Premier, Inc. (PINC) Earnings Call Transcript

All right. I guess we will get started. Hello, everyone. I'm Jailendra Singh, health care technology and distribution analyst at Crédit Suisse. Thanks, everyone, for joining us. Next up, we have Premier. From the company, we have Susan DeVore, CEO; Craig McKasson, Chief Administrative and Financial Officer; Ben Krasinski, Director, IR; and Angie McCabe, VP of IR. Thanks, everyone, for joining us. We are doing this in a fireside chat. I'll kick it off with some of my prepared questions. And if you want me to ask a question on your behalf, please e-mail them to me at jailendra.singh@credit-suisse.com.

Maybe to begin, Susan and Craig, just because you guys reported earnings very recently. Maybe start with quick key highlights or summary of the earnings and maybe let's begin there.

Thanks, Jailendra. So we are very pleased with the quarter. Even in the tough COVID environment, we saw double-digit growth in consolidated revenue and in revenue in each of the segments, supply chain and Performance Services. As expected with our restructuring, we did see the decline in EBITDA, adjusted EBITDA and EPS, as expected, with some impact of COVID as well. We are continuing to monitor the utilization patterns and what's happening in health care systems relative to COVID-19, and we'll continue to do that. I think that the environment we're in really validates the long-term strategy around technology-enabled, end-to-end supply chain and enterprise analytics and performance improvement. And so we are really excited about the execution of the strategic plan to get to mid, high single-digit growth rates across each of the segments and on a consolidated basis going forward. So we're feeling very good.

Great. I mean, I understand the whole rationale for not issuing fiscal '21 guidance, but beyond the uncertainty of general pace of recovery, which remains unknown, and I don't think anybody has a great crystal ball there. But can you walk us through some of the other puts and takes that we should be aware of when thinking about the growth drivers near-term and long-term as well?

Yes. So Craig, why don't you start with kind of guidance and how we see the puts and takes going forward. And I can just add in.

Sure. Happy to do so. So as indicated, we are uncertain about the duration and the nature of how long the pandemic will last. So that's why we haven't issued formal guidance. But what we have tried to do is give some directional commentary on near-term impacts that we see. And then I can hit on -- in terms of our longer-term expectations around growth. So if we look at the components of our business, from a group purchasing standpoint, our focus, once we get past the pandemic, is to return to the low-to-mid single-digit growth that we have in our group purchasing business. And really our focus and everything we're doing now and into the future around that is working more tightly and closely with our health care providers through enabling further technology to capture more spend. And so we capture a lot of spend today through our group purchasing organization, but there's a substantial amount of additional spend that health care providers are incurring that's not running through our GPO contracts. And so we're looking to enhance and augment that through technology enablement and capturing up the entire population of spend that they're utilizing to reduce their costs and to provide growth for Premier at the same time. And so in the near term, we're having the impact of the pandemic, but that's sort of longer-term where we see. The other component of our supply chain services business is our direct sourcing business, which is our contract manufacturing for product. We've seen demonstrable increase in demand for those commodity products through the pandemic, and we've talked about the outsized level of top line growth that we've seen in that business. Very different margin business because we are taking title to the product. So it's a lower-margin business, but we've had substantial increases in revenue. And so we've talked about, actually 2 quarters ago, seeing incremental demand over the first half of fiscal 2021. And then on our most recent earnings call, we again talked about -- we had about $59 million of additional revenue in the first quarter due to pandemic-related business. And we talked about the fact that we expect to see an incremental $40 million or so of additional revenue above and beyond that in the second quarter. Depending on the nature of the pandemic, we could see things turn -- start to return back down to normal run rates on a go-forward basis. And then longer term, we would expect our supply chain direct sourcing business to grow in sort of that 10% range on a year-over-year basis through further penetration of our existing portfolio with our members and selectively extending and identifying new product categories to enter into where it makes sense. So the combination of those gets us to a mid-to-high single-digit sort of revenue growth longer-term in our supply chain services business. And then on the Performance Services side of our business, which is probably 70% or so technology-based and about 30% advisory services or collaborative type arrangements with our members. That business, we are targeting mid-to-high single-digit growth on a longer-term basis. We feel good about the growth that we're experiencing and saw in the first quarter this year, giving us more confidence for growth in fiscal 2021 even, with the implications of the pandemic. We haven't seen as big of an impact on that side of the business as we did on the supply chain side from the pandemic, but there is some slower decision-making because of the focus and attention that providers are having to put on dealing with the pandemic and their ability to focus on things. And then in some of our consulting engagements, there's some risk of a little bit of delay as people are not able to be on site and do some of the same advisory service type work that they've done in the past. But longer term, we expect that to grow mid-to-high single-digit as well through continuing to extend capabilities into our providers, but also leveraging that to look at adjacent markets and working with employers, payers and life sciences companies. So mid-to-high single-digit growth there longer-term as well from a revenue standpoint. The combination of those between both supply chain and Performance Services delivering at that growth. Longer term, we expect we'll deliver, also, mid-to-high single-digit growth in profitability, adjusted EBITDA and adjusted earnings per share.

All right. That's great. Just at a high level, I know, Susan, you are one of the thought leaders, I consider the thought leaders in the industry. Just curious, like, I mean, given what happened during COVID in 2020 and clearly, things are much better in terms of hospitals and health systems are prepared to deal with this versus what we had in March and April and May time frame. Can you share thoughts around like 1 or 2 structural changes or process improvements you think should be made to the supply chain business in the country to make sure our health care system is better prepared to deal with any such crisis in the future?

Yes, there are two big ones. First one is, I think we've all learned we were far too dependent on a few countries for critical products. And so Premier is taking a look at all the critical products and drugs, and we've identified the 60 in each category that we think are critical, and we are engaging in resilience strategies. You saw us invest in Prestige Ameritech. We need more onshore, nearshore and offshore diversification of the sources of these critical supplies. So we've made that investment. We are thinking through things like gloves, things like isolation gowns, things like disinfectant because in any pandemic epidemic, we just need more access, more stockpile. So that's the first big one. The second one is really technology enablement and visibility into supply chain demand and supply. I think we also learned through this that there's a very fragmented approach to that today. We have ERP capabilities. We have supply chain analytics. We have clinical analytics. We've connected those two, the clinical surging COVID hotspots with the supply chain details. And I think as an industry, we need to move that forward in a much bigger way so that we are better able in real-time to deal with the supply and demand issues. Those would be the two big ones.

No, that makes sense. Actually, I was going to ask about your domestic manufacturing, but I think you've kind of covered that. I was also going to ask about the -- you mentioned this on your earnings call and I had some other players that also mentioned this that health systems and hospitals are doing like stockpiling. I mean some guys stockpiling for as much as like 120 days. And I mean, how do you get a good picture at this point that where exactly the demand is right now? I mean what is the state of supply chain because you don't know whether it's real demand or they're really stockpiling for next 3 -- 2, 3 months and given the experience they had in March and April? What kind of visibility do you have? I know -- I mean, clearly, you're not giving guidance for the same reason because we don't have visibility. But just curious like how do you -- what channel checks you do? What visibility you can get in terms of supply chain demand here?

Yes. So we have hundreds of people who are out in our field force working with the health care systems, some on site, some virtually. We have stand up calls several times every week with that field team. We survey those members regularly, and we monitor purchasing patterns. What we can't predict is what's going to happen with opening or closing elective surgeries and those sorts of things and decisions that will be made, so that we would feel more comfortable with guidance. But what I would say is it varies by state. So some are doing 30-day, 60-day, 90-day, even 120-day stockpile. So I think, again, most health systems have determined they're not going to live as close to the just-in-time inventory that they used to live in. Some of them got down to 1 day or 2 days of supplies, and that was very scary for them. So I do think that we're seeing the initial buildup of those stockpiles. And as Craig described, once those stockpiles sort of get built the first time, it will be natural replenishment and usage. And that's why we think we'll go back to the more normal growth rates in direct sourcing.

Okay. That's fair. I want to switch gears to and talk about the market share and total addressable market for you guys. Last call, you guys talked about roughly $67 billion of purchasing volume runs through the company's GPO contracts. I think you've also talked about the GPO total market in that $180 billion to $210 billion. So probably like almost 1/3 of market share. So with the new health system markets, clearly, you will have more purchasing volume flowing through. But has there been any change in that TAM? And how do you think about capturing or penetrating into that remaining 2/3? Is it a real market? Or is it really a greenfield opportunity or something like you think you'd say market share gain opportunity?

So we think it's both. So we do think it's still a $200 billion addressable market. We've been a market taker. We have really high retention rates in the GPO at the 98% level. We did -- you saw the growth in the number of hospitals going up to 4,100, the number of alternate sites going up to 200,000 and the spin going from $60 billion to $67 billion. So we're making a ton of progress. What I would say is there are categories that are not fully penetrated yet. And a lot of that getting from $67 billion to $200 billion is additional contracts in our high compliance portfolio, additional contracts and technology and purchase services. All of it's enabled with technology and supply chain analytics. There are specialty areas of spend that we're focused on having more contracts. And so that's probably the biggest piece of how you get from $67 billion to $200 billion. But there -- the market share piece. We've been a market taker. We've added 20 or more health care systems in the last couple of years and maintained our high retention rate. So almost every health system has a primary GPO today. So you are taking market share away from others. And the combination of that market growth with new customers and the penetration of existing customers, it's what gives us comfort in those overall mid-to-high single-digit growth rates for the business.

And Susan, one piece, a quick color, I would just add when you talk about that addressable market. The $200 billion that you've heard us talk about, the way to think about the kind of general supplies market is about -- we believe, is around $120 billion. So that's really what our $67 billion is comparing against. The remaining $80 billion, we believe, is in the purchase services and these other areas that traditionally haven't been in group purchasing organization structures or under those contracts. And so that is true greenfield, where we are really working to establish and have talked about our initiatives around purchase services to capture that spend as well. So just want to highlight, when you talk about that we have penetration of about 1/3 of our market, we're actually really probably over 50% in the traditional supplies market, and then we've identified this newer purchase services market to capture on a go-forward basis.

Okay. Before I move into my questions for individual segments. I just want to remind everyone that if they want to ask questions, they can e-mail them to me at jailendra.singh@credit-suisse.com, and I can ask on your behalf. Let's drill into individual segment here. Supply chain services. I was wondering if you can provide any more update on how elective surgeries are trending. Clearly, reports have been, of course, they have been moving in the right direction. Some hospitals have said that they're back to the pre-COVID levels. Some are saying it's still like 80%, 90%. What's the -- what are you seeing in your client marketplace in general? And how do you see this being impacted as the flu season? And of course, these recent cases rising as well, having some impact? Just share your thoughts on that.

Yes. So as we discussed on the earnings call, we are -- and we have a big footprint of health care systems. We are seeing on average something like 90%, 95% back to normal inpatient operations. On an outpatient basis, it's a little bit lower than that, more like 80% in the outpatient and ER space. And in the non-health care space, which we also have GPO contracts and customers in, that's been even harder, 50% to 70%. And that has to do with universities and schools and restaurants and things like that being closed down. So we do see it having come back quite a bit. I think the more recent surges in COVID have also led to a higher intensity of severity in the hospital. So the patients are sicker or they're more intense, which tends to drive purchasing volume. So it's a moving target, though. And I think when you have 100,000 new cases every day, there are staffing challenges. And we think that we are a critical partner to these health care systems with their supplies and drugs and information. And so we're not letting any gas off the pedal because their needs are very significant. And we'll continue to serve them as those volumes come back. We are hearing from our health care systems that they're now beginning to see regular flu patients as well. And so our view of this is that we're in for some challenging times for health care systems to serve their communities, probably for the next 6 months at least.

When we think about like you said 85% to 90% of pre-COVID utilization levels, do you think there could be some leakage that this could be a new norm? And we might never go back to that. We've kind of lost this 10%, 15% of utilization permanently maybe because either it has moved to telehealth or just permanent leakages happened? Just curious on your thoughts there.

I don't really think so. And I think Premier has been really intent on having GPO contracts, technology, analytics and services across the whole continuum. And I think what we're seeing is that patients are moving around to different parts of the health care system. And I think many have been delaying treatment because they've been worried about going into doctors' offices or health care systems. I think as we get a vaccine, as we get the vaccine out to the general population, I think people will go back to some of the more normal behaviors. And I think there is some pent-up demand potentially until it gets back to normal. I do think telemedicine and the efficiency of visits and technology enablement will create a new normal but I actually also believe there are downstream potential clinical ramifications of COVID and the impact on patients post having had COVID. And so my sense is that from our health care systems that across the whole continuum that they're still going to be utilization patterns that have existed in the past. They may just be in different places.

Got it. Actually, I have one e-mail question coming in here. Let me read that to you guys. What are your thoughts on the merger between your 2 competitors? I think he's referring to Vizient buying Intalere? What are your thoughts there?

Yes. Our thoughts are, in some ways, similar to the Vizient acquisition of MedAssets, which is spending capital dollars to buy basically traditional GPO services. Our investments for the last several years have been around new technologies, new categories of spend. We are moving down that end-to-end technology-enabled supply chain, purchase services, other things. And so our sense is we've been taking customers from Vizient and Intalere. We actually just took Virginia Mason, which was one of their largest customers. And so our approach is to take these differentiated capabilities. To pull customers away from both Vizient and Intalere and HPG, and we've been very successful in doing that over the last several years. So it didn't make sense for us to use our capital dollars to acquire basically capabilities we thought we already had.

Yes, that makes sense. So switching to Performance Services segment, given that you mentioned like 70% -- 70% to 80% is like SaaS-based business with recurring revenue. Maybe give us a little bit -- I mean, I think Craig did cover this in his opening remarks -- in an earlier question about opportunities for this business in a post Covid environment. Do you think there's a lot of uncertainty in this business as well? Or you think that providers are a lot more comfortable taking on these new projects as things are relatively normal compared to March, April, may time frame. Just to talk about the near-term or even long-term outlook for this business?

Yes. Our sense is that we did very well in the quarter and had mid-single-digit growth. So from a technology perspective, we think health care systems need information, need insights, they need to connect those insights. And so this idea of enterprise analytics in a COVID world is even more important. And I think it sort of shined a light on that. And so from a technology perspective, we feel very good about the growth opportunities there. In consulting, it was a little bit harder. It's a little bit harder during COVID. We've got a great pipeline and the cost management challenges that our health care systems are going to have, have them already thinking and engaging and how they're going to drive cost improvements post COVID. And so we think that's coming back, and that's what gives us the comfort of both of the business that we can continue to to grow in the mid- to high single digits on a going-forward basis. We also are very excited about our expansion strategy with Contigo Health into the employer market, payer market and the growth in our applied sciences, life sciences business. So you remember, a couple of years ago, we said we really wanted to take our capabilities and sell them into adjacent markets, and we've been doing that and seeing some of the results from that as well. I don't know, Craig, if you have anything to add?

I think you covered it.

Okay. Let's talk about Contigo Health, which was very interesting you guys put together. Maybe provide some color on the Walmart partnership contract there. Was that a direct outcome of your health design plus partnership or it was outside of that? And any color you can provide there in terms of potential revenue opportunities and how that whole HDP partnership and Contigo Health is trending?

So I'll start strategically, and then Craig, you can provide some financial color. So Walmart is a big Centers of Excellence customer, and they were a customer of HDP. The reason that we acquired HDP was, one, we needed that administrative infrastructure to enable our direct-to-employer strategy because we had this huge network of providers. We have all kinds of analytics data. And we're expert in performance improvement, but we needed that administrative infrastructure. We also wanted the best player out there in centers of excellence programs because we think employers, in a post-COVID world, many will continue to face cost challenges. Those costs are rising at a rate faster than they want them to rise. And so we think expansion of centers of excellence programs is really important. So Walmart re-upped for a new contract, and we have several other Fortune 25 companies that are a part of Centers of Excellence programs. We're also now able to leverage HDP to our health systems and many of whom have provider-sponsored health plans or for their employees. And so we see growth opportunities for HDP, and we saw an acceleration of our ability to get into the Centers of Excellence market with mega employers. And so that's what that strategy helps us do. Craig, I don't know if you want to talk about financial.