are through germination of ideas with our health care systems and their executive teams identifying where the pockets of need are so that we can attack a market opportunity and then deliver growth based off of doing that. And then lastly, while our footprint and our DNA has been in the health care provider footprint, we've realized there are markets that we can actually extend into. That's the Contigo Health opportunity with employers. It's our clinical decision support capabilities around -- with payers and then the suppliers through the Remitra platform. All of those 4 pillars are anchored in kind of the aspects you see down below. Stable cash flow-generating business that allows us to do the investments we need to do and also return capital to shareholders, a comprehensive integrated technology platform that we can continue to augment the innovation that I discussed and the ways that we can accomplish that and then a very highly-engaged culture and team of employees that are very focused on the mission of what we're trying to advance. This page has a lot of details. I'm not going to go through it. I'm just going to quickly highlight that we are making progress on advancing the strategies that we've talked about across the 4 pillars that we're focused on. If you think about the relationship side, we're very proud of the co-investing that we've been doing around supply chain resiliency with our health care systems, partnering with a number of health care systems to invest in domestic manufacturing of masks, domestic manufacturing of isolation gowns and the most automated capability available on the globe -- around the globe, investing alongside with them in generic drug manufacturing. So a real focus on ensuring that we create resiliency so that we do not relive some of the issues that we faced during the pandemic. And those relationships are what enable us to actually achieve and do that in a differentiated way. A number of areas we've continued to strengthen and focus on technology enablement, the AI enablement to allow for automation of prior authorization, which I talked about. We're also doing quite a bit around HCC coding to actually help our members ensure that they're getting reimbursed appropriately for the care that they're providing. And so continuing to look at how to technology enable that. Innovative Solutions. Mike talked about Remitra. We launched this past year Remitra CFO, which is focused on actually automating and guaranteeing the payment process for suppliers in the marketplace. And then in the adjacent markets, very excited about the Contigo growth that Mike talked about and the continuing opportunities we have there, a lot of potential around the life sciences space and the things that we're doing to actually help from a real-world evidence standpoint, ensure clinical efficacy, also help to identify patients for clinical trials with life science companies that are in the marketplace. From a financial perspective, we are in the midst of our second quarter close. You're not seeing a financial update today. We will release our earnings in a couple of weeks and provide our second quarter results and our perspective on our 2023 outlook. But from a long-term perspective, very significant, stable cash flow generating business that gives us the ability to do the investments and the things that we need to do to advance our strategy. We continue to have a very flexible balance sheet, not a lot of debt on the balance sheet that has enabled us to be -- continue to have dry powder to be opportunistic when we need to. And from a capital deployment standpoint, we will continue, and we've been consistent with this statement to be balanced in our approach. We are interested in deploying M&A for growth to strengthen and build the capabilities that I talked about earlier, but we are balancing that with shareholder return. And so we do have a quarterly dividend in place, $25 million provided back in the first quarter, and that's sort of been the run rate we've had. We have been increasing that dividend over the past couple of years. We also have done share repurchase. We do not have a share repurchase authorization in place at this time, but we'll continue to address with the board the best use of capital and the appropriate time to use that as a shareholder return lever. So that's sort of financially where we sit. And Mike, I think I'm going to give you all of 10 seconds to close this out.

Yes. So as I said, our focus really is to support these health care systems and truly differentiate them in their markets. We think that, obviously, through the technology and the data and the services that we provide, we truly can help have a dramatic impact and help them to find who they really want to be in the future. And we're really excited about the opportunity to go forward with them in a very, very a difficult time for them right now, but to really create alternatives to helping them with driving revenue and help them really drive improvements in the way they're providing care from a quality standpoint. So with that, we'll open it up for questions.

Great. There's quite a few people standing in the room. There are seats if you want to get comfortable for the next 20 minutes. There's a bunch up in the front and there's some in the third row. But maybe starting with higher-level macro just based on where you sit in health care, you always have such a great bird's eye view of what's really going on. So can you discuss -- you talked about a number of different challenges that the hospitals are facing right now. But what are they really seeing as the most acute problem? And where are they asking you for help?

Yes. So it's a great question. So I would just tell you that it's very regional. It's really hard to say that one area of the country is the same as the next because I have different issues in different markets that we're sort of dealing with. I will tell you, if you were just to characterize it in one area I'd tell you, it's performance improvement. So health care systems are looking at ways of becoming more efficient, leaning out infrastructure that doesn't necessarily provide strategic advantage in their markets. So we're working with them doing that kind of work. Obviously, they're looking at ways to automate the way care is being provided because it will improve the level of quality. So we're obviously in the midst of doing a whole bunch of those programs for the health care systems. And then finally, I'll just say this. It's really interesting. It's not press worthy today, but we did see in this last 3 or 4 weeks or I guess, 2 or 3 weeks, utilization of beds by COVID patients go up again. So it's really hard for us to say we're kind of over this hump and let's get on to the next iteration of health care. But suffice it to say, we're doing all those things that these health care systems need from an efficiency standpoint, a quality improvement standpoint. And as they migrate to new payment models, helping them build out the infrastructure to do that.

It seems like the hospitals are maybe a little bit more willing than they've been in the past to automate because now they have to. They have these labor shortages. Historically, the hospitals have been the largest employer in a region, and so they didn't want to do that. How can this drive cost savings for health care over time? Because this seems like a really big opportunity.

Yes. So one of the things that we're constantly having conversations with them about are the synergies. So are there activities that you're doing day to day that lend themselves better to doing at significant scale. So why are you all doing very similar repetitive things that may not, again, add strategic differentiation. And so as I said, these Board Advisory Committee meetings and even at the Board, we talk about what are those capabilities that we should be developing to support them. But I will tell you, it starts with us always in the supply chain because we do think -- we've got significant opportunities to drive higher levels of commitment, higher levels of standardization to continue to drive down their overall cost of supplies.

Well, the only thing I would add to that, Mike. I think from a corporate infrastructure standpoint, they also have to look for efficiencies. And so part of our rationale for the Remitra platform we've talked about is that even today, post COVID, which you thought would have changed, 82% of payments in health care is still made via paper check. And you would have thought that would have come down dramatically. It was 85% before the pandemic. So there is corporate infrastructure that can be rationalized across these systems to ensure that they have the resources they need to maximize the clinical care that they have to continue to provide.

That's helpful. We've been hearing about hospitals because of some of these macro challenges you've been talking about tightening up their budgets, maybe providing a little more scrutiny on purchasing, elongating their sales cycles. Are you seeing any of that today?

Sure. Yes. So a couple of things. You do see it in the decision-making process. But Annie, I'll tell you, one of the things that we are doing and we need to continue to do is to show real value day one of any program that we implement. So be that a performance improvement initiative, be that a contract that we launch, technology that we implement, we've got to show short-term results because they are so focused right now on trying, again, to improve their operating margins that it just becomes more noise if you can't really highlight these opportunities that really drive short-term value.

Yes. And I think to add to that on the supply chain side, I think clearly, with some of the financial pressures and utilization not coming back fully to where they expected in some cases. There are implications in the supply chain where things aren't as bullish as they were in the past, things like capital equipment purchases that may be being delayed a bit. Some of those -- we're not immune to that. I mean we are subject to that. We tend to have a little bit of a lag to when they're seeing that implication, but that's certainly something that has the potential to impact us in the future.

And you touched on utilization a little bit. You talked about COVID beds increasing. In the past, flu has had a little bit of an impact on your business. It's been a crazy season with flu, COVID, RSV. How is that impacting your business right now?

Yes, I'm happy to address that. Generally speaking, flu itself has not had a big impact up or down in terms of our business overall because typically, flu is not a real supply intensive implication in the case that it leads to hospitalization. So obviously, that becomes more of an impact on the business. I'll say not dissimilar to COVID. In the early days of COVID, it was the hospitalizations that created all the dynamics. You're now seeing a rise in COVID patients, but the hospitalizations clearly aren't at the level that they were. So what we're seeing is not a material impact due to flu, RSV or COVID today. The question is, are people staying away that aren't sick because of what's happening in the ecosystem, and that's why utilization is not necessarily back in all markets to where it was pre-pandemic.

That's helpful color. In recent years, you've really highlighted investing and growing [indiscernible] markets business. So you've had a lot of success with Contigo. Maybe we could start there. Can you give us an update on how that's going and how you're adding value for your customers there?

Yes. So just as a quick reminder, this is an initiative we started a few years back. We had a very, very large national employer come to us and ask us to help really build out a high-value network of providers. And they said, you guys had this history of working with health systems, benchmarking their performance against one another and then driving improvements based upon how people are performing and you're the right partner. And that really got us into this building out this idea of Contigo Health. So today, it's morphed quite considerably. We're still focused on building out these high-value network for very, very large employers as well as regional employers in the markets of our health systems. But further, what we've been building out is we acquired an organization that has a TPA capability for centers of excellence programs for a lot of these large employers who are really, really excited about that. So it brought us TPA and centers of excellence capability. Why is that so important to Premier? That is so important to Premier because we want that to be the impetus behind driving change with the health system. To say if you want to be a centers of excellence, if you want to be part of a high-value network, you're going to need to perform at different levels, and we're here to help you drive that level of performance. So that's been going very, very well. We did, as I mentioned in my remarks, we bought a company called TRPN, has access to 900,000 providers. With that, with the other capability that we can provide, like I said, we can now provide wrapper capability to our health systems that actually may already have a health plan. So today, a lot of value leaks from those relationships. And we're thinking that with that TRPN relationship that we're going to be able to create a model where a lot of that value does not leak. It actually stays within the provider base. So we're really, really excited about that. And from a growth standpoint, we're still driving that greater than 30% growth. So -- from a live standpoint as well as a business standpoint. So we're really excited about the business.

Maybe just coming back to the TRPN acquisition. Can you talk about what that adds and maybe help us with some examples for those of us who maybe don't know it as well. And then the provider base that it adds, how incremental is that to your base?

Yes. I'm happy to take the incremental piece real quick. So when we acquired those 900,000 contracts across 4.1 million locations, we had about 25% overlap. So there was a lot of incremental contract and expansion capability into that out-of-network area. That wasn't historically part of the business. Now we have an ability to also add more into the network within our own existing footprint.