Arthur Baer’s short thesis on Premier Inc from the 2015 IRA Sohn Conference.
Company Overview
- Premier (PINC) is a healthcare services company operating two divisions: Supply Chain Services (Group Purchasing Organization or GPO) and Performance Services (Consulting and Software)
- Total Member base of 3,400 hospitals (2,100 are part of the GPO) and 110,000 alternate care sites
- 73% of Premier’s revenue and 97% of cash flow comes from the Supply Chain Services (GPO) division
- GPO economic model:
- Pre?negotiate contracts with healthcare supply vendors
- Charge the vendors a 1%?3% Admin Fee on products purchased by Premier GPO members through these contracts
- Premier then pays a portion of the Admin Fee back to its members in a Revenue Sharing program
- GPO’s are a fully evolved and competitive market:
- 96% of all acute care hospitals are in at least one GPO
- 72% of purchases that hospitals make are made using GPO contracts
Premier Inc: Short Thesis
- Premier’s accounting obfuscates the economic reality of its business by publishing misleading financial statements that omit significant expenses required for ongoing operations
- The omitted expenses are related to a change in economics and corporate structure with Premier’s members that took place at the time of the company’s IPO in Sept 2013
- These expenses, in the form of consideration paid to its own customers, represent 35% to 77% of the earnings power of the business (depending on methodology used) and are not reflected in the income statement
- Premier also has an undisclosed open and ongoing investigation with the Office of Inspector General (Health and Human Services) that was identified through a Freedom of Information Request and there is an undisclosed arrangement with a paid advisor to the Board
- Premier trades at a premium to its closest peer which based on the structural/regulatory risks and actual earnings power, it does not deserve
- After deducting the actual expenses needed for ongoing operations, there is significant downside and Premier is fairly valued at $14.50 / share, 62% lower than the current market price
Pre-IPO Corporate Structure
A Simple Structure, with no Outside Stakeholders…
- Premier was a partnership owned by its members
- Owner?Members did not receive any revenue share of the Admin Fees, but split the profits of the company based on their purchasing volume
- Non?Owner Members received a market rate Revenue Share of the Admin Fees which averaged 66%
- All profits were distributed to the Owner?Members and there would have been no profits available for public shareholders
- 77% of gross Admin Fees came from Owner?Members and 23% of gross Admin Fees came from Non?Owner Members
See full slides below.
