On February 4, 2020, Credit Suisse https://www.credit-suisse.com in a conference call to Premier’s (PINC) management https://premierinc.com, discussed the rationale and details concerning PINC’s deal with the Greater New York Hospital Association (GNYHA) https://gnyha.org. GNYHA wants to exit their GPO (Acurity) and consulting (Nexera) businesses.
Premier has announced that an agreement had been reached to acquire substantially all the assets of Acurity Inc. https://www.acurity.com, and Nexera, Inc., https://www.nexerainc.com which are two indirect wholly owned subsidiaries of GNYHA for $291.5 million.
If PINC had not acquired these assets, GNYHA would have taken them to market to find another buyer. PINC management reported they saw cost synergy opportunities as well as cross selling revenue opportunities by having direct access to GNYHA’s member hospitals and customers.
Credit Suisse researchers made a follow-up call On February 10, to Premier to clarify some information. PINC explained that GNYHA is not owned by the underlying member hospitals so the purchase price of $291.5 million to GNYHA should be viewed as the amount flowing to the member hospitals. It is up to GNYHA to decide on the use of proceeds which can either be used to fund the one time rebate payment to hospitals or to spend on advocacy, education, or other initiatives.
PINC also noted that prior to the transaction, GNYHA had already agreed with their member hospitals to make a one-time rebate payment which PINC estimates at $92-$97 million to the hospitals.
The question asked is why is only 82% revenue locked in? PINC responded that they were not involved in those conversations. However, the company notes that it is likely that the remaining 18% of the contracts were on a more normal “waterfall” kind of renewal cycle. Some of them might have just renewed 3-4 months earlier.
Also questioned, what are the financial trends for Nexera? Nexera currently generates $20 -$25 million in annual revenue and operates at an EBITDA margin of 15-20%. PINC management notes that Nexera’s $20-25 million annual revenue does not reflect the value it generates in a co-management relationship with Acurity GPO by driving further contract penetration and net administration fees.
PINC expects $15 million in annual cost synergies ($3.2 million in FY20) primarily driven by the elimination of duplication in contracting and sourcing functions, and corporate infrastructure.
PINC won’t be dealing with one large contract since the customer base will be spread over 300 health systems in greater New York. PINC needs to be able to analyze their compliance rates, technologies, buying behaviors etc., and also seek additional revenue synergy opportunities.
What is the price agreed on for the shares PINC will be buying from GNYHA? Per the negotiation of the transaction, it was agreed that GYBNHA will be allowed to hold their last 1/7th of unvested Class B shares until October 30, 2020 when they are eligible to be exchanged into Class A shares, which GYNHA can sell in the open market.
What happens in five years? PINC will be making cash payments to GNYHA’s member hospitals reflecting shareback in the mid-30% range through the end of 2024. Management notes that during the next phase of negotiations, the discussion will focus on the total value proposition and ROI PINC delivers, rather than just administration fee shareback.
Contigo Health http://explore.premierinc.com/contigohealth, Premier’s direct-to-employer high value care network initiative, announced that a pilot program had been initiated with a major national employer. The plan is to develop a clinical program designed to improve care for employees with the focus on advancing maternal health. PINC chose maternal child health because they have done work in that area in many different forms.
The question asked concerns the pushback from employers with respect to getting on board? Employers made it clear that they want real structure, real design, real measurements, and technology capable of monitoring trends in targeted markets. As explained, it takes a lot of time and energy, to deal with one employer at a time getting on board since it takes a long time to make decisions that affect clinical care delivery.
For more information or to provide feedback, email Jailendra Singh, Research Analyst at jailendra.singh@credit-suisse.com or call 212-325-8121.