Arthur Baer’s Short Thesis On Premier Inc (PINC)

Arthur Baer’s short thesis on Premier Inc from the 2015 IRA Sohn Conference.

Company Overview

  • Premier (PINC) is a healthcare services company operating two divisions: Supply Chain Services (Group Purchasing Organization or GPO) and Performance Services (Consulting and Software)
  • Total Member base of 3,400 hospitals (2,100 are part of the GPO) and 110,000 alternate care sites
  • 73% of Premier’s revenue and 97% of cash flow comes from the Supply Chain Services (GPO) division
  • GPO economic model:
    • Pre?negotiate contracts with healthcare supply vendors
    • Charge the vendors a 1%?3% Admin Fee on products purchased by Premier GPO members through these contracts
    • Premier then pays a portion of the Admin Fee back to its members in a Revenue Sharing program
  • GPO’s are a fully evolved and competitive market:
    • 96% of all acute care hospitals are in at least one GPO
    • 72% of purchases that hospitals make are made using GPO contracts

Premier

Michael Mauboussin: Challenges and Opportunities in Active Management And Using BAIT #MICUS

michael mauboussin, Credit Suisse, valuation and portfolio positioning, capital markets theory, competitive strategy analysis, decision making, skill versus luck, value investing, Legg Mason, The Success Equation, Think Twice: Harnessing the Power of Counterintuition, analysts, behavioral finance, More Than You Know: Finding Financial Wisdom in Unconventional Places, academics , valuewalkMichael Mauboussin's notes from his presentation at the 2020 Morningstar Investment Conference, held on September 16th and 17th. Q2 2020 hedge fund letters, conferences and more Michael Mauboussin: Challenges and Opportunities in Active Management Michael Mauboussin is Head of Consilient Research at Counterpoint Global in New York. Previously, he was Director of Research BlueMountain Capital, Read More


Premier Inc: Short Thesis

  • Premier’s accounting obfuscates the economic reality of its business by publishing misleading financial statements that omit significant expenses required for ongoing operations
  • The omitted expenses are related to a change in economics and corporate structure with Premier’s members that took place at the time of the company’s IPO in Sept 2013
  • These expenses, in the form of consideration paid to its own customers, represent 35% to 77% of the earnings power of the business (depending on methodology used) and are not reflected in the income statement
  • Premier also has an undisclosed open and ongoing investigation with the Office of Inspector General (Health and Human Services) that was identified through a Freedom of Information Request and there is an undisclosed arrangement with a paid advisor to the Board
  • Premier trades at a premium to its closest peer which based on the structural/regulatory risks and actual earnings power, it does not deserve
  • After deducting the actual expenses needed for ongoing operations, there is significant downside and Premier is fairly valued at $14.50 / share, 62% lower than the current market price

Pre-IPO Corporate Structure

A Simple Structure, with no Outside Stakeholders…

  • Premier was a partnership owned by its members
  • Owner?Members did not receive any revenue share of the Admin Fees, but split the profits of the company based on their purchasing volume
  • Non?Owner Members received a market rate Revenue Share of the Admin Fees which averaged 66%
  • All profits were distributed to the Owner?Members and there would have been no profits available for public shareholders
  • 77% of gross Admin Fees came from Owner?Members and 23% of gross Admin Fees came from Non?Owner Members

Premier

See full slides below.