Jim Storey - Head, Investor Relations Susan DeVore - President and Chief Executive Officer Mike Alkire - Chief Operating Officer Craig McKasson - Chief Financial Officer Keith Figlioli - Senior Vice President, Healthcare Informatics.

Ryan Daniels - William Blair Jamie Stockton - Wells Fargo Elizabeth Blake - Bank of America Merrill Lynch Lisa Gill - JPMorgan Donald Hooker - KeyBanc Michael Cherny - Evercore ISI Nicholas Jansen - Raymond James Sean Dodge - Jefferies Richard Close - Avondale Partners Sean Wieland - Piper Jaffray Gene Mannheimer - Topeka Capital Markets.

Good afternoon, and welcome to the Premier, Inc. Fiscal Year 2015 Third Quarter Results and Conference Call. At this time, all lines have been placed in a listen-only mode and the floor will be opened for questions following the presentation. [Operator Instructions] It is now my pleasure to introduce today’s host, Jim Storey. Please begin..

Thank you, operator and welcome everyone to Premier Inc.’s fiscal 2015 third quarter conference call. Our speakers today are Susan DeVore, President and Chief Executive Officer; Mike Alkire, Chief Operating Officer; and Craig McKasson, Chief Financial Officer.

Susan, Mike and Craig will review the quarter’s performance and discuss the outlook for the remainder of our fiscal year.

Before we get started, I wanted to remind everyone that copies of our press release and the supplemental slides accompanying this conference call are available in the Investor Relations section of our website at investors.premier.com.

Management’s remarks today contain certain forward-looking statements and actual results could differ materially from those discussed today. These forward-looking statements speak as of today and we undertake no obligation to update them.

Factors that might affect future results are discussed in our filings with the SEC, including our most recent Form 10-K and we encourage you to review these detailed Safe Harbor and risk factor disclosures.

Please also note that where appropriate, we will refer to non-GAAP financial measures such as adjusted EBITDA, segment adjusted EBITDA, adjusted fully distributed earnings per share and free cash flow to evaluate our business.

During this discussion, we will also be comparing current year-to-date results with last year’s results on a non-GAAP pro forma basis since our company has not completed its reorganization and IPO until after last year’s first quarter.

Comparisons made in accordance with GAAP do not reflect the impact of the reorganization and IPO and therefore management believes they do not provide meaningful year-over-year comparisons.

Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release, in the appendix of the supplemental slides accompanying this presentation and in our Form 8-K filing with the SEC, which we expect will be soon. Now, let me turn the call over to Susan DeVore..

Thanks, Jim and hello everyone.

I will start off with an overview of our fiscal third quarter performance and our expectations for the remainder of the year ending June 30, as well as provide comments on some important changes in the environment that we expect to positively impact our business over the long run, Mike will then discuss our ongoing operational achievements, and Craig will walk you through our third quarter financials and revised outlook in more detail.

Before we begin, I want to remind you that Premier was developed and it remains majority owned by healthcare provider systems. Our products and services are developed in close collaboration with our provider members.

And overall, we believe this provider-centric co-innovative alignment drives consistent and increasing demand for the solutions we develop and it positions Premier to deliver exceptional value and growth over the long run. Now, let’s review our strong third quarter financial performance.

Year-over-year consolidated net revenue increased by 16%, driven by 15% growth in supply chain services and a 19% gain in performance services. Consolidated adjusted EBITDA increased 14% and adjusted fully distributed earnings per share rose 13%.

Our supply chain services segment outperformed management’s expectations due both to a strong 9.1% year-over-year increase in net administrative fees revenue from our group purchasing organization and continuing momentum in our direct sourcing and specialty pharmacy businesses, which drove a 25% rise in product revenue.

Turning to performance services now, we increased revenue in that segment, 19% from a year ago. We also finished the quarter with solid bookings and a robust sales pipeline.

And looking at our overall business, we are on track to achieve a 99% retention rate in our GPO business and a 94% SaaS-based institutional renewal rate for our fiscal year ending June 30.

As a result of our third quarter performance and based on our expectations and assumptions for the remainder of the year, we are raising our full year revenue and adjusted EBITDA guidance ranges. Craig will provide more specifics on guidance in a few minutes.

We believe that Premier’s continued strong financial performance and outlook are based on our unique role as a provider-led healthcare improvement company.

As an example, we are continually extending our PremierConnect platform across domains that align our capabilities with the performance improvement imperatives of our members, in the areas of cost reduction, quality and safety improvement and population health management.

Each PremierConnect domain offers distinct capabilities and when pulled together, they deliver a comprehensive view of total performance improvement opportunities across the health system.

Add to this, our wrapped around advisory services, our performance improvement collaborative, our supply chain services offerings and we believe Premier is uniquely positioned to lead our members through the transformative changes sweeping our industry.

From Washington’s shift in support of HIT interoperability to recent legislation propelling our industry into alternate payment models and population health, developments are occurring that we believe will require healthcare providers to adopt a comprehensive approach to the technologies and services that Premier provides in order for them to succeed in this rapidly evolving environment.

Just weeks ago, for instance, we witnessed the passage of federal legislation that permanently reforms the way Medicare pays for physician services.

Called the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, this legislation retires the flawed sustainable growth rate SGR formula and creates new incentives designed to encourage physicians now to move toward risk-based alternate provider payment models, such as episodic bundled payments, shared savings and global payments.

We believe this legislation will spark greater participation in these models, ensuring that providers across the care continuum are all working together towards the aligned goals of high quality and cost effective care. We also believe this is a watershed event.

When coupled with the recent health and human services announced objectives to ship up to 50% of Medicare payments to alternative models by 2018, this legislation also validates our position that advance payment models are here to stay and they will become the new standard.

We expect physicians and their professional groups will begin moving away from fee for service, ramping up efforts to join existing alternative payment programs and collaborating with health systems to build the necessary infrastructure to take on risks and succeed in this fast approaching payment reform environment.

Also notably included in this legislation is the requirement to achieve EHR system interoperability, which is also foundational to the most recent meaningful use proposed changes, enabling healthcare providers to access and use data that is currently locked in these EHR systems.

So we at Premier have seen this transformation coming for years and we have been preparing for it for just as long. In fact today, we have nearly 400 hospitals across 30 states participating in our Population Health Collaborative and our Bundled Payment Collaborative, which focuses on the capabilities necessary to successfully function.

Under the episodic bundled payment model includes approximately 120 hospitals, spanning 27 states. Members in these collaboratives leverage our PremierConnect SaaS-based solutions to identify and replicate and scale success.

We also provide the health data analytics, the benchmarking and dedicated advisory services to support development and implementation of these capabilities. So we have been a pioneer in the development of data driven performance improvement collaboratives and technologies focused on alternative payment models and accountable care organizations.

And our efforts have earned us recognition by class as the leader in population health management advisory services. Our role has always been to serve as a strategic and operational extension of our member health systems, optimizing performance today and helping prepare for the future.

As this industry changing legislation further defines and accelerates the future of healthcare, we believe it will also afford us new opportunities to innovate and lead to provide value to our members and to drive future growth for our company. With that, let me turn the call over now to Mike Alkire, our Chief Operating Officer..

Thanks Susan and welcome everyone to our conference call. Looking at our performance from an operating perspective, we are very pleased with the third quarter.

I believe our growing track record of achievements and member collaboration demonstrates that Premier is very well positioned as an industry leader to capitalize on the transformational changes impacting our nation’s healthcare systems.

I want to start off by providing an update on my comment from our last call, when I noted that we were finalizing plans with one of the largest integrated delivery networks in the country to implement PremierConnect Enterprise.

I am extremely excited to announce that the Denver based Catholic Health Initiatives signed on for PremierConnect Enterprise in our third quarter.

Catholic Health Initiatives plans to use this broad capability to establish a single source for consistent, integrated quality reporting at the system, divisional, facility and physician level and also to identify quality improvement opportunities and measures – measure the ongoing effectiveness of its quality improvement program.

CHI becomes the 11th member organization to join Premier’s Data Alliance Collaborative and we are excited about working with them on PremierConnect Enterprise, which as most of you know, is one of the domains of our PremierConnect platform.

Turning now to our third quarter performance, as Susan noted our supply chain services business performed above management’s expectations in the third quarter. And as Craig will discuss shortly, it is the driver behind our increased guidance for the full year.

In our GPO business, the 9.1% net administrative fee revenue growth was driven by continuing contract penetration among our existing members and by recruitment and conversion of new members. This growth was further amplified by the improved patient utilization trend that our members have been experiencing in recent quarters.

A trend that we believe is being supported by the improving economy, as well as expanding healthcare coverage under the Affordable Care Act. Within this segment, I want to further discuss our rapidly growing direct sourcing of specialty pharmacy businesses that we launched a few years ago in collaboration with our members.

Together, these businesses achieved 25% revenue growth in the third quarter and are up 35% year-over-year for the nine months of this fiscal year. Our direct sourcing business has achieved remarkable growth by helping our members achieve double-digit savings on basic commodity products.

And our specialty pharmacy business has also delivered double-digit revenue growth both by adding members to the program and through expansion of the therapies we manage. We believe revenue growth of both businesses will normalize as they mature.

At the same time, we expect specialty pharmacy to play an expanding role in our business, as health systems increasingly move to population health models, where there is an even greater need to manage the chronic, high cost patients that require specialty therapies and are the largest consumers of healthcare.

This, combined with the shear volume of the high cost therapies that continue to enter the market has made specialty pharmacy management a strategic priority for many of our health systems.

As such, we are continuing to build out our clinical and information technology infrastructure to provide differentiated programs and tools to our member health systems and their patients to improve quality, patient satisfaction and health outcomes. We have seen strong uptake with new members utilizing our specialty pharmacy program in the past year.

Now I want to discuss PremierConnect Supply Chain, our new SaaS-based offering on the PremierConnect platform. We launched it in March, and we believe this is a breakthrough solution that is also most – more cost effective to implement when compared with other competitive offerings in the marketplace.

Overall, we believe it will further disrupt the supply chain and strongly position Premier for future growth in both our supply chain and Performance Services businesses. Let me briefly walk through this innovative offering with you.

PremierConnect Supply Chain is designed to enable health systems to manage the entire procurement process across their acute and ambulatory settings.

Powered by our development initiatives, as well as our recent Aperek acquisition, it allows for seamless integration across the existing platforms while also providing the capability of a complete, end to end procurement solution.

Using PremierConnect Supply Chain, members can manage every aspect of the procurement life cycle and 100% of their purchasing including both GPO and on non-GPO spending. This integrated solution provides real time supply analytics that look at the total supply chain spend by facility, by physician, by site and by service line.

This enables more comprehensive visibility to costs throughout the health system and the ability to analyze and take action on usage patterns across all areas.

It also provides online sourcing and contract management, customizable catalog management and for those who need it a full ERP materials management systems that enables users to plan, buy, receive, pay and manage the procurement process across all sites of care.

We believe we are the only company in our space that has this offering with these integrated capabilities.

PremierConnect Supply Chain has been tested and adopted by several major health systems and hospitals including Honor Health, formerly Scottsdale Lincoln and Scottsdale Arizona, at Venice Health, in Roseville, California, Fairview Health Services in Minneapolis, Memorial Healthcare System in Hollywood, Florida, Mount Sinai Medical Center in South Florida and Atlantic General Hospital in Maryland.

We are currently implementing PremierConnect Supply Chain in a number of other systems across our member channel and it continues to be instrumental in winning our all-in business and expanding our relationships.

We believe it is an innovative differentiator and just one of the strategic tools we are using to disrupt the healthcare supply chain, drive revenue growth and continue to distinguish Premier as a marketplace leader in years to come.

Now moving to performance services, given what Susan noted about the new healthcare legislation, we believe provider demand for our services will increase as they seek to align with physicians and develop the necessary clinically integrated networks and alternate payment models that will enable success in this changing environment.

Just a few recent examples of healthcare systems working with Premier to establish clinically integrated networks are North Shore-LIJ Health System of New York, which has more than 12,000 affiliated physicians in 19 hospitals, LifeBridge Health of Baltimore, with more than 600 network physicians, and Innovative Health Alliance, an accountable care organization in Albany, New York working with a network of more than 300 physicians.

We have strong continuing provider interest in our alternate payment model and clinically integrated network capabilities and we believe this interest will accelerate still further in the months and years to come as the nation’s healthcare systems shift to the new payment models.

Finally, the high cost physician preference arena remains a significant area of focus among our members, evidenced by the continuing growth in our SYMMEDRx business.

In the third quarter, SYMMEDRx teamed up with one of our large academic member health systems to achieve savings of approximately 24% on the purchase of medical devices related to just one disease state.

During the quarter, SYMMEDRx also entered into a 3-year agreement with the Greater New York Hospital Association to provide comprehensive data analysis and advisory support to help drive savings across all disease states.

Greater New York Hospital Association is one of our largest member owners and we work together to address the challenges of cost reduction, quality and safety improvement and population health management. Thank you for your time today. Now, let me turn the call over to Craig McKasson, our Chief Financial Officer..

Thanks Mike. As Susan and Mike already stated, we are very pleased with our fiscal third quarter financial results, which included double-digit year-over-year consolidated revenue, adjusted EBITDA and adjusted fully distributed earnings per share growth.

This was driven by strong revenue contribution from our supply chain services segment and performance services segment results that were consistent with our expectations.

As a result of our year-to-date performance and our outlook for the fourth quarter, we are increasing consolidated revenue and adjusted EBITDA guidance for the full fiscal year ending June 30, 2015. Now, let’s review the quarter in more detail. Consolidated net revenues of $261.7 million increased 16% from a year ago.

These results are comprised of $192.1 million in net revenue from our supply chain services business segment, up 15% year-over-year and $69.6 million in revenue from performance services, up 19% over the prior year.

Looking at the segment level, the 15% revenue growth in supply chain services exceeded our expectations and was driven by our core GPO business, where net administrative fees revenue increased 9.1%, largely driven by contract penetration in both acute and alternate site members and the continuing impact from the recruitment and conversion of new members.

This growth was further amplified by the improved patient utilization trends that Mike mentioned a few minutes ago. In addition, our third quarter net administrative fees revenue growth also benefited from some earlier-than-anticipated vendor reporting.

Our GPO is subject to quarterly fluctuations in net administrative fees revenue due to periodic variability based on the timing of when cash and vendor reports are received.

Our direct sourcing and specialty pharmacy product businesses combined to produce 25% top line growth in the quarter from a year ago, an increase that represents a more normalized pace than in previous quarters, which we have anticipated as these relatively new businesses continue to expand.

Both businesses benefited from ongoing expansion of member support. Our direct sourcing revenue growth was fueled by demand for high-quality products at a reduced cost and our specialty pharmacy business continued to gain momentum, driven by increased member participation and expanding product usage, in particular, the new hepatitis C therapies.

In performance services, the 19% revenue increase was consistent with our expectations and resulted from continued growth of our PremierConnect SaaS-based subscriptions and renewals, which historically account for approximately 60% of total segment revenue.

Additionally, our advisory services business delivered growth led by engagements tied to the areas of cost management, population health, physician preference and capital equipment planning.

Consolidated adjusted EBITDA of $103.7 million for the quarter represents a 14% increase from a year ago, with supply chain services increasing 11% and performance services up 29%.

The increase in supply chain services adjusted EBITDA predominantly reflects the growth in net administrative fees revenue, as well as continued expansion of our direct sourcing activities.

The growth in performance services adjusted EBITDA was primarily the result of new PremierConnect SaaS-based subscription sales and the effective management of operating expenses. Our adjusted EBITDA growth was strong in the quarter.

The change in our EBITDA margin reflects our ongoing sales mix shift within supply chain services, where an increasing proportion of segment revenue is being generated from the direct sourcing and specialty pharmacy businesses. We do expect this trend to normalize over time as these newer businesses continued to mature.

Looking at bottom line performance, non-GAAP pro forma adjusted fully distributed net income totaled $55.3 million for the quarter, or $0.38 per fully diluted share compared with $49.1 million or $0.34 per share last year.

As I have previously discussed, because of our corporate structure and quarterly member owner share exchange process, we guide to adjusted fully distributed earnings per share.

This non-GAAP measure calculates income taxes at 40% on pre-tax income, assuming the entire company is a taxable C-Corporation and further assumes that all of the company’s Class A and Class B common shares are held by the public and included in the share count determination.

From a liquidity and balance sheet perspective, cash flow from operations in the quarter increased 13% to $101.9 million and for the first nine months of fiscal 2015 totaled $255.6 million.

This is lower than the same nine-month period last year primarily due to the addition of member owner revenue share as a result of the reorganization and IPO effective October 1, 2013.

For the fiscal third quarter, free cash flow, which we define as cash provided by operating activities less distributions to limited partners and purchases of property and equipment, was $59.5 million.

The high level of free cash flow relative to adjusted EBITDA in the third quarter is largely attributable to the strong performance in our supply chain services segment. At March 31, 2015, our cash, cash equivalents and short and long-term marketable securities totaled approximately $503.3 million.

We also ended the quarter with no outstanding borrowings on our 5-year $750 million revolving credit facility. We believe that we are in excellent position to deploy capital to help provide solutions for our member needs and drive our strategic growth objectives and we continue to evaluate an active pipeline of potential acquisition opportunities.

Now, let’s turn to our expectations for fiscal 2015. We are raising our outlook for fiscal full year consolidated net revenue and adjusted EBITDA, based on the continued strength in our supply chain services segment.

Our revised guidance reflects our third quarter performance and our expectations and assumptions for the remainder of the year as discussed on this call and included in our earnings release.

For the full year, we now expect supply chain services revenue to grow 13% to 15%, driven by 27% to 32% growth in our products businesses and 6% to 7% growth in net administrative fees revenue. We continue to expect performance services revenue to grow 15% to 18%. As a result, we have revised guidance as follows.

Total net revenue is expected to grow 14% to 16% to between $988 million and $1.08 billion, which is an increase in the previous range.

Non-GAAP adjusted EBITDA is forecast to grow 9% to 12% to between $384 million and $392 million, which also raises the previous range and non-GAAP adjusted fully distributed earnings per share, is expected to grow 8% to 11% to between $1.40 and $1.44, which remains unchanged from the previous guidance range.

Finally, let me provide a quick update on our recent quarterly exchange, which took place on April 30. Approximately 276,000 Class B units were exchanged into Class A common shares, following the right of first refusal process in which non-exchanging member owners can purchase Class B units being offered for exchange.

Our next quarterly exchange will occur on July 31. With that, let me turn the call back over to Susan..

Thanks Craig. Before opening the call for questions, I want to briefly expand on Craig’s comments related to our capital deployment strategy. Acquisitions play an important role in our future and we continue to evaluate many opportunities in front of us.

We do so focus on innovative and unique solutions and using a disciplined well-defined due diligence process to help ensure acquisitions perform as expected and provide a measurable return on investment over time.

As we have stated in the past, we will evaluate potential acquisitions of all sizes, including strategic tuck-ins that can be expanded through our member channel, as well as those that would be considered transformative allowing us to establish or expand foothold in areas of the business that serve the needs of our health systems.

So with that, operator you may now open the call for questions..

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Ryan Daniels..

Hi guys. Thanks for taking my questions. Mike, maybe I will start with one for you. Congrats on the larger Premier enterprise connect deal with Catholic Health Initiatives.

Can you talk a little bit about how that will be rolled out, when we might see that flow into to the performance services revenue line, just any color there?.

Let me just take a first pass then I will ask Keith and Craig to sort of weigh in. So it’s already in the guidance in terms of the revenue that’s associated with it.

From a technology standpoint, Keith do you want to weigh in?.

Yes. Financially, Ryan this is Craig, so as we have talked about in the past with PremierConnect Enterprise engagements, they don’t have a long implementation period.

So as Mike indicated, we will start to see contributions from that in the fourth quarter and obviously moving into 2016 and continue to have opportunities with that relationship with Catholic Health Initiatives to expand our footprint there in terms of the capabilities we are providing them in order to manage their quality improvement programs and the opportunities they are trying to identify within their system..

Okay, great. And then Mike, I think you – I meant to say Mike for this one, you mentioned PremierConnect Supply Chain and highlighted six clients that you have already, so maybe it’s too early given the recent launch, but number one, how quickly do you think that can roll out to the rest of the client base.

And then number two, I am curious with the six accounts already using it, if you have seen any changes in the contract compliance or their behavior at all?.

So, we just obviously just launched the program. So we are already in the process of rolling it out. Obviously, we are seeing a lot of interest in it. As a part of the rollout, we have wrapped around services and capabilities from our field that analyze the data and look for that off-contract usage.

I don’t expect that you are not going to – just do the timing of us identifying those opportunities and by the time that we actually see that in terms of cash, it will be a few months before we actually see the uptake in the admin fees for any opportunities for contract penetration..

Okay, that makes sense. And then last one, I will hop off. And Susan this one I guess this is for you.

You talked a lot about the movement towards advance payment models and I am curious if you have looked at any of your IDMS with higher risk based reimbursements and trying to determine what that has done to the GPO business meaning their goal is really to reduce utilization and provide population health, is that having an impact at all in your GPO business and utilization there? Thanks..

Thanks Ryan. I think what we see the population health front is as they we move to these advance payment models, it does create cost pressure, but it also incents them to provide the care in the parts of their integrated delivery system that are the most effective clinically and most efficient.

And a lot of the more advanced health systems are moving to centralized purchasing where the buying for supplies is being done for their – all their physicians, all their affiliated entities, whether they are owned or not and their hospitals and their surgery centers.

So we actually see it as a movement around the integrated delivery system to the right setting. And our utilization data for the last quarter would indicate that both inpatient and outpatient utilization is up, even in the world of population health and even in the world of population health for our advanced health systems.

I think it’s demographic, I think it’s the exchanges, I think it’s the Affordable Care Act, I think it’s chronic conditions, but that’s what we are seeing..

Okay, very helpful. Thank you..

Thank you..

Thank you. Our next question is coming from Jamie Stockton..

Hi Jamie..

Hi, good evening. Thanks for taking my question.

I guess maybe the first one, Craig your comment about the GPO business, the acceleration of some fees during the quarter, if I look at kind of the implied guidance for the June quarter, would you say that $4 million of revenue in the March quarter might have been a decent number as far as the impact of that acceleration?.

Jamie, that’s in the relative ballpark in terms of – what we typically have is a – obviously, the way that we recognize revenue, from an administrative fees perspective is when we receive the payment and the associated supplier report from the manufacturer to substantiate the payment that we received.

Sometimes the receipt of those can cross over the quarters. It tends to be a one – potentially up to 1% or 2% variability. And we did have some benefits from that in the third quarter..

Should we interpret essentially those fees as being pulled from the June quarter?.

That’s correct..

Okay. And then maybe Susan just one quick one, I know you talked about the M&A picture, we obviously saw a lot of activity here in the last few months with moves that players like IBM have made in the space. You have a growing cash balance, I know you are being disciplined about the way that you approach M&A.

I guess maybe if you could just help us understand internally how you guys see the trade-off between purchasing a business that has the potential for high growth and what I assume are some very lofty valuations that some of these assets are going for these days?.

Yes. Thanks Jamie. So we have a full-time corporate development group as you know with several people and we have liaisons in each of the segments.

And we are constantly sourcing population health companies, ambulatory data acquisition companies, supply chain, workflow and analytics companies, specialty pharmacies all kinds of capabilities that we are interested in. And we look at a variety of companies and they are all sizes. And you are right, the valuations sometimes are high.

We are interested in things that strategically enhance this long-term all-in capability that we have to disrupt both supply chain and then health systems from the inside with quality, safety, population health. And so the way we think about it is we have a framework and we have a pretty definitive criteria that we assess every opportunity against.

And it’s both strategic and financial. So I think that I would say we are trying to make prudent and wise business decisions that have a long-term ROI for the company and for the shareholders. And so I think you will see a variety of acquisitions from us. We are a relatively small company, so everything we do is pretty visible in our financials.

And so I think you will see it. But we are looking at all of it..

Okay, that’s great. Thank you..

Thank you..

Thank you. Our next question is coming from Elizabeth Blake..

Hi, Elizabeth..

Hi, good afternoon and thanks for taking my questions.

First, could you update us on the partnership for patients’ contract from last quarter?.

Yes. So last quarter, we described that it had ended and then I think a few days after the call, we were notified and had the ability to apply for a 1-year extension. We have now applied for that extension. So, we recruited hospitals across the company to participate with us and we have not heard anything yet.

So we, as with all government contracts, are not sure of the timing of the final decision, but we have applied..

Okay, great. Thank you.

And then on the PremierConnect Supply Chain solution, could you elaborate a little bit on the response you are getting from non-GPO clients using that tool?.

Well, I think what Mike said was that the tool helps health systems who are partners with us in supply chain and in the GPO. It helps them manage their GPO spend as well as their non-GPO spend.

We are primarily selling it today to folks who are either current GPO customers or recruiting new customers and this supply chain analytics overlay is a real differentiator. So, I think that’s what he meant..

Okay. Okay, great. That’s helpful. Thank you..

Thank you..

Thank you. Our next question is coming from Lisa Gill..

Hi, Lisa..

Hi, Susan. My first question was around your comments as it pertains to population health. I think you talked today about 400 hospitals, 30 states.

I am just wondering, one, who are you competing against when you think about winning that business in population health, because it’s clearly more than just your member hospitals? And then secondly, do you see opportunities to sell other collaboratives into those hospitals or is it primarily just population health that they are looking at, at this point?.

Lisa, we always view it as a foot in the door. So, we do have actually a large number of members that participate with us in the population health collaboratives that we have been – have additional conversations about PremierConnect and about supply chain and about all of our other services.

Our collaborative, in terms of your first part of your question, we compete with a variety of consulting firms or other companies, but we don’t compete with anybody that really has the footprint, the sort of advanced intelligence in Washington, DC about what’s coming and what the real details of all of these changes are and companies that have technology and the breadth of data to provide the measurement.

So, I think that’s why we got both current members and non-members, and yes, it’s a door into our other services for sure..

So, you are not competing against any of the kind of traditional IT providers today that are signing a population health type of offering?.

I think we see all the competitors. I think what health systems have to have first is clinically integrated networks. So, they have to align their physicians to their health systems. And then they have to have analytics data that we bring to the table through our technologies and our services.

And then as they evolve, they need additional operating capabilities and that’s part of the logic around, I think it was Jamie’s question around some of the acquisition capabilities we continue to partner or acquire, but we compete with consultants, we compete with payers, we compete with EHR vendors, we compete with a variety of companies who are marketing services.

KLAS named us as the number one population health and we had sort of, I think KLAS said it was 80% of our customers said they would come back to Premier for additional services. So, we think we are pretty well positioned, because of the depth and breadth of our capabilities..

Okay, great. And then my second question was just around some of your comments on the GPO side and talking about further penetration within existing accounts. I think also I am not sure if it was you or Mike that talked about both growth on inpatient as well as outpatient.

As we look at some of the hospitals that reported on the public side, it looks like there was a lot more on the outpatient side than the inpatient side. I am just wondering if you are seeing something different there.

And secondly, I think someone asked earlier about the collaborations that you have and what it’s meaning to your GPO business, but Susan, do you think you are getting deeper penetrated, because they are taking risks and therefore they are really laser focused on what they are buying and where they are buying it from and trying to be adherent to whether it’s PPI or some of the other tools to bring down costs?.

Yes, so a couple of questions in there, Lisa. On the utilization question, the trend we used to see was inpatient slightly declining and outpatient growing. The trend we have seen in the last three to six rolling quarters and months is inpatient is actually increasing, but outpatient continues to increase at a higher rate.

So, I think what you are hearing from the hospitals is that outpatient continues to increase at a higher growth rate than inpatient, but at least our health systems in our footprint, which is pretty big footprint that we have data on are also seeing inpatient increases as well.

On the question of penetration of GPO contracts, I think part of it is the cost reduction they need and they know that compliance is tied to increased level of savings, but I also think it’s all the services we provide in supply chain beyond just GPO.

So, our acquisition of SYMMEDRx, our acquisition of MEMdata, both of those help them manage their supply chain costs in physician preference, and capital and that together with the compliance that drives savings and commodities and in food and in pharmacy I think pushes them towards higher penetration and we are seeing higher penetration in many of our contract categories..

Susan, if I could just add a couple of things. I think Lisa you asked about collaborative suite. We do have an ASCEND collaborative that really focuses on driving high levels of commitment for categories. That collaborative is doing a very, very well and growing.

I talked a little bit about PremierConnect Supply Chain and this is why this is still critical for our healthcare systems.

The product itself will allow us to extend the catalogs into the ambulatory settings, so as our healthcare systems build out their clinically integrated networks, they are going to have the ability to extend that pricing in those catalogs out to those partners.

So, we do believe there is going to be higher levels of penetration for this system as they are building out their ambulatory settings..

And Mike, I know we have talked in the past about moving into the alternate side and your rollout there, but it sounds like today that what you are saying is that your relationship with the IBM can, in essence, get you there without necessarily having to go out and contact directly.

Am I hearing that correctly?.

Yes, both. I think one is doing it through our systems and as they are building up their clinically integrated networks. Two, we have a number of our systems that have their affiliated programs. So through their group affiliations, we are continuing to drive contract penetration under the ambulatory setting.

And then we have also got our own sales and marketing model to continue to expand in those – into that market. So, we really have sort of a three-pronged attack..

Okay, great. Well, thanks for all the comments and congratulations on a nice quarter..

Thanks, Lisa..

Thank you..

Thank you. Our next question is coming from Donald Hooker..

Hey, good afternoon..

Hi, Don..

So, it seems like we have had – hey, good afternoon. So, with regards to the GPO, obviously, strong performance through this year, and I think in the past, you gave out sort of a long-term view of sort of GPO growth.

Is that something that might be revised now? I mean, is the performance of the GPO so strong enough this fiscal year that you might want to revise your prior sort of longer term view of I think it was closer to 4% growth?.

Yes, Don, this is Craig. Thanks for the question. What we have historically talked about is kind of low to mid single-digit growth for our GPO.

One of the things we have talked about that you have seen the benefit of this year is last year we had gone through a process of recruiting some new organizations and it was taking some time for them to convert.

And so what we have really seen the benefit of is that performance this year, plus the impacts of utilization, which rebounded from a year ago has caused us to have higher performance in the current year, which is why we are now guiding and expecting that we will see 6% to 7% administrative fee growth this fiscal year.

I would say we are not in a position yet to say that we would change our longer term outlook, because once fully ramped up that kind of low to mid single-digit range is still what we think is the current market for GPO growth..

Okay.

And then with regards to the specialty pharmacy, can you maybe discuss a little bit how penetrated that service is into the membership and how that might trend over the next year or year two?.

Sure, this is Craig, I will start and then Susan or Mike could add any color. So, what I would say is that we are still early in the life of our specialty pharmacy with our member organizations. This is, I will say a more unique population health strategy as we have talked about as opposed to just being a pure play specialty pharmacy approach.

And so a lot of our institutions that are on the – more on the front edge in terms of thinking about their approach to population health and how to manage patients in a post acute setting to ensure protocols are followed to minimize readmissions and things of that nature.

So there is still a pretty long runway Don, in terms of opportunities to grow and expand our specialty pharmacy footprint. We are not at the point yet to say in 2 years, it’s going to be X, but early stages of where we are in that business..

Yes. I think it’s a strong business for us. Different markets have different requirements for specialty pharmacy. And given all of the things I have said about alternative payment models and sort of the need to manage chronic patients, clearly it’s an opportunity for us, longer term..

Yes.

And I am sorry Don, one other last one I would just reinforce is that as we look at the specialty pharmacy market that is one of the areas we have identified for potential capital deployment as we look at particular markets where you may need to have a bricks and mortar capability in order to actually drive business in specific geographies across the country..

Great. I will just ask one last one and I know you don’t – haven’t historically provided this, but may be you can just provide some qualitative color.

I know this specialty pharmacy and the other products business is lower margin, obviously, but is it safe to assume those – both of those businesses are scaling and margins are improving sequentially?.

Yes. That’s absolutely..

Okay. Thank you..

Thank you..

Thank you. Our next question is coming from Michael Cherny..

Hi Michael..

Good afternoon guys and congratulations on the nice quarter.

So I want to take for a minute for [ph] attention question from a different angle, you talked about 99% that’s as good as we have heard from a services business, in terms of the 1%, I am sorry to focus on this or just to leave out the question, but what cause is that 1% customer leave, is it all from consolidation you see across the industry or are there any competitive disruptions and if so why would a customer decide that they no longer want to work with you?.

It is primarily acquisitions or affiliations where hospitals are getting together and they are different GPOs when they are making a decision. And so all that consolidation acquisition activity is both an opportunity for us sometimes and a risk for us sometimes, but it’s almost always related to some combination in some market..

Yes, I know. I mean I know last year or ahead of the IPO there is a little lower retention because of the transition.

So I just want to get an understanding now as you think about how you generate that record level what is the driver of that…?.

Yes.

I mean 99% is so high, you almost can’t go anywhere, right?.

There will be the trick..

Yes. So I mean it’s so high that we think it’s just almost always it’s the acquisition related or affiliation related..

Got it.

And then just on a different way to take the acquisition front, I know you touched a bit about the type of assets you would be looking at, I want to take a step back and look at what you have already completed, you highlighted SYMMEDRx has an acquisition or at least an asset that you have taken and had a really nice performance in the quarter, had a nice expansion in the customer base.

Can you maybe just touch just qualitatively on the integration of some of your other businesses particularly something like TheraDoc, just how it’s fitting in with the overall portfolio you have in terms of client interest or whatever it may be?.

Yes. So great question and we do this routinely internally, so Meddius was probably the oldest one and that’s the data acquisition tool. That’s been complete integrated and it actually helps us to get at more real time data now across lots of our applications.

It’s proving to be just a wonderful data acquisition engine inside a lot of our other applications. SYMMEDRx, I already talked about, MEMdata, I already talked about. TheraDoc was a medium-size acquisition for us. That one has been integrated. We are in the process of combining the two products.

That particular application on a combined basis is also rated number one by KLAS in clinical surveillance. Very critical to all the quality and safety and value-based purchasing that our health systems are engaged in. We have retained the leadership teams of all the companies and have integrated them with the rest of our businesses.

We bought the rest S2S, the remainder of S2S, that one was already integrated for all intents and purposes. And we now own 100% of that company. And then Mike talked about Aperek as a part of this supply chain, PremierConnect Supply Chain new offering. So we have taken it in.

We have added it to all of our other capabilities, evolved it with our own organic development and that’s what Mike talked about in the launch of that new product. So, I would say so far really good, really good integration of all the companies and lots of new customers and lots of retention of existing customers with those acquisitions..

Thanks for update on this. I really appreciate it..

Thank you..

Thank you. Our next question is coming from Nicholas Jansen..

Hi Nick..

How are you guys. Thanks for taking the questions.

Most of mine have been answered, but maybe just two follow-ups, you had almost 38% adjusted EBITDA margins in your performance services segment, which I believe is a record high, I know there are some quarterly fluctuations here, but maybe wanted to get a little bit more detail on how margins expanded about 300 basis points year-over-year.

And then kind of where ultimately you think the performance services margins can grow as you get them a higher mix of your revenue to kind of SaaS applications? Thanks..

Yes. This is Craig. Thanks Nick. So the one thing I would point out in terms of performance services EBITDA margins is we do get the benefit of the deferred revenue add back that we put – have in place following the TheraDoc and Aperek acquisitions.

You are going to see that begin to taper off in the fourth quarter as we kind of have gotten through the meat of that kind of one year deferral process. So the 37% you referenced is higher than we would normally expect. I think the more normalized place we have been is in that 30 – low-30s range.

And I think that’s more of an expectation of what you would see..

Okay, that’s helpful.

And then secondly, a lot of – lot’s been discussed on M&A and it looks like your acquisition related add backs in terms of expenses in the quarter seem to pick up a little bit relative to the recent trajectory, so I just wanted to get your sense of how have you been disappointed by not closing deals, I just wanted to get a little bit more surrounding kind of what’s going on there? Thanks..

Yes. So I would just say we spend money pursuing acquisitions and we will continue to spend money pursuing acquisitions in doing our due diligence. And I think it just reflects the activity and that acquisitions are sort of part of our strategic DNA..

Thanks Susan..

Thank you..

Thank you. Our next question is coming from Sean Dodge..

Hi, good afternoon. Thanks. Susan it’s been a few months now since HHS released its 2018 goals for alternative payment model and I realized we don’t have explicit details yet on how all of that’s going to happen.

But I am curious has there been any discernible changes in the conversation that you have being having with clients on the heels of this, has this encouraged a few more come off the fence and begin moving more quickly to fee for value or is everybody still in kind of wait and see mode?.

Yes. There is a lot of things. So first, the announcement I think has accelerated health systems into saying well I need to get myself ready, I need to build the infrastructure which feeds into the things we provide, the clinically integrated networks, the technology infrastructure, the data they need to actually move there.

So I would say it has accelerated their urgency around it. I also think this new payment model for physicians, the macro that I have talked about on the call that is mobilizing health systems to integrate with their physicians and to build this stuff together and it’s mobilizing physicians as well.

So I think that’s also going to create an acceleration of their interest in building all of these capabilities. So I think there is a lot of activity. And I think recently and I didn’t talk about it on this – in the script, but Medicare is also – CMS has also just certified the results from some of these pioneer and shared savings ACOs.

And I think the reason that’s important is it means that CMS can take something from a demonstration straight into a program. And I think all of those things are certainly making health systems aware and interested in building the capabilities, because they think this is going to be new standard ways of paying for services..

Okay, excellent. Thanks. And then it was mentioned earlier that the adoption of PremierConnect Enterprise enables clients to bring together, for the most part, your entire platform.

I am curious of those that have adopted so far, how big are those relationships, the PCE relationships relative to the average maybe non-PCE clients I guess maybe thinking it different, how big of an inflection in revenue can the adoption of PCE drive within a client over time as they adopt more?.

Yes. So, what I would say is and you saw it on the slide PremierConnect is actually seven different domains. And so there is pricing for the technologies, for the services, for the wraparounds within each one of those domains on the platform, PremierConnect Enterprise being just one of the seven different domains.

And I think, Craig, you have talked a little bit before about what the average kind of revenue is for PremierConnect Enterprise domain..

Yes. What I would add is that, so in and of itself again varies obviously by engagement, but the opportunity for PremierConnect Enterprise engagements to have an annual kind of value of $0.5 million, up to $1 million.

Importantly, though it is also a natural extension of the relationship that we may have with some of our institutions that are leveraging some of our capabilities.

And if they are not taking advantage of all of those, the data management and data analytics capabilities that PremierConnect Enterprise affords does give us an opportunity to actually move into other domains across the PremierConnect platform longer term, as Susan just described..

Perfect, thank you..

Thank you..

Thank you. Our next question is coming from Richard Close..

Hi, Richard..

Hello, thanks for taking the question and congratulations.

I was wondering if you could break down the GPO revenue a little bit more, obviously 9% or so growth there and you talked a little bit about a pull forward, but if you were to break it out between increased utilization, the new customers and the contract compliance, any ballparks on those, what those contributed?.

Sure. This is Craig. So, broadly, we talked about the pull through being a few million of the increase that you saw.

And then what I would say is we don’t specifically disclose percentages, but I would say that’s probably a little more than half is a result of continuing penetration of our existing members in the acute and the non-acute space and then the balance of that being the conversion and migration of newer members that we have added..

Okay.

And just a follow-up on the GPO side, how are you viewing the competitive marketplace out there? Are there deals to be, one, in terms of RFPs coming up – or contracts coming up for renewals, just any thoughts about maybe the churn or expected churn in the GPO side going forward over the next year or so?.

So, all I would say is that most health systems today have a GPO relationship. It’s highly penetrated.

And so you know, there is not many move every year, but we certainly are a market taker and we get more than our share I think because of the broad base set of supply chain solutions that we can bring to the table and the connection of the supply chain solutions with the other utilization and standardization data that we have over on the clinical side.

So, I think that consolidation in the industry continues to happen and that maybe creates fewer and larger entities, but I think that the differentiation we have in terms of our service capabilities, technology capabilities and the embeddedness that we provide any time we propose on a new deal. It’s just a different comprehensive level of service..

Okay, that’s all I have. Thanks. Congratulations..

Thank you, Richard..

Thank you..

Thank you. Our next question is coming from Sean Wieland..

Hi, Sean..

Hi, Susan. Thanks for taking the question..

How are you?.

I am doing well. Thank you. So, on the CHI deal, congrats on that.

Am I thinking that they are not a GPO customer, but they are now using PremierConnect Enterprise?.

They are not a GPO customer. They have been using some of our quality and safety applications in some of their facilities and this is sort of an all-in on the quality side with PremierConnect Enterprise..

So, when that GPO business comes up for bid at some point, how does this affect your ability to win that, how does that affect your positioning relative to the GPO business?.

So, obviously, GPO decisions are comprehensive and very detailed and when we go to pursue a GPO, and clearly, if you have relationships in one side of the business, it works both ways for us, but it gives us an opportunity to really show health systems how you can take a GPO and a direct sourcing company and a specialty pharmacy, along with all your population health stuff and all your PremierConnect Enterprise and quality and safety solutions and really drive savings and really drive improvement.

So, that’s how we view it and that’s how we approach it. Now, those decisions get made a lot of different ways in health systems, but that’s our approach..

Hey, Sean, this is Mike. One other build when we do have the PremierConnect quality application into these healthcare systems, it does allow us to connect quality and cost, which really helps us around resource utilization.

So, as healthcare systems look to standardize how they are providing care, leveraging supply chain products, we are able to actually bring the power of that supply chain quality to the table to show appropriate resource utilization and the value of really focusing in on that cost..

How many PremierConnect Enterprise customers are not GPO customers?.

Keith?.

Probably just that one..

They are probably the only one right now..

Okay..

So, Sean, I think it’s just that one. It’s Keith..

Okay, thanks Keith.

And then in the performance services business, do you have what the organic growth rate was in the quarter?.

Yes. Sean, as we have discussed we don’t separately breakout organic and inorganic. I will continue to reinforce the messaging I have had that we expected about $20 million of revenue contribution from our TheraDoc and Aperek acquisitions this year, which we disclosed when we issued guidance at the beginning of the year.

Those acquisitions have continued to be on plan..

Super. Okay, that’s all I got. Thank you very much..

Thanks, Sean..

Thank you. Our last question is coming from Gene Mannheimer..

Hi, Gene..

Hey, good afternoon and congrats on a good quarter.

I wanted to ask with respect to the acquisition of Phytel by IBM, given that Phytel is a partner of yours on the pop health side, is there any impact at all from that transaction do you see on your business?.

So, no impact. We – both IBM and Phytel are current business partners in our population health and enterprise analytic offerings. We don’t anticipate any changes to the relationships. We have built into the relationships sort of in anticipation of future changes on both sides.

And so obviously, there are future opportunities for both of us and so we will continue to always explore those..

Great, thanks a lot..

Thank you..

Thank you. At this time, I would like to turn it back to today’s staff for any final or closing remarks..

So, thanks so much everybody for participating on the call today. Our next conference call where we will cover the fourth quarter and our fiscal year is currently scheduled for August 24 and we look forward to meeting and speaking with many of you in the interim. Operator, you may now close the call..

Thank you. On behalf of Premier, Inc., we would like to thank you for your participation. You may now disconnect and have a wonderful day..