Premier, Inc. (PINC) Earnings Call Transcript

Thank you, everyone, for joining my last session of the day at the SVB Leerink Global Healthcare Conference. We have one of my top picks, Premier, both the CEO and CFO, Mike Alkire and Craig McKasson. Guys, thank you so much for joining.

Thank you, Stephanie, for having us, and thanks for us being one of your top picks.

Hey, you know what, it's always deserved. It's never anything I'm doing. I'm just calling market trends.

Thank you.

[Operator Instructions] Now Mike, we have had a year. You had this fireside chat with me last year. You had just been announced at that for the CEO seat. I didn't really know what was going to happen, and you presented this giant vision around tech enablement and adjacent markets and a data strategy. And I promptly wrote you off and made sure that I stayed at neutral. Now you've got a year under your belt. So where are we on that vision? And why do I have you as one of my top picks?

Yes. It's a great question. So first of all, I think, Stephanie, as we talked about last year, and as you know about myself and Premier, we're really focused on tech enablement. And I mean -- I think the difference between me and maybe my predecessor is that I grew up in computer science. I've had -- my whole career has been with systems integrators or technology enablement of strategies and those kinds of things. And obviously, that's just sort of my background. So the focus for us was really that evolution of technology into the business. And we've been doing that through obviously continuing to grow our Remitra capability within our e-invoicing and e-payables capability, which I think you know will absolutely differentiate our supply chain offerings, and that we're going to be able to look at all the spend, given that we can pull in all the invoice data of our health systems. And so that's on the supply chain side. On the Performance Services side, since we've talked last year, we rebranded our technology assets that are focused on our health care enterprises, and that's -- the rebrand is PINC AI. And just as a quick reminder to the investors on the call, PINC AI encompasses all of our technology and data assets that are related to safety and quality and labor in supply chain. We integrate those data sets and create insights from a performance improvement standpoint. And then as we think about how do we take that to the next level, we build out algorithms then using AI and machine learning into Epic and Athena and Cerner, right? So that when you drive performance improvement, you can literally get that embedded into the -- those EMRs. So that's really, really important. So that's PINC AI. And then we also talked about the expansion into those adjacent markets. So if you think about what we're doing in clinical decision support and we're expanding into HCC coding, right, like truly using natural language processing, natural language technology to help ensure that health systems are coding for procedures appropriately. We're also using that technology for prior authorization, and that is just think about utilizing high-cost implants and those kinds of things. And then finally, you saw a most recent win associated with our Contigo effort, and our Contigo effort, obviously, is our capabilities to help our health care systems work more closely with employers. And we just won a big deal at OhioHealth, OhioHealthy, which is the health plan for OhioHealth, and we're doing the TPA capabilities. So that Contigo Health company has continued to grow and build out more capability to support our health systems as they're contemplating movement into working more closely with employers.

OhioHealth, going back to your hometown.

There you go. Going back to the home state.

There it is. Now what is left? You had this grand vision. I can't imagine 12 months was enough to finish it off. What whole -- what are your big plans, I guess, as we go into 2022?

Yes. So if you think -- the only other area I didn't mention was our life sciences practice, which is having a fantastic year, probably the fastest growth it's ever had. It's continuing to move out of just being a data provider to pharma and the medical device companies to doing more real-world evidence studies. So that's really all about the study of how effective those products are being and the evidence that supports it. And then migrating that even further into identifying patients for trials. And we think that's very, very unique to us. So we can look at lab values and screens and patient characteristics to identify whether or not somebody would be a good candidate for a trial. And we always want to make sure we're teeing up those options at -- in a real-time manner for those patients and those physicians to have that conversation. So we think that, that's going to be something that's going to do really, really well in the future, and we want to continue to evolve those capabilities in support of that. In Contigo Health, we want to continue to build on our network, right? So we want to continue to add capabilities to help the employers not only leverage centers of excellence on a national level, but to drive that to regional levels. We want to make sure that as they think about leveraging a high-value network of care across the country, especially for a national employer, that we have consistency in the way that care is being provided, not only from the acute, but the nonacute. So we want to continue to build out capabilities from that. And then as it relates to our -- sort of our clinical decision support, today, we've been really focused on high-cost images. We want to continue to go down that path and look at other diagnostics as well as pharmaceuticals for appropriateness of use and then really making sure that the clinical outcomes are really tied back to the utilization of those additional therapies.

You talked about the pharma business, and that is like a very big theme that we've been seeing throughout today. I think every -- yes, now every company that I talked to you today brought up some component of targeted pharma IT wallet. But a lot of them also brought M&A as a pretty big component of that because it's difficult to build in-house. How should we think about your build-out of the pharma side of the business? Are there any deals or assets you would need to do that?

Yes. Well, we're going to constantly look for additional capabilities, right? I think we're in the -- where we sit today with pressures on the labor market, we want to continue to build out algorithms that support our capabilities on real-world evidence, continue to build out algorithms that support identification of patients for trials. So both of those are going to be obviously areas that we're going to want to make investments, partnerships, joint ventures and those kinds of things. And then the other area is going to be, obviously, go-to-market stuff, right? So we've got a very, very strong, very, very focused group of experts that work with pharma every day. And I'd love to see us, again, continue to expand our market presence there and our go-to-market capability.

I have a bunch of questions about your recent quarter. It was only 2 weeks ago. I feel like I have to go off script here for a second because you talked a lot about PINC AI. I was at a conference recently, and almost every single conversation I had did bring up not only Premier's data, but that you guys have been keeping at a certain price point and you haven't really been discounted from that price point. So you kind of -- you know the worth of what you're selling and you must be getting enough inbounds that you're not really willing to be that flexible on the pricing side of things. Where did this come from? Like I said, we've heard about the data asset at Premier for years, but I've only recently actually heard about people demanding it.

It's really, really interesting. As you said, we have some incredible data sets, obviously, working with our health care systems to help them improve their quality. We have data sets to help them, especially now with labor issues, how to appropriately utilize that labor. And then obviously, we're pulling that data and information in from a safety standpoint, very similarly. As our health systems are recovering from COVID, it's going to get all the way -- there's always been a focus on safety, but we want to continue to make sure we've got the algorithms and capabilities to help them do that. So we've always had some great data assets and then, of course, you know everything we're doing in the supply chain. But I will tell you, it's the utilization of that data that I think is actually provoking more thought about how to use that data differently. So the better we get at using AI, machine learning, natural language processing and pulling that data into those machine learning algorithms and those kinds of things, I think that will -- they'll build that symbiotic bond of creating faster execution around driving more of those use cases and then pulling in the need for more of that data to build out more of those use cases. So I would actually argue that the reason I think our data has been so talked about over the last, really, couple of years is just how we're using differently today than what we've done in the past.

Yes, and the one thing I would quickly add to that -- I'm sorry, Stephanie, but just quickly to add to that.

No, no, no, continue.

I think the pandemic and now the staffing challenges that are in the industry have really forced health care providers to need to look for different ways to create more efficiency and not have as much manual process that they've historically employed in their institutions. And so our ability to leverage aggregate data and find those best practices and find ways to automate historically manual things is much more of a need today than it was in the past. And I think that's going to sustain and persist into the future.

Well -- and Stephanie, if I could, if you don't mind us to spend a little bit of time here. Because of this tight labor market and as Craig said, we're moving from more manual interventions to try to do more automated, so think of prior authorization, right, where you've used hordes of resources in the past to do that manual effort. HCC coding, to the degree that you can automate that, can you free up clinical labor then to go work with patients and those kinds of things? But also, we're utilizing labor to ensure that people are practicing at the top end of their license, right? So making sure that we're putting the right people in the right spot. And we have a bunch of algorithms and best practices to support the health systems in doing that.

All right. Flip side of this because we're all talking about hospitals having demand for this data. I'm getting demand for this data from health tech players, other vendors that kind of want that specific utilization data you have. So how did that come about? Why did that come about? Why is your data that different?

I think it's the depth of our data, quite frankly. We have administrative data. We have, again, the labor data. We have safety data, real-time data that comes out of -- both coming out of the laboratory system as well as the safety systems of our health systems. So I think that, again, it's us presenting that data in a more consumable way, right, where it's integrated across multiple silos that I believe that is the -- that's driving the interest. But I'll tell you, we talked a little bit about Qventus at -- on our last earnings call, and that's a really interesting partnership as well in that they've got a lot of capability. They've got some pretty cool use cases. And we think by leveraging some of their capability with our capability, we're going to be able to drive to the market much quicker with various use cases using AI and ML and advanced technologies.

Do you ever move to a lower price point versus these products for selling it to maybe health tech peers or peers outside of the traditional hospital system side of the world?

Everything we do -- and I'll answer your question, but I want you to hear this just very quickly. Everything we do is value-based, right? So we want to make sure that our health systems are getting the appropriate ROI and those kinds of things. So we're constantly not -- we just don't sell a product and then leave it. We're going back on a monthly, quarterly basis and ensuring that there's the health systems. And by the way, I keep saying health systems, I should -- that means hospitals and their nonacute facilities. It really means both acute and nonacute.

Provider catchall.

Exactly. So are getting value for it. So -- anyway, so we really sell by value. But would we be interested in selling our data? We'd have to be really, really careful and establish the appropriate BAAs. There are certain areas that the folks that provide us the data want tech -- the data to be leveraged. And think about it, it would be in areas that actually could help them drive efficiency, actually create therapies or medical devices that improve outcomes, those kinds of things that are very, very patient-centric, that I think those are the areas that we'll want to continue to look at expanding in.

Let's pivot a bit to some of your recent earnings just because I've gotten a lot of pushback on it. When I made you guys one of my topics, I talked about a flight to quality. And I said, "Well, that is having derisked quarters." I had 1 million people e-mail me and say, "Derisked quarters, doesn't Premier miss every quarter on performance services?" How would you clap back to that?

I'm happy to -- go ahead. I'm sorry. I'm happy to respond. I would say that we had some challenges in times quarters and quarters ago, where given the dynamics in the marketplace. But we've been a very consistent performer and Performance Services for a number of quarters. I think the one thing we have talked about, that's hard to predict perfectly at times is when some of our enterprise analytics agreements are going to hit given the nature of those agreements. So we did have one that slipped in Q1. We talked about the fact that it was on track to come in Q2, it did. We had a very significant performance in the second quarter in that part of our business that made up for that in the first quarter. And so I wouldn't say that we've been missing in Performance Services for quite some time.

You've actually -- I mean, you guys have been beating for, what, the past 6 quarters or so.

That's right.

So that's like important to highlight because it's almost like a bad misperception that doesn't really hold true for over 1.5 years now. You do have a lot of decel baked in from your first half to your second half though, if we look at the guidance on the supply chain side. Is there anything to call out there just given the recent pace of outperformance you have had?

Sure. Thanks. We are really proud of the performance in the first half of the year, first of all, very strong recovery from COVID. I think 2 things that are affecting the second half of the year on the Supply Chain Services side of our business are direct sourcing, continuing at our contract manufacturing of commodity products, continuing to normalize postpandemic. So we had a lot of excess and outsized demand in the prior year as a result of people building stockpiles and just higher demand as people were treating all the COVID patients and learning how to deal with that from a PPE standpoint, et cetera. So that's continuing to come down. We've been very transparent about those expectations for quite some time. That will continue through the back half of the year. And then the other piece is on our GPO business, and we've been very transparent about this as well, but we went through a very large restructuring that was very successful in fiscal 2021. Over 90% of our members agreed to restructure their agreements in the long-term, 5-, 6-, 7-year contracts at that time in advance of when their current existing contracts were going to terminate. There was a small subset that, for various reasons, leadership changes, potential M&A, other things they might have been doing, elected not to renew at that time. So their historical contracts ran through the first quarter of our fiscal 2022. And then at that time, many of them actually renewed. And so the new economics associated with their agreements have come into place now, but it does have a different pricing construct than what was in existence in the historical agreement, just as we had done the year prior with all of the other members that agreed. And candidly, and we've said this, we did have some health systems that did an evaluation and elected to go partner with another organization. That happens. We're proud of our 98% retention that we have as a business, but we lost a couple of customers. And so as they've departed and wound down, the impact of that will be affecting us in the back half of the year as well.

Okay. Let me poke some holes in this one. So we talked about the product revenues going down. Those are like low-calorie revenues, right? They don't really have a lot of dollar contribution to your margin, correct?