Premier, Inc. (PINC) Earnings Call Transcript
May 11, 2021
Earnings Call Speaker Segments
Good afternoon. I guess, now that it's post noon, and thank you, everyone, for joining us for this session of the BofA Virtual Healthcare Conference. I'm Michael Cherny, the health care tech and distribution analyst here at BofA. It's my pleasure to welcome with us Premier. We have Mike Alkire, long-time President, newly promoted CEO; as well as Craig McKasson, long-time CFO, and still very much CFO among -- I can't imagine how many hats Craig officially and unofficially wears at Premier. So we're going to have a fireside chat. As always, feel free to use the conference website or send me direct questions if you have them.
Before we get into the meat of the business, maybe a question for Craig to start. It seems, like, there's a little bit of confusion, I think, that came out of your earnings last week, particularly around some of the commentary around fiscal '22 and how we should think about next year's performance. So just to level set what your early preliminary views are? And how we should be thinking about that in terms of what it means for the trajectory of your business, especially in what still is an, unfortunately, pandemic-heavy world?
Sure. Thanks, Mike. I appreciate the question. So on our earnings call, we did, as a reminder, raised our guidance for fiscal 2021. And while we're still doing and finalizing our planning for fiscal 2022, we provided an early view. And so to be sort of crystal clear around what we've said is that we continue to be on track for our longer-term growth targets of mid to high single digits for revenue and profitability. If you think about revenue for fiscal 2022, the right way to think about a jump-off point is to take our fiscal 2021 revenue and adjust it for the incremental benefit we've gotten from direct sourcing this year, and we've disclosed that each quarter, on a year-to-date basis through the first 3 quarters, that's about $335 million of revenue so far. We disclosed $59 million in the first quarter, $119 million in the second quarter and $155 million for the third quarter. And then we indicated that we expect a step down of $10 million to $20 million for the -- an incremental revenue of $470 million to $480 million this year, which should be backed out as the starting point. And then we said for fiscal 2022, we will have mid- to high single-digit growth and consolidating net revenue off that base. And then from an adjusted EBITDA standpoint, we updated our guidance on our earnings call to $460 million to $475 million for adjusted EBITDA. That is the right range and the jump-off point for fiscal 2022. And what we articulated is an expectation to grow at the low end of our mid- to high single-digit profitability growth in fiscal 2022. And then we would expect to see growth move up in that range as we move into future years. There were really a couple of primary drivers. We have an increase in the fee share that we're paying as a result of mix and the finalization of some of the members that didn't agree to the restructuring last August. And we do have some incremental investments that we're making next year in some of our new strategies like Remitra and our clinical decision support capabilities. So again, just to quickly summarize, our current guidance range for adjusted EBITDA is what the base -- mid-single digits in fiscal 2022, and we'll obviously provide more color when we established guidance in August.
Perfect, Craig, and very helpful level setting. With that, let's maybe dive into the business a bit. You had a very interesting opportunity over the last 18 months to essentially go to your largest most strategic customers member owners as you went through the restructuring and really talk to them about their needs and how to think on a contract on a go-forward basis. So using that as a framework, can you give us a sense of what they told you, what they were happy with, and some of the opportunities you had to continue to expand your services, your partnership with them as part of that agreement as part of that renegotiation?
Michael, first, let me just say thanks for having us. And as you said on the opening remarks, this is week 2 for me, and I'm -- I just want to share that I'm incredibly humbled and incredibly excited about the opportunity to lead Premier. I think we've got some incredible building blocks, and I look forward to -- of the future of this business. So as Craig and I and Susan were having conversations and talking about the financial restructuring, I think a number of things jumped out. So obviously, from a supply chain standpoint, our health care systems, at that time, were really concerned about resiliency in the supply chain, right? So how do we make sure now that we have good pricing, but that we also have access to products. I think what you saw over the last 18 months or so is that we took a -- along with 16 of our health systems, we took an interest in a domestic manufacturer of facial protection, of masks. Along with 34 of our health systems, we took an interest in a domestic manufacturer for isolation gowns. And what's so unique about that opportunity is we designed the products with our clinicians, and it's going to be almost 100% automated. Not everything is 100%, but it's very, very highly automated. And the reason that's important is that we believe it has a sustainable business model going forward to be competitive against low labor cost countries. So that's the way we think about doing some of these -- setting up some of these organization. So that's isolation gowns. We still think we've got to do more stuff in the area of chronic -- generic drugs that are in chronically short supply. So you're going to see us continue to move down that path and looking for partnerships in those areas, especially with organizations that have the ability to buy -- or to, I'm sorry, manufacture the API, the raw materials that go into the finished goods. So that's resiliency. The other thing they wanted us to focus on is that we still have to be very, very cost-efficient. So continue to evolve and build out your committed programs, and which we have. I think you are well aware, Michael, we have a couple of committed programs, one is called SURPASS. Today, we have about 18 integrated delivery networks that participate in that worth about $8.5 billion of volume in that. We also have ASCEND, which has about 245 of our member hospitals in that, and it represents about $20 billion in spend. But they said, keep driving of the market, creating leverage in the market and getting us great prices. So that was point #2. Point #3, the supply chain with the technology enablement. Anything you guys can do to make investments, to make it more efficient for us to run our supply chains, we're interested. We went out, we bought a company called IDS. IDS is all about e-invoicing and e-payables, which is a huge opportunity for health care systems to drive efficiencies. And what's very unique about the IDS technology platform is it does have things like advanced optical character recognition, so it can pull in faxes, it can pull in paper-based stuff, it can do a bunch of different things in terms of looking at invoices at scale. We're going to -- we've been surrounding that offering in the last couple of years because we've got a really, really strong partnership with them around sort of reengineering what invoice management looks like at our health systems and decentralize that. So we're going to continue to evolve that and then there's a big opportunity for the payment side as well. So that sort of centralized and scale out payment from a technology standpoint. So those are the things on the supply chain standpoint. And then, for the most part, in Performance Services, it really was helping them get back to normal. So the whole focus was, how do you leverage -- how can you bring us the clinical decision support capability, writing standards into our workflows to create high levels of clinical standardization, which obviously improve quality and reduce costs, but also help us with creating more agile infrastructure within the business, either our corporate costs, or our clinical costs, but we want more agility so in the event that we have something like a pandemic that impacts our operations of the future, we know what buttons to push to ensure that we can do whatever it is that we can do to care for the population in the most efficient way. So those were the -- probably the 5 big buckets that they spend time talking to us about.
And in particular, one of the things that you mentioned with respect to SURPASS and ASCEND programs that's one of those dynamics that I feel like it's -- these high compliance contracts makes the relationship stronger. It's more than just that. So can you maybe remind us what goes into these contracts and the incremental value aside from just purchasing and volume discounts that a member or customer gets when they're enrolling one of these key programs for you?
It's a great question. So it's not just the ability to aggregate spend and then go to a manufacturer and try to get better pricing. We actually spend a ton of time looking at clinical data to look at, truly, whether there's clinical parity between products. And so there's a lot of upfront work that has to be done. And by the way, that upfront work could be used by health systems to do further evaluations. But the point is helping understand sort of the value analysis associated with the product, it could be a medical technology, it could be medical supply, but really trying to show parity between one clinical product and another. Or if there wasn't parity from a clinical outcome standpoint, to assess some form of value associated with the lack of parity. So the point of all of it is we create those kinds of programs within SURPASS and ASCEND, where we're bringing clinicians and looking at areas where we can drive standardizations. And we're building out the artifacts, if you will, so that as we think about trying to drive standardization, the data and the technology that we're using, we're actually taking that back, Michael, to those health systems to actually help them drive the standardization once we make a decision at the SURPASS or the ASCEND level, they want all the exhaust from that process so that they can then have conversations with their clinicians to get them to grow standardization. So to your point, it's -- there is this big focus on, like, creating leverage and driving that price, but it's also very, very part and parcel to driving clinical standardization and...
And just maybe talking about your customer base. Clearly, there's a lot of moving pieces on -- overutilization across the country in different areas. Where would you say your customers are right, now on a whole, and obviously, break it down as much as you can but in that pace of recovery in that return to whatever that normal or pre-COVID level is?
Yes. So it's pretty interesting. On average, I will tell you that they're probably about 95% in general. But there's huge regionality associated with it, Michael. You have places in the upper Midwest that won't approach those kinds of levels because they're still dealing with the virus. And then you have some parts of the population where you have maybe more than 100% utilization because of pre-COVID utilization because you have this pent up the demand for elective procedures and those kinds of things. So I will just tell you, in the acute setting, it's about 95%. In the non-acute setting, depending on what the class, think about a surgery center or are you thinking about long-term care facilities, each of those have different sort of percentages. I would say the closer you are to providing procedures, you're seeing those numbers ramp up. And then obviously, as people are feeling more comfortable going in the long-term care facilities and those kind of things, those numbers are ramping up. But very similar numbers in terms of approaching pre-COVID levels. I'll tell you, though, the area that -- for us that has not come back was -- well, and this represents less than, I think, 10% of our value, but it's the non-health care stuff. So think we also provide sourcing and pricing services and contracting to universities and to municipalities and places like that. So that has not come back in a way that anywhere near pre-COVID level just because I think a lot of those institutions have not instituted having workers come back into the premises yet.
And particularly, you have customers that are over 100%. But when do you think your entire base will be able to check that box of being at 100%? Like, what -- obviously, absent any fourth wave or fifth wave or whatever wave that would be next.
Yes. So assuming that the pandemic is curtailed and it's pre-managed, I would tell you, I think one of the precursors is going to be, obviously, vaccination rates, Michael, you know this. I think to the degree that some of those communities are not vaccinated at the same levels, I think we're going to have to make sure that we get the message out on the importance of getting the vaccine and those kind of things. It's too early for me to tell whether or not there is a -- it's too early to tell whether or not there is a -- when all of that's going to come back to normal. So -- but I will tell you, I think vaccination is that they -- our ability to control the variance are going to be really, really critical as well.
Got it. I figured I'd ask, I know, obviously, it's a hard question to answer. Another thing I want to dive into is Premier's role during COVID. I know you're nice enough to grace us with a few calls giving an update from the field. And what continually stuck out to me is just how much Premier acted as a partner? And I think you can see it too with the commentary Craig gave at the beginning on the product side, you're selling a lot of products revenue that really was not a huge margin generator or profit generator, but because it was value-add to your customers. And so along those lines, can you just remind us all of the advancements you made, all the expansions you had for your customers during COVID? How many of those stay in place for the future? And how that impacted, which I'd assume on a positive basis, your customer relationships?
Okay. Michael, I'm not sure if there's a technician that could help because I think Craig's screen has gone white, and I want to make sure if Craig wants to add anything, that he's more than welcome to do so.
I'm still here, Mike. Definitely I'm still here.
Okay. So Michael, there's a couple of different areas, and I'll start with the supply chain. So all the way back when the virus first hit, I think Susan and myself and the rest of the organization was really keen on figuring out a way to communicate to the federal -- the important federal government agencies that needed to be in the know of what was happening from a supply chain standpoint. So we -- in partnership with FEMA and HHS, we set up a coalition of distributors and PPE manufacturers and other group-purchasing organizations to really have this open dialogue in terms of what was happening and what was being needed. And if you remember way back when, the virus first was in the New York area and then it also settled into the Seattle area. So there's a lot of intelligence that we were gathering. We have a huge penetration in the New York market. And so we were -- there was a lot of PPE, utilization of ventilators and products associated with doing ventilation of patients as well as the drugs. And so we provided a ton of insights around utilization patterns and those kinds of things as the virus progressed through the U.S. So a couple of things that we did, obviously, as quickly as possible, we have a very substantial presence in Southeast Asia in terms of resources that work with manufacturers to produce products. So very, very quickly, we stood up somewhere between 5 and 7 additional manufacturing facilities that were manufacturing various forms of PPE. So we got that thing rolling. We were on the phone with entities like Delta Air Lines and other logistics organizations to ensure that once product was produced, that we could figure out ways to bring that product in. Of course, the Trump administration at that time had Project Airbridge, and that was all working as well on bringing products in. But at that point in time, our focus really was to get as much product into the U.S. as possible. So that again -- and then -- and we were doing a ton of stuff in terms of doing group buys and ensuring that if -- helping basically manufacturer get access to raw materials. In some cases, we bought SMS or other raw materials and shifted it over to producers in Southeast Asia to have those products brought back here. But it was really a 24/7 sort of operation within Premier to get as much PPE into the U.S. as possible because we saw first hand what was happening with caregivers that didn't have the appropriate coverage or protection and caring for these patients. So big focus was to get the PPE here on hand. Secondly, we built out -- we have this technology, Michael, that uses machine learning natural language technology that's embedded into the workflow used in the EMRs of Epic and Cerner and Athena. And we were using that technology to do some stuff around managing advanced images. But very, very quickly, we spun that technology around syndromic surveillance and we actually published an article for the Harvard Business Review. The reason that that was important way back when is that we didn't have the testing. And so we thought that a novel way to actually understand what is happening to a population was by looking at the symptoms. And if you could see that there was a prevalence of symptoms or an abundance of sentiments, then you would understand that you have a pretty significant prevalence of the disease. And we can do it all the way to the ZIP code level. So we could understand whether or not a factory was -- had experienced the COVID outbreak or it was in there or whatever. But anyway, we, very quickly, we're leveraging that kind of technology. So with syndromic surveillance, we've been talking a little bit about the supply chain and getting access to the product. And then the third area that we focused on is building out algorithms and machine learning to help our health care systems understand as the virus progressed, we were using publicly available as well as Premier data to look at patterns of how the virus is progressing. And then we, because of the work that we had done in New York, new utilization patterns for PPE or drugs that were going to be required, drugs that were being used to treat the virus. The point of all of it was so that we build out a model so that we could forecast the demand of products that were going to the health care systems are going to need in the event the pandemic kept spreading. And the reason we did that was there was such a stress and such an imbalance from a supply-demand standpoint on PPE because everybody was overbuying. Everybody was trying to stockpile. Everybody was trying to be prepared, and there just wasn't the global supply of that product. So what we're trying to do is provide data and technology, get them into the hands of the health care provider so they could really understand what, in fact, they needed to care for their population. So those are 3 of the big areas that we focused on. Craig, I'm not sure I missed anything?
Yes. The only thing I would just quickly add is we also became sort of a go-to source for our members just to get the facts. And so we actually stood up in that every other week with a very large number of our clinicians and member -- across the membership to talk about all the things Mike just highlighted, but also to identify conservation protocols and what were the best practices that can be shared across to really just continue to maintain the...
Got it. And that was...
That was a big point -- Michael, I'm sorry, that was a huge containers of gloves. And could your team on the ground are trying to validate that. In fact, those products were met clinical specifications and those kinds of things. So that was a big area. By the way, one other area we get step off and it's nice that you hear us talk about it because -- a little bit because it's brand new. But our whole e-commerce platform, we had stood it up just before COVID. And I'll tell you I'm so glad we did because you have a lot of nursing homes and a lot of non-acute facilities that did not have a history of actually buying products. And so they were going out into these open markets and trying to get products. And anyway, we were able to ensure that if the nursing home was out of products, that if they did come to our site and we did actually have the products, that we could literally vouch for the product that it did go through the appropriate channels and it did meet the clinical standards, that system. So that fully e-commerce platform, I think, was pretty important as well through the pandemic.
Got it. Turning a bit to the future of the products business. I know we've just touched on a bit. Craig, I know you gave some very helpful commentary. How do you think about your product's entity as a whole in terms of, especially the post-COVID world, especially when you've been able to stand up a lot of that supply that customers were struggling with? What should the role be of that part of your business on a go-forward basis?
Yes. So from my standpoint, I -- we will always leverage the products part of the business to create competitive friction in the market. So if we thought that we weren't going to be able to get enough pricing, we always wanted to leverage that to say, "Look, if we're not going to get the kind of pricing, we're going to vertically integrate, we're going to actually get into the contract manufacturing or the production of the product ourselves." So it was just one of those areas or one of those strategies that we wanted to ensure that we were creating an efficient supply chain for our health care systems by driving cost out. I'll talk through the business towards more resiliency and strategic differentiation. So for example, to the degree that it differentiates us from other players in either the supply chain market or in the GPO market, then we're going to continue to vertically integrate. And our health care systems are incredibly supportive of that.
Yes. And I think financially, just to add, I think once we get past this sort of incremental demand that's happened through direct sourcing, I've disclosed what we expected was this year, I think you're going to see it step down in fiscal 2022, but it's not going to go all the way back down to pre-pandemic levels in '22. And so we're currently estimating, again, depending on the nature, but that they will likely average sort of in the $80 million to $90 million a quarter of product revenue in fiscal 2022, with a sort of heavier weight early in the year and then kind of coming down. And then longer term, our plan, Michael, financially, is that that continues to be, in a normal course environment, a high single to low double-digit type growth business within the supply chain, as Mike described, where we will look for vendors and suppliers that can give us great pricing from a GPO standpoint but to enable competitive friction and get the best products, and we'll do contract manufacturing where it makes sense.
Got it. Right low on time, but Mike, I know you said it's been 2 weeks as CEO, but clearly a lot longer than 2 weeks as part of the senior leadership and strategic team. But as you settle into this new proverbial seat, how do you think about what your vision of Premier is in the future? And how you think about the ability to continue to support your customers, support shareholders, all these pieces coming together in -- I'm not trying to get you too far ahead of a detailed strategic vision, but just what you're bringing to the role and the pieces that you want to make sure that you're focusing on and really letting shine for Premier to make sure that it's optimizing its value for all the various different stakeholders?
Thank you for the question, Michael. So a couple of things. First of all, as I said earlier, I'm incredibly humbled and I'm incredibly excited. I think the team's done an amazing job of building some incredible building blocks for the future of this business. Having said all that, Michael, I'm a sort of a technologist by background. I think you're going to see us lean more towards the technology enablement of stuff that we've been kind of dragging down the path on. I think IDS, obviously, had our fingerprints all over it. I mean that's something we've been looking at for the last couple of years, but it is something we think is really critical in terms of driving more efficiency. But as you think about the vision going forward, technology enablement and supply chain, I think you're going to see us have a very, very significant focus on that. Vertical integration of the supply chain, that's something that I've been a big proponent of. And I think we need to really make sure our health systems have access to those products. The whole focus on Remitra, that whole -- that's attracting. We think there's a number of services that we can build off on top of that, that not only can help drive efficiencies to our health systems but also drive efficiencies to the suppliers, but then there's also value that can be monetized on behalf of the health systems that participate in the program. So that whole Remitra e-invoice and e-payables, I think, is a big opportunity for us. Contigo Health, that focus towards allowing or helping or supporting our health care systems and their interest to be tighter with employers, I think that's, again, another huge opportunity for us to understand from a payer's mentality, the folks that are actually paying for the service, what is it that they expect from health care, from clinicians? And we want to drive that into just about everything that we think about, from the way that we deploy capital, to the way that we provide our collaboratives, to the way that we provide our advisory services, and to the way we build our technologies. So I think having those services is a big opportunity for us as well. And the last thing is life sciences. I think our technology knows itself incredibly well to identifying patients for trials, which is a big issue as pharmaceutical companies are thinking about developing new therapies and watching those therapies in the real world.
Awesome. Well, we are out of time, I see a whole bunch of zeros on my screen. So Mike, Craig, as always, thank you for joining us and giving us an update on the company. And for everyone on the line, thank you very much for being here today.
Michael, thanks for having us.
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