James R. Storey - Premier, Inc. (North Carolina) Susan D. DeVore - Premier, Inc. (North Carolina) Michael J. Alkire - Premier, Inc. (North Carolina) Craig S. McKasson - Premier, Inc. (North Carolina).

Steven J. Valiquette - Bank of America Merrill Lynch Ryan S. Daniels - William Blair & Co. LLC Eric W. Coldwell - Robert W. Baird & Co., Inc. (Broker) Eric Percher - Barclays Capital, Inc. Lisa Christine Gill - JPMorgan Securities LLC Jamie Stockton - Wells Fargo Securities LLC Garen Sarafian - Citigroup Global Markets, Inc. (Broker) Nicholas M.

Jansen - Raymond James & Associates, Inc. Sean W. Wieland - Piper Jaffray & Co. Mohan Naidu - Oppenheimer & Co., Inc. (Broker) Richard Collamer Close - Canaccord Genuity Group, Inc. Sandy Y. Draper - SunTrust Robinson Humphrey, Inc. Sean Dodge - Jefferies LLC Michael Cherny - UBS Securities LLC.

Good day, ladies and gentlemen, and welcome to the Premier Incorporated Fiscal Year 2017 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Jim Storey, Vice President, Investor Relations. Sir, you may begin..

Thank you, Chanel, and welcome, everyone, to Premier's fiscal 2017 first 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 earnings release and the supplemental slides accompanying this conference call are available in the Investor Relations section of our website at investors.premierinc.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 to evaluate our business.

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

Thanks, Jim. Welcome, everyone, to our fiscal first quarter conference call. I'll start today with a quick overview of the quarter and the opportunities we see ahead given our strong market positioning. Mike will then provide an operational update and Craig will walk through the quarter's financials in more detail.

As you know, Premier's provider-aligned business model is powered by multiple revenue drivers that distinctly differentiate our company as a market leader in our nation's evolution to a provider accountable, value-based healthcare delivery system.

We believe our integrated offerings, developed in collaboration with our members, position our company to achieve continuous growth over the long term as we also build sustainable long-term stockholder value. In our first quarter, we achieved 16% consolidated net revenue growth and a 6% rise in non-GAAP adjusted EBITDA from a year ago.

This was led by continued strength in our Supply Chain Services segment. Diluted earnings per share and non-GAAP fully distributed earnings per share each increased 8%. Our first quarter performance supports the full year expectations we articulated when we established fiscal 2017 guidance last quarter.

Today we are affirming our fiscal full year revenue and adjusted EBITDA guidance and increasing our adjusted fully distributed earnings per share guidance range to now reflect 9% to 16% growth for the full year. We continue to believe Premier remains well-positioned strategically for the long term as the market continues its move to value-based care.

So let's talk more about our strategic positioning. When assessing our performance and our potential for future growth, it's important to understand that our strategy is built on the underlying strength and performance of our Supply Chain Services businesses, particularly our group purchasing organization.

We believe this is a distinct advantage for Premier in this changing market. Our GPO's consistent performance and cash flow generation enabled Premier with our strong balance sheet to invest in areas that leverage our capabilities to the future opportunities inherent in value-based healthcare.

Many of you have heard me state that we strive to be 18 to 24 months ahead in terms of where the market's going. We continuously work inside member health systems and leverage our unique data, insights and experiences to help shape federal and state government programs and prepare for future healthcare delivery and payment models.

So as the market evolves to encompass performance across multiple providers beyond the inpatient stay, health systems will require integrated data and solutions that span the entire care continuum, data and solutions that help them lower cost, improve quality and safety and take full responsibility for community populations.

We've been preparing and planning for this evolution by building and acquiring the technology and advisory services capabilities to ensure that Premier and our member health systems succeed in this transition as well as in the long term.

Specifically, a major recent catalyst for this continuing evolution has been the MACRA legislation and its impact on physicians and clinicians. As we discussed last quarter, we've been working closely with many of our health systems to prepare for this shift.

At the end of our first quarter, Premier's top-ranked value-based advisory service was very active with members on MACRA as interest in our services and technologies continues to grow with last month's release of the final MACRA rules.

With MACRA and all of the other programs, we've been expanding and enhancing our leading technology capabilities in the acute quality and performance improvement market and we've combined that with several acquired and internally developed ambulatory assets.

We are launching a new Premier clinician performance management platform, which we've been building over the last year since our acquisition of CECity. This is a fully integrated solution.

Within one platform, clinicians have the ability to track clinical and financial performance metrics for all pertinent federal, state, and commercial payment programs. They also can benchmark their performance against others. They can obtain continuing education certification and track performance in the new MACRA program.

Our beta and presales process has generated excitement in the market and we plan to launch this new solution in December.

So, while we're in an election cycle full of rhetoric and confusion, and the recent MACRA rules allows for some flexibility in reporting in the short term, the original implementation date of 2019 remains intact with data collection beginning in 2017.

This reinforces the inevitable shift to value-based payment with associated reporting and improvement needs across the continuum. We do believe Premier is uniquely positioned with integrated technology and wrap-around advisory services that address the needs of our members in this shifting market environment.

And we do not believe any other competitor possesses these same types of combined capabilities that enable healthcare systems to do all of their regulatory reporting, ACO, bundled payments, MACRA, value-based purchasing in one place while at the same time maintaining a comprehensive view across all their hospitals and all of their providers.

Premier has been making the necessary investments to ensure that these solutions are in place, and we're experiencing solid sales bookings in our Performance Services segment, and an active pipeline under the new leadership of Leigh Anderson and Kelly Rakowski.

In the short term, we're managing through some transitional market dynamics and performance services that we've identified and discussed previously. These include lengthier and more complex sales cycles, and longer implementation and delivery schedules, resulting for more comprehensive integrated engagement.

In addition, our advisory services business is experiencing some extension in revenue recognition timelines associated with certain performance based engagements. While we expect Performance Services conditions to continue through the second quarter, we remain optimistic about our revenue and earnings outlook in the second half of fiscal 2017.

We also continue to believe the longer term market dynamics offers significant strategic growth opportunities and we've been investing and preparing for success in that regard. Let me now turn the call over to Mike Alkire, our Chief Operating Officer..

Thanks, Susan, and thanks to everyone joining us on the call. I am also excited about the progress we are making to position Premier for the future. Today, I want to provide an operational update on our business and also review our growth strategy, which to Susan's point, is derived from our multiple revenue drivers.

Looking across our businesses, our group purchasing organization continues to drive strong and consistent growth and our products businesses continue to expand participation with members, also enabling growth in the Supply Chain Services.

Our Performance Services offerings are showing progress, given the ongoing market dynamics impacting the industry in these areas. We continue to develop, invest in, and introduce new technology-enabled solutions.

Our wrap-around advisory services are winning larger, more complex engagements that are expected to drive future performance, and our enterprise analytics solutions continue to support the realization of both cost reduction and quality improvement for our members as well as our analytics who assist in managing patient population across the members' integrated delivery networks.

Additionally, our recent acquisitions are performing as expected and contributing both financially and operationally to build long-term growth. We continue to evaluate and pursue additional opportunities that we believe will also contribute to our long-term growth in stockholder value.

Let's look more closely at a few of our recent successes in the market. We are continuing to pursue opportunities created by the recent market disruption resulting from the merger in the GPO industry earlier this year. Our business development teams have been very active on this front, responding to inquiries and establishing relationships.

While this process can take 18 to 24 months, we are optimistic that our integrated capabilities and value proposition uniquely position Premier in this space. And we expect it will translate to additional growth opportunities.

As we announced last week, we just secured a broad engagement with Northern Arizona Healthcare, a regional provider employing 3,000 healthcare professionals across two hospitals and multiple ambulatory clinics, surgery and treatment centers.

Northern Arizona Healthcare contracted for Premier's group purchasing services, SaaS-based supply analytics and advisory services, with a focus on reducing costs while maintaining or improving quality of care.

They've cited our reputation, scale and integrated technology as the key criteria in selecting Premier as their performance improvement partner. We also announced in September an all-in total cost reduction project with Verity Health System.

This engagement, which includes technology and large advisory services component, will support the six hospital systems' cost reductions imperative, focusing on improving supply expense, pharmacy cost reductions, physician preference and overall purchasing practices.

Verity and the advisory team will leverage our GPO and cloud-based supply chain management and quality analytics. Finally, we have developed a unique technology-enabled, High Reliable Care dashboard for a progressive academic health system, which provides functionality for the executive team to drive standards of care across their system.

Using this extensive expertise analytics capability, our advisory services and integrated proprietary datasets (13:10) to identify more than $50 million in system line improvements.

As far as new development and enhancing our offerings, we continue to focus on building or acquiring those assets that meet the needs of our members across our Supply Chain Services and Performance Services segments.

At Supply Chain Services, for example, we remain attracted to the potential of an alternate site group purchasing, a fragmented but growing market where administrative fee revenue growth generally outpaces the rate of growth at our acute care GPO.

We already have a team focused on growing that business organically and also benefit from a 50% equity ownership interest in Innovatix, one of the nation's largest alternate site GPOs. Similarly, on the Performance Services side of our business, we continue to be interested in acquiring additional population health capability.

We also continue to develop our integrated pharmacy offering, where we believe Premier is uniquely positioned to help our provider health systems drive down drug costs, create pricing transparency, and drive competitive friction.

Rising drug prices are one of the healthcare industry's biggest challenges, as underscored in a recent Premier survey where 94% of our members' C-suite executives rated increasing drug prices as one of their top concerns. We're working with our members and partners to combat rising drug prices.

In the case of price inflation for drugs in short supply, we're working to bring new manufacturers TO the market and leverage new approvals of generic and biosimilars. We continue to leverage our scale and technology to create competitive friction to drive down drug pricing.

And further, we will continue to build out our comparative effectiveness and logistical solutions to improve the speed to market and acceptance of biosimilars.

Our integrated pharmacy strategy encompassing our national contract portfolio, specialty pharmacy infrastructure, and PBM (15:24) relationship helps to create the transparency and competitive friction needed in the market to drive total cost reduction and improve quality outcomes for all of our members.

Further, our ability to work collaboratively with providers across the care continuum, allows for real-time interaction to support their high-cost chronically ill patient which we believe will further solidify and grow our member relationships supporting long-term shareholder value.

In conclusion, Premier continues to build out our unique set of integrated solutions, which we believe will drive significant growth over the long term.

In any economic or regulatory environment, we're able to leverage our Supply Chain Services and enhanced analytics, and wrap-around advisory services to help our member health systems drive cost and quality performance. Thanks for the time today. I'll now turn the call over to Craig McKasson, our Chief Financial Officer..

Thanks Mike. As Susan noted, our first quarter consolidated financial results support the full year financial performance expectations that we articulated when we established guidance in August. We believe we are positioned to drive solid revenue and adjusted EBITDA growth for our fiscal 2017, consistent with our current guidance.

In addition to the assumptions we disclosed when we first provided fiscal 2017 guidance in August; our guidance range contemplates consistent performance in our Supply Chain Services business, as well as accelerating growth in our Performance Services business in the second half of the fiscal year.

Now let's walk through the first quarter results in more detail. Consolidated net revenues of $313.3 million increased 16% from a year ago. Supply Chain Services net revenue increased 19% to $233.8 million and Performance Services net revenue rose 7% to $79.5 million.

Within Supply Chain Services, our core GPO business delivered growth of 7% from a year ago which was primarily driven by contract penetration in both acute and non-acute members and the ongoing positive impacts of the conversion of newer members.

Our direct sourcing and specialty pharmacy businesses combined to produce 36% top line growth in products revenue for the fiscal first quarter from a year ago.

Both businesses continue to benefit from increased member participation, partially offset by the ongoing industry-wide decline in specialty pharmacy revenues associated with the treatment of hepatitis C. Our products business did include a contribution of $23.4 million from the recently-acquired Acro Pharmaceuticals business.

Excluding the contribution from Acro and the impact of the hepatitis C market dynamic, the products business grew revenue 17% from a year ago.

Given the focus on direct and indirect remuneration, or DIR fees the past couple of days, we would like to point out that our financial statements include the immaterial impact of DIR fees within product revenues in which specialty pharmacy revenues are reported net of DIR fee.

Additionally, we do not believe DIR fees will have a material impact on our Supply Chain Services or consolidated revenue or adjusted EBITDA financial performance in fiscal 2017.

In Performance Services, the 7% year-over-year revenue increase resulted from continued growth in our SaaS-based information technology business of 11% with relatively flat growth in our advisory services business from a year ago.

We don't anticipate Performance Services growth to accelerate until the second half of our fiscal year when advisory service engagements are expected to yield revenue recognition and ambulatory regulatory reporting delivers revenue growth in the third quarter when the annual reporting occurs.

Consolidated non-GAAP adjusted EBITDA of $110.8 million for the quarter represents a 6% increase from a year ago, with Supply Chain Services increasing $14.4 million or 14% and Performance Services decreasing $2.6 million or 10%.

The increase in Supply Chain Services adjusted EBITDA primarily reflects the consistent growth in net administrated fees, growth in direct sourcing and specialty pharmacy, augmented by contributions from the recent August acquisition of Acro, as well as equity earnings from our 49% equity investment in FFF Enterprises made at the end of July.

Our investment in FFF protects our relationship with a key supplier to our members in important areas including vaccine and blood products. We reported $3 million in FFF earnings in equity and net income of unconsolidated affiliates in our fiscal first quarter.

The majority of FFF's earnings occur at this time of year as a result of vaccine distribution for the flu season. We don't expect FFF contributions for the balance of the year to have a material impact on our financial performance.

The decline in Performance Services adjusted EBITDA in the first quarter results from costs associated with staffing investments aimed at future growth and delivery of engagement in advisory services that were not offset by revenue growth in the quarter.

Corporate adjusted EBITDA was impacted by a $6 million or 26% expense increase from the prior year primarily related to the addition of corporate infrastructure including data center consolidation, cyber security initiatives and additional staffing as well as from acquisitions that were not fully reflected in the prior year.

The year-over-year rate of increase in corporate expenses is expected to decline in future quarters and we currently expect full year corporate expenses included in adjusted EBITDA to increase 5% to 7% from fiscal 2016.

Looking at bottom line performance, GAAP net income increased 11% to $58.1 million for the quarter from a year ago and GAAP diluted earnings per share increased 8% to $0.26.

Non-GAAP adjusted fully distributed net income increased 5% to $58.9 million for the quarter and non-GAAP adjusted fully distributed earnings per share increased 8% to $0.41 per share. As a reminder, we do guide to adjusted fully distributed earnings per share as a result of our corporate structure and quarterly member owner share exchange process.

This non-GAAP measure 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. Further, income taxes are calculated as though the entire company is a taxable C-Corporation.

I would like to point out that because of a statutory reduction in the North Carolina corporate income tax rate from 4% down to 3% finalized in September, we are now calculating adjusted fully-distributed earnings based on a 39% tax rate beginning with our fiscal 2017 first quarter. The prior year's results were calculated at 40%.

As a result of the impact of this tax rate change and the retirement of approximately 3 million Class B common shares in connection with the cash settlement of a portion of our October member share exchange, we are increasing our guidance range for adjusted fully-distributed earnings per share by $0.05 and the new range is $1.76 to $1.87.

From a liquidity and balance sheet perspective, cash flow from operations in the quarter was $41.8 million compared with $22.7 million last year.

The increase in cash flow from operations is primarily because current-year operations do not include a one-time $15 million prepayment made to a distributor in the first quarter last year to obtain price discounts. First quarter non-GAAP free cash flow totaled $2.4 million compared with negative $16.9 million last year.

The improvement results from the current-year operations, not including that prior year one-time distributor payment just mentioned. First quarter free cash flow is typically lower due to the payment impact of certain fiscal year-end expenses, including annual incentives.

We currently expect that full-year free cash flow will continue to be in the range of 40% of adjusted EBITDA. We define free cash flow as cash provided by operating activities less purchases of property and equipment as well as quarterly tax distributions and annual tax-receivable agreement payments to limited partners.

During the first quarter we spent approximately $134.4 million in cash to fund the acquisition of Acro Pharmaceutical Services and the 49% equity investment in FFF Enterprises.

As a result our cash and cash equivalents totaled approximately $156 million at September 30, 2016 as compared with $296.7 million in cash, cash equivalents and short and long term marketable securities at June 30, 2016. We had no outstanding balance on our five-year $750 million revolving credit facility at quarter year end.

Subsequent to quarter year end, we did use approximately $50 million of available cash and $50 million in borrowings under our long term credit facility to settle a portion of the October 31 Class B common unit exchange, totaling approximately 5 million units.

Approximately 3 million Class B units were settled for cash and retired, which reduced our overall outstanding share count. And the remaining Class B units were exchanged on a one-for-one basis for shares of Class A common stock.

Looking forward, we cannot predict if we will continue to use cash to settle quarterly exchanges, but we'll continue to appropriately assess the settlement method.

Our primary focus continues to be growth and expansion of our capabilities and overall offerings, but we will continue to evaluate the use of cash to settle all or a portion of future exchanges if we determine it to be an appropriate use of capital at that point in time. With that, let me turn the call back over to Susan..

Thanks, Mike and Craig. So before opening the call to questions, I'd just like to share a few final thoughts about our future. When I think of some of the growth challenges that public companies in the healthcare space are facing and then look at our prospects, I'm excited by the unique potential that I see in Premier's diversified capability.

Our multi-channel business model means we can pull many revenue levers to help drive growth. At the same time, the powerful cash flow engine in our GPO and our consistently strong balance sheet allow Premier to build and invest through acquisition, minority equity investment and most recently, cash settlement of our Class B unit exchange.

These are critical components enabling both strategic and financial growth, and we intend to continue to employ them as we move forward, building our business for the future and long term value for our stockholders. With that, operator, we're ready to open the line for questions..

Thank you. And our first question comes from the line of Steven Valiquette of Bank of America Merrill Lynch. Your line is now open..

Thanks, and good afternoon. So, and I guess for us it's obviously encouraging that the DIR fees are essentially immaterial because it's not really a fun topic for anyone.

I guess just for us in the specialty pharmacy house (28:57) just on a go-forward basis, including Acro, is there any color on how much of your revenue mix is Medicare versus commercial. Just to get a rough sense for that and hopefully we can just put to bed any concerns about the DIR fees..

Yes, thanks, Steve, for the question. This is Craig. So today, somewhere in the range of 30% to 40% of our specialty pharmacy business would be Medicare related.

I do think it's important to note that from a DIR perspective in our business today, we have a nominal or a lesser amount with the particular organization that assesses those fees today, which are effectively pay for performance fees, 75% of which are based on medical adherence.

And I would remind that our provider-centric approach to specialty pharmacy is really focused on ensuring we have the highest medical adherence ratios in the industry which helps us in that regard. And so we haven't had as much exposure as some others may be talking about in the marketplace.

We will continue to be incredibly focused on delivering high levels of adherence, high levels of performance, because no one is more incented to ensure that occurs than the providers themselves that have the risk for that patient care in an accountable care world..

Okay. Great. Thanks..

Thank you..

Thank you. And our next question comes from the line of Ryan Daniels of William Blair. Your line is now open..

Hi, Ryan..

Hey, Susan. Thanks for taking the question. A follow-up for you on your prepared commentary on the clinical performance management platform, can you talk a little bit more detail.

I'm curious if that incorporates a number of other tools that you're offering, and CECity into a broader platform or if that's really a new offering for reporting and benchmarking and I guess physician network management..

Yeah, so Ryan, as you will remember, we're the market share leader in the acute care quality and safety space. We did acquire CECity. That gave us first in market in ambulatory regulatory reporting. We have combined those into a platform and an offering, and we've been beta testing it, we demonstrated it at Breakthroughs and at HIMSS.

We're launching it in December. It is an offering and there are additional revenue streams associated with the new offering. We do obviously intend to pursue people who are using the existing quality and safety application, as well as new customers that will be potentially looking at it for the first time.

So this is really the hard work we've done since a year ago when we acquired CECity to combine it on a platform..

Okay, perfect. All right then (31:45). Maybe one for you, Craig, you've talked about the back half improvements in Performance Services growth and I know you highlighted some reporting mandates that'll come in the third quarter as well as a uptick in advisory services.

But I'm curious if you still need to sell more engagements and more reporting tools to hit the targets, or is your visibility there really based on kind of what you already have in the near-term pipeline or already under contract. Thanks..

Sure. Thanks, Ryan. So it's really a combination. We obviously don't have the entire book of business for the back half of the year sold yet. However, what I would highlight is that our ambulatory reporting tracking at this point in terms of what will yield revenue in the third quarter is reflecting a double digit improvement over what we saw last year.

And from an advisory services standpoint, there are a number of significant and large engagements that we are working on and servicing today, but the revenue recognition will come in the second half of the year.

So we do have a high level of confidence in our ability to have additional revenue and profitability performance take place in the back half of the fiscal year..

And essentially, Ryan, we're incurring those costs in Performance Services for the people doing that work and we're going to recognize the revenue in the back half of the year. They're hard at work on what our large-scale improvement cost and quality engagement..

Okay. Great. Thank you for the color. I'll hop back in the queue..

Thank you..

Thank you. And our next question comes from the line of Eric Coldwell of Robert W. Baird. Your line is now open..

Hi, Eric..

Hey, good evening. Just a couple of quick ones here, first one, technically small question but CECity and Healthcare Insights, they were not fully annualized in the quarter.

Could you give us their inorganic contribution to growth?.

Yeah, it's in the $4 million to $5 million range for the quarter is the contribution from those businesses. They continue to be on track to deliver the full-year guidance that we articulated of $40 million to $50 million. Again, there's some seasonality to that business given the annual regulatory reporting that I discussed.

But they are on track to deliver the top line and the adjusted EBITDA contribution they articulate..

Yeah. That's great. And then just – I hate to beat the DIR horse, but maybe a couple of quick follow-ups on that. First off, understanding that your Med D exposure is less than perhaps another party in the market that had an issue last week, and you might have less exposure to the large pharmacy PBM combo that's taking these fees.

But to the extent that you do have exposure to that account, are the fees what you expected, or perhaps higher than you originally expected but manageable within the scope of your overall business..

Yeah I'm not sure I would say that the fees were higher than we expected. I think we continue to manage the performance of our services to ensure that our medical adherence rate is as high as possible as I mentioned earlier, which is 75% of the calculation of those DIR fees, and then the remaining 25% is on a couple of other characteristics.

We will continue to monitor to this. We do understand the mechanics of how it's being determined to the best of our abilities. And so we'll continue to manage that but do not see it as a significant exposure for us at this point in time..

Okay. Go ahead (35:04). Go ahead. Yeah..

There's one primary market participant today and that participant represents a very small portion of our business..

That's very helpful. Thanks so much, guys..

Thank you. And our next question comes from the line of Eric Percher of Barclays. Your line is now open..

Hi, Eric..

Good evening. Thank you. On the capital deployment side, I appreciate your commentary about looking at repurchase each year anew, or maybe each time anew.

As you consider your other priorities, could you give us a bit of an update relative to what we see are high valuations in technology and some recent investment on the specialty side, maybe a bit of prioritization?.

Yeah, so Eric, as you know, we have a very strong balance sheet and a lot of debt capacity. We have acquired a number of companies and we believe in fully integrating those companies. So we've been hard at work on all of that over the last year and the last several months. We did acquire Acro. We're in the thick of integrating Acro.

We, as we said in the conference call comments, we are interested in alternate site. It continues to grow at a faster rate than the acute care GPO business and so we continue to be interested in alternate site. We continue to be interested in population health technologies and analytics and services.

But we are, in the pharmacy space, very focused right now on integrating Acro, consolidating and combining it with our Commcare capabilities and our integrated pharmacy strategy..

Okay.

And relative to the FFF piece, you just spoke about the need to secure a relationship, how often could that or would that be the case? And how do you consider access versus sheer expansion in the specialty space?.

Yeah, so what I would say is FFF was sort of an unusual situation where one of the co-owners passed away and this was a key supplier for our members and they play a really important role in blood products and vaccines. And so we stepped in and it gives us some interesting capability as biosimilars come to market.

So I think that, and it is part of the fully integrated pharmacy strategy, but again as I said earlier, we are in the process of making sure the connectivity to FFF and the integration of our specialty pharmacy and the transparent PBM model we have, which we think is also different in the market, that all of those things are working well together.

So that's where our focus is right now..

Thank you..

Thank you, and our next question comes from the line of Lisa Gill of JPMorgan. Your line is now open..

Thanks for that (38:06)..

Hi, Lisa..

Hi, Susan. Good afternoon, everyone. I just really wanted to follow up though just talking about your integrated pharmacy opportunities and some of the comments that you made around driving biosimilars and comparatives, effectiveness, etcetera.

Can you maybe just help me to understand how that would work within the hospital system? So, are you working towards formulary management with hospitals and taking that biosimilar and replacing the branded product? I'm just trying to understand one, how that works, and then secondly, is it through your specialty pharmacy, how it works specifically for Premier..

Hey, Lisa. This is Mike Alkire. So just a couple things, as you know our integrated pharmacy story really is all about driving down costs for our healthcare system. It's getting access to limited distribution drugs. And it's also to help create healthy markets where there are drugs that are in short supply.

So, those are the three key tenets that we drive our strategy around. If you think about the biosimilars, obviously, we think that there is going to be somewhere between 15% and 30% savings.

The way that we used to play in that market is one, is we do bring our data and our healthcare delivery capabilities to help those organizations assess the comparative effectiveness of those therapies, vis-à-vis the biologics.

And so we're in (39:35) a number of conversations and we've been doing a number of real world sort of research service program looking at those therapies to assess the effectiveness of these biosimilars. So we think that we are very, very well positioned. Not all of these biosimilars are going to require a specialty pharmacy.

Some might, depending on how those therapies are actually dispensed. But to Susan's point, we wanted to make sure we still have that logistical channel of FFF to actually help us with the distribution of those biologics if we decided we needed to leverage it..

And I think, Lisa, some branded are not on contract if they have no competition. But a biosimilar who wants to get to market and wants to get to market with a clinical effectiveness wrap-around and sort of a test hospital market, we're a great place for that..

And so when I think about how Premier fits into that, you'd fit into that more as like a traditional specialty pharmacy so you'll make some level of a spread on the drug. I'm just trying to think about it from a financial perspective as to how it impacts your model..

So, typically, if we were to file someone (40:50) right now, we think that we're working with a number of organizations and it looks like it's an admin fee model that we're currently contemplating. And then those that we literally would be – we dispense, obviously it would come through as product revenue.

But right now, we think the majority of that is going to come through the GPO..

Okay. Great. And then just my follow-up would be on the DIR fees. I know this is a big topic right now, but you're talking about one specific PBM that has implemented them.

Craig, have you thought about what it would mean if others were to implement them at some point in calendar 2017? Or would you have already signed a contract and know about that as we move into calendar 2017?.

Yeah, so we've reviewed our agreements with our payer contracts that we have. That is the only one that currently has that on a couple of the plans that they administer, not all of them, and it's a minority of the plans that we have business with today.

We will continue to work with other payer relationships and PBMs as we move forward to ensure that there's good transparency to the calculation and the determination of those fees.

And then, as I mentioned earlier, that we continue to execute and perform on the high quality of our specialty pharmacy business to ensure that we minimize the exposure to any type of fee like that that is based on a pay per performance approach..

Okay, great. Thanks for all the comments..

Thanks, Lisa..

Thank you. And our next question comes from the line of Jamie Stockton of Wells Fargo. Your line is now open..

Hi, Jamie..

Hey, good evening. I guess maybe just real quick on the specialty pharmacy business, just the legacy business and the growth profile there. Well, within the products business overall it sounds like hep C created something like 10 points of headwind or something like that for the organic growth rate of that business.

Can you talk about how you expect that to change over the next two or three quarters? I think what you guys originally guided for this year you said that you felt like that product segment would grow 15% or 20% ex the Acro business and I'm just wanting to know kind of your updated thoughts on how that's going to flow..

Sure, Jamie. This is Craig. So a couple of quick points, first of all, I would say that the quarter that we just reported on was below water mark in terms of the deterioration we saw in hepatitis C business.

So we think that we will begin to see that improve at a steady state, not at the atmospheric growth rates that you saw in the past, but it will grow moving forward. In terms of the organic products business, we continue to believe that will grow in double digits as we've talked about in the past, as we move forward..

Okay, that's great. I think actually I'll stop there. Thanks..

Thanks, Jamie..

Thank you. And our next question comes from the line of Garen Sarafian of Citigroup. Your line is now open..

Hi, Garen..

Good afternoon, Susan and Craig, Mike. A couple questions, first I guess, on the GPO side, you've been mentioning the strength and the new opportunities that are coming up.

You were a bit ahead of the Street estimates on the GPO side so just wondering how much of the strength on the GPO side this quarter was new clients versus just core client expansion. I didn't hear when (44:26) you sort of announced two major new clients so I just wanted to clarify that there..

Yeah, this is Craig. I'll kick it off and then Susan or Mike can add any color. But the majority of our growth in the first quarter was the ongoing contract penetration of our existing members, although we do continue to have benefit of conversion of members that we've brought on over the past 3, 6, 9, 12 months.

We do have the offset or the impact of Vanguard which we've previously talked about on prior calls. So that on a net new member basis, is impacting that to some extent but we are still seeing benefit from the addition of new members.

But the majority of the growth is coming from our existing member and continued penetration and use of their contracts..

The market disruption piece, Garen, we're in the process of RFIs and RFPs right now. And a lot of these organizations haven't looked at competitors, some of them in 10 or 15 years. So we're spending a lot of time doing deep drill down reviews of our capabilities with them.

So we're still in that 18 to 24 month cycle, we think, to identify and win some of those accounts and bring them over so they would not be reflected in these numbers..

Got it. That's actually very useful. And then secondly, I guess, given the timing of this call and what's going on, I wanted to ask a macro question on elections.

How are you discussing and planning for the range of possibilities from this week's election? So what sorts of impact could the various scenarios from the possibility of a Republican candidate president to a full Democratic sweep have on health trends specifically on you guys, Premier, of course? And then related to that, sort of what's in your control that you're sort of developing strategies around?.

Yeah, so I would say that in any case this focus on cost reduction, quality improvement, safety outcomes and these alternative payment models, we think that's happening in any case. What it's called, what form it takes, we think could change but the overall problem that needs to be solved doesn't change.

We think the biggest impact in the market is whether there's a sweep either way. So if there's a Democratic sweep, meaning at the administration as well as congress, then we think the train just moves even faster to alternative payment models, ACOs, bundled payment.

If Hillary Clinton expanded the Medicare eligible age down to 55, a lot of these programs would affect that many more people. If it were a Republican sweep, meaning Trump plus Republican control of the house and senate, we think that would create more uncertainties as those folks try to figure out what their replacement plan might be.

It would incorporate a lot of the same bipartisan ideas we think, like ACOs and alternative payment models and MACRA, all of which were bipartisan sort of ideas, but we do think there would be a period of uncertainty if it were a sweep.

We actually think what's going to happen is you're going to have divided government, you're going to have both Democrats and Republicans who have a framework to work within that maybe will be tweaked, revised, added to or taken from. But the train for alternative payment models, cost reduction, quality and safety will keep going down the track.

We've tried to build a little bit of uncertainty around that into our guidance for 2017..

All right. Thanks for your thoughts..

Yes, thank you..

Thank you, and our next question comes from the line of Nicholas Jansen of Raymond James. Your line is now open..

Hi, Nick..

Hey, guys. A lot's been discussed but maybe I just want to focus a little bit more on the seasonality of the Performance Services segment. I know with the introduction of CECity last year, it brought a lot more lumpiness into the quarters.

But is there anything, I know you're saying back half weighted for this year, but is there any kind of observations you want to make about sequentially so we can true up our models. And I think that's the biggest delta relative to expectations right now. Thanks..

Sure, Nick. This is Craig. Thanks for the question. What I would highlight is that from a second quarter perspective, while I think you will anticipate sequential growth over the quarter that we just closed, we did have our high-water mark from a comparable period last year in the second quarter.

So I do think you will see lower growth rates as a result of that tougher comp. And then you'll see the acceleration in the third and the fourth quarters in terms of the higher growth rate.

What I would say is, generally over the past couple of years our Performance Services revenue has tended to be in kind of the 48% in the first half, 52% of the revenue coming in the back half of the year.

This year, as a result of some of these revenue recognition extensions in the advisory services piece and the growth that we're seeing in the CECity ambulatory reporting, I think that's going to be more of kind of a 45% to 55% split in terms of revenue, front half to back half of the year.

And then that has given that revenue mix and kind of the more static nature of the expense base has an even more pronounced impact on the EBITDA contributions, where I think you will see more of a kind of 40% 60% EBITDA impact first half of the year versus second half of the year..

That's extremely helpful. And then the second question just on FFF, I know you said the flu vaccine drives the performance in the September quarter.

So in terms of just making sure we're all modeling this correctly, from here on out the September quarter should be the strongest equity earnings contribution as we think about the impact for the next three quarters? Thanks..

Yes. Thanks Nick. Good question as well. So September followed closely I would say by that October to December quarter as there's still some vaccines going in the early part of this quarter. And then the back half of the year is a much more nominal contribution.

I think you should be thinking about a full year contribution somewhere in the range of $6 million or so from that business in our current fiscal year..

Thanks, guys..

Thank you. And our next question comes from the line of Sean Wieland of Piper Jaffray. Your line is now open..

Hi, Sean..

Hi, Susan.

How are you?.

Good..

So I'm about to fill out my ballot here in California, and just was wondering what your thoughts are on Prop 61. I don't think you have any direct impacts on your business, but just as a precedent what that means for your business..

We believe in transparency. We fully believe in transparency. And our whole goal in life is to try to drive the cost of healthcare down, including the cost of drugs. And so the way our revenue goes up is with contract penetration and with advisory services and with people using our contracts when we create the competitive friction.

We're not big fans of government control, if you will, either at the state or the federal level because over time it doesn't become about what it really costs to deliver that service.

So we're watching what happens there, but our commitment to transparency and creating competitive friction is always what we're about in the pharmacy space along with clinical effectiveness..

Hey, Susan. This is Mike. Could I add? So Sean, to Susan's point and to get a bit more detail, we actually want to see healthier supply markets. We want to see more suppliers actually providing product where there's more competition which will put more pressure on pricing as opposed to what potentially could be thought of as a price control.

So our focus really is how do you build longer-term agreements to actually entice folks into these markets to create healthier supply markets..

Great. Thanks for your thoughts..

Thanks, Sean..

Thank you. And our next question comes from the line of Mohan Naidu of Oppenheimer. Your line is now open..

Hi, Mohan..

Hi, Susan. Thanks for taking my question. I just want to go back to the CECity segment a little bit. I know you guys have several partnerships with the electronic health record vendors about reporting and collection of data.

Can you give us some details about these partnerships? And what are you hearing from them about the potential demand for MACRA-related services around that?.

Yeah. So the EHR relationships continue to be in place. I think we discussed the four relationships we had on one of our prior calls. All of those continue to be in place. They continue to serve their physician clinician market for this reporting.

The estimates out of CMS are that something like 600,000 or so physician clinicians are going to report in this fiscal – or calendar – I guess this 2017 year. And they actually, the smart ones know that the more they report and the more measures they report, the better they're going to do.

And so we continue to work with our EHR vendors as well as to go direct to that market. And as Craig indicated earlier, we're seeing some nice growth in that area. So we think it's – there are some opt-out provisions for small physicians.

Again, most folks that we're talking to are saying this is inevitable, we need the infrastructure, we need to start figuring out how to do this. And we built a little bit of what could be a third quarter reduction in the meaningful use reporting just because of that optionality. But it's all embedded in our guidance at this point..

Okay. Great. Thanks for taking my question..

Thanks..

Thank you. And our next question comes from the line of Richard Close of Canaccord. Your line is now open..

Hi, Richard..

Thank you. Hello. How are you? So in Performance Services you have 7% to 13% I guess is your revenue targets there. And you're talking about the ramp up as we progress through the year.

Just thoughts in terms of what gets us to the low, what gets us to the high? And is there any risk in terms of these advisory services contracts? I guess they're related to cost and performance that you might not hit certain points and thus unable to recognize revenue..

Sure, Richard. This is Craig. So I'll break it into two components. From a technology standpoint, I would say the factors that could cause us to perform higher in the range versus lower in the range would be all around that annual reporting process.

To the extent that we see more pull-through from an ambulatory reporting perspective in the third quarter. To the extent we have conservatively estimated and expected what we will achieve in terms of establishing our guidance range. But if we saw more it would put us to the upper end on that particular side of our business.

If we were to see less or if something were to cause more people to opt out, it could be on the lower end of that. So that's the key driver I would say, from a pure technology standpoint. The nature of the rest of that business is annuity based.

So really at this point, sales that we're making at this point in our fiscal year tend to have more of an impact moving into the trough of the (56:09) subsequent fiscal year as opposed to the current year, although there is phenomenal impact obviously, of continuing to sell business in the current year as well.

On the advisory services side of the business, what I would say is to the extent that variability or timing to your point were to impact us, although we have very good track records, experience and history with these performance based engagements that we've talked about, in terms of knowing where we are, in terms of the delivery of those.

It's just a function of getting through the clock and the time period in terms of when those savings can be attested and signed off that will allow us to recognize the revenue.

And then the third element that I would talk about that there is some variability that could help us to the higher end of the range that we discussed is we do have this business around research services to organizations that enable us to the extent that we are able to do prospective type analysis with pharma and other companies to improve their performance.

That can actually yield revenue that would put us to the higher end of the range depending on our success there..

Okay. Thank you..

Thank you. And our next question comes from the line of Sandy Draper of SunTrust. Your line is now open..

Hi..

Hey, Susan, how are you? Hey, Craig, hey, Mike.

Just one quick clarification, I want to make sure the 40% 60% EBITDA comment you made, that's specific to just to Performance Services, correct? Not the entire business?.

That's correct. Yes..

Okay. Great. The second question is that I just want to do some sort of extend out mix question and look at the simple math. The back half of this year looks like Performance Services will be, clearly have to be double digits growth in order to get to your numbers.

So when you're there are you sort of thinking that's becoming, you've cycled through your challenges, cycled through comps and you can get back to a still a normalized double digit business longer term there? Or really is the full year is taking (58:19) out where it's mid to high single digits more – the more sustainable growth and it's just, there's a lot of lumpiness.

I'm just trying to think about how to extend out, because it's obviously a pretty big difference between first and second half growth, and just trying to think how to calibrate that in terms of what the longer term opportunity of this business is to grow. Thanks..

Sure. Thanks, Sandy. This is Craig again.

So as we've talked about when we established guidance for fiscal 2017, from an organic perspective, we talked about mid to high single digit performance and then with the contributions from the acquisitions we did within the past year at a double-digit level would get us to double digit targeted growth for the year.

That is holding true to this point. It is timing in terms of it coming into the back half of the year.

We have also talked about on the past couple of calls that we were in this period of election cycle, post-EHR implementations, relaxation of regulatory reporting requirements that was causing us to see a slowed growth rate, and with all the cost pressures that we're ultimately going to come, a desire and a need from our health systems to have more integrated solutions from a technology standpoint, and more comprehensive engagements from an advisory services standpoint to really get after this cost.

So we expected to see a lull in growth in calendar 2016 and we thought that we would – and hoped we would see that improve as we move into 2017. We see that playing out and our expectations are to continue to target double-digit growth out of that part of our business from a revenue perspective as we move forward..

Great. That's really helpful. Thanks..

Thank you..

Thank you. And our next question comes from the line of Sean Dodge with Jefferies. Your line is now open..

Hi. Good evening. Hi, Susan. I have just one. I'll keep it simple.

Craig, with you all having just gone through a relatively big exchange of member owner shares, is there anything you gathered during the process that helps explain why some of these members were bigger sellers just last quarter than they had been during the first handful of opportunities they've been given?.

Sure. What I would tell you is we've seen consistent behavior through the first three years. So I've talked about this in a number of forums but what we typically tend to see is the same organizations exchanging their equity through the first three years so in the first year we had about 4.8 million of the potential shares that could be exchanged.

Last October we had about 5.8 million that were exchanged and this year it's about 5 million. So each year when the one-seventh becomes eligible it's been about a consistent number that's transacted. It has tended to be either large organizations that are not healthcare providers themselves.

They provide services on behalf of a large number of healthcare service systems in a particular geography. They are using that cash flow, A, to fund initiatives and efforts that they're doing in their marketplace and, B, a couple of those were actually some of our largest owners.

And so from a risk diversification standpoint, they've been exchanging some of it so that they're not so concentrated in one company or equity investment.

That leads to the second driver that has caused a number of organizations to exchange which is some of our healthcare systems use their investment in Premier as a pure equity investment subject to investment committee or finance committee policies and guidelines which can lead to concentration, individual security limits, et cetera.

Whereas a large number of our health systems actually view their investment in Premier as more of a strategic investment, like they would have in a physician practice or a joint venture type of organization not subject to that criteria.

And then we do, given our large footprint, 170 plus health systems that own us, we do have some that may not be performing as well or have a need for cash flow and so have exchanged some of their shares. So I really haven't seen a change in behavior.

Generally most of the conversations I have with the CFOs of our member health systems that have been exchanging, it's been for one of those three reasons that I just articulated..

That's very helpful. Thanks..

Thank you. And our next question comes from the line of Michael Cherny of UBS. Your line is open..

Hi, Michael..

Hey, guys. Thanks for all the details so far. Most of the questions have been answered but I did want to go back – when you're talking through M&A you talked a lot about the alternate site of care. You're seeing better growth in that market. And I know this is something that you've talked about frequently but typically we don't go into a ton of details.

Can you just walk through a little bit of the competitive landscape in that market? And my understanding has been that you guys have been outgrowing the peers there, but kind of are you seeing the same GPOs that you do across the rest of your business? Who else competes in that market and what are some of the underlying growth drivers as well as potential barriers and risks to incremental growth opportunities?.

Yeah, so we actually have three (01:03:25) ways of going to market in alternate site, one is our 50% ownership of Innovatix. The other is our own direct alternate site GPO program. And the third is through our member hospitals who have their own GPO alternate site programs but they use our portfolio. So it's a widely dispersed market.

We go to market in three ways. We really compete mostly with a company called MHA that's owned by Roper, and obviously Vizient has an alternate site program as well. What we see with our combination of the three programs is that it's growing at a rate that's higher than the acute care GPO business.

It takes more feet on the street to support that business. We think it's an opportunity in penetration. We think it's an opportunity in new customers, and we think that if we could get synergies and bring the operations of these alternate site programs even more together that that would be an opportunity to continue to grow that business..

And Susan, this is Mike Alkire, real quick, couple of other quick thoughts. As our healthcare systems are building out integrated delivery networks, they are thinking through how do they provide services to drive down costs in the non-acute setting.

So, as we've discussed on prior calls, we have the building out technologies that actually extend our healthcare systems contracts and order entry capabilities out into those ambulatory markets. So we do think we have some very unique capabilities that will allow us to continue on our growth spurt (01:05:07)..

And the last thing, this is Craig, I would just add real quick, Mike, is that the whole industry trends of inpatient to outpatient movement that you're seeing in an accountable payer world, we're seeing that play out as we continue to look at utilization and all the things that are happening. So it's really where we have a focus longer term..

Excellent. Thanks..

Thank you..

Thank you. Ladies and gentlemen that does conclude today's Q&A session. Thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day..

Thanks..