Premier Inc. (NASDAQ:PINC)

Transcription

1 Premier Inc. (NASDAQ:PINC) Recommendation: Long Aneesh Chona, Karthik Bolisetty, & Satya Yerrabolu WITG Healthcare Investing Team April 26, 2015

2 Thesis Premier s unique business model and growth opportunities in the healthcare IT space, and its undervaluation stemming from low expectations of GPO and specialty pharmacy growth, offer an attractive investment opportunity for value appreciation 1. PINC is well-positioned to be a first mover in dominating the GPO and specialty pharmacy markets given its large membership base and ability to operate in many segments of the market 2. PINC unique business model, high amount of cash, and heavy acquisitions makes the company ideal to outcompete other companies in the industry 3. Low expectations of future GPO growth and disregarding specialty pharmacy opportunities leads to an undervaluation of PINC 2

3 General Overview Premier s Foci 3

4 $41.00 Stock Price Chart $39.00 $37.00 $35.00 $33.00 Meddius, Inc. Acquisition Released PremierConnect Supply Chain $31.00 $29.00 MEMdata, LLC Acquisition TheraDoc Acquisition Aperek Acquisition S2S Global Acquisition $27.00 $25.00 IPO (9/26/2013): $760 million with 28.2 million shares, priced at $27 4

5 Industry Overview The Healthcare Informatics industry is characterized by many fragmented companies each specializing in a primary segment. Overall industry growth is being heavily driven by recent policy changes in the United States, the widespread emergence of big data. PINC operates in all of the critical segments of the industry. Quality Companies that specialize in this segment provide applications to track and analyze patient outcomes and provider effectiveness so as to make operational recommendations to hospitals. Examples include Truven Health, FlatIron, and most recently IBM. Operations Companies in this segment focus on providing software solutions that optimize supply chain management and labor utilization, helping the hospital make the most cost effective purchasing decisions. Within this segment, GPOs and specialty pharmacy management are becoming increasingly lucrative. Examples include Oracle and McKesson. Financial Companies in this segment provide hospitals revenue cycle management analytics, claims analytics, and risk management services. Prominent players are AllScripts and Navigant. 5

6 Premier s Position in the Healthcare IT Ecosystem 6

7 Uniquely Placed to Address Industry Needs 7

8 Products & Revenue Streams PINC has six key revenue streams: supply chain, quality, safety, labor, population management, and pharmacy. Ø Suite of products that aim to reduce supply chain costs Ø QualityAdvisor: Evidence-based treatment recommendations Ø PhysicianFocus Hospital: Outcomes and cost data Ø Quality Measures Reporter: Analyzes core measures for compliance and reimbursement Ø LaborAdvisor: Suite of labor management applications to measure productivity Ø SafetyAdvisor: Automates identification of patients at risk for harm Ø PopulationFocus: Tracks provider performance Ø CareFocus: At home patient monitoring Ø Premier Pro Rx: Access to negotiated rates Ø Pharmacy Data Analytics: Evidence-based purchasing decisions 8

9 GPO Structure Ø Healthcare providers join an organization for better negotiating power Ø When providers buy a product via the GPO which is usually at favorable prices, a portion of the vendor profit lows to GPOs Ø GPOs save the US health care industry over $36B annually and working without a GPO, hospitals would need to spend approximately $800,000 more annually To give an example, it s one thing for a GPO to be able to reduce prices by 1 or 2%, but it s quite another to drive the price point to zero. However, in many cases, that s what we are able to do. Michael Alkire, COO Source: Healthcare Supply Chain Association 9

10 Industry Analysis: Porter s Five Forces Threat of new entrants: Very high Low barriers to entry with software. PINC still has a relative advantage given it already has a wide quite of solutions Bargaining power of suppliers: Relatively low All property is proprietary Threat of substitutes: Very high Currently, many products in the industry PINC still has an advantage, because its wide variety of solutions Bargaining power of buyers: Relatively low Obamacare places restraints on spending and performance in the Healthcare industry Rivalry among existing competitors: Relatively low Few existing firms attempting to do anything similar to Premier first mover advantage Premier s industry position is both favorable and stable. 10

11 Competitors $20.53 (per Share) $26.67 (per Share) $35.84 (per Share) MedAssets Market Cap: $1.2B EV/EBITDA: 9.80 Inovalon Holdings Market Cap: $3.9B EV/EBITDA: Omnicell Market Cap: $1.3B EV/EBITDA: Premier s Metrics Market Cap: $5.47B EV/EBITDA: $38.00 (per Share) 11

12 Management 12

13 Up-C Corporate Structure Member Owners Premier Trust Public Stockholders Premier, Inc. (Delaware Corp) Class A Common Stock Class B Common Stock Premier Services, LLC (Delaware LLC) General Partner designation and holder of Premier LP Class A common units 13

14 Reason for Undervaluation Using sell side research as a proxy for market consensus, investors are currently not pricing in future growth opportunities in the GPO market. We believe this is a mistake given that PINC has already acquired a huge membership base and can leverage this to expand into the given spaces. The market in evaluating PINC almost never mentions specialty pharmacy nor evaluates it as a solid growth opportunity. Given massive growth and projected future growth, this should almost certainly be priced in. The market does not understand Premier s corporate structure, partially a symptom of the fact that many investors do not either. This is critical because the market is arguing that competitors will enter the industry and steal share for PINC. However, given their structure, current competitors are not a threat because they can not use this structure as they already have IPO d, and competitors in the future that may replicate the structure will be too late given PINC s first mover advantage. 14

15 Catalysts Expansion into GPO & Specialty Pharmacy Markets Investors are currently not pricing in future growth opportunities in the GPO market, and never even mention specialty pharmacies. We believe this is a mistake given that PINC has already acquired a huge membership base and can leverage this to expand into the given spaces. Increasing Need to Trim Costs As the US transitions out of the fee-forservice world, Premier s population health, quality, and safety analytics products will become increasingly relevant. In fact, while likelihood to use these services is only at about 10-20%, it is expected to rise to over 50% by 2017 Up-C Corporate Structure Premier s corporate structure is somewhat unique in that most of its customers are also significant shareholders of the firm, significantly de-risking the firm s revenue streams. This is also a model that often is not mentioned in sell side research reports but upon more recognition can lead to a rise in value 15

16 Value Driver: Specialty Pharmacy Expansion Ø PINC s significant investments in building out its specialty pharmacy solutions are poised to generate upside as this niche industry grows Ø Specialty pharmacies are pharmacies that deal primarily in the administration of specialty drugs (primarily biologics such as monoclonal antibodies, therapeutic proteins, and endothelial growth factors) that require complex, attentive patient management, making them particularly attractive targets for big data solutions Ø Specialty drug market is projected to have a CAGR of 10.1% from 2014 to Ø Specialty pharmacy growth has exploded à from 0 to 100 by the beginning of 2015, with ~150 projected to open by the end of this year Ø Increased demand for PINC s services among these firms due to their high profitability, with the top grossing specialty pharmacies in 2015 averaging >$1 million in revenue per employee and annual revenue growth of 51%. 16

17 Value Driver: GPO Market Expansion Ø PINC is currently the number one ranked ACO, which signals to future members that they successfully cut costs which providers and hospitals will increasingly need going forward Ø PINC already serves approximately 53% of hospitals and currently has about 21% of the GPO market Ø Despite potential competition, GPOs do not necessarily function as a zero-sum game as hospitals can be members of multiple GPOs. Therefore, given its unique suite of applications and connection with half of the hospital market, PINC is ripe to take over the GPO market Ø Followed expansion in hospitals from direct sourcing activities to forecast growth rates 17

18 Public Value Driver: Up-C Structure During IPO $$$ $$$ Class A Shares Premier, Inc Assets bought for higher than book value, creating a loss Share Exchange Claim on Assets Claim on Assets Premier Services LLC Public Public $$$ Class A Shares Premier Services LLC Class B Shares Class A Shares Premier, Inc Original owners get liquidity by selling to the public; incentive for high share price Class A at market value exchanged for Class B at IPO value, creating a loss 18

19 Valuation Overview Bear Case Base Case Bull Case 19

20 Revenue Projection Model Revenue was projected by PINC s two main segments. Supply chain consisted of GPO s, Specialty Pharmacies, and Direct Sourcing. GPO revenue was modeled by taking the total market at the projected CAGR and growing PINC s market share via an S-curve. Direct sourcing was modeled assuming revenue/hospital stayed constant and number of hospitals grew in proportion to GPO contracts. Specialty pharmacy and performance were grown at CAGR s given limited information. 20

21 Revenue Projection Model Growth Assumptions USD Millions Our Model Consensus Revenue 2015 $ $ $ $ $ $ Modeled revenue even with conservative assumptions reveal market is not properly pricing in future growth opportunities and revenue potential 21

22 Valuation Drivers Ø Gross margins are currently high at near 70%, so assumed margins would be slightly below this and continually decrease going forward given increasing penetration of the market Ø SG&A is at the high end at about 32%. Management projects it will decrease going forward but raised it to be conservative and fit with our specialty pharmacy driver Ø R&D was high in the past but has tapered down to 0.4%. Most of R&D is complete at this point as PINC is ready to expand, so kept constant going forward Ø CapEx is currently around 5-6% and will likely grow given PINC is looking to expand. Despite management explaining it will decrease, kept it marginally increasing for conservatism Ø PINC s current effective tax rate is 7.7% due to giving its members a stake in the company, which is tax deductible. While we expect this unique model to continue, built in a higher tax rate in anticipation of other segments that do not operate in this way also growing Ø Adjustments were also made to balance sheet items, such as cash, to further fit in line with our projections 22

23 Summary of Valuation 23

24 WACC Calculation Sensitivity Analysis ü Using PINC s beta instead of the industry beta generates a WACC WACC 6.30% 6.50% 6.70% 6.90% 7.10% 7.30% 7.50% Base Case 71.80% 64.10% 57.00% 49.50% 44.60% 39.10% 34.00% ü ü of 5.8% and a ROI in the base case of 97% Chose to stick with industry beta approach to minimize error and be conservative Industry average is ~7.08%, so calculation is in line with industry 24

25 Target Price Bear Case Base Case Bull Case 25

26 Healthcare IT Bubble Risk: Many investors are uncertain regarding the industry as a whole, fearing the collapse of a presumed bubble Mitigant: Unique business model and 70% of current assets are cash secure PINC s holding in the market, enabling it to withstand adverse industry shocks. If anything, the market will recognize PINC s advantage if this occurs, making it a solid investment Diminished GPO Market Share Risk: Competition is fierce and PINC might not capture enough of the GPO Market share Mitigant: Heavy M&A, first mover advantage, and large consumer base allow Premier to capture this despite competition. Even if they do not gain GPO share, diversity across many segments allow PINC to hedge against this Risks Specialty Pharmacies Do Not Take Off Risk: Specialty Pharmacies do not take off as we are predicting in our valuation Mitigant: While this is very unlikely given specialty pharmacies are expected to make up to 50% of drug costs by 2016, even without this growth if PINC continues operating as it is now it will still be in a ripe position for growth or at the very minimum, not fall in value Affordable Care Act Risk: Future impacts are relatively uncertain, which management has stated may create some volatility for the company Mitigant: If anything, the ACA is what gives PINC growth potential as hospitals increasingly have to focus on cost, patient compliance, and general data analytics to optimize their services given the many changes, such as with insurance 26

27 Questions? 27