Premier, Inc. (PINC) Earnings Call Transcript

Good afternoon. My name is Lisa Gill. I'm the Healthcare Technology and Distribution analyst with JPMorgan. It is with great pleasure this afternoon that I introduce Premier. With us from Premier is CEO, Susan DeVore. The breakout room will be across the hall in the Olympic Room. Susan?

Thanks so much, Lisa, and thank you, everybody, for being here this afternoon. I would love to share with you the story of Premier and what we're all about. We've been public now for over 6 years. Premier is a health care improvement company. We wake up every day thinking about how we're going to lower the cost of health care, how we're going to take the 4,000 health care systems and hospitals that are a part of Premier, aggregate their buying power, aggregate their data and information and really drive clinical cost improvement, safety improvement and help get them ready for what we think is the eventual value-based care models that will be emerging. We have a very strong track record of performance. And so delivering stockholder value is of great importance to us as well. When we think about where health care is going. We actually write a trends article every year in health affairs. We do think that this shift to value-based care is ongoing. It's going to continue. It hasn't had quite the momentum for the last couple of years. It's been stuck in a lot of political process. But we think as the election clears that the movement to value-based and risk-based models will continue. We also think that there will continue to be tremendous pressure on the pharmaceutical market and the cost of pharmaceuticals. So we track and measure how we're doing as it relates to the price of pharmaceuticals for our health care systems. Our inflation rates are about half the rate overall for the industry. We are helping our health care systems through a company we established, called ProvideGX, to deal with drug shortages. So we're helping them move to generics. We're helping them move to therapeutic equivalents. We're helping them lower the cost of branded. We're helping them lower the cost of generics, and we're helping them get access to the drugs that they need. We also are helping our health care systems with overall cost management. You'll see with our data assets that we can give them insights and infrastructure in the areas of labor, in the areas of supply chain, in the areas of clinical quality and safety, in the areas of population health. We have more recently talked about on our earnings calls, some activities direct with employers. We have a huge network. We want to bring that network directly to employers and drive out the variation in care and the high cost of care that they're experiencing for their employee bases. And lastly, we have a lot of data assets, a lot of technology. And it really is about how do you take all of that data, make it actionable, give them the insights, wrap services around it to help them improve. So at the end of the day, it doesn't matter who the President is. It doesn't matter who the Congress is, the health care problem in this country is a cost problem, a quality problem, a safety problem and a value problem. And so the sooner we can move the whole industry to these risk-based models and to measures of quality, safety and outcomes, along with cost, we'll get closer to solving the overall problem. I talked a bit about some of our data and technology assets. We actually have been collecting data for decades. We now have over 100 billion data points. And we have data on every aspect really of provider care delivery. So everything from labor supply chain, pharmaceutical, clinical outcomes, infection rates, complication rates, length of stay in hospitals, readmission rates, performance under these accountable care organization new value-based care payment models. But not only do we have data that's important for providers, and providers who have their own health plans, but actually employers are increasingly interested in companies that have data and can put data into the point-of-care, into the workflow. And insurance companies care about that. Employers care about that. Pharma is adopting building, generating biosimilars, new drugs, new therapies. They want real-world evidence. They want a test bed of health care systems. And so increasingly, our strategy is to say, how do we help providers improve but then also how do we find the sweet spots where providers and payers and employers and life sciences and patients intersect because we think we would be -- and we think we are uniquely positioned to help with some of those sweet spots. We have 4,000 hospitals, health systems across the country. That's a huge footprint. We have insights and data on over 45% of the patients in hospitals in the country. We have more than 175,000 affiliated alternate sites, physician practices, surgery centers, nursing homes, those kinds of things. We run $61 billion of volume through our group purchasing, supply chain contracts. So we have visibility into a lot of what's going on in the health care system. We also have a very long-term and loyal customer base. So these are -- this is just a sampling of some of the big IDNs and health systems that we have around the country. Most of our customers have been with us for 10, 15, 20, 25 years. We involve and engage our health system customers in the strategic activities that we are implementing. And this is a long-term C-suite relationship and it's viewed as strategic. So over 80% of our health system customers would say they view us not as a vendor but as a strategic partner. And their expectation is that we will stay 2 to 3 years ahead of where the market's going. We'll help them get ready for it. We'll provide technology, infrastructure and data. And then we'll wrap services around it to help them improve and to navigate their way through the complexity of our health care system. From a business segment perspective, we report in 2 segments. The Supply Chain business has a group purchasing organization and also a direct sourcing company that does contract manufacturing. It accounts for 70% of the consolidated revenue and 81% of EBITDA. On the Performance Services side of the business, we have all of our data assets, our technology assets, consulting wraparound services. And something we call collaboratives. That's where we bring multiple health systems together, we enable it with technology and intelligence, and they work on problem-solving for common problems, cost, quality, population health, risk-bearing entities, those kinds of things. That side of the business is 30% of our net revenue and accounts for 19% of EBITDA. We then have a consolidated field force and all of our underlying cloud-based technology that supports both segments and the intersection of both segments. From a business model perspective, in the supply chain world, we receive admin fees from suppliers. And we also have contract-manufactured direct product sales. Performance Services is your typical SaaS-based subscription fees and license fees. We do fee-for-service consulting. And then typically, our collaboratives. These are the multi health system collaboratives that we run. They typically pay 1-year, 2-year, 3-year subscriptions. On a consolidated basis, at the beginning of every fiscal year, and we're about halfway through our fiscal year now, we have significant visibility to the revenue streams in the high 80s, low 90%. And from a retention perspective and a renewal perspective, for all the years since we've been public and before that, we've really driven 98% retention in the GPO over the last 5 years and 95% renewal rates for our informatics and technology products. So we're very focused on technology enabling all of the improvement and enabling it not only with data and analytics but with the business intelligence, with the artificial intelligence, with the algorithms that go behind it. And we've been making a lot of investments in those areas. Our goal, because we have 4,000 health care -- hospitals and systems, is to be vendor-agnostic and payer-agnostic as it relates to the source of data because so many of our health systems are in the acquisitive mode. They don't all have the same EHRs in their acute care settings and their ambulatory settings. They have different ERP systems. They have different time and reporting systems. Our job is to take all that data from all those different source systems, standardize it, normalize it, compare it, derive insights from it. And more recently, we bought a company called Stanson Health. And the purpose of -- for that company for us was to then take all of those analytics and be able to embed them in the workflow so that clinicians real-time with patients can make informed decisions about the clinical care process. So you can see here on the graphic, all the different kinds of data we have. We have over 1,000 hospitals and health systems in many of those domains. And so it's all about how you combine that data and that technology and wrap services around it to drive the improvement. Every year here and every quarter with our members, we share how we're doing. And we show you a different one every year. So you're not seeing the same one every time we present. Every time we present, you're seeing a different sample of one of our health systems. This is a large IDN. They are spending a couple of million dollars with us every year in terms of services and technology. We provide resources on the ground. That's the first little blue bubble. We share back some of the administrative fees that we get from suppliers. We drive annual cost savings, and then many of our members have ownership and some remaining equity. And we take the equity off the table when we calculate the ROI to the health system. And at this particular health system, we're able to say, last year, we drove an ROI to your organization of 15:1. The ROIs generally range from 5:1 to 20:1. So this is a good return on the investment that they're making in their Premier relationship. From a financial perspective, in the overall company, we have a lot of different growth drivers. We have diversification in the business. We have recurring a very visible revenue stream. We actually, on both sides of the business, have the core chassis built. So we've got an infrastructure for GPO that is a chassis that's built. We have a cloud-based platform that is the chassis for our technology. We have virtually no debt on the balance sheet. So we have lots of flexibility and lots of free cash flow generation. Overall, last 3 years, compound annual growth rate and revenue, 8%. Non-GAAP adjusted EBITDA, 8%. And non-GAAP adjusted fully distributed EPS of 18%. I said, we have a strong balance sheet. We basically have no debt, lots of debt capacity on our $1 billion revolving credit line and cash flow -- non-GAAP free cash flow that's very significant. That allows us to make the investments that we want to make organically. It allows us to acquire the capabilities that we need to acquire to accelerate the implementation of our strategy. So when we think about capital allocation, we think about it in a balanced framework. We're focused on growth and expansion, both organically and inorganically. We want to maintain the flexibility in our balance sheet. We have the ability to lever up. We will do that for the right strategic acquisitions. And we also last year, did a $250 million buyback. We have authorization for a $300 million buyback that we've been exercising this fiscal year. So we will always be considering all the strategic ways to deploy capital and to execute on the strategic vision. From a growth opportunity, when you look at supply chain, we've had 11% compound annual growth rate on the top line and 8% CAGR in EBITDA. And our goal there is to keep recruiting new members, keep driving more volume into the GPO portfolio, keep driving penetration, higher and higher penetration levels of the contract portfolio. And actually, we want to go upstream and comanage or own with our health care systems, the total supply chain, whether it's on GPO contract or not. We have a model for that. We are executing this model in a couple of places where we effectively partner with the health care system. We do contracting with them. We bring our supply chain and clinical subject matter experts to the table. We bring all of our analytics, supply chain, pharmacy, clinical, all of our analytics to the table, and then we help them get best-in-breed fulfillment or logistics contracts so that then we both say we own your total supply chain outcome. We get paid the GPO admin fees. We get paid consulting fees. We get paid technology fees. And so this is our way of owning the supply chain with them, having it generate growth and revenue for Premier but also generate that ROI that you saw for the member customer. We think there is a ton of upside. And we've never shown this slide before. It's illustrative, but our view is that we have $61 billion of spend running through the GPO today. And you see the portfolios there of products. We think there's more room in physician preference products. That's the implants, and the more complicated products. We think there are a lot of regional activities going on and activities going on in specialty areas like oncology. And there are a fair number of what we would call member GPOs, and these are regional GPOs. We think there's opportunity for us to go upstream and own that $60 billion of volume but something on the order of magnitude of $120 billion. And then if you add purchase services to that, there's another $80 billion in purchase services that we think is really unmanaged spend today. So in addition to recruiting new members, we see an opportunity for growth in volume. In Performance Services, we have historically had mid- to high single-digit growth rates that have slowed with some of the stalling of some of the forward-looking programs for risk assumption and quality and safety measurement. CAGR over the last few years, 3% on the top line, 5% on the bottom line. We haven't ever shown this slide before either, but we have embarked over the last several months strategically thinking about how do we take those data assets that we have, those great provider relationships we have, find the sweet spot between providers, payers, employers that benefit patients and go after some things there. Pivot, if you will, some of our assets to adjacent markets that are beneficial for payers, providers, life sciences and Premier. A couple of those areas. So if you think about a big pain point for health systems and for payers and for patients, they would say, prior authorization, medical necessity of procedures. We went looking for a way to automate prior authorization inside the workflow so that if you're a patient with a physician, need to have a procedure and the protocol is inside the workflow and it's automated, you can quickly get that prior authorization. Makes patient happier, saves the insurance company money, saves the provider money, and it works for everybody. Likewise, if you think about clinical trials, we have a huge network of providers. Life sciences companies are always trying to figure out how to get the right people and enough of the people they want into the trials. If we can get that embedded into the workflow of our provider network, it works for patients, it works for providers, it works for life sciences. So we have some strategies built around how do we go after some of those other sweet spots in Performance Services to drive more growth than the 3% and 5% you saw on the prior page. We've launched a couple of important strategic initiatives this year. Since JPMorgan last year, we've launched a company called Contigo Health. That is our vehicle to do direct contracting with employers with our private -- with our provider network. We acquired the company called Stanson Health. That's a company that embeds analytics, clinical decision-making inside the workflow that enables some of those sweet spot ideas that I mentioned. We launched an e-commerce company, I think, last June. And it is an e-commerce engine for alternate sites first so that the ease of use and the ease of ordering can happen in some of those maybe less sophisticated alternate sites. And then more recently, we bought a company called Medpricer. That's an analytics company, a technology that actually automates the analysis of all of that purchase services spend, that $80 billion potentially in our membership that isn't being as actively managed as we think it could. So from our perspective, we have a compelling financial business. It's a high cash flow business. We've delivered on our expected revenue and earnings. We have a strong balance sheet. We have no debt. We have lots of differentiated technology and data assets that sit on a cloud-based platform. We're disciplined about our growth strategy. Our trading multiple makes acquiring companies at much higher multiples more difficult. And we're very disciplined about how we do that. We do have the long-term best interest of growth and value to stockholders in mind. We have seen more recently a little bit of a utilization uptick, we've seen it last quarter. We think we see it this quarter. We're not sure it's a sustainable trend yet, but we have seen some of that, and we've seen that in our member relationships, long-term relationships. We've been tracking what happens in utilization in those health systems for a long time. We think we're well positioned to capitalize on industry trends. We have a long-term view. We have an embedded field force. We have a loyal and retentive customer base and we're looking forward to getting past the election, getting on with some of the macro changes that need to happen in the health care system in this country. So with that, I'm 3.5 minutes early. And we're in the Olympic Room, which is right across the hall. So thank you so much.

Good afternoon. My name is Lisa Gill. I'm the health care technology and distribution analyst with JPMorgan. You are listening to or attending the Premier breakout session at the JPMorgan Healthcare Conference. To my right is Mike Alkire, President of the company. To his right is Susan DeVore, the CEO of the company. And to Susan's right is Craig McKasson, the CFO of the company. Welcome, everyone.

Thank you.

Thank you, Lisa.

So first, I thought that we could start with talking about some of the growth drivers. Susan, you did a great job for those that didn't go to the presentation, talking about some of the acquisitions that you've made, some of the new businesses that are coming to the market. Contigo Health is really interesting to me, specifically, and I think probably a lot of people, as you start to think about what employers are trying to do. I mean my own employer trying to do things with Haven, the direct negotiations of going to the providers. So talk a little bit about the early successes that you've had and what you really think you can do with this.

Yes. So if you think about our company, Contigo Health, think about it this way. Employers don't necessarily want to disrupt their insurance relationships.

Right.

They don't necessarily want to disrupt their TPAs. They are self-insured. What they really want to do is take the variation out that exists in how health care is delivered to their populations. So we think they've been looking for a place that has a national footprint, that has data and technology, that can embed that data and technology in the workflow and that the employer then can help steer patients to the right provider who will have all of the information around that employer's programs and also a provider who a third-party has a lot of data on that can compare and contrast the clinical outcomes, the financial outcomes, and they can educate and inform their employees. We think we naturally fit in a very significant sweet spot for employers who are trying to deal with the overall total cost of care.

Lisa, would you like a little more detail in terms of how we're sort of launching it, and thinking of it?

Yes. So launching it, how the finances work on your side? And then just lastly, as we think about that provider network, are you building the network? Or is this you're piggybacking off of the health plan networks?

Okay. A couple of things. So we try to summarize it in sort of 3 areas. So the first area that Contigo Health solves is, as Susan said, these are large employers that are all self-insured. So many of them have benefit plans and ancillary benefits. The example I always use is smoking cessation. So their goal, the employers are trying to drive their employees to leverage that benefit. And oftentimes, it's very difficult for them to ensure that that actually happens. So with our acquisition of Stanson Health, we actually have the ability at the point of care. So when that patient is actually meeting with that clinician, we can say, "Oh, by the way, this is an employee from x company, and they have a smoking cessation program."

Right.

And it's -- the opportunity for that clinician to actually have that conversation at that point in time. So that's number one. So then you asked about the network and whether or not we're piggybacking on networks that are already in existence from payers or what we're trying to create. So from a network standpoint, we're actually trying to network together our collective health care systems, right? Because we've been working with them over time, working with them in terms of improving quality, improving safety, helping them as they're transforming new payment models, thinking about bundled payments and those kinds of things, ACOs. So the whole focus is to build this high-value network, where if you were to get a procedure in, say, for example, Orlando, Florida, it was -- it's going to be done the exact same way in Fargo, North Dakota. And so these large employers think there's huge unnecessary variation in terms of how care is provided for the same procedure across the country. And so they're very interested in our data and our ability to help our health care systems' standardized care across very, very large systems and hospitals. So that's number two. And then number three, we have a number of health care systems that actually have health plans.

Right.

And so they go directly to large employers in their market. And their interest is -- today, they'll go and they'll provide some level of service to the corporate entity. But if they have employees outside of that footprint of a health care provider, they're all oftentimes having to use the secondary entity, maybe like a multiplan or some other entity, to actually provide care to that large employees employer -- that large employer's employees. Now if you have this high-value network stood up as the backbone, that health care system can actually have that backbone of this high-value network that says, hey, basically, care's going to be provided the same way at the corporate as it is in all of your ancillary places.

And then Lisa, I think to the business model part of your question, quickly. So part of it is a toolkit that has been put together for the providers to help them in their engaging with the large employers or employers in the networks. So there's fees to Premier for doing that. There are SaaS technology fees for utilization of the Stanson capability, which is what's enabling the network to actually create the infrastructure and put it into the clinical workflow. And then longer term, the plan with the employers is that that will pay a small but PMPM to us for the enablement that we're providing of the high-value network.

And what the -- and employers really want is that clinician and that physician who is intervening in the electronic health record every time they meet with patients to then see the analytics, see the opportunity, see the clinical program and do it real-time in the workflow. That's what's different from other sort of employer-based programs.

Yes, Susan, I heard you talk today about value-based care models and that we're somewhat stuck because of the political environment today. Why do you think we were not seeing more uptake though in the commercial market? So is it that the commercial market is waiting to figure out what Medicare or Medicaid ultimately is going to pay for? Or is there something else that's holding up that the commercial market is moving in that direction?

It's interesting. I think that -- I think entering into value-based arrangements necessarily requires some collaboration, data sharing, data transparency. I think that sometimes gets in the way of commercial insurers more than it would get in the way of federal state governments who've said we're willing to open up our data set so you can improve health care. I think that's part of it. I also think insurance companies make money off fee-for-service.

Absolutely.

Right.

They make money off fee-for-service. And so I think if the health care system ultimately owns the cost of care delivery, and they are the ones who are in the position to get the variation out to lower the cost, to use the generics to do all the things that it takes to really drive the cost down then I think providers and possibly employers are somewhat concerned that insurers will just keep that arbitrage.

Themselves and not share it back, right.

That's right.

And as far as that -- as we think about DC right now? I know under the Obama administration, there are a lot of programs driving towards value-based care. But in talking to this administration, it seems that they still want to move forward. Is it just that they're moving much more slowly? They're looking at things differently, I mean what's your experience?

Two things. One is first term means there's a second term reelection risk. And I think that plays into some of the political decision-making. I also think that when you have a divided Congress, it makes it harder to advance. Obamacare was advanced when they had a democratic President, Democratic Congress. They could drive those things through and drive those things through aggressively. We think you're taking off the reelection risk, potentially if Trump wins. If a Democrat wins, we think they will want to get back on the train of implementing that form of Affordable Care Act that they initially wanted to implement. We do think we're going to be still in somewhat of a divided Congress. So we think momentum could pick up. We think it is the right answer long term, right? It's a question of urgency and how fast it actually will get implemented.

But I think to that end it circles back to your first question about Contigo Health. I think the employers in the last 24 months, last 3 years, they are now obviously with what you're doing with Haven, they're not going to rely on the commercial insurers to help drive down the cost of care. Because as Susan said, what's happening is if there's inflation for health care, the employer is the one that's footing the bill for it.

Most are -- at least the big ones are self funded, self-insured.

Exactly. So they're at this place of saying, we need to be disruptive. We need to be innovative, especially the really big ones that have to have feet on the Street. And we're looking for models like Contigo Health.

I think -- I'm sorry, Lisa, just one last thing I would add in terms of this administration. I think that while most of the underlying principles of value-based care are actually bipartisan, politically, there was such a division that they didn't want to just further what the Democratic Party had been putting forth. So what you have seen is a movement to make things more voluntary than actually mandated, which is what happened to the previous administration, which by its very nature, slowed it down somewhat. And I think there was a reluctance to make it and push it too aggressively because it would have furthered what their competition was doing for lack of a better term.

Susan, you've talked on the most recent call that there's uncertainty in the political environment that as we get closer to the election, you think that people can start to think about making investments in how you move forward. Does that happen as we move throughout this year? Or do we have to actually wait until November of 2020 when we know whoever it is going to be the next President?

I just think -- I think it will continue to grow as it has within Premier. It just grows at a slower rate. So I think the rate picks up. And so our goal is to get to mid- to high single-digit growth rates on the Performance Services, more consistent with where we were in the first several years. I think that momentum picks up. I also think that for us as a company, taking those data assets we have and also pivoting them to those sweet spots with employers, with insurers, with life sciences companies gives us other growth alternatives that can supplement what might be a slower growth in the provider sector.

Offset some of that.

Regardless of the pace in terms of what's happening politically, our health care systems know that they've got to continue to take costs out of the system. And so they're putting a lot of pressure on us to continue to innovate and build out technologies to help them to get after more of their cost to negotiate better contracts to solve the issue with high cost pharmaceuticals. So that even if there is some political decision that's made, where there's clear direction, they're in a process of operating at a very low cost environment. So we're going to keep focusing on cost reduction. We're going to keep focusing on clinical standardization. Many of our health care systems obviously have multiple hospitals. Their focus is to practice the same way in each of the hospitals. Many of them are in acquisitive modes. So they have to extend that clinical standardizations to their acquisitions. So all of that is just going to be a really nice building blocks to whatever it is that eventually gets decided from a federal level.

Are there questions in the audience? Yes. Go ahead.

Last quarter, you talked about utilization driving part of the upside, how sustainable do you think that is as a driver?.