Premier, Inc.
Q3 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Good morning, my name is Dexter and I'll be your conference operator today. At this time, I would like to welcome everyone to the Premier Inc. Fiscal Year 2021 Third Quarter Results and Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. As a reminder, this conference is being recorded. Ms. Angie McCabe, you may begin the conference.

[Angie McCabe:]

Thank you, Dexter. Welcome to Premier's fiscal 2021 third quarter conference call. Our speakers this morning are Mike Alkire, our President and CEO; and Craig McKasson, our Chief Administrative and Financial Officer. Before we get started, I want to remind everyone that our earnings release and the supplemental slides accompanying this conference call are available in the Investor Relations section of our website at investors.premierinc.com.

[Mike Alkire:]

Thanks, Angie. Good morning, everyone and thank you for joining us today for a discussion of our fiscal 2021 third quarter results, outlook for the remainder of this fiscal year and preliminary thoughts on fiscal 2022. Before we get started, let me say that I'm honored and humbled to have been chosen by our board to lead Premier as we continue on our strategic journey to transform healthcare together with our members. I want to thank Susan for her leadership and her role in shaping Premier into the company it is today, an industry-leading healthcare solutions company, with an extensive provider network and artificial intelligence enabled technology platform that helps our members and other customers to deliver and provide access to higher quality, more cost effective healthcare. Susan and I continue to work closely to ensure a smooth transition, and I look forward to her continued insights and perspectives for Premier as she takes on her advisory role. Turning to some highlights for the third quarter. We are pleased with our results which exceeded our expectations and reflect another quarter of strong fundamental performance. Compared with the third quarter of fiscal 2020, consolidated net revenue grew 40%, supply chain services segment net revenue increased 56%, and performance services segment net revenue grew 3%. As we expected, adjusted EBITDA and adjusted earnings per share declined year-over-year primarily due to the amended and extended GPO agreements that were executed in August 2020. We also announced this morning that we are increasing our fiscal 2021 guidance ranges. We currently expect consolidated net revenue to be in the range of $1.671 billion for $1.711 billion. Adjusted EBITDA to be in the range of $460 million to $475 million, and adjusted EPS to be in the range of $2.42 to $2.51. Craig will discuss our financial results and updated guidance in his remarks.

[Craig McKasson:]

Thanks, Mike. I'll begin with a brief discussion of our fiscal 2021 third quarter results and provide details regarding our updated financial guidance for the remainder of fiscal 2021. We are pleased with our strong performance in the quarter, and we're excited about the opportunities ahead of us. While we are still developing our fiscal 2022 plan, I will also provide you with our preliminary thoughts for next fiscal year. For the third quarter of 2021, consolidated net revenue of $469.9 million increased 40% from the year ago quarter. Supply chain services segment revenue of $371.2 million increased 56% compared with the prior year quarter, and performance services segment revenue of $98.7 million increased 3% compared with the prior year quarter. In supply chain services, net administrative fees revenue decreased compared with the prior year quarter, primarily due to

[Operator:]

Thank you, Mr. Craig. Your first question comes from the line of Samuel from JP Morgan. Your line is open.

[Unidentified Analyst:]

Thanks so much for all the color and congrats on the great quarter. I was hoping maybe you could provide a little bit more on the increased focus on value-based care? What's the appetite looking like with your customer base to align with that and what incrementally are you seeing out there in the marketplace?

[Mike Alkire:]

Yes, this is Mike. So, it's interesting. So with the new Biden administration, it's a little too early to tell, but obviously, we're really encouraged by the commentary and the actions that are coming out of DC. And as you know, we've positioned the business to be a bit more agnostic where we're not so reliant on value-based care. But the net of everything is, it's a little early to tell but I think the signs are positively pointing towards more value-based care.

[Unidentified Analyst:]

Very helpful, thank you.

[Mike Alkire:]

Thank you.

[Operator:]

Your next question comes from the line of Jailendra Singh from Credit Suisse. Your line is open.

[Jailendra Singh:]

Yes. Thank you and good morning and congrats on good quarter. I wanted to get some color around community healthcare system partners contract when you announced a few days back -- few weeks back. My understanding is it was a win from Intellia GPO. Just wondering if it was the fallout from the acquisition of Intellia , and if you're seeing or you're expecting some additional opportunities from -- emerging from that combination?

[Mike Alkire:]

Yes. I think Jailendra, you're referring to community health. So, just as a quick reminder, that was -- it was a broad-based win for Premier where I think our -- obviously our GPO and our pricing played a significant role in us winning that opportunity, as well as our the future and what we've actually been implementing from a technology standpoint to really get after all of the costs in the supply chain to include purchase services and some of the areas that we -- you know, that GPO don't historically focus on. But I think it was a win that really highlighted the differentiation that Premier has.

[Jailendra Singh:]

Okay. And then, last comment Craig just made about this headwind you see in fiscal '22 about some contracts which were not negotiated for fee sharing previously. Can you quantify the impact, how much is that? And with that, will you be done with all the contracts coming in the high-40%, low-40% fee sharing arrangement? Just give us some more color there.

[Craig McKasson:]

Sure, this is Craig. I'll start, and then Mike can add any color. As we talked about, when we did the restructuring in August of 2020, the vast majority of our members agreed to the amended and extended GPO agreements but we did have a subset that we're continuing or already in sort of an evaluation process, they continued under the existing contract that we had in place prior to the restructuring for this fiscal year. And so we've been working with them, the majority of them will have new agreements in place moving forward, there have been a very small subset that have through the process made a determination to partner with a different organization due to leadership change or merger acquisition. But we're not at a point actually to specifically quantify the magnitude but it will have an impact on our growth next year and cause that fee share to move within the original range but from the high 40's to the low 50's.

[Mike Alkire:]

Yes, Craig. The only thing I'll add is that we are very disciplined about the economics that we provide to customers, and there are times when from a business standpoint, it does not make sense to continue the partnership. So we will walk away if in fact we're not getting the economics that makes sense for our business.

[Jailendra Singh:]

Okay, thanks guys.

[Operator:]

Your next question comes from the line of Ryan Daniels from William Blair. Your line is open.

[Jared Haase:]

Hey, good morning. This is Jared Haase in for Ryan. Mike, I wanted to circle back to one of the points that you've talked about in the prepared remarks; just around some of the market adjacencies that you're looking to expand into. And I know we've talked a good deal about the employer in the life sciences; I think those are good themes in the last couple of quarters. So, I was hoping maybe we could spend a little bit more time around the payer segment that you mentioned. Just curious if you could talk a little bit further about kind of where you see Premier sitting from a value proposition perspective for that channel? I know you talked a little bit about prior authorization; so maybe there is some value-add on that front. But just curious if you could talk about any areas where you see Premier adding value in any specific investments or product areas that you think Premier can add to further penetrate that adjacent market?

[Mike Alkire:]

Sure. Thanks for the question. So from a payer perspective, I think there's two areas that -- and you mentioned one of them, that I think are technology and our data and our network lends themselves well to providing valuable services too. So first, we believe that in the prior authorization space as you suggested, using our natural language technology to literally embed things into the workflow or insights into the workflow is something that payers are going to be very supportive of. And I think you're aware that one of the initiatives that we're currently working on is for Medicare, which is all about PAMA which is the focus on looking at ways to reduce high cost imaging. So just think of the potential extension of high cost imaging and other diagnostics into the payer market. So, I think that's number one. Number two; we have a number of our health care systems that actually have health plans. So from that standpoint, many of them are very, very interested in linking into our Contigo Health initiative. As I think about how do they create a more meaningful capable health plan to their communities and create or leverage wrappers for -- when their health plan participants need services outside of their current geographic arena. So, I think in two ways; one, prior often, and then, obviously leveraging our Contigo Health offering.

[Jared Haase:]

Got it. That makes sense. And thanks for that. And then, maybe just a quick follow-up; and I think this is maybe more for Craig. Could you just talk a little bit to what extent your sales and implementations and business development activities kind of remain split between sort of virtual or remote or in person? I'm just trying to get a sense of what kind of normalized OpEx might look like? And to what extent that might also be impacting the commentary that you shared regarding fiscal 2022 profitability.

[Craig McKasson:]

Sure, I'll start and then again, Mike can add color as well. From a standpoint of virtual versus on-site, we certainly have some of our advisory services and our field force that have begun to go back on-site to our facilities but continue to do a fair amount in a virtual capacity as well, and I think the go-forward business will not -- will be a mix of that on a prospective basis, I would expect. I would say that as we look to next year, we do expect to see some incremental OpEx as continued travel starts to pick back up, as we do begin to reconvene with our members in person, which we have -- in aggregate, which we have done virtually this year. So, certainly that is an impact on our fiscal 2022 performance as we return to normal. But overall, continue to begin to be more on-site with our members, but we'll also leverage the opportunity for virtual enhancement that I think has been learned across the industry through the pandemic.

[Jared Haase:]

Okay, great. That makes sense. And thanks, and congrats on the quarter.

[Craig McKasson:]

Thank you.

[Mike Alkire:]

Thank you.

[Operator:]

We have a question from Richard Close from Canaccord Genuity. Your line is open.

[Richard Close:]

Great, thanks. Congratulations on the quarter. Mike, I was curious if you could expand a little on your comment that you need to be creative in your approach to increasing value of the portfolio assets. Is there anything specific that you can add to that or just like where you're coming from in terms of that statement?

[Mike Alkire:]

Yes. First of all, we've been doing a lot of it over the last couple of years where we are looking for partners and others to really help extend our capabilities. So if you think about our future going forward and as we are continuing to evolve into new markets, we are going to be looking for partners to literally help us expand in those markets, either quicker or with more scale; so think of -- maybe organizations within life sciences that have strong ability from a channel standpoint or think of organizations that can marry data that they have, maybe from a claim standpoint with some of our clinical as well as our operational data. So, think of -- also maybe in the prior areas that -- we're looking also for partners that have clinical protocols that we can embed into some of our machine learning and natural language technology. So those are -- those would just be a couple of examples.

[Richard Close:]

Okay. And then, as we think about acquisitions and new product development, is there any sort of guide post you can provide us in terms of how much is like focused in on the core business versus the new adjacent markets?

[Craig McKasson:]

Sure, Richard. This is Craig. I don't know that we'd say we have a specific earmark; broadly, I think we will always look for capabilities to enhance our core technology capabilities on the supply chain side, things that we can do to further cement the technology evolution of our supply chain services and drive additional contract penetration and access to product suites, etcetera. On the performance services side, I think relative to the core provider component of the business, we'll continue to look for ways to improve and enhance the data across the entire continuum of care. But we will also focus on opportunities to extend, and as Mike just talked about, look for those partnerships or potential M&A targets to further enhance our growth opportunities in the life sciences payer and employer markets, although those do tied very directly to our kind of core capabilities and improving provider performance.

[Richard Close:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Jessica Tassan from Piper Sandler. Your line is open.

[Jessica Tassan:]

Hi, thanks for taking my question. This is Jeff on for Sean. And, I think we're just interested, if you could remind us what the net admin fee impact of the Acurity and Nexera transactions was that we are lapping in February of 2021? And then, just any other P&L impact of those transactions that we should be aware but we left them ?

[Craig McKasson:]

Sure. So from a standpoint of the Acurity and Nexera acquisition, we've disclosed the fact that prior to our acquisition of that business they had entered into some agreements with a prepaid administrative fee that we were required to report from a GAAP standpoint in that way; that's about $20 million a year. So we've been having the impact of that amortization of about $5 million per quarter in non-cash amortization, that now that we're a year past should be lapped in terms of that impact as we move forward. And then, again, they had entered into five-year agreements with the vast majority of their members prior to the acquisition; so we're in place with them moving forward. And then for the rest of our business, the majority of our members entered into five, six and seven-year contracts at the increased fee share that we've previously disclosed, we had talked about $100 million to $110 million or so impact to our fiscal 2021 results that as we move into fiscal 2022 we will be beyond, although we do have the small minority of numbers that I talked about in my prepared remarks where either some of them will have incremental fee share as they've been operating under the historical 30% that all of our members had prior to the restructuring. And then, we have had a couple again that potentially will not or have made a decision to no longer remain with Premier as a result to be their executive changes within that healthcare system or due to merger and acquisition we had a couple that were acquired, as happens in a consolidation environment. But again, largest percentage of our members, 96% agreed to the amended and extended GPO agreements moving forward.

[Jessica Tassan:]

Got it. And can I just follow-up and ask what drove some of the strength and performance services in the quarter? And should we expect that those are multi-month contracts that are kind of shorter term in nature? Any color would be helpful.

[Mike Alkire:]

Yes. In general, our Health Design Plus acquisition is obviously going well. We're continuing to see a lot of strong interest in our advisory services and our clinical decision support, and our life sciences business had a at a really solid quarter this quarter.

[Craig McKasson:]

And I think -- this is Craig, just a little bit of color. So with respect to the applied sciences growth, that's a combination of what we would call sort of short-term data projects where we actually deliver data and they delivered strong growth, and then kind of ongoing consulting projects; so it's really a mix of short-term and kind of more extended agreements. I will say we continue to have a very positive pipeline of new engagements and continue to see really strong growth in the applied sciences part of our business. As Mike mentioned in the performance improvement consulting arena; those are primarily engagements that are not one-time episodic, they tend to be consulting engagements to deliver -- perform margin improvement services over a period of time. And again, seeing really strong growth and performance in that part of the consulting practice. And so, just -- it's a blend of sort of as -- as is typical, kind of more short-term engagements to deliver revenue in the quarter, and then with extension beyond into the next quarter and beyond.

[Angie McCabe:]

Do we have any further questions?

[Operator:]

Okay. Your next question comes from the line of Iris Long from Berenberg. Your line is open.

[Iris Long:]

Hi, good morning. Thanks for taking my question. So, along the same line on life sciences; I'm just wondering if you can kind of speak about the opportunities there. So Mike, you mentioned in the remarks that you guys have clinical trial recruitment, maybe can you talk about that business a little bit? And then, also, can you kind of help us to understand what sort of competition like for your life sciences business?

[Mike Alkire:]

Sure. So, this is Mike. I'll start. So just as a reminder, our life sciences business obviously is focused for the most part towards the pharmaceutical industry but we do some things with the medical device area as well. I think our sweet spot really is all around real world evidence, so as new discoveries are being made, I think pharma and med device partners really like a warm test-bed, if you will, post-drug approval to see how therapies are actually reacting in the real world. Because we have a very, very strong network, because we have very, very strong data, that provides them insights into how to effectively leverage those therapies into the patient markets. So that's number one. Number two, and this is a sort of a recent trend; we're also beginning to work because -- work with life sciences company because we have the ability at the point-of-care to look at the unstructured data, to identify whether or not patients would be good for a specific drug trials. And so there is a lot of interest on behalf of pharma to understand the utilization of that technology and identify whether or not a patient has a good prospect of being a good candidate for a trial. So, we think that there is pretty significant upside from a drug-trial patient identification standpoint. As it relates to competitors, I think the very unique aspects or the very strong -- the strength of Premier is, basically the three items that Craig and I have been talking about really. It's our strong -- both, clinical and operational data; two, it's our technology, our ability to use natural language technology, natural language processing and embed information or glean information from the electronic medical record. And it's also our strong network that we have with our health systems, with it's ability truly to -- at a broad-based standpoint be able to look at real world studies and those kinds of things.

[Iris Long:]

Okay, great. And then my follow-up question is on performance services. So it sounds like the lower enterprise analytics licensing revenue, it's entirely due to timing; is that right? And then, maybe can you kind of talk about your bookings and maybe pipeline for the enterprise analytics solution?

[Craig McKasson:]

Sure, this is Craig. So, yes; whenever we enter into an enterprise analytics license agreement which we continue to really like because it furthers the sort of strategic alignment with the member and the long-term stickiness to that relationship. But the way the revenue recognition does work is that the majority -- a large portion of the contracted revenue gets recognized at the time of that engagement, and so there is a timing implication that's going to happen. We did have enterprise analytics license agreements in the current quarter, it's just not at the levels that we had had in the prior year quarter; so it did present a little bit of a headwind in Q3 but in prior quarters earlier in the year, we had strong growth from those. From a pipeline standpoint, there continues to be a pipeline for those engagements and relationships moving forward. It's just hard to predict Iris, exactly what quarter something may hit in terms of how that pipeline develops overtime.

[Iris Long:]

Okay, thanks.

[Operator:]

Next question, Bill Sutherland with Benchmark Company.

[Bill Sutherland:]

Thanks and good morning, everybody. In performance services with the addition -- with the growth and additions you've made in that portfolio of businesses; I wonder if you could give us a feel about for the mix of revenue between perpetual and SaaS, and also tech-enabled services?

[Craig McKasson:]

Sure, Bill. This is Craig. So we continue to have about 70% of the business today being technology-based which is a combination of both, the SaaS and the license-based revenue that we've discussed tied to enterprise analytics license agreements, and about 30% of our business is in the advisory services; either I'll say one-to-one margin improvement services that we provide or the collaboratives that we have which think of as one to many consulting where we're working on a collective issue such as bundled payment or some other aspect of value-based care that we continue to have in that portfolio as well.

[Bill Sutherland:]

And then, Craig, within the 70%, roughly what would be the split with perpetual and more SaaS like?

[Craig McKasson:]

Significant majority today continues to be SaaS-based revenue. But we have had a ramp up in enterprise analytics license agreements over the past year or so, so it has become more of a piece but the vast majority is still SaaS-based.

[Bill Sutherland:]

Okay. That's exactly what I was wondering. And then, finally, regarding stamps ; Mike did you say that the used case there with PAMA -- is that a needle mover in this next fiscal year? Should we think about it that way?

[Mike Alkire:]

I think it's all embedded in our forecast and our guidance.

[Bill Sutherland:]

For fiscal '22?

[Mike Alkire:]

Yes, right.

[Craig McKasson:]

Well, we haven't issued guidance for fiscal '22 yet but included in the mid to high single-digit revenue growth that we've contemplated, and said we intend to target for next year, that factors in some incremental contributions from that part -- that expansion of our business.

[Bill Sutherland:]

Okay. Thanks, everybody.

[Mike Alkire:]

Thank you.

[Operator:]

Next is Stephanie Davis with SVB Leerink. Your line is open.

[Stephanie Davis:]

Thank you for taking my questions, and congrats on the quarter. I wanted to follow-up on the real world evidence questions. Just given we're seeing a lot of different players with dataset start to enter the side of the universe, could you walk us through the competition dynamics? Is this something where a life sciences company would have still be one dataset or will it be kind of a co-op petition where multiple datasets can coexist in peace? So there is not much need to differentiate.

[Mike Alkire:]

Yes, couple of things. First of all, I said earlier in our remarks, that we've got some incredible datasets, right. So we have -- if you think about our clinical datasets, we have more than 1,000 hospitals that subscribe to our clinical datasets, about 1,000 hospitals in our safety. As you think about -- you just heard the clinical decision support and stance in health, we're in hundreds of hospitals where we're getting sort of real-time feedback and forth with Epic and Cerner and Athena. You think about our operational labor datasets, again, we have close to 1,000 hospitals that participate there. So we just think we've got a very, very strong capable dataset that's very, very unique in the industry. And now, most recently with some of the work that we've been doing with a couple of our members, we're now beginning to pull in claims data as well. So I think our history of integrating these datasets and creating meaningful insights out of these data sets are truly things that differentiate us. And then our ability truly to take those data and write them into the workflow in terms of the insights or to pull information out of that, the workflow or from the electronic medical record is a pretty significant differentiation for our capability and for life sciences.

[Stephanie Davis:]

And then, thinking about the used cases for having this robust dataset in a post-COVID world; is it more towards analytics? Is it more towards improving efficiencies, staffing modeling? What are you seeing the demand for it?

[Mike Alkire:]

Yes. So post -- thank you, it's a great question. So post-COVID for our health systems, it's all about getting back to normalcy. So obviously, as they are -- as COVID is in many cases is on the downward swing, they're trying to get as many elective procedures back up and running as quickly as possible. Many of our healthcare systems are coming to us and asking us to help them to create a more flexible corporate cost structures. Using our data and be a bit more dynamic with those cost structures and asking us to provide services and those kinds of things to augment them when they need help or to help them when they need to reduce costs. So I think, number one, from a healthcare system standpoint, it's really all about helping them get back to some form of normalcy. Life sciences, as Craig and I have both been talking about, I think that real world evidence is continuing to be a significant opportunity for us. Patient identification for drug-trial from those kinds of things also seem to be obviously a much -- the life sciences companies are very interested in that as well. And then, finally from a Contigo standpoint, these -- you have many of our large employer customers that have experienced some financial turmoil as a result of COVID and they're looking for ways to maximize the investment in healthcare for their employee ease. And so they're looking for our Contigo offering to sort of help them migrate through some of those scenarios to ensure that they can work more closely with our health systems and get the lowest cost, highest quality care possible.

[Stephanie Davis:]

Sounds like a good setup. Thank you, guys.

[Mike Alkire:]

Thank you.

[Operator:]

Next question is from Michael from Bank of America.

[Unidentified Analyst:]

This is Allen in for Mike. Thanks for taking the questions. Craig, I think you mentioned the direct sourcing business, some of the PPE, you expect to see a step down over the next couple of quarters. Can you talk about what you're hearing from clients and what you see is the demand curve looking like out of a couple of quarters?

[Craig McKasson:]

Sure. So, I think as I mentioned in my prepared remarks, demand certainly as COVID has become a bit more stabilized, is coming down; although I will say, it depends on kind of region and geography. I mean we are continuing to see sort of pretty significant wave in the upper Midwest, so in that part of the country we are continuing to see demand but in many other parts as you're well aware from everything you're seeing in the news, COVID cases are down dramatically. And I think that people have become far more effective at sort of managing that in an appropriate fashion. The other point that I highlighted that I think is important is that a lot of health systems have spent the past year ensuring they have appropriate stockpiles of critically needed PPE and other equipment so that they're not put into it similar predicament as happened a year ago when they were down to the hour in terms of some of that supply. And so we think that that's been built up, and we will get back to more of a normalized trend. So as I our articulated, we see a slight step down in Q4, $10 million to $20 million step down off of what we had in the third quarter. And then, do expect a pretty significant step down moving into fiscal 2022 from the levels that we're at at this point. We are still sort of working through the exact sequential impact of that over multiple quarters, and I think we'll have more color to that when we actually establish an issued guidance in August.

[Unidentified Analyst:]

Great, thank you.

[Operator:]

There are no further question at this time. I would like to turn the conference back to Mr. Mike Alkire.

[Mike Alkire:]

Thank you, Dexter. And thank you all again for joining our call this morning. I look forward to engaging with you in the weeks and months ahead, and sharing with you the progress we're making on achieving our goals.

[Operator:]

This concludes today's conference call. Thank you for joining. You may now disconnect.