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) Durral R. Gilbert - Premier, Inc. (North Carolina).

Jeff R. Garro - William Blair & Co. LLC Donald H. Hooker - KeyBanc Capital Markets, Inc. Sean Dodge - Jefferies LLC Robert Willoughby - Credit Suisse Securities (USA) LLC Eric Percher - Barclays Capital, Inc. Steven J. Valiquette - Bank of America Merrill Lynch Stephanie J. Davis - JPMorgan Securities LLC Mike Ott - Oppenheimer & Co., Inc. Nina D.

Deka - Piper Jaffray & Co. Evan A. Stover - Robert W. Baird & Co., Inc..

Good day, ladies and gentlemen, and welcome to the Premier Incorporated Fiscal Year 2017 Third 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 be given at that time.

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

Thank you, James, and welcome, everyone, to Premier, Inc.'s fiscal 2017 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 want 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 Form 10-Q, 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 the 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, and welcome, everyone, to our fiscal third quarter conference call. I'll lead off today's call with an overview of the progress we achieved during the quarter. Mike will then provide an operational update and Craig will walk through the financials in more detail.

I'm pleased to report that Premier delivered another quarter of strong profitability, while at the same time, continuing to expand our value proposition in the marketplace.

We believe our integrated solutions developed in collaboration with our members and leveraging proprietary data analytics and insights uniquely differentiate Premier in this competitive environment.

Our member health systems remain under constantly increasing pressure to better manage costs, produce higher quality patient outcomes and thrive in a value-based care world.

Looking at the third quarter year-over-year performance on a consolidated basis, we delivered 27% net revenue growth, we grew non-GAAP adjusted EBITDA, 14%, and non-GAAP adjusted fully distributed earnings per share, 18%.

Within our business segments, Supply Chain Services net revenue rose 34% year-over-year, driven by a 10% increase in net administrative fees revenue and a 73% gain in products revenue, both businesses benefiting from recent acquisitions.

Performance Services revenue increased 10%, fueled by 11% growth in advisory services and 9% growth in our Informatics and Technology business. In Performance Services, our physician quality reporting system, which we believe is the largest in the nation, grew revenue by 37% from a year ago.

PQRS is one of the many capabilities we acquired with CECity in 2015, and we expect its continued growth as the number of clinicians reporting quality and performance metrics rises in relation to the increasing at-risk amount of Medicare reimbursement.

While we did encounter some revenue headwinds in our lower-margin integrated pharmacy business this quarter, they did not appreciatively impact overall profitability nor are they affecting our fiscal full-year non-GAAP EPS guidance, which we are increasing today.

We're also experiencing more moderate overall growth for Performance Services revenues due to regulatory uncertainty in the marketplace.

Our updated guidance ranges, which Craig will discuss in further detail, reflect this reduced segment in total revenue, a tightened non-GAAP adjusted EBITDA range and increased non-GAAP earnings per share expectations for the year. Now, let's talk about our position in the marketplace.

Our nation's healthcare system continues to be one of the biggest social, economic and political issues of our time. Total healthcare spending reached $3.4 trillion in 2016. Today's healthcare providers are under increasing pressure to deliver more value while containing costs.

We believe Premier is uniquely positioned to help our health systems meet these challenges, both in today's environment and over the long term. Throughout our history, we've cultivated our ability to focus on the future, identify emerging market trends and build solutions to help our member health systems prosper in the changing landscape.

This vision drives our constantly evolving solutions platform, which is supported by our flexible balance sheet and strong cash flow. Our solutions are designed to help our members manage through these periods of intense change.

Through the uncertainties associated with the Affordable Care Act and now, the American Health Care Act, regardless of near-term twists and turns, change remains a prerequisite for success, as our member health systems continue their journey to higher quality, more cost-effective healthcare.

Speaking of emerging trends and constant change, just two weeks ago, we held a strategic advisory forum with senior executives representing more than 800 of our member facilities.

We discussed market trends, we provided demonstrations of the solutions that we're building and evolving, solutions like service line analytics, which you'll hear more about from Mike. One of our guest speakers was a senior official from the Centers for Medicare & Medicaid Services.

His message was that, despite the short-term uncertainties, accountable care organizations are going to continue. MACRA and the programs around it are going to continue. Bundled payments are going to continue and the focus on lowering the cost of healthcare is going to continue.

We also believe that many of the state Medicaid programs are adopting value-based payment models. Moreover, all five of the major national health insurers are expanding their value-based payment plans. In other words, our nation's journey to value-based care and payment is continuing.

Within Premier, our Population Health Management Collaborative experienced 10% membership growth sequentially in our third quarter. Over the past 18 months, our Medicare shared savings collaborative participants doubled to 41 ACOs.

We believe that outside of CMS, Premier operates the largest comparative claims analytics platform of Medicare ACOs in the nation, supporting members that represent over a million Medicare beneficiaries. So, I believe we're playing a leadership role in the healthcare transformation that is occurring across the nation.

We move forward as a leader in this transformation, confident in the value that we provide through our long-standing member relationships, value that's demonstrated in the 17-year average tenure of our member owners, and by our strong historical retention rates.

Based on our third quarter performance, we remain on track to achieve continued very high GPO retention and SaaS institutional renewal rates for fiscal 2017. The strength of these relationships helped us deliver strong profitability in the third quarter and provides the foundation for our company's continued growth.

Our business outlook for the fourth quarter remains positive. Our balance sheet is strong. Most importantly, we continue to deliver what we believe is unmatched value to our members by building and launching new technology, by making investments in our solutions and by staying focused on the future.

And this, we believe, will translate to long-term value and growth for our stockholders. So with that, let me now turn the call over to Mike Alkire, our Chief Operating Officer..

underperformance of Acro's former parent under a services agreement entered into when Acro was acquired; and a central-hub distribution process imposed by the manufacturer of one of these drugs which we discussed last quarter. Premier is working with Acro's former parent and the manufacturer to resolve these issues.

Given the lower margin nature of this business, the revenue shortfall has very minimal impact on the profitability of our overall organization.

We continue to focus our integration of our acquired companies, and as always, our business development team will continue to consider future investments based on strategic fits, financial return, cultural alignment and the ability to drive additional value to our members and long-term growth for our stockholders. Thank you for your time today.

Now, let me turn the call over to Craig McKasson, our Chief Financial Officer..

Thanks, Mike. I'll begin my comments with a brief overview of our third quarter, and then, discuss our financial outlook and guidance for the remainder of the fiscal year in more detail.

As Susan and Mike noted, we believe we performed very well from a profitability standpoint during the quarter, producing strong growth in non-GAAP adjusted EBITDA and adjusted fully distributed earnings per share. Consolidated revenue did not meet our expectations due almost entirely to the headwinds in our integrated pharmacy business.

The rest of our businesses in both Supply Chain and Performance Services performed in line with our expectations. Now, let's look at the quarter in more detail. From a GAAP standpoint, consolidated net revenue of $379.8 million increased 27% from a year ago. GAAP net income increased to $72.1 million for the quarter from a year ago.

After a non-cash adjustment to reflect the increase in the redemption value of limited partners' Class B common unit ownership based upon our stock price appreciation between the December and March quarters, the GAAP loss per share totaled $1.58. Drilling down into our performance, Supply Chain Services net revenue rose 34% to $285.2 million.

Net administrative fees revenue, including the contribution from Innovatix and Essensa, increased 10% from the same period last year. Organic growth in the quarter was impacted by periodic variability that sometimes occurs based on the timing of when cash and vendor reporting occurs at the end of the quarter.

We had some significant one-time events in the prior year that affected our year-over-year comparables. Excluding the effects of the timing variability and the prior year one-time events, year-over-year fiscal third quarter organic net administrative fees revenue growth approximated 5%.

Within the Supply Chain Services segment, our products business achieved 73% top-line growth from a year ago, driven primarily by the acquisition of Acro Pharmaceuticals and the double-digit growth in our direct sourcing business.

Our direct sourcing business benefited from the continuation of our pilot program in which we are employing technology-enabled consolidated purchasing that aggregates member demand for select products. This produces growth for Premier and additional cost savings for our members.

Looking more closely at our integrated pharmacy business, revenues missed expectations due primarily to the Acro-related issues that Mike just discussed. Additionally, our legacy specialty pharmacy business continued to experience declining sales for Hepatitis C drugs, consistent with industry trends.

Excluding the impact of Hepatitis C and Acro, product revenue increased 12% in the quarter. Turning to Performance Services, revenue of $94.6 million increased 10% year-over-year, which was in line with our expectations.

The increase is primarily due to 9% growth in the segment's Informatics & Technology Services business, which benefited from growth in ambulatory reporting, cost management and research. Our advisory services business produced 11% year-over-year growth, reflecting increased revenue from cost management and value-based care engagements.

Looking at profitability, consolidated non-GAAP adjusted EBITDA of $136.7 million for the quarter represents a 14% increase from a year ago. From a segment perspective, the 8% increase in Supply Chain Services non-GAAP adjusted EBITDA primarily reflects net administrative fees revenue growth from our Innovatix and Essensa acquisition.

In Performance Services, the 19% increase in non-GAAP adjusted EBITDA is primarily driven by revenue growth in Informatics & Technology Services as well as efficient expense management.

Non-GAAP adjusted fully distributed net income increased to $73 million for the quarter and adjusted fully distributed earnings per share totaled $0.52, representing an increase of 18% from a year ago. Reviewing liquidity, cash flow from operations for the nine-month period was $274.2 million compared with $270.9 million last year.

Non-GAAP free cash flow for the fiscal third quarter and nine months totaled $95.5 million and $155 million, respectively, compared with $97.9 million and $148.3 million for the comparable year ago periods.

The decline in free cash flow for the third quarter was primarily a result of increased outflows related to working capital needs and higher capital expenditures. The year-to-date increase in free cash flow from a year ago was primarily driven by increased net administrative fees and lower year-to-date capital expenditures.

Non-GAAP free cash flow represented approximately 70% of adjusted EBITDA for the quarter and 42% for the nine months ended March 31. While variability does occur in certain quarters, we continue to anticipate that full year free cash flow will exceed 40% of adjusted EBITDA.

From a balance sheet perspective, our cash and cash equivalents totaled $236.2 million at March 31, 2017, compared with $218.9 million at December 31, 2016. The increase is primarily due to growth in net administrative fees revenue. We had a balance of $367.5 million on our five-year $750 million revolving credit facility at quarter end.

Subsequent to the quarter close, we repaid an additional $97.5 million on the credit facility, reducing the outstanding balance to $270 million. Our balance sheet at March 31 does reflect an increase in inventory balances as a result of the Acro acquisition and the additional inventory for our direct sourcing business.

Now, let's look at guidance for the remainder of fiscal 2017. We are narrowing and adjusting full-year guidance ranges to reflect continued expectations of mid single-digit organic net administrative fees revenue growth, which increases to double-digit growth for the fiscal year when contributions from Innovatix and Essensa are included.

Products revenue growth for the full year, excluding contributions from Acro, are in the 6% to 8% range which is due primarily to reduced revenue contributions associated with Hepatitis C. Excluding Acro and Hepatitis C, product revenue would be expected to be in the 12% to 14% growth range.

Acro revenue of $180 million to $190 million, compared with our original estimate of $200 million to $220 million as a result of the issues previously discussed. And somewhat more moderate, overall growth expectations for Performance Services in light of the ACA and AHCA-related uncertainty that we continue to believe is in the marketplace.

Specifically, we are lowering revenue guidance for Supply Chain Services to a range of $1.08 billion to $1.12 billion, primarily due to integrated pharmacy. We are reducing the Performance Services range to $348 million to $357 million due to some of the market uncertainty just discussed.

These adjustments results in a consolidated net revenue range of $1.43 billion to $1.47 billion. Given that the majority of the change in revenue guidance relates to our lower-margin integrated pharmacy business, the impact on profitability guidance is minimal.

We are narrowing our full-year consolidated non-GAAP adjusted EBITDA guidance, which now reflects a range of $500 million to $510 million, and the range for non-GAAP fully distributed earnings per share has increased to $1.89 to $1.94.

Except for the impact of the adjustments I've discussed today, we are reiterating the remaining underlying assumptions that we have disclosed in prior guidance. Finally, turning to our quarterly exchange. On May 1, just under 1 million Class B units were exchanged on a one-for-one basis for shares of Class A common stock.

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

Thanks, Mike and Craig. Before opening the call to questions, let me reiterate that we believe Premier is uniquely well-positioned to lead in this constantly changing marketplace.

Our integrated offerings enabled Premier to deliver a comprehensive solution to help our members reduce costs, improve quality and continue their transformation to value-based care across the entire healthcare continuum.

In addition, we believe the value proposition and integrated solutions we deliver to our members promote long-term stockholder growth and value. We come together every day with our members to improve healthcare delivery in the communities across this country.

Success with our members is measured by improved outcomes, saved lives and lower healthcare cost. It's a noble mission and long-term endeavor and on behalf of our management team, I just like to thank you supporting us on this journey. So with that, James, I think we're ready to open the line for questions..

Thank you, Ms. DeVore. Our first question comes from Jeff Garro with William Blair & Company.

Your question, please?.

Hi, good afternoon. Thanks for taking the questions. I want to ask a little bit on the products side of things.

How should we think about the potential future contributions from Acro versus your original expectations? And so maybe in other words, how much of these headwinds that you've experienced so far are transient in nature?.

Sure. Jeff, this is Craig McKasson. Thanks for the question. Clearly, the Hepatitis C component of our specialty pharmacy has continued along the lines of industry trends. We do believe that has continued from a market perspective to get more down to the bottom of the cycle.

So I think that over time – but you will not – it'll narrow out, but I don't think you're going to see the explosive growth that you saw in the past.

From a standpoint of the issues that affected us with the Acro acquisition, it is all about the, particularly in the respiratory disease state, it is all about the number of patients that are referred into the program and we're issuing scripts for, given the nature of that disease state being a one that isn't long-term.

And so, we are hopeful with the mitigation steps that we're putting in place. We will be bringing new patients into the program to get that business back on a growth trajectory, but clearly, did lose significant revenue since acquisition as a result of that.

And in our direct sourcing business, the other component of our products business, is continuing to perform at a double-digit level and doing extremely well..

Great. Very helpful. One more, if I could, thinking about the very nice margin performance in this quarter and maybe looking at the guidance for the rest of the year and what implies for Q4, maybe a slightly lower margin implication for Q4.

So, I want to ask how much of that is a – has a seasonal impact? I know that CECity a really nice contributor in the most recent quarter versus maybe conservative on just some of the timing of expected revenue and expenses as we look into your fiscal fourth quarter..

Yeah. What I would tell you is that overall, our adjusted EBITDA in the quarter of 36% obviously did reflect an increase. I think you should continue to expect on a full-year basis for us to be in the 35% range on a consolidated basis. So, you may see a little bit of retrenchment from a margin perspective in Q4 but not significant.

There is always going to be some seasonality and variability with certain items. We do have our large member conference that takes place in June, so travel expenses do tend to be higher in the fourth quarter as a result of that..

Great. Thanks for taking the questions. I'll hop back in the queue for now..

Thank you, Jeff..

Thank you. Our next question comes from Donald Hooker with KeyBanc. Your question, please..

Great. Good afternoon. Yeah. I just wanted to, I guess, see if I could get an update on some of the sort of the GPO contract renewals.

I guess, the number of the members, I guess, are going to be, I guess, next year, I believe, are renewing some of their GPO contracts and kind of where you are there or maybe it's a bit – a little bit early but I was kind of curious just – you had any early visibility to that?.

Yeah. So as you know, Don, we have long-standing relationships with our members and their strategic relationships. So, we talk to them all the time and we've been in conversations for a while with them about a variety of issues.

We actually view the renewal process as an opportunity for us to continue to advance enterprise-wide relationships and an opportunity for additional cross-selling of some of our solutions into those accounts.

So, our perspective is that the discussion of admin fees is just a very small portion of the total value proposition that we're always talking to them about.

And so, we expect a great majority are going to renew with us at the current or similar economics, and they will continue to challenge us to deliver more and more cost savings and quality improvement and infrastructure for population health. And so, our view of it is it's an opportunity to continue to expand the relationship..

When do you get better visibility there as well? I guess, in October or September this year?.

Yeah. I think, we'll have better visibility over the next six months into the October cycle and these are automatic renewal contracts. And so, we're – we are very active in the process of the long-standing relationships and discussions that we have with these members..

And Don, this is Craig. The only thing I would add to that is that, of our member owners, so as we've talked about historically, they had majority, had five-year GPO agreements at the time of the IPO, those run through September of 2019.

About 25% of our member owners actually have terms beyond that September 2019 timeline, and actually, of all of our administrative fee revenue, about 40% is outside the window of the 2019 time period as well..

Okay. Let me ask one other one. The service line analytics addition, it sounded like you had some impressive hospital wins there.

Is that meaningfully impacting your revenues at this point or is that more fiscal 2018?.

It's still on the front end. I think you'll see it. We're in the install phase for a lot of that right now. So I think, it's done more of a fiscal 2018 impact..

Okay. Thank you so much..

Thank you..

Thank you. Our next question comes from Sean Dodge with Jefferies. Your question, please..

Yeah. Good afternoon. Maybe starting with a bigger picture question. Susan, you mentioned your clients continuing to work to transition to value-based care. And with efforts to repeal and replace these, do you see really dragging out in some of the more controversial pieces being softened.

Have you noticed any change in the urgency with which your clients are preparing for that transition?.

Sean, so I think we have built into our guidance adjustments, any thoughts about that. We're watching it as our members are and we think that the Senate will have quite a challenge in getting a legislation passed and it's got to go back to the House.

And so, I think that what's clear to our members is, this focus on cost pressure, this focus on clinical outcomes, this focus on ACOs and bundled payment and MACRA, none of those things are changing.

And so, if you think about our Supply Chain Services and you think about our technologies which are designed to really help them from an integrated approach deal with cost and quality and population health, we think they're continuing to build that infrastructure and we've built in a little bit of uncertainty just given the back and forth of what it's going to exactly look like..

Sure. Okay. And then, on Performance Services, Craig, you had mentioned previously the expectation of a pickup in advisory services revenue tied to – I think, it was getting clients to sign off on some savings you had already delivered.

Did those happen in the fiscal third or is it still expected to come in the fourth?.

Yeah. Great question. As Mike articulated, more of that's in the fourth quarter.

So, we talked about the back half of the year improving sequentially which did occur in the third quarter but the majority of that pickup was from the ambulatory clinical reporting that takes place in that quarter, and then, we'll see an improvement in advisory services revenue due to the recognition capability in the fourth quarter..

And it's – that's something you guys have pretty good visibility on?.

We do..

Okay. Thank you..

Thank you..

Thank you. Our next question comes from Robert Willoughby with Credit Suisse. Your question, please..

Hi, Bob..

Hi, Susan, Mike and Craig. It looks your leverage ratios are down, it looks like your cash is up nicely. You passed on buying back stock with this latest exchange.

Is this indubidently setting the stage for a larger deal here near term or what can we say about the pipeline and your financial wherewithal to go after some larger assets?.

Sure. Bob, this is Craig. So clearly, we have the capital and the firepower to look at a number of acquisitions, including large ones. We still have a very active pipeline. I would not necessarily infer that the lack of using cash for this quarterly exchange is indicative of anything.

I think, as we've talked about historically, we will evaluate the appropriate use of capital at points in time. We have already used $125 million so far this year for the repurchase of stock the last two quarters. This was a smaller exchange so we did just exchanged in stock for this particular quarter.

On a go-forward basis our primary focus for the use of capital will continue to be growth and expansion of our capabilities in order to drive better value and offerings for our members and long-term growth for the company, but we also will continue to look at on a longer-term basis whether share repurchases are an appropriate use of capital as well..

And maybe a follow-up, just – how are you viewing the consolidation in the device sector here? Is this a sign that you're sourcing efforts to those of some of the other guys out there are creating some waves here or is it just simply a trend among many that are out there? Is there any read-through to your strategy?.

We think it's a trend out there. The consolidation of suppliers is good for our business. It just means that health systems need to be aggregating their purchase power and need to be driving savings. And so, the consolidation of suppliers has been happening over time and I don't read through it anything really more than that.

Although I do think in different supply chain categories, different suppliers are trying to get more scale or more diversification of their revenue stream. The combination of Cardinal and the Medtronic/Covidien product is a complementary consolidation. It appears to us BD and Bard are different product lines as well.

So, it's really just bringing diversified product lines, we think..

Thank you..

Thanks..

Thank you. Our next question comes from Eric Percher with Barclays.

Your question, please?.

Thank you. I just like to return to Performance Services. I know you had a line in there around increasingly complex and competitive marketplace.

Could you unwind that one a bit more for us?.

Yeah. This is Mike Alkire.

Just – simply just what's happening in the regulatory environment, so there's just, as executives are sort of thinking through what's going to happen with the MACRA laws that moves from PQRS to MIPS, what if that's going to be stuff that's going to become impactful and meaningful to their business and how much investment should they be putting towards building out solutions in those regards? So, it's just – it's really the instability of the market and – of the regulatory market and just not truly understanding what some of the legislation might become..

And I think it's timing more than anything. They're making investments. They're making investments, we've talked about our data warehousing, large scale engagement. And so, they're making investments. It's just taking a little bit longer and the sales are more complex. And we've built that uncertainty in..

In the forum you just had, is that a requirement or there are opportunities for advisory work and other project-based work that's occurring today?.

Yeah. So, the executive forum is actually a time when we bring CEOs, CFOs, CMOs together and we share with them some of our new products under development and our strategies and get their insights and input. And so, they're not required to attend but they voluntarily attend and it's a really wonderful way for us to do co-innovation.

What was clear in that session and it represented a large piece of our member base was, they think these alternative payment models and these value-based care models, they're feeling the pressure from commercial payers from whatever is going to happen in their states with Medicaid, and they really are interested in integrated sets of solutions that help them connect the data, figure out where there are opportunities for improvement or whether it's quality and high reliable care or whether it's cost reduction, and really optimizing all the different pieces of services and capabilities that Premier brings to the table..

I do have one build on that, Susan. During the forum, it did become very clear to us that this partnering with the physicians was going to be very, very critical.

And I think some of the investments that we've made over the last couple of years, specifically in CECity, are going to set us up very well to support our healthcare systems, that they are partnering more closely with physicians in their market to drive improvement and quality and safety and reducing overall costs..

And so, is that, as you said as the thought leader there, are you giving that – are you acting as a consultant alongside without creating a new project and ultimately it flows into one of your usual service offerings or is there some activity today?.

Yeah. So, it happens both ways actually. So, the collaboration that we do creates advisory services offering. They pay to be a part of the collaboratives.

They pay for individual advisory services, and then, we've acquired a number of technologies, InFlow, CECity, Healthcare Insights, and what we do is wrap the two together, which is, to say, you need the technology, you need the ongoing datasets, you need to wrap around advisory services and we can bring all of that to you in this world where value-based payment is going to matter a lot.

So, we actually think it's pretty differentiated from a pure GPO who can't bring all that or a pure technology company who can't bring all that, along with all of the policy, influence and all of the deep, deep understanding that we have of the algorithms that Medicare and Medicaid use in all of their measurement systems.

And we think this is early on. I mean, the reason we acquired these assets was because we see this physician health system, payment model train moving forward and going a long distance. And so, we wanted to build those capabilities and we tried to stay a couple of years ahead of where we think that train is going.

Thank you..

Thank you..

Thank you. Our next question comes from Steven Valiquette of Bank of America Merrill Lynch.

Your question, please?.

Hi. Thanks. Good afternoon, Susan, Mike and Craig. In the core hospital GPO business, there are a few moving parts in the reported net admin fee growth numbers, as you mentioned.

But just related to that, where do you think Premier stands on the market share gain opportunities related to the merger of two other big hospital GPOs? Do you think that's generally around its course by now or do you think there's still a good runway of opportunity to take share from any disruption tied to that other merger? Thanks..

Yeah. We think there is good runway on that. We think we're early in. We have said on prior calls that we think this is an 18 to 24-month cycle. We announced Wake Forest joining us. We hired – we have hired a new academic health system leader for Premier.

And so, we have a number of RFPs, proposals, demonstrations, conversations going on around the country, so we think we're early in that process..

Okay. That's great. Thanks..

Thank you..

Thank you. Our next question comes from Stephanie Davis with JPMorgan.

Your question, please?.

Hey, guys. Thank you for taking my question. Continuing the M&A question line, could you give us an update on pipeline, particularly on the Performance Services segment? Because given recent deals have been more skewered towards the Supply Chain side..

Yeah. So, I think, as we've said on prior calls, a few quarters ago, they – we did several Performance Services acquisitions with CECity, Healthcare Insights and InFlow. More recently, we've done Innovatix, Essensa and Acro.

I would say we're very focused on operationally integrating all of those acquisitions and you heard about some of the mitigation plans with Acro. So, I think we're very focused on integration of all of those assets. We continue to have obviously a very strong balance sheet and cash flow generation capability.

So, we continue to look at things in Performance Services along the lines of claims analytics, population health, services and analytics capabilities that would really extend our health systems' ability to take on these risk-based contracts and value-based payment systems.

We continue to have targets on the Supply Chain side because we continue to enhance our technology and aggregation ability for buying collectively across the Premier membership. So, we continue to have targets on both sides and we continue to have a lot of dry powder to really continue to make investments..

All right. Thank you so much..

Thank you..

Thank you. Our next question comes from Mike Ott with Oppenheimer.

Your question, please?.

Good afternoon and thanks for taking my question. For the Innovatix and Essensa acquisitions, we saw the $11.6 million admin fee contribution in the release. I believe that's just deferred amount. And I'm wondering if you could also give their full revenue contribution in the quarter..

Yeah. This is Craig. I'll have to see if I can find the exact number.

I believe the $11.6 million was actually the revenue contribution, and then, there was approximately $12 million of the non-GAAP contribution as a result of cash collections that we received but they're related to purchases that occurred by the providers prior to the acquisition date.

So, you would need to combine those two numbers to get to the total contribution from the business..

Okay. Thanks very much..

Thank you..

Thank you. Our next question comes from Nina Deka with Piper Jaffray.

Your question, please?.

Hey, guys. Thanks for taking the question..

Thank you..

I was wondering if you could provide any more insight on the type of projects that you're doing as you increase your presence with the pharmaceutical companies? And are you getting involved at all with clinical trial – trial improvement?.

Yeah. This is Mike. So historically, our business has been focused on providing retrospective data to help the pharmaceutical companies just understanding sort of market share data and things of that nature.

Our focus really has been to leverage our clinical data which really helps the pharmaceutical companies with understanding the clinical effectiveness of products. So, we're engaging in conversations that are much more prospective in nature.

So, as they're thinking through launching a new therapy, how they're appropriately launching those therapies, and then, our healthcare systems are appropriately consuming them to ensure that we're driving the best outcomes at the most reduced cost..

It's really an interesting combination, Nina, where we can provide pilot sites – hospital health system pilot sites and we also have datasets. So, if they want to look at biosimilars or a new treatment protocol, we have the ability to bring both to the table, which we think is unlike others.

And so, we are seeing an increasing interest in the level of our datasets and our test sites..

Yeah. And one other thing I would – I'd like to share with you. We also have been engaged in really the – from a population health angle.

So, as some of these pharmaceutical companies are thinking about launching vaccines that potentially can bring overall cost of the – cost of healthcare in a community, we're working through some of those programs with them to just ensure that as we are using those therapies, that they are in fact actually bringing down the overall cost of healthcare in that community.

One final thing, and Susan and I both have spoke to this, around CECity. CECity actually provides us a really nice clinical registry that allows us to look at how a drug is actually being used and how it's actually – the clinical outcomes associated with that drug with all the different variants that have an impact on the use of that drug.

So, that registry is something that really does help differentiate our capability as we're providing these services to pharmaceutical companies..

Thanks. That's helpful. And just one more.

How many physicians do you have subscribing to CECity?.

So, we just finished the March reporting cycle and it was over 40,000. We actually think, as these new payment models roll forward, there are 500,000 or 600,000 physicians who will be reporting as it becomes a bigger and bigger share of their Medicare reimbursement.

So, we think we are the number one technology reporting system, and so, we've continued to make investments in that technology and our marketing efforts to continue to expand there but we think there's a lot of runway there as well..

Great. Thank you..

Thank you..

Thank you. Our next question comes from Evan Stover with Robert W. Baird. Your question, please..

Hi, Evan..

Mr. Stover, your line is open..

Hey, can you hear me? Can you hear me?.

Yes..

There you are..

Okay. Sorry about that. Thank you for taking my question. I've got to go back to specialty pharmacy even though it's a pretty low margin to the bottom-line. I'm looking at a comment in the press release, I'm hoping I could get a little bit of clarity on some of the Hep C decline you actually highlighted due to limited distribution drugs.

And I mean, I don't think the Hep C decline is surprising to a lot of us that follow the industry but the limited distribution comment is, because I thought we were mostly talking about open distribution drugs there. And then, the second part of that question, somewhat related.

I look at a comment about declining revenues from limited distribution drugs, Acro's difficulties with a manufacturer hub.

How does Premier really think about the specialty pharmacy pretty small relative to the industry overall? How do you think about positioning to actually capture a lot of the pipeline growth here that looks like it's going to limited manufacturer networks?.

Yeah, this is Durral. And I would just say that first of all, on the limited distribution side, we do dispense for our member health systems and for Medicare drugs across a number of therapeutic disease states, many of which do have limited distribution as well as open distribution.

Hep C, to your point, is open distribution therapies but they're still broader therapies that we supply to our members of the market. In terms of the overall value, I mean, physicians find it incredibly difficult to manage these patients due to the care coordination requirements for these patients. These medications are expensive.

Patients need support in getting access to funding these therapies, and then, maintaining a high degree of medication adherence, all services which physicians in hospitals are having very, very difficult times of serving.

This is the role that we play with our member health systems and we do drive down the cost to those systems through providing those services at scale. And also, we provide them insights into the patients' therapy treatment so that they can actually help these patients from a population health perspective..

Yeah. So, we're not really trying to compete with the independent specialty pharmacies. We're really viewing this as a way for healthcare systems to drive adherence, to drive population health, to lower readmissions, to lower ER visits.

And in a world of alternative payment models, we think this capability in an integrated way with health systems and their physicians is important for some of the same reasons Mike talked about earlier relative to physician relationships with health systems.

So, we have had some challenges with a couple of specific drugs, Hep C, as well as a couple of challenges we're having with two drugs given the Acro acquisition, and we have retrained that sales force and are doing – taking the steps to mitigate those two. But this is a much larger population health strategy..

Okay.

And just to check the box on Hep C and your – or sorry, on specialty pharmacy in your guidance, does that new Acro revenue contribution of $180 million to $190 million, does that assume that you solved the issues with the pulmonary fibrosis drugs or is that add to that number at this point, and I guess, what happened there? Because I thought we were maybe close to resolving that the last time we heard from you?.

Yeah. So to answer the first part of your question, kind of the loss of revenue that's happened to date, and then, the guidance that we've put in place now of $180 million to $190 million does not assume some rapid reacceleration, just ongoing business at this point.

Having said that, we are working with, as Susan indicated, the former parent organization and their respiratory therapist to ensure that the recognition of the program is in place and the contracted marketing services are taking place as designed.

And then, what we talked about last quarter in terms of the issue being primarily resolved, was the central distribution process that the manufacturer for one of the new drugs that put in place, that issue was remediated last quarter as we have discussed in terms of us being carved out of that central distribution process.

But what Mike had talked about when we met last quarter was our need to reeducate the sales representatives from that manufacturer to ensure that we could actually get the pull through going without having to go through that central distribution hub, that has taken longer than we thought but we do believe that has been remediated at this point.

So, the issue now is really getting the pull through of patients to create a steady stream of IPF scripts moving forward but the current guidance does not contemplate a reacceleration or an increase of that at this point in time..

Okay. Thanks for going into that. I know it's not a big bottom-line driver but big, big, big revenue influence, so I appreciate the color..

Yeah. As you know, it's a very small portion of our EBITDA and EPS..

Thank you..

Thank you..

Our next question comes from Michael Cherney with UBS. Your question, please..

Hi, this is Alan in for Mike. I wanted to go back to the GPO.

Can you talk about the timing of cash flows and impacts on net admin fee growth in the quarter? What caused this and how should we think about the potential impact moving forward?.

Sure. Michael, this is Craig. So, I think the – we've talked about in the past, effectively, our GPO net administrative fees are on the cash basis, and so, we recognize the revenue when the supplier actually sends us the payment and the associated vendor report that substantiates that payment under current GAAP accounting.

And so, what can happen in various quarters depending on timing implications is a few hundred basis point change as a result of the timing of whether those reports in associated cash are in by the end of the quarter or slip into the following quarter.

And so, what actually happened to us from an organic net administrated fee revenue basis in this current quarter, it was two compounding factors. One, we have the one – some significant one-time event a year ago that actually caused us to have substantially higher growth in the third quarter last year.

We had a very significant one-time revenue recovery where we identified underpaid administrative fees that were made to us. There was a manufacturer that had changed their systems and actually made an additional payment to us in that particular quarter a year ago.

And then, so those made the year-over-year comps higher, which is what I talked about on the call earlier. Then we had the issue of some timing in the current period where cash we thought might have come in this quarter didn't come in on the timeline that we were anticipating. It will slip into the fourth quarter.

So, we expect our growth rate to return back to the mid single-digit level in Q4 but on an organic basis, it did impact us in the third quarter on a year-over-year basis..

Got it. That's helpful.

And then, on Performance Services, did something change since last quarter that caused you to lower the outlook for that business or was it just sustained hesitation by providers that's persisting longer than you guys expected?.

Well, we had a bigger range and given the uncertainty now with the passage of the American Health Care Act, we just felt like it was wise to lower the range a bit and tighten it..

Got it. Thank you very much..

One clarification I would like to make back to an earlier question that was asked around the GPO contract renewals, I believe, I inadvertently said September 2019. The contracts actually expire in September of 2018 which is during our 2019 fiscal year.

I did want to go ahead and make sure that that was inadvertent in terms of me stating September of 2019..

Thank you. I show no further questions at this time. I'd like to turn the call back over to Ms. DeVore for closing remarks..

Yeah. Yeah. Thank you again for spending time with us today and we look forward to seeing many of you at our Investor Day in New York City on May 24. Thanks so much. Good night..

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day..