Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year ended June 30, 2016
Commission File Number 001-36092
Premier, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 35-2477140 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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13034 Ballantyne Corporate Place Charlotte, North Carolina | | 28277 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: (704) 357-0022
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Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class | | Name of Each Exchange on Which Registered |
Class A Common Stock, $0.01 Par Value | | NASDAQ Global Select Market |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the Class A common stock held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $1,537.3 million. For purposes of the foregoing calculation only, executive officers and directors of the registrant have been deemed to be affiliates.
As of August 19, 2016, there were 47,394,515 shares of the Registrant’s Class A common stock, par value $0.01 per share, outstanding and 94,809,069 shares of the Registrant’s Class B common stock, par value $0.000001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s definitive proxy statement for its 2016 Annual Meeting of Stockholders to be held on or about December 2, 2016 are incorporated by reference into Part III hereof to the extent described herein.
PREMIER, INC
FORM 10-K
TABLE OF CONTENTS
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 1B. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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PART II |
ITEM 5. | | |
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ITEM 6. | | |
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ITEM 7. | | |
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ITEM 7A. | | |
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ITEM 8. | | |
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ITEM 9. | | |
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ITEM 9A. | | |
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ITEM 9B. | | |
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| PART III | |
ITEM 10. | | |
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ITEM 11. | | |
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ITEM 12. | | |
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ITEM 13. | | |
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ITEM 14. | | |
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| PART IV | |
ITEM 15. | | |
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EXPLANATORY NOTE
This report represents the annual report for the fiscal year ended June 30, 2016 for Premier, Inc. (this "Annual Report"). On October 1, 2013, Premier, Inc. completed the initial public offering ("IPO") of its Class A common stock (the "Class A common stock"). Premier, Inc. is a holding company that was incorporated as a Delaware corporation on May 14, 2013 which, prior to the IPO, had no substantial assets and conducted no substantial activity except in connection with the IPO. Premier, Inc.'s sole asset is a controlling equity interest in Premier Services, LLC, a Delaware limited liability company ("Premier GP"). Premier GP is the general partner of Premier Healthcare Alliance, L.P. ("Premier LP"), a California limited partnership, which historically conducted the group purchasing portion of our supply chain services business. Unless the context suggests otherwise, references in this Annual Report to "Premier," the "Company," "we," "us" and "our" refer (1) prior to the IPO and related transactions, to PHSI (as defined herein) and its consolidated subsidiaries and (2) after our IPO and related transactions, to Premier, Inc. and its consolidated subsidiaries.
Immediately following the consummation of the IPO, a series of transactions, which we refer to as the "Reorganization" (and, collectively with the IPO, the "Reorganization and IPO"), occurred by which Premier GP became the general partner of Premier LP. Premier Healthcare Solutions, Inc. ("PHSI"), a Delaware corporation, through which we historically conducted the majority of the performance services portion of our business under the name "Premier, Inc.", became our indirect subsidiary through Premier LP. PHSI, Premier LP and Premier Supply Chain Improvement, Inc., ("PSCI"), a Delaware corporation and our indirect subsidiary (through Premier LP) through which we historically conducted certain portions of our supply chain services business, historically conducted all of our business. Upon the consummation of the Reorganization and the IPO, our assets and business operations were substantially similar to those of PHSI, Premier LP and PSCI prior to the Reorganization and the IPO, and we conduct all of our business through Premier LP and its subsidiaries.
Because the Reorganization and the IPO had not yet been consummated and Premier, Inc. had no substantial assets and conducted no substantial activities until October 1, 2013, the financial statements and other information of PHSI and its consolidated subsidiaries are included in this Annual Report for periods prior to October 1, 2013. For more information about the Reorganization and the IPO, refer to Note 2 - Initial Public Offering and Reorganization to the audited consolidated financial statements of this Annual Report.
Throughout this Annual Report, references to (1) "members" refer collectively to our past, present and future customers and (2) "member owners" refer collectively to our past, present and future members, who have owned, or who currently own, limited partnership interests in Premier LP and/or common stock of PHSI, and, as the context relates to the completion of the Reorganization and the IPO, as described in Note 2 - Initial Public Offering and Reorganization to the audited consolidated financial statements of this Annual Report, beneficially own shares of Premier, Inc. Class B common stock, (the "Class B common stock"), and Class B common units of Premier LP (the "Class B common units") after giving effect to the Reorganization, provided, that, in the context of discussions of the group purchasing organization ("GPO") participation agreements throughout this Annual Report, the term "member owner" also includes any related entity or affiliate of a member owner that is approved by Premier LP to be the signatory of such GPO participation agreement in lieu of the member owner.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this Annual Report that are not statements of historical or current facts, such as those under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from historical results or from any future results or projections expressed or implied by such forward-looking statements. In addition to statements that explicitly describe such risks and uncertainties, readers are urged to consider statements in conditional or future tenses or that include terms such as "believes," "belief," "expects," "estimates," "intends," "anticipates" or "plans" to be uncertain and forward-looking. Forward-looking statements may include comments as to our beliefs and expectations regarding future events and trends affecting our business and are necessarily subject to uncertainties, many of which are outside our control. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:
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• | competition which could limit our ability to maintain or expand market share within our industry; |
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• | consolidation in the healthcare industry; |
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• | potential delays recognizing or increasing revenue if the sales cycle or implementation period takes longer than expected; |
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• | the terminability of member participation in our group purchasing organization ("GPO") programs with limited or no notice; |
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• | the rate at which the markets for our non-GPO services and products develop; |
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• | the dependency of our members on payments from third-party payers; |
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• | our reliance on administrative fees which we receive from GPO suppliers; |
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• | our ability to maintain third-party provider and strategic alliances or enter into new alliances; |
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• | our ability to timely offer new and innovative products and services; |
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• | the portion of revenues we receive from our largest members; |
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• | risks and expenses related to future acquisition opportunities and integration of acquisitions; |
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• | financial and operational risks associated with investments in, or partnerships or joint ventures with, other businesses, particularly those that we do not control; |
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• | our reliance on Internet infrastructure, bandwidth providers, data center providers and other third parties and our own systems for providing services to our users; |
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• | data loss or corruption due to failures or errors in our systems and service disruptions at our data centers, or breaches or failures of our security measures; |
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• | the financial and reputational consequences of cyber-attacks or other data security breaches that disrupt our operations or result in the dissemination of proprietary or confidential information about us or our members or other third parties; |
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• | our ability to use, disclose, de-identify or license data and to integrate third-party technologies; |
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• | our use of "open source" software; |
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• | changes in industry pricing benchmarks; |
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• | any increase in the safety risk profiles of prescription drugs or the withdrawal of prescription drugs from the market; |
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• | our ability to maintain and expand our existing base of drugs in our specialty pharmacy; |
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• | our dependency on contract manufacturing facilities located in various parts of the world; |
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• | our ability to attract, hire, integrate and retain key personnel; |
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• | adequate protection of our intellectual property and potential claims against our use of the intellectual property of third parties; |
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• | potential sales and use tax liability in certain jurisdictions; |
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• | our indebtedness and our ability to obtain additional financing on favorable terms; |
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• | fluctuation of our cash flows, quarterly revenues and results of operations; |
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• | changes in the political, economic or regulatory healthcare environment; |
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• | our compliance with complex federal and state laws governing financial relationships among healthcare providers and the submission of false or fraudulent healthcare claims; |
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• | interpretation and enforcement of current or future antitrust laws and regulations; |
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• | compliance with complex federal and state privacy, security and breach notification laws; |
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• | compliance with, and potential changes to, extensive federal, state and local laws, regulations and procedures governing our specialty pharmacy operations; |
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• | risks inherent in the filling, packaging and distribution of pharmaceuticals, including the counseling required to be provided by our pharmacists for dispensing of products; |
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• | our holding company structure and dependence on distributions from Premier Healthcare Alliance, L.P. ("Premier LP"); |
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• | different interests among our member owners or between us and our member owners; |
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• | the ability of our member owners to exercise significant control over us, including through the election of all of our directors; |
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• | exemption from certain corporate governance requirements due to our status as a "controlled company" within the meaning of the NASDAQ rules; |
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• | the terms of agreements between us and our member owners; |
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• | payments made under the tax receivable agreements to Premier LP's limited partners and our ability to realize the expected tax benefits related to the acquisition of Class B common units; |
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• | changes to Premier LP's allocation methods that may increase a tax-exempt limited partner's risk that some allocated income is unrelated business taxable income; |
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• | provisions in our certificate of incorporation and bylaws and the Amended and Restated Limited Partnership Agreement of Premier LP (as amended, the "LP Agreement") and provisions of Delaware law that discourage or prevent strategic transactions, including a takeover of us; |
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• | failure to maintain an effective system of internal controls; |
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• | the number of shares of Class A common stock that will be eligible for sale or exchange in the near future and the dilutive effect of such issuances; |
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• | our intention not to pay cash dividends on our Class A common stock; |
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• | possible future issuances of common stock, preferred stock, limited partnership units or debt securities and the dilutive effect of such issuances; and |
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• | the risk factors discussed under the heading "Risk Factors" in Item 1A herein. |
More information on potential factors that could affect our financial results is included from time to time in the "Cautionary Note Regarding Forward-Looking Statements," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" or similarly captioned sections of this Annual Report and our other periodic and current filings made from time to time with the Securities and Exchange Commission ("SEC"), which are available on our website at http://investors.premierinc.com/. You should not place undue reliance on any of our forward-looking statements which speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements.
Market Data and Industry Forecasts and Projections
We use market data and industry forecasts and projections throughout this Annual Report and in particular, under Item 1, Business-Industry Overview. We have obtained the market data from certain publicly available sources of information, including publicly available industry publications. We believe the data others have compiled are reliable, but we have not independently verified the accuracy of this information. While we are not aware of any misstatements regarding the industry data presented herein, forecasts and projections involve risks and uncertainties and are subject to change based on various factors, including those discussed under Item 1A, Risk Factors of this Annual Report. You should not place undue reliance on any such market data or industry forecasts and projections. We undertake no obligation to publicly update or revise any such market data or industry forecasts and projections, whether as a result of new information, future events or otherwise.
Trademarks, Trade Names and Service Marks
This Annual Report includes trademarks, trade names and service marks that we either own or license, such as “Premier,” “PremierConnect,” “PremierPro,” “Premier REACH,” “Commcare,” “ProviderSelect MD” and “QUEST,” which are protected under applicable intellectual property laws. Solely for convenience, trademarks, trade names and service marks referred to in this Annual Report may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. This Annual Report also may contain trademarks, trade names and service marks of other parties, and we do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
PART I
Item 1. Business
The following discussion should be read in conjunction with our audited consolidated financial statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our business and other factors which could cause actual results to differ materially from the results referred to in the historical information and the forward-looking statements presented herein, see "Item 1A, Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" contained in this Annual Report.
Our Company
Premier, Inc., incorporated in Delaware on May 14, 2013, is primarily owned by hospitals, health systems and other healthcare organizations (such owners are referred to herein as member owners) located in the United States, as well as public stockholders. Together with our subsidiaries and affiliates, we are a leading healthcare improvement company, uniting an alliance of approximately 3,750 U.S. hospitals and more than 130,000 other providers to transform healthcare. With integrated data and analytics, collaboratives, supply chain solutions, and advisory and other services, Premier enables better care and outcomes at a lower cost. We believe that we play a critical role in the rapidly evolving healthcare industry, collaborating with members to co-develop long-term innovations that reinvent and improve the way care is delivered to patients nationwide. We deliver value through a comprehensive technology-enabled platform that offers critical supply chain services, clinical, financial, operational and population health software-as-a-service ("SaaS") informatics products, advisory services and performance improvement collaborative programs.
As of June 30, 2016, we were controlled by 171 U.S. hospitals, health systems and other healthcare organizations that represent approximately 1,400 owned, leased and managed acute care facilities and other non-acute care organizations. Our current membership base includes many of the country's most progressive and forward-thinking healthcare organizations, and we continually seek to add new members that are at the forefront of innovation in the healthcare industry. Our Class A common stock is generally held by the public, and our Class B common stock is held by the limited partners of Premier LP, referred to as our member owners.
As a member-owned healthcare alliance, our mission, products and services, and long-term strategy have been developed in partnership with our member hospitals, health systems and other healthcare organizations. We believe that this partnership-driven business model creates a relationship between our members and us that is characterized by aligned incentives and mutually beneficial collaboration. This relationship affords us access to critical proprietary data and encourages member participation in the development and introduction of new Premier products and services. Our interaction with our members provides us with a window into the latest challenges confronting the industry we serve and innovative best practices that we can share broadly within the healthcare industry, including throughout our membership. This model has enabled us to develop size and scale, data and analytics assets, expertise and customer engagement required to accelerate innovation, provide differentiated solutions and facilitate growth.
We seek to address challenges facing healthcare delivery organizations through our comprehensive suite of solutions that we believe:
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• | improve the efficiency and effectiveness of the healthcare supply chain; |
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• | deliver improvement in cost and quality; |
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• | innovate and enable success in emerging healthcare delivery and payment models to manage the health of populations; and |
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• | utilize data and analytics to drive increased connectivity, and clinical, financial and operational improvement. |
Our business model and solutions are designed to provide our members access to scale efficiencies, spread the cost of their development, derive intelligence from our data warehouse, mitigate the risk of innovation and disseminate best practices that will help our member organizations succeed in their transformation to higher quality and more cost-effective healthcare.
We deliver our solutions and manage our business through two reportable business segments: supply chain services and performance services. The supply chain services segment includes our group purchasing organization or GPO, specialty pharmacy offerings and direct sourcing activities. The performance services segment includes our informatics, collaborative, advisory services and insurance services businesses.
Industry Overview
According to data from the Centers for Medicare & Medicaid Services, or CMS, healthcare expenditures are a large component of the U.S. economy expected to grow by an average of 5.8% per year for the period 2015-2025, reaching 20.1% of gross domestic product, or GDP, by 2025. According to data from the 2014 American Hospital Association's Annual Survey, published in the 2016 edition of the AHA Hospital Statistics™, there were approximately 5,000 U.S. community hospitals with approximately 786,900 staffed beds in the United States. Of these acute care facilities, approximately 3,200 were part of either multi-hospital or diversified single hospital systems, meaning they were owned, leased, sponsored or contract managed by a central organization. According to the May 2016 edition of IMS Health’s Healthcare Market Index, in addition to U.S. hospitals, there were approximately 520,000 alternate site facilities and providers across the continuum of care in the United States. These alternate site facilities include primary/ambulatory care and post-acute care providers. Increasingly, these alternate site facilities are being acquired by, integrated into or aligned with acute care facilities creating integrated delivery networks.
Healthcare Supply Chain Services Industry
According to CMS data, total spending on hospital services in the United States is projected to be approximately $1.1 trillion, or approximately 32% of total healthcare expenditures, in 2016. Expenses associated with the hospital supply chain, such as supplies and operational and capital expenditures, typically represent between 20% and 30% of a hospital's budget according to Booz & Company. With continued reimbursement rate pressure across government and managed care payers, a transitioning payment model from fee-for-service to value-based payment, and national health expenditures representing a significant portion of the economy, healthcare providers are examining all sources of cost savings, with supply chain spending a key area of focus. We believe opportunities to drive cost out of the healthcare supply chain include improved pricing for medical supplies and pharmaceuticals, appropriate resource utilization and increased operational efficiency.
From origination at the supplier to final consumption by the provider or patient, healthcare products pass through an extensive supply chain incorporating manufacturers, distributors, GPOs, pharmacy benefit managers, and retail, long-term care and specialty pharmacies, among others. In response to the national focus on health spending and managing healthcare costs, supply chain participants are seeking more convenient and cost-efficient ways to deliver products to patients and providers. We believe that improvements to the healthcare supply chain to bring it on par with other industries that have more sophisticated supply chain management can drive out significant inefficiencies and cost.
Healthcare Performance Services Industry
Legislative reform, unsustainable cost trends, and the need for improved quality and outcomes have generated greater focus among healthcare providers on cost management, quality and safety, and population health management. In 2015, the Department of Health and Human Services (HHS) announced its goals for aligning future Medicare payments with quality and value, including tying 85 and 90 percent of Medicare fee-for-service payments to performance in 2016 and 2018, respectively, and shifting up to 50 percent of Medicare fee-for-service payments to alternative payment models, such as accountable care organizations (ACOs) or bundled payment arrangements by the end of 2018. In order to meet these goals, health systems will need to continually monitor performance and manage costs, while maintaining high levels of quality and testing new care delivery models. In response to this changing environment, we expect the markets for performance services and solutions in the areas of cost management, quality and safety and population health management to grow significantly.
We expect information technology to continue to play a key enabling role in efficiency and cost reduction, performance improvement and care transformation across the healthcare industry. In particular, the trends toward value-based purchasing and population-based healthcare are proving to require more sophisticated business intelligence and technology solutions. To achieve higher-quality outcomes and control costs, providers exhibit a strong and continuing need for data and data analytics to help them understand their current performance and identify opportunities for improvement. We expect demand for data management and data analytics products to complement the focus on electronic health record adoption. According to Frost and Sullivan, 50% of hospitals in the United States are expected to adopt data analytics capabilities by 2016, up from 10% in 2011. Similarly, the advisory services business is growing rapidly in the areas of business model redesign, process improvement, labor productivity, non-labor cost management, clinical integration and change management.
Our Membership
Our current membership base includes many of the country's most progressive and forward-thinking healthcare organizations. The participation of these organizations in our membership provides us with a window into the latest challenges confronting the industry we serve and innovative best practices that we can share broadly throughout our membership. At June 30, 2016, our members included approximately 3,750 U.S. hospitals and more than 130,000 other providers. Approximately 390 individuals, representing approximately 165 of our U.S. hospital members, sit on 23 of our strategic and sourcing committees, and as part of these committees, use their industry expertise to advise on ways to improve the development, quality and value of our products
and services. In addition, ten senior executives from our U.S. hospital member owner systems currently serve on our board of directors. Other than GNYHA Purchasing Alliance, LLC and its member organizations, which accounted for 9%, 9% and 8% of our net revenue in the fiscal years ended June 30, 2016, 2015 and 2014, respectively, no individual member or member owner systems accounted for more than 5% of our net revenue in such periods. Total GPO purchasing volume by all members participating in our GPO was approximately $48 billion and $44 billion for the calendar years 2015 and 2014, respectively.
The following table sets forth certain information with respect to retention rates for members participating in our GPO in the supply chain services segment and renewal rates for our SaaS informatics products subscriptions in the performance services segment for the fiscal years shown:
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GPO retention rate (a) | 97% | 99% | 99% | 98% |
SaaS institutional renewal rate (b) | 92% | 94% | 94% | 93% |
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(a) | The retention rate is calculated based upon the aggregate purchasing volume among all members participating in our GPO for such fiscal year less the annualized GPO purchasing volume for departed members for such fiscal year, divided by the aggregate purchasing volume among all members participating in our GPO for such fiscal year. |
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(b) | The renewal rate is calculated based upon the total number of members that have SaaS revenue in a given period that also have revenue in the corresponding prior year period divided by the total number of members that have SaaS revenue in the same period of the prior year. |
Our Business Segments
We deliver our integrated platform of solutions that address the areas of total cost management, quality and safety improvement and population health management through two business segments: supply chain services and performance services, as addressed in Note 23 - Segments to the audited consolidated financial statements of the Annual Report. We have no significant foreign operations or revenues.
Supply Chain Services
Our supply chain services segment assists our members in managing their non-labor expense and capital spend through a combination of products, services and technologies, including one of the largest national healthcare GPOs in the United States serving acute and alternate sites, specialty pharmacy offerings and direct sourcing activities. Membership in our GPO also provides access to certain SaaS informatics products related to the supply chain and the opportunity to participate in our ASCEND® collaborative. Our supply chain services segment consists of the following products and solutions:
Group Purchasing. Our national portfolio of approximately 2,200 contracts with approximately 1,200 suppliers provides our members with access to a wide range of products and services, including medical and surgical products, pharmaceuticals, laboratory supplies, capital equipment, information technology, facilities and construction, food and nutritional products and purchased services (such as clinical engineering and document shredding services). We use our members' aggregate purchasing power to negotiate pricing discounts and improved contract terms with suppliers. Contracted suppliers pay us administrative fees based on the purchase volume of goods and services sold to our healthcare provider members under the contracts we have negotiated. We also partner with other organizations, including regional GPOs, to extend our network base to their members.
Our contract portfolio is designed to offer our healthcare provider members a flexible solution comprised of multi-sourced supplier contracts, as well as pre-commitment and/or single-sourced contracts that offer higher discounts. Our multi-sourced contracts offer pricing tiers based on purchasing volume and/or commitment and multiple suppliers for many products and services. Our pre-commitment contracts require that a certain amount of our members commit in advance to a specified amount or percentage of purchasing volume before we enter into a contract with a particular supplier. Our single-source contracts are entered into with a specified supplier, and through this exclusive relationship, allow us to contract for products that meet our members' specifications. In the case of pre-commitment contracts, we provide the particular supplier with a list of members that have pre-committed to a specified amount or percentage of purchasing volume and the supplier directly handles the tracking and monitoring of fulfillment of such purchasing volume. In the case of single and multi-sourced contracts we negotiate and execute the contracts on behalf of our members and make such contracts available to our members to access. The utilization of such single and multi-sourced contracts is determined by the particular member with assistance from our field force. Since there are no specific fulfillment requirements needed in our single and multi-source contracts in order to obtain certain pricing levels, each particular member and supplier agree on the appropriate pricing tier based on expected purchasing volume with tracking and ongoing validation of such purchasing volume provided by the supplier. The flexibility
provided by our expansive contract portfolio allows us to effectively address the varying needs of our members and the significant number of factors that influence and dictate these needs, including overall size, service mix, and the degree of integration between hospitals in a health system.
We continually innovate our GPO programs and supply chain platforms. For example, our EXPRESSbuy® program enables coordinated, limited-time, volume-driven purchasing opportunities that offer savings beyond regular contract pricing. Through a proprietary web-based application, we offer our members the opportunity to aggregate committed volumes and achieve additional price discounts while allowing our suppliers to sell targeted products, including time-sensitive or excess inventory, more efficiently and at reduced costs.
Our GPO programs target multiple markets, including acute care and alternate site settings. Our alternate site program, one of the largest in the United States with approximately 130,000 members as of June 30, 2016, includes the following:
Continuum of Care. Alternate sites served by our Continuum of Care GPO program include long-term care and senior living, ambulatory care, first responders and emergency medical services, home health, imaging centers and surgery centers. Our Continuum of Care GPO members have access to nearly all of our GPO supplier contracts, including medical and surgical products, pharmaceuticals, laboratory supplies, facilities and construction, capital equipment, information technology, food and nutritional products and purchased services, as well as additional GPO supplier contracts accessed through our 50% ownership interest in Innovatix, LLC, one of the nation's largest alternate site GPOs.
ProviderSelect MD®. ProviderSelect MD® is one of the nation's largest group purchasing programs for physicians. Focused specifically on independent physician practices, the program offers members access to nearly all of our GPO supplier contracts.
Premier REACH®. Premier REACH® is a group purchasing program for non-healthcare entities, including education (e.g., K-12 schools, colleges and universities, and early childhood education), hospitality, recreation (e.g., stadiums, parks and fairgrounds) and employee food programs. Our Premier REACH® members have access to nearly all of our GPO supplier contracts including food service, facilities products and services, information technology and administrative services.
Specialty Pharmacy. Through our specialty pharmacy business, we developed a complete service offering for our members to improve access to medication and to better manage patient therapy for chronically-ill patients with specialty drug needs and genetic disorders. Our specialty pharmacy business provides traditional pharmacy dispensing services (i.e., retail and mail order), as well as “specialty pharmacy” services, which fully integrate the administrative coordination, patient care management, and data management reporting functions that ultimately service the needs of patients, providers, payers, and pharmaceutical manufacturers. The business was specifically designed to serve as a scaled solution for our members and to provide a specialty pharmacy “care hub” to meet the unique specialty pharmacy needs of health systems across the continuum of care. We provide robust clinical management programs that are targeted toward those disease states where best-in-class care pathways and interventions by clinically-trained pharmacists are essential for patient adherence and compliance. Our “care hub” capabilities enable members to more effectively care for complex patient populations, improve clinical quality and safety, and harness otherwise unavailable clinical data.
Direct Sourcing. Our direct sourcing business, SVS, LLC d/b/a S2S Global ("S2S Global"), was established to help our members access a diverse product portfolio and to provide transparency to manufacturing costs and competitive pricing to our members. Through our consolidated subsidiary, S2S Global, we facilitate the development of product specifications with our members, source or contract manufacture the products to member specifications and sell products directly to our members or suppliers. By engaging with our members at the beginning of the sourcing process to define product specifications and then sourcing, or contract manufacturing, products to meet the exact needs of our members, we eliminate the need for unnecessary product features and specifications that may typically be included by suppliers and result in higher prices for our members without providing incremental value. Therefore, our direct sourcing activities benefit our members by providing them with an expanding portfolio of medical products through more efficient means, and with greater cost transparency, than if such products were purchased from other third-party suppliers. We market our direct sourcing activities under two distinct brands: PremierPro™, which is designated for our members, and Prime Plus™, which is designated for our other customers, primarily regional distributors with private-label product programs.
Managed Services. Our managed services line of business is a fee for service model created to perform supply chain related services for members. Through a partnership with a national pharmacy benefit manager, we provide contract negotiation and administration, claims data and rebate processing and evaluation of current pharmacy formulary and utilization.
SaaS Informatics Products. Members of our GPO have access to certain components of our PremierConnect Supply Chain offering and its associated applications and the ability to purchase additional elements that are discussed in more detail below.
ASCEND® Collaborative. Our ASCEND® Collaborative has developed a process to aggregate purchasing data for our members, enabling such members to determine whether to negotiate committed group purchases within the collaborative. Through our ASCEND® Collaborative, members receive group purchasing programs, tiers and prices specifically negotiated for them, as well as benchmarking metrics to assist them in identifying additional supply chain and operations cost savings opportunities and knowledge sharing with other member participants and industry experts. As of June 30, 2016, approximately 780 U.S. hospital members, which represent approximately 111,000 hospital beds, participated in our ASCEND® Collaborative. These hospital member participants have identified approximately $300 million in additional savings as compared to their U.S. hospital peers not participating in ASCEND® since its inception in 2009. For calendar year 2015, these member participants had approximately $14.6 billion in annual supply chain purchasing spend.
Performance Services
Our offerings in the performance services sector of the healthcare industry are primarily information technology analytics and workflow automation and advisory services. We believe we are one of the largest informatics and advisory services businesses in the United States focused exclusively on healthcare providers. Our SaaS informatics products utilize our comprehensive data set to provide actionable intelligence to our members, enabling them to benchmark, analyze and identify areas of improvement across three main categories: cost management, quality and safety, and population health management. This segment also includes our technology-enabled performance improvement collaboratives, through which we convene members, design programs and facilitate, foster and advance the exchange of clinical, financial and operational data among our members to measure patient outcomes and determine best practices that drive clinical, financial and operational improvements. Our performance services segment includes our PremierConnect® technology offerings, advisory services and collaboratives and insurance services, as follows:
PremierConnect®:
We have created a world-class integrated technology platform for continuous performance improvement called PremierConnect®. This platform allows members to analyze performance using established data standards, benchmarking, interactive dashboards and custom report services. This portfolio of performance improvement solutions is comprised of the following domains:
PremierConnect Quality & Regulatory. The PremierConnect Quality & Regulatory domain enables health systems and providers to identify and target high-value quality improvement areas that drive greater clinical effectiveness and efficiency across the continuum of care. This solution provides clinical benchmarking, population analyses and predictive analytics to help hospitals and physician practices be successful in the transition to value-based care.
PremierConnect Safety. The PremierConnect Safety domain enables health systems and providers to improve patient safety, including ongoing infection prevention, antimicrobial stewardship, reduction of hospital-acquired conditions and real-time clinical surveillance used to drive faster, more informed decisions.
PremierConnect Supply Chain & ERP. The PremierConnect Supply Chain domain enables health systems and providers to lower supply chain costs through leading supply chain management analytics, evidence-based purchasing, and innovative enterprise resource planning ("ERP") workflow that drives efficiency and effectiveness throughout the entire procurement life cycle. This healthcare-only ERP solution also extends into accounts payable, general ledger and financial reporting.
PremierConnect Operations. The PremierConnect Operations domain enables health systems and providers to optimize labor management with integrated financial reporting and budgeting across the continuum of care. These applications integrate benchmarking and productivity data from acute, outpatient and ambulatory settings.
PremierConnect Population Health. The PremierConnect Population Health domain enables health systems and providers to transition to optimal resource and risk management through actionable business intelligence utilizing analytics that provide population and provider insights from measuring and benchmarking acute and ambulatory clinical performance.
PremierConnect® Enterprise. The PremierConnect Enterprise domain enables health systems and providers to leverage integrated analytics across all of Premier's subject matter expertise. This solution includes integrating a member's custom data into a hosted and integrated data warehouse and analytics platform. This solution provides data acquisition, management and governance capabilities for health systems and extends this capability to research and life sciences.
Advisory Services:
Our advisory services, provided through Premier Performance Partners, seek to drive change and improvement in cost reduction, quality of care and patient safety, and prepare our members to succeed in a population health environment. We use an income statement method to address every area affecting the member's bottom line, finding opportunities in both revenue
enhancement and expense management. Premier Performance Partners offers expertise and capabilities in the following areas: care coordination and physician engagement, clinical, financial and operational performance, facilities and capital asset management, organizational transformation, physician preference items (PPI), reform readiness assessment, clinical integrated and population health operations and analytics, purchased services assessment, revenue cycle management and recovery audit contractor (RAC) readiness, service line improvement, strategic and business planning and supply chain transformation.
We provide a data-driven approach and expertise to deliver targeted results in reducing costs, increasing margin and improving quality. Using various specialists and advisors, we provide wrap-around services for our major SaaS informatics products and our GPO to enhance the member value from these programs. For example, our clinical performance partners provide U.S. hospitals with access to performance improvement and operational specialists. Using our informatics tools and applications, these clinical performance partners mine data for improvement opportunities and then lead or assist with improvement projects in such areas as resource and operational assessments, process improvement, performance improvement monitoring, strategic planning and knowledge transfer for organizational change. U.S. hospitals contract for clinical, financial and/or operational performance partner support for a given number of days per month, with contracts lasting from less than a year to five years in duration.
Performance Improvement Collaboratives:
QUEST® Collaborative. Through our QUEST® Collaborative (QUEST®), we work with our members to identify improvement opportunities and best practices and engage them to participate in performance improvement exercises using identified best practices, to collaborate to define performance goals and to use healthy competition to drive performance improvement. QUEST® builds on the past success of our partnership with CMS in the Premier Hospital Quality Incentive Demonstration, a value-based purchase program through which CMS awarded bonus payments to hospitals for high quality in several clinical areas and reported quality data on its website. The collaborative currently targets improvements in seven domains, including evidence-based care, cost and efficiency of care, patient and family engagement, safety, mortality and appropriate hospital use and community health. As of June 30, 2016, QUEST® had approximately 350 participating U.S. hospitals working together and utilizing our SaaS informatics products to develop highly standardized quality, safety and cost metrics. QUEST® seeks to develop next-generation quality, safety and cost metrics with a consistency and standardization we do not believe exists today. We believe that our members who participate in QUEST® are better prepared to deal with healthcare reform requirements and, by improving in the seven domains referenced above, can earn Medicare incentives, avoid Medicare penalties and better manage reimbursement cuts.
Bundled Payment Collaborative. Our Bundled Payment Collaborative assists our members in their participation in the CMS Bundled Payments for Care Improvement Initiative, an initiative by which organizations enter into payment arrangements that include financial and performance accountability for episodes of care. Our Bundled Payment Collaborative offers ongoing analysis of our members' Medicare Part A and Medicare Part B data, dashboards for managing bundled payment programs and gainsharing, in addition to providing knowledge, expertise, and best practices from experts and members.
The Population Health Management Collaboratives. Our Population Health Management Collaborative, or PHM Collaborative (the successor to our PACTTM-Partnership for Care Transformation collaborative), is focused on helping members develop and implement effective models of care and payment for connected groups of providers who take responsibility for improving the health status, efficiency and experience of care (quality and satisfaction) for a defined population (i.e., accountable care organizations) and how to align this care redesign with new value based payment arrangements. Our PHM Collaborative provides members with the opportunity to share value based case and payment developmental strategies, programs, and other best practices. The PHM Collaborative provides valuable assistance and access to over 30 PHM subject matter experts to members in developing the tools necessary to manage the health of a population and to exchange knowledge with each other and with industry and government experts. As of June 30, 2016, we had 67 health systems and Clinically Integrated Networks, comprised of over 445 hospitals in 33 states participating in our PHM Collaborative.
Partnership for Patients Collaborative. We participated in the CMS-established Partnership for Patients initiative, a public-private collaborative working to improve the quality, safety and affordability of healthcare. Physicians, nurses, hospitals, employers, patients and their advocates, and the federal and state governments have joined together to form Partnership for Patients to decrease preventable hospital-acquired conditions and readmissions. Our Hospital Engagement Network (HEN) serves as a mobile classroom with Clinical Improvement Advisors (CIAs). In September 2015, CMS renewed the Partnership for Patients initiative.
Data Alliance Collaborative. A group of the nation’s leading health systems have launched the Data Alliance Collaborative to ensure that healthcare providers have the technology and analytics in place to improve quality and lower costs. These forward-thinking providers are working together with Premier to disrupt the way healthcare information technology is
developed. Data Alliance Collaborative members are using integrated data (e.g., clinical, claims, labor, supply chain, administrative, financial, patient experience, genomics, etc.) to develop new insights and answer the complex questions driven by the transformation to population-based care. They are innovating collaboratively to meet their current needs and are creating the conceptual and technical foundation that enables them to respond nimbly to an uncertain future.
Insurance Services. We provide insurance programs and services to assist U.S. hospital and healthcare system members with liability and benefits insurance services, along with risk management services. We design insurance programs and services for our members to improve their quality, patient safety and financial performance while lowering costs. We provide management services for American Excess Insurance Exchange, Risk Retention Group, a reciprocal risk retention group that provides excess hospital, professional, umbrella and general liability insurance to certain U.S. hospital and healthcare system members. We also negotiate the purchase of other insurance products from commercial insurance carriers on behalf of our members.
Pricing and Contracts
We generate revenue from our supply chain services segment through fees received from suppliers based on the total dollar volume of supplies purchased by our members in connection with our GPO programs and through product sales in connection with our specialty pharmacy and direct sourcing activities. Our performance services segment has three main sources of revenue: (i) three to five-year subscription agreements to our SaaS informatics products, (ii) annual subscriptions to our performance improvement collaboratives and (iii) professional fees for our advisory services.
Supply Chain Services
In connection with the Reorganization and IPO, our member owners entered into GPO participation agreements with Premier LP which became effective upon the completion of the Reorganization and the IPO. Pursuant to the terms of its GPO participation agreement, each of these member owners generally receives revenue share from Premier LP equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such member owner's owned, leased, managed and affiliated facilities through our GPO supplier contracts. In addition, our two largest regional GPO member owners, which represented approximately 16% of our gross administrative fees revenue for the year ended June 30, 2016, each remit gross administrative fees collected by such member owner based upon purchasing by such member owner's owned, leased, managed and affiliated facilities through the member owner's own GPO supplier contracts, in accordance with their Premier GPO Agreement, and receive revenue share from Premier LP equal to 30% of such gross administrative fees remitted to us. Subject to certain termination rights, these GPO participation agreements are for an initial five-year term, although our two largest regional GPO member owners have entered into agreements with seven-year terms. The terms of the GPO participation agreements vary as a result of provisions in our existing arrangements with member owners that conflict with the terms of the GPO participation agreement and which by the express terms of the GPO participation agreement are incorporated by reference and deemed controlling and will continue to remain in effect. In limited circumstances, Premier LP and certain member owners entered into GPO participation agreements with certain terms that vary from the standard form, which were approved by the member agreement review committee of our board of directors, based upon regulatory constraints, pending merger and acquisition activity or other exigent circumstances affecting those member owners. Certain non-owner members operate under contractual relationships that provide for a specific revenue share that differs from the 30% revenue share that we provide to our member owners under the current GPO participation agreements.
In our specialty pharmacy, we earn revenue from product sales and other services. Revenues are earned through traditional pharmacy dispensing services (i.e., retail and mail order), as well as “specialty pharmacy” services, including 340B drug pricing program dispensing services, administrative coordination, patient care management and data management reporting functions. Our specialty pharmacy contracts generally range from one to three years in length and, except for exclusive networks, there are generally no guaranteed sales associated with a payer network contract.
In our direct sourcing activities, we earn revenue from product sales. Products are sold to our members through direct shipment and distributor and wholesale channels. Products are also sold to regional medical-surgical distributors and other non-healthcare industries (i.e., foodservice). We have contracts with our members that buy products through our direct shipment option. These contracts do not usually provide a guaranteed purchase or volume commitment requirement.
Performance Services
Performance services revenue consists of SaaS informatics products subscriptions, certain perpetual and term licenses, performance improvement collaborative and other service subscriptions, professional fees for advisory services, and insurance services management fees and commissions from group-sponsored insurance programs.
SaaS informatics products subscriptions include the right to use our proprietary hosted technology on a SaaS basis, training and member support to deliver improvements in cost management, quality and safety, population health management and provider analytics. Pricing varies by subscription and size of the subscriber. Informatics subscriptions are generally three to five-year agreements with automatic renewal clauses and annual price escalators that typically do not allow for early termination. These agreements do not allow for physical possession of the software. Subscription fees are typically billed on a monthly basis and revenue is recognized as a single deliverable on a straight-line basis over the remaining contractual period following implementation. Implementation involves the completion of data preparation services that are unique to each member's data set and, in certain cases, the installation of member site-specific software, in order to access and transfer member data into our hosted SaaS informatics products. Implementation is generally 90 to 170 days following contract execution before the SaaS informatics products can be fully utilized by the member.
Performance improvement collaborative and other service subscription revenue to support our offerings in cost management, quality and safety and population health management is recognized over the service period, which is generally one year.
Professional fees for advisory services are sold under contracts, the terms of which vary based on the nature of the engagement. Fees are billed as stipulated in the contract, and revenue is recognized on a proportional performance method as services are performed and deliverables are provided. In situations where the contracts have significant contract performance guarantees or member acceptance provisions, revenue recognition occurs when the fees are fixed and determinable and all contingencies, including any refund rights, have been satisfied. Fees are based either on time and materials or the savings that are delivered.
Sales
We conduct sales through our embedded field force, our dedicated national sales team and our Premier Performance Partners advisors, collectively comprised of approximately 620 employees as of June 30, 2016.
Our field force works closely with our U.S. hospital members and other members to target new opportunities by developing strategic and operational plans to drive cost management and quality and safety improvement initiatives. As of June 30, 2016, our field force was deployed to seven geographic regions and several strategic/affinity members across the United States. This field force works at our member sites to identify and recommend best practices for both supply chain and clinical integration cost savings opportunities. The regionally deployed field force is augmented by a national team of subject matter specialists who focus on key areas such as lab, surgery, cardiology, orthopedics, imaging, pharmacy, information technology and construction. Our field force assists our members in growing and supporting their alternate site membership.
Our sales team provides national sales coverage for establishing initial member relationships and works with our field force to increase sales to existing members. Our regional sales teams are aligned with the seven regions in our field force model.
Our Premier Performance Partners team identifies and targets advisory engagements and wrap-around services for our major SaaS informatics products and our GPO to enhance the member value from these programs.
Intellectual Property
We offer our members a range of products to which we own intellectual property rights, including online services, best practices content, databases, electronic tools, web-based applications, performance metrics, business methodologies, proprietary algorithms, software products and advisory services deliverables. We own and control a variety of trade secrets, confidential information, trademarks, trade names, copyrights, domain names and other intellectual property rights that, in the aggregate, are of material importance to our business.
We protect our intellectual property by relying on federal, state and common law rights, as well as contractual arrangements. We are licensed to use certain technology and other intellectual property rights owned and controlled by others, and, similarly, other companies are licensed to use certain technology and other intellectual property rights owned and controlled by us.
Research and Development
Our research and development, or R&D, expenditures primarily consist of our strategic investment in internally developed software to further our initiatives, and new product development in the areas of cost management, quality and safety and population health management. We have also made significant investments in our SaaS informatics product offerings. We expensed $2.9 million, $2.9 million and $3.4 million for R&D activities for fiscal years 2016, 2015 and 2014, respectively, and capitalized software development costs of $61.0 million, $57.9 million and $41.1 million for fiscal years 2016, 2015 and 2014, respectively. We experience fluctuations in our research and development expenditures, including capitalized software development costs, across reportable periods due to the timing of our software development life cycles, with new product features and functionality, new technologies and upgrades to our service offerings.
Competition
The markets for our products and services in both our supply chain services segment and performance services segment are fragmented, intensely competitive and characterized by rapidly evolving technology and product standards, user needs and the frequent introduction of new products and services. We have experienced and expect to continue to experience intense competition from a number of companies.
The primary competitors to our supply chain services segment are other large GPOs such as HealthTrust Purchasing Group (a subsidiary of HCA Holdings, Inc.), Intalere Inc., Managed Health Care Associates, Inc. and Vizient, Inc. In addition, we compete against certain healthcare provider-owned GPOs in this segment. Our specialty pharmacy competes with Caremark Inc. (owned by CVS Caremark Corporation), Curascript, Inc./Accredo (owned by Express Scripts Holding Co.), Diplomat Specialty Pharmacy and many smaller local specialty pharmacies. Finally, our direct sourcing activities compete primarily with private label offerings/programs, product manufacturers and distributors, such as Cardinal Health, Inc., McKesson Corporation, Medline Industries, Inc. and Owens & Minor, Inc.
The competitors in our performance services segment range from smaller niche companies to large, well-financed and technologically-sophisticated entities. Our primary competitors in this segment include (i) information technology providers such as Allscripts Healthcare Solutions, Inc., Caradigm USA LLC, Cerner Corporation, Epic Systems Corporation, IBM Corporation, Infor, Inc., McKesson Corporation and Oracle Corporation, and (ii) consulting and outsourcing firms such as The Advisory Board Company, Deloitte & Touche LLP, Evolent Health, Inc., Healthagen, LLC (a subsidiary of Aetna, Inc.), Huron Consulting, Inc., Navigant Consulting, Inc. and Optum, Inc. (a subsidiary of UnitedHealth Group, Inc.).
With respect to our products and services across both segments, we compete on the basis of several factors, including breadth, depth and quality of product and service offerings, ability to deliver clinical, financial and operational performance improvements through the use of products and services, quality and reliability of services, ease of use and convenience, brand recognition and the ability to integrate services with existing technology. With respect to our products and services across both of our business segments, we also compete on the basis of price.
Government Regulation
General
The healthcare industry is highly regulated by federal and state authorities and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare industry, regulation, litigation and general economic conditions affect the purchasing practices, operations and the financial health of healthcare organizations. In particular, changes in laws and regulations affecting the healthcare industry, such as increased regulation of the purchase and sale of medical products, or restrictions on permissible discounts and other financial arrangements, could require us to make unplanned modifications of our products and services, result in delays or cancellations of orders or reduce funds and demand for our products and services.
We are subject to numerous risks arising from governmental oversight and regulation. You should carefully review the following discussion and the risks discussed under “Item 1A, Risk Factors” for a more detailed discussion.
Affordable Care Act
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education and Reconciliation Act of 2010, collectively referred to as the Affordable Care Act, is a sweeping measure designed to expand access to affordable health insurance, control healthcare spending and improve healthcare quality. The law includes provisions to tie Medicare provider reimbursement to healthcare quality and incentives, mandatory compliance programs, enhanced transparency disclosure requirements, increased funding and initiatives to address fraud and abuse and incentives to state Medicaid programs to promote community-based care as an alternative to institutional long-term care services. In addition, the law provides for the establishment of a national voluntary pilot program to bundle Medicare payments for hospital and post-acute services, which could lead to changes in the delivery of healthcare services. Likewise, many states have adopted or are considering changes in healthcare policies in part due to state budgetary shortfalls. Because implementation of many provisions of the Affordable Care Act remains unsettled, we do not know what effect the federal Affordable Care Act or state law proposals may have on our business.
Civil and Criminal Fraud and Abuse Laws
We are subject to federal and state laws and regulations designed to protect patients, governmental healthcare programs and private health plans from fraudulent and abusive activities. These laws include anti-kickback restrictions and laws prohibiting the submission of false or fraudulent claims. These laws are complex and broadly-worded, and their application to our specific products, services and relationships may not be clear and may be applied to our business in ways that we do not anticipate. Federal and state
regulatory and law enforcement authorities have over time increased enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations and other reimbursement laws and rules. These laws and regulations include:
Anti-Kickback Laws. The federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The definition of "remuneration" has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to influence the purchase, lease or ordering of healthcare items and services regardless of whether the item or service is covered under a governmental health program or private health plan. Certain statutory and regulatory safe harbors exist that protect specified business arrangements from prosecution under the Anti-Kickback Statute if all elements of an applicable safe harbor are met, however these safe harbors are narrow and often difficult to comply with. Congress has appropriated an increasing amount of funds in recent years to support enforcement activities aimed at reducing healthcare fraud and abuse.
The U.S. Department of Health and Human Services, or HHS, created certain safe harbor regulations which, if fully complied with, assure parties to a particular arrangement covered by a safe harbor that they will not be prosecuted under the Anti-Kickback Statute. We attempt to structure our group purchasing services, pricing discount arrangements with suppliers, and revenue share arrangements with applicable members to meet the terms of the safe harbor for GPOs set forth at 42 C.F.R. § 1001.952(j) and the discount safe harbor set forth at 42 C.F.R. § 1001.952(h). Although full compliance with the provisions of a safe harbor ensures against prosecution under the Anti-Kickback Statute, failure of a transaction or arrangement to fit within a safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the Anti-Kickback Statute will be pursued. From time to time, HHS, through its Office of Inspector General, makes formal and informal inquiries, conducts investigations and audits the business practices of GPOs, including our GPO, the result of which could be new rules, regulations or in some cases, a formal enforcement action.
To help ensure regulatory compliance with HHS rules and regulations, our members that report their costs to Medicare are required under the terms of the Premier Group Purchasing Policy to appropriately reflect all elements of value received in connection with our Reorganization and IPO on their cost reports. We are required to furnish applicable reports to such members setting forth the amount of such value, to assist their compliance with such cost reporting requirements. There can be no assurance that the HHS Office of Inspector General or the U.S. Department of Justice, or DOJ, will concur that these actions satisfy their applicable rules and regulations.
False Claims Act. Our business in general, and our specialty pharmacy in particular, is also subject to numerous federal and state laws that forbid the submission or "causing the submission" of false or fraudulent information or the failure to disclose information in connection with the submission and payment of claims for reimbursement to Medicare, Medicaid, other federal healthcare programs or private health plans. In particular, the False Claims Act, or FCA, prohibits a person from knowingly presenting or causing to be presented a false or fraudulent claim for payment or approval by an officer, employee or agent of the United States. In addition, the FCA prohibits a person from knowingly making, using, or causing to be made or used a false record or statement material to such a claim. Violations of the FCA may result in treble damages, significant monetary penalties, and other collateral consequences including, potentially, exclusion from participation in federally funded healthcare programs. The scope and implications of the amendments to the FCA pursuant to the Fraud Enforcement and Recovery Act, or FERA, have yet to be fully determined or adjudicated and as a result it is difficult to predict how future enforcement initiatives may impact our business. A claim that includes items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA.
Privacy and Security Laws. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, contains substantial restrictions and requirements with respect to the use and disclosure of certain individually identifiable health information, referred to as "protected health information." The HIPAA Privacy Rule prohibits a covered entity or a business associate (essentially, a third party engaged to assist a covered entity with enumerated operational and/or compliance functions) from using or disclosing protected health information unless the use or disclosure is validly authorized by the individual or is specifically required or permitted under the Privacy Rule and only if certain complex requirements are met. In addition to establishing these complex requirements, covered entities and business associates must also meet additional compliance obligations set forth in the Privacy Rule. In addition, the HIPAA Security Rule establishes administrative, organization, physical and technical safeguards to protect the privacy, integrity and availability of electronic protected health information maintained or transmitted by covered entities and business associates. The HIPAA Security Rule requirements are intended to mandate that covered entities and business associates regularly re-assess the adequacy of their safeguards in light of changing and evolving security risks. Finally, the HIPAA Breach Notification Rule requires that covered entities and business associates, under certain circumstances, notify patients/beneficiaries and HHS when there has been an improper use or disclosure of protected health information.
Our specialty pharmacy, our self-funded health benefit plan and our healthcare provider members (provided that these members engage in HIPAA-defined standard electronic transactions with health plans, which will be all or the vast majority) are directly regulated by HIPAA as "covered entities." From time to time, as part of our specialty pharmacy business, certain of our affiliates act as business associates of retail and other pharmacies in connection with co-branding initiatives. As such, we are subject to HIPAA and other risks discussed herein associated with being a business associate. Additionally, because most of our U.S. hospital members disclose protected health information to us so that we may use that information to provide certain data analytics, benchmarking, advisory or other operational and compliance services to these members, we are a "business associate" of those members. In these cases, in order to provide members with services that involve the use or disclosure of protected health information, HIPAA require us to enter into "business associate agreements" with our covered entity members. Such agreements must, among other things, provide adequate written assurances:
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(i) | as to how we will use and disclose the protected health information within certain allowable parameters established by HIPAA, |
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(ii) | that we will implement reasonable administrative, organizational, physical and technical safeguards to protect such information from misuse, |
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(iii) | that we will enter into similar agreements with our agents and subcontractors that have access to the information, |
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(iv) | that we will report breaches of unsecured protected health information, security incidents and other inappropriate uses or disclosures of the information, and |
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(v) | that we will assist the covered entity with certain of its duties under HIPAA. |
With the enactment of the Health Information Technology for Economic and Clinical Health, or HITECH Act, the privacy and security requirements of HIPAA were modified and expanded. The HITECH Act applies certain of the HIPAA privacy and security requirements directly to business associates of covered entities. Prior to this change, business associates had contractual obligations to covered entities but were not subject to direct enforcement by the federal government. In 2013, HHS released final rules implementing the HITECH Act changes to HIPAA. These amendments expanded the protection of protected health information by, among other things, imposing additional requirements on business associates, further restricting the disclosure of protected health information in certain cases when the disclosure is part of a remunerated transaction, and modifying the HIPAA Breach Notification Rule, which has been in effect since September 2009, to create a rebuttable presumption that any improper use or disclosure of protected health information requires notice to affected patients/beneficiaries and HHS.
Transaction Requirements. HIPAA also mandates format, data content and provider identifier standards that must be used in certain electronic transactions, such as claims, payment advice and eligibility inquiries. Although our systems are fully capable of transmitting transactions that comply with these requirements, some payers and healthcare clearinghouses with which we conduct business may interpret HIPAA transaction requirements differently than we do or may require us to use legacy formats or include legacy identifiers as they make the transition to full compliance. In cases where payers or healthcare clearinghouses require conformity with their interpretations or require us to accommodate legacy transactions or identifiers as a condition of successful transactions, we attempt to comply with their requirements, but may be subject to enforcement actions as a result. In 2009, CMS published a final rule adopting updated standard code sets for diagnoses and procedures known as ICD-10 code sets and changing the formats to be used for electronic transactions subject to the ICD-10 code sets, known as Version 5010. All healthcare providers are required to comply with Version 5010 and use the ICD-10 code sets. We are actively working to make the proper modifications in preparation for the upcoming release of new ICD-10 code sets on October 1, 2016.
Other Federal and State Laws. In addition to our obligations under HIPAA there are other federal laws that impose specific privacy and security obligations, above and beyond HIPAA, for certain types of health information and impose additional sanctions and penalties. These rules are not preempted by HIPAA. Most states have enacted patient and/or beneficiary confidentiality laws that protect against the disclosure of confidential medical information, and many states have adopted or are considering adopting further legislation in this area, including privacy safeguards, security standards, data security breach notification requirements, and special rules for so-called "sensitive" health information, such as mental health, genetic testing results, or Human Immunodeficiency Virus, or HIV, status. These state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements, and we are required to comply with them as well.
We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or how those changes could affect our business or the associated costs of compliance. For example, the federal Office of the National Coordinator for Health Information Technology, or ONCHIT, is coordinating the development of national standards for creating an interoperable health information technology infrastructure based on the widespread adoption of electronic health records in the healthcare sector. We are yet unable to predict what, if any, impact the creation of such standards and the further developments at ONCHIT will have on the necessary specifications or demand for our products, services, or on associated compliance costs.
Antitrust Laws
The Sherman Antitrust Act and related federal and state antitrust laws are complex laws that prohibit contracts in restraint of trade or other activities that are designed to or that have the effect of reducing competition in the market. The federal antitrust laws promote fair competition in business and are intended to create a level playing field so that both small and large companies are able to compete in the market. In their 1996 Statements of Antitrust Enforcement Policy in Health Care, first issued in 1993, or the Healthcare Statements, the DOJ and the Federal Trade Commission, or FTC, set forth guidelines specifically designed to help GPOs gauge whether a particular purchasing arrangement may raise antitrust concerns and established an antitrust safety zone for joint purchasing arrangements among healthcare providers. Under this antitrust safety zone, the DOJ and FTC will not challenge, except in extraordinary circumstances, joint purchasing arrangements among healthcare providers that meet two basic conditions: (i) the purchases made by the healthcare providers account for less than 35% of the total sales of the purchased product or service in the relevant market; and (ii) the cost of the products and services purchased jointly account for less than 20% of the total revenues from all products and services sold by each competing participant in the joint purchasing arrangement.
We have attempted to structure our contracts and pricing arrangements in accordance with the Healthcare Statements and believe that our GPO supplier contracts and pricing discount arrangements should not be found to violate the antitrust laws. However, no assurance can be given that enforcement authorities will agree with this assessment. From time to time, the group purchasing industry comes under review by congress and other governmental bodies with respect to antitrust laws. In connection with the 2002 hearing by the U.S. Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, we and other operators of GPOs formed the Healthcare Supply Chain Association, or HSCA, which developed a code of conduct to assure compliance with ethical and legal standards, including the antitrust laws. In addition, in 2002 we adopted our own Code of Conduct in consultation with a leading ethicist.
On August 11, 2009, we and several other operators of GPOs received a letter from Senators Charles Grassley, Herb Kohl and Bill Nelson requesting information concerning the different relationships between and among us and our members, distributors, manufacturers and other suppliers, and requesting certain information about the services we perform and the payments we receive in connection with our GPO programs. On September 25, 2009, we and several other operators of GPOs received a request for information from the U.S. Government Accountability Office, or GAO, also concerning our services and relationships with our members in connection with our GPO programs. Subsequently, we and other operators of GPOs received follow-up requests for additional information. We fully complied with all of these requests. On September 27, 2010, the GAO released a report titled "Group Purchasing Organizations-Services Provided to Customers and Initiatives Regarding Their Business Practices." On that same day, the Minority Staff of the U.S. Senate Finance Committee released a report titled "Empirical Data Lacking to Support Claims of Savings with Group Purchasing Organizations." On March 30, 2012, the GAO released a report titled "Group Purchasing Organizations-Federal Oversight and Self-Regulation." On November 24, 2014, the GAO released a report titled "Funding Structure Has Potential Implications for Medicare Costs."
Congress, the DOJ, the FTC, the U.S. Senate or another state or federal entity could at any time open a new investigation of the group purchasing industry, or develop new rules, regulations or laws governing the industry, that could adversely impact our ability to negotiate pricing arrangements with suppliers, increase reporting and documentation requirements, or otherwise require us to modify our arrangements in a manner that adversely impacts our business. We may also face private or government lawsuits alleging violations arising from the concerns articulated by these governmental factors or alleging violations based solely on concerns of individual private parties.
Governmental Audits
Because we act as a GPO for healthcare providers that participate in governmental programs, our group purchasing services have in the past and may again in the future be subject to periodic surveys and audits by governmental entities or contractors for compliance with Medicare and Medicaid standards and requirements. We will continue to respond to these government reviews and audits but cannot predict what the outcome of any future audits may be or whether the results of any audits could significantly or negatively impact our business, our financial condition or results of operations.
Compliance Department
We have developed a compliance program that is designed to monitor that our operations are conducted in compliance with applicable laws and regulations and, if violations occur, to promote early detection and prompt resolution. These objectives are achieved through education, monitoring, disciplinary action and other remedial measures we believe to be appropriate. We provide all of our employees with a compliance education that has been developed to communicate our code of conduct, standards of conduct, and compliance policies and procedures, as well as policies for monitoring, reporting and responding to compliance issues. We also provide all of our employees with a third party toll-free number and Internet website address in order to report any compliance or privacy concerns. In addition, our Chief Ethics and Compliance Officer individually, and along with the Audit and Compliance Committee of the Board of Directors, helps oversee compliance and ethics matters across our business operations.
Employees
As of June 30, 2016, we employed approximately 2,100 persons, approximately 47% of whom are based in our headquarters in Charlotte, North Carolina. None of our employees are working under a collective bargaining arrangement.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy the documents that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain further information about the operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect these reports and other information without charge at a website maintained by the SEC. The address of this site is https://www.sec.gov. In addition, our website address is www.premierinc.com. We make available through our website the documents identified above, free of charge, promptly after we electronically file such material with, or furnish it to, the SEC.
We also provide information about our company through: Twitter (https://twitter.com/premierha), Facebook (https://www.facebook.com/premierhealthcarealliance), LinkedIn (https://www.linkedin.com/company/6766), YouTube (https://www.youtube.com/user/premieralliance), Instagram (https://instagram.com/premierha), Foursquare (https://foursquare.com/premierha) and Premier’s blog (https://www.actionforbetterhealthcare.com).
Except as specifically indicated otherwise, the information available on our website, the SEC's website and the social media outlets identified above, is not and shall not be deemed a part of this Annual Report.
Item 1A. Risk Factors
Our business, operations, and financial position are subject to various risks. Before making an investment in our Class A common stock or other securities we may have outstanding from time to time, you should carefully consider the following risks, as well as the other information contained in this annual report. Any of the risks described below could materially harm our business, financial condition, results of operations and prospects, and as a result, an investment in our Class A common stock or other securities we may have outstanding from time to time could decline, and you may lose part or all of the value of your investment. This section does not describe all risks that are or may become applicable to us, our industry, or our business, and it is intended only as a summary of certain material risk factors. Some statements in this annual report, including such statements in the following risk factors, constitute forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.” More detailed information concerning other risks or uncertainties we face, as well as the risk factors described below, is contained in other sections of this annual report.
Risks Related to Our Business
We face intense competition, which could limit our ability to maintain or expand market share within our industry and harm our business and operating results.
The market for products and services in each of our operating segments is fragmented, intensely competitive and characterized by rapidly evolving technology and product standards, dynamic user needs and the frequent introduction of new products and services. We face intense competition from a number of companies, including the companies listed under “Item 1 - Business - Competition.” The primary competitors for our supply chain services segment are other large GPOs, including in certain cases GPOs owned by healthcare providers. Our specialty pharmacy competes both with large national pharmacies and smaller local specialty pharmacies. Our direct sourcing activities compete primarily with private label offerings and programs, product manufacturers and distributors. The competitors in our performance services segment range from smaller niche companies to large, well-financed and technologically-sophisticated entities, and includes information technology providers and consulting and outsourcing firms.
With respect to our products and services in both segments, we compete on the basis of several factors, including breadth, depth and quality of our product and service offerings, ability to deliver clinical, financial and operational performance improvement through the use of products and services, quality and reliability of services, ease of use and convenience, brand recognition and the ability to integrate services with existing technology. Some of our competitors are more established, benefit from greater name recognition, have larger member bases and have substantially greater financial, technical and marketing resources. Other of our competitors have proprietary technology that differentiates their product and service offerings from our offerings. As a result of these competitive advantages, our competitors and potential competitors may be able to respond more quickly to market forces, undertake more extensive marketing campaigns for their brands, products and services and make more attractive offers to our members.
We also compete on the basis of price in both of our segments. We may be subject to pricing pressures as a result of, among other things, competition within the industry, consolidation of healthcare industry participants, practices of managed care organizations, changes in laws and regulations applicable to our business operations, government action affecting reimbursement and financial stress experienced by our members. If our pricing experiences significant downward pressure, our business will be less profitable and our results of operations will be adversely affected. In this competitive environment, we cannot be certain that we will be able to retain our current members or expand our member base. If we do not retain current members or expand our member base, our business, financial condition and results of operations will be harmed. Moreover, we expect that competition will continue to increase as a result of consolidation in both the healthcare information technology and healthcare services industries. If one or more of our competitors or potential competitors were to merge or partner with another of our competitors, the change in the competitive landscape could also adversely affect our ability to compete effectively and could harm our business, financial condition and results of operations.
Consolidation in the healthcare industry could have a material adverse effect on our business, financial condition and results of operations.
Many healthcare industry participants are consolidating to create larger and more integrated healthcare delivery systems with greater market power. We expect regulatory and economic conditions to force additional consolidation in the healthcare industry in the future. As consolidation accelerates, the economies of scale of our members’ organizations may grow. If a member experiences sizable growth following consolidation, it may determine that it no longer needs to rely on us and may reduce its demand for our products and services. Some of these large and growing healthcare systems may choose to contract directly with suppliers for certain supply categories, and some suppliers may seek to contract directly with the healthcare providers rather than with GPOs such as ours. In connection with any consolidation, certain of our members may also move their business to another GPO. In addition, as healthcare providers consolidate to create larger and more integrated healthcare delivery systems with greater market
power, these providers may try to use their market power to negotiate fee reductions for our products and services across both of our business segments. Finally, consolidation may also result in the acquisition or future development by our members of products and services that compete with our products and services. Any of these potential results of consolidation could have a material adverse effect on our business, financial condition and results of operations.
We may experience significant delays in recognizing revenue or increasing revenue if the sales cycle or implementation period with potential new members takes longer than anticipated.
A key element of our strategy is to market the various products and services in our supply chain services and performance services segments directly to healthcare providers, such as health systems and acute care hospitals, and to increase the number of our products and services utilized by existing members. The evaluation process is often lengthy and involves significant technical evaluation and commitment of personnel by these organizations. Further, the evaluation process depends on a number of factors, many of which we may not be able to control, including potential new members’ internal approval processes, budgetary constraints for technology spending, member concerns about implementing new procurement methods and strategies and other timing effects. In addition, the contract or software implementation process for new products or services can take six months or more and, accordingly, delay our anticipated financial benefits from sales of such products or services. If we experience an extended or delayed implementation cycle in connection with the sale of additional products and services to existing or new members, it could have a material adverse effect on our business, financial condition and results of operations.
Member participation in our GPO programs may be terminated with limited or no notice and without significant termination payments. If our members reduce activity levels or terminate or elect not to renew their contracts, our revenue and results of operations may decrease materially.
In connection with the Reorganization, we entered into new GPO participation agreements with all of our member owners existing immediately prior to the completion of the Reorganization. These GPO participation agreements are generally terminable at any time by either party, upon one year’s prior written notice, in addition to being terminable for cause. Our success in retaining member participation in our GPO programs depends upon our reputation, strong relationships with such members and our ability to deliver consistent, reliable and high quality products and services. In addition, members may seek to reduce, cancel or elect not to renew their contracts due to factors that are beyond our control and are unrelated to our performance, including their business or financial condition, changes in their strategies or business plans or economic conditions in general. When contracts are reduced, canceled or not renewed for any reason, we lose the anticipated future revenue associated with such contracts and, consequently, our revenue and results of operations may decrease materially.
The markets for our non-GPO services and products may develop more slowly than we expect, which could adversely affect our revenue and our ability to maintain or increase our profitability.
The market for products and services in our non-GPO lines of business is narrowly based, and our success will depend to a substantial extent on the willingness of existing and potential new members to increase their use of our SaaS informatics products. Many companies have invested substantial resources to integrate established enterprise software into their businesses and therefore may be reluctant or unwilling to switch to our products and services. Furthermore, some companies may have concerns regarding the risks associated with the security and reliability of the technology delivery model associated with these services. If companies do not perceive the benefits of our products and services, then the market for these products and services may not expand as much or develop as quickly as we expect, which would significantly adversely affect our business, financial condition and results of operations.
Our members are highly dependent on payments from third-party healthcare payers, including Medicare, Medicaid and other government-sponsored programs, and reductions or changes in third-party reimbursement could adversely affect these members and consequently our business.
Our members derive a substantial portion of their revenue from third-party private and governmental payers, including Medicare, Medicaid and other government sponsored programs. Our sales and profitability depend, in part, on the extent to which coverage of and reimbursement for our products and services our members purchase or otherwise obtain through us is available to our members from governmental health programs, private health insurers, managed care plans and other third-party payers. These third-party payers are increasingly using their enhanced bargaining power to secure discounted reimbursement rates and may impose other requirements that adversely impact our members’ ability to obtain adequate reimbursement for our products and services. If third-party payers do not approve our products and services for reimbursement or fail to reimburse for them adequately, our members may suffer adverse financial consequences which, in turn, may reduce the demand for and ability to purchase our products or services.
In addition, government actions could limit government spending generally for the Medicare and Medicaid programs, limit payments to healthcare providers and increase emphasis on competitive bidding programs that could have an adverse impact on our members and, in turn, on our business, financial condition and results of operations.
We rely on the administrative fees we receive from our GPO suppliers, and the failure to maintain contracts with these GPO suppliers could have a generally negative effect on our relationships with our members and could adversely affect our business, financial condition and results of operations.
Historically, we have derived a substantial amount of our revenue from the administrative fees that we receive from our GPO suppliers. We maintain contractual relationships with these suppliers which provide products and services to our members at reduced costs and which pay us administrative fees based on the dollars spent by our members for such products and services. Our contracts with these GPO suppliers generally may be terminated upon 90 days’ notice. A termination of any relationship or agreement with a GPO supplier would result in the loss of administrative fees pursuant to our arrangement with that supplier, which could adversely affect our business, financial condition and results of operations. In addition, if we lose a relationship with a GPO supplier we may not be able to negotiate similar arrangements for our members with other suppliers on the same terms and conditions or at all, which could damage our reputation with our members and adversely impact our ability to maintain our member agreements or expand our membership base and could have a material adverse effect on our business, financial condition and results of operations.
In addition, CMS, which administers the Medicare and federal aspects of state Medicaid programs, has issued complex rules requiring pharmaceutical manufacturers to calculate and report drug pricing for multiple purposes, including the limiting of reimbursement for certain drugs. These rules generally exclude from the pricing calculation administrative fees paid by drug manufacturers to GPOs to the extent that such fees meet CMS’s “bona fide service fee” definition. There can be no assurance that CMS will continue to allow exclusion of GPO administrative fees from the pricing calculation, which could negatively affect the willingness of pharmaceutical manufacturers to pay administrative fees to us.
If we are unable to maintain our relationships with third-party providers or maintain or enter into new strategic alliances, we may be unable to grow our current base business.
Our business strategy includes entering into and maintaining strategic alliances and affiliations with leading service providers and other GPOs. These companies may pursue relationships with our competitors, develop or acquire products and services that compete with our products and services, experience financial difficulties, be acquired by one of our competitors or other third party or exit the healthcare industry, any of which may adversely affect our relationship with them. In addition, in many cases, these companies may terminate their relationships with us for any reason with limited or no notice. If existing relationships with third-party providers or strategic alliances are adversely impacted or are terminated or we are unable to enter into relationships with leading healthcare service providers and other GPOs, we may be unable to maintain or increase our industry presence or effectively execute our business strategy.
If we are not able to timely offer new and innovative products and services, we may not remain competitive and our revenue and results of operations may suffer.
Our success depends on providing products and services within our supply chain services and performance services segments that healthcare providers use to improve clinical, financial and operational performance. Information technology providers and other competitors are incorporating enhanced analytical tools and functionality and otherwise developing products and services that may become viewed as more efficient or appealing to our members. If we cannot adapt to rapidly evolving industry standards, technology and member needs, including changing regulations and provider reimbursement policies, we may be unable to anticipate changes in our current and potential new members’ requirements that could make our existing technology, products or service offerings obsolete. We must continue to invest significant resources in research and development in order to enhance our existing products and services, maintain or improve our product category rankings and introduce new high quality products and services that members and potential new members will want. If our enhanced existing or new products and services are not responsive to the needs of our members or potential new members, are not appropriately timed with market opportunity or are not effectively brought to market we may lose existing members and be unable to obtain new members and our results of operations may suffer.
We derive a significant portion of our revenues from our largest members, some of which are also GPOs that serve our members.
Our top five members, all of which are participants in our group purchasing programs, comprised approximately 18% of our consolidated net revenues for the year ended June 30, 2016. Our largest member, GNYHA Purchasing Alliance, LLC and its member organizations, comprised approximately 9% of our consolidated net revenues for the same period. The sudden loss of any significant member or a number of smaller members that are participants in our group purchasing programs could materially and adversely affect our operating results. In addition, certain of our significant members are themselves GPOs with their own respective direct contracting relationships, including relationships with some of our other members. The sudden loss of any of these members
may also result in increased competition for our supply chain services segment and materially and adversely affect our operating results.
Acquisitions could result in operating difficulties, dilution and other adverse consequences.
Our business strategy includes growth through acquisitions of additional businesses and assets. Future acquisitions may not be completed on preferred terms, and acquired assets or businesses may not be successfully integrated into our operations. Any of these acquisitions will involve the risks commonly encountered in acquisitions of businesses. Such risks include, among other things:
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• | failing to integrate the operations and personnel of the acquired businesses in an efficient, timely manner; |
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• | assuming potential liabilities of an acquired company, some of which may not become known until after the acquisition; |
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• | an acquired company's lack of compliance with laws and governmental rules and regulations, and the related costs and expenses necessary to bring such entity into compliance; |
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• | an acquired company's general information technology controls may not be sufficient to prevent unauthorized access or transactions, cyber-attacks or other data security breaches; |
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• | managing the potential disruption to our ongoing business; |
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• | distracting management focus from our core businesses; |
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• | encountering difficulties in identifying and acquiring products, technologies, or businesses that will help us execute our business strategy; |
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• | entering new markets in which we have little to no experience; |
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• | impairing relationships with employees, members, and strategic partners; |
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• | failing to implement or remediate controls, procedures and policies appropriate for a public company at acquired companies that prior to the acquisition lacked such controls, procedures and policies; |
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• | the amortization of purchased intangible assets; |
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• | incurring expenses associated with an impairment of all or a portion of goodwill and other intangible assets due to the failure of certain acquisitions to realize expected benefits; and |
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• | diluting the share value and voting power of existing stockholders. |
Anticipated benefits of our previous and future acquisitions may not materialize. Future acquisitions or dispositions of under-performing businesses could result in the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill and other intangible assets, any of which could harm our results of operations and financial condition. In addition, expenses associated with potential acquisitions, including, among others, due diligence costs, legal, accounting, technology and financial advisory fees, travel and internal resources utilization, can be significant. These expenses may be incurred regardless of whether any potential acquisition is completed. In instances where acquisitions are not ultimately completed, these expenses typically cannot be recovered or offset by the anticipated financial benefits of a successful acquisition. As we pursue our business strategy and evaluate opportunities, these expenses may adversely impact our results of operations and earnings per share.
Our business and growth strategy also includes non-controlling investments in other businesses. In the event these investments do not perform as well as expected, we could experience the loss of some or all of the value of our investment which loss could adversely impact our financial condition and results of operations.
Although we conduct accounting, financial, legal and business due diligence prior to making investments, we cannot guarantee that we will discover all material issues that may affect a particular target business, or that factors outside the control of the target business and outside of our control will not later arise. To the extent we invest in a financially underperforming or unstable company or an entity in its development stage that does not successfully mature, we may lose the value of our investment. Occasionally, current and future investments are, and will be, made on a non-controlling basis, in which case we have limited ability to influence the financial or business operations of the companies in which we invest. If our investment loses value, we may be required to write down or write off our investment, or recognize impairment or other charges that could adversely impact our financial condition or results of operations and our stock price. Even though these charges may be non-cash items and not have a material impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us and our business strategy and our Class A common stock.
We are subject to litigation from time to time, which could have a material adverse effect on our business, financial condition and results of operations.
We participate in businesses that are subject to substantial litigation. We are from time to time involved in litigation, which may include claims relating to commercial, product liability, personal injury, employment, antitrust, intellectual property or other regulatory matters. Additionally, if current or future government regulations are interpreted or enforced in a manner adverse to us or our business, specifically those with respect to antitrust or healthcare laws, we may be subject to enforcement actions, penalties, damages and other material limitations on our business.
From time to time, we have been named as a defendant in lawsuits brought by suppliers of medical products. Typically, these lawsuits have alleged the existence of a conspiracy among manufacturers of competing products and operators of GPOs, including us, to deny the plaintiff access to a market for its products. No assurance can be given that we will not be subjected to similar actions in the future or that such matters will be resolved in a manner satisfactory to us or which will not harm our business, financial condition or results of operations.
We may become subject to additional litigation in the future. Some of these claims may result in significant defense costs or may compel us to pay significant fines, judgments or settlements, which, if uninsured, could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, certain litigation matters could adversely impact our commercial reputation, which is critical for attracting and retaining suppliers and member participation in our GPO programs.
We rely on Internet infrastructure, bandwidth providers, data center providers and other third parties and our own systems for providing services to our users, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation and negatively impact our relationships with users, adversely affecting our brand, our business and our financial performance.
Our ability to deliver our performance services segment products is dependent on the development and maintenance of the infrastructure of the Internet and other telecommunications services by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security for providing reliable Internet access and services and reliable telephone, facsimile and pager systems. We have experienced and expect that we will experience in the future interruptions and delays in these services and availability from time to time. We rely on internal systems as well as third-party suppliers, including bandwidth and telecommunications equipment providers, to provide our services. We are also currently in the process of migrating some of our data center operations to third-party data-hosting facilities. We do not maintain redundant systems or facilities for some of these services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact our relationship with users. To operate without interruption, both we and our service providers must guard against:
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• | damage from fire, power loss, and other natural disasters; |
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• | communications failures; |
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• | software and hardware errors, failures, and crashes; |
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• | security breaches and computer viruses and similar disruptive problems; and |
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• | other potential interruptions. |
Any disruption in the network access, telecommunications or co-location services provided by our third-party providers or any failure of or by these third-party providers or our own systems to handle current or higher volume of use could significantly harm our business. We exercise limited control over these third-party suppliers, which increases our vulnerability to problems with services they provide. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with users and adversely affect our business and financial performance and could expose us to third-party liabilities, some of which may not be adequately insured.
Data loss or corruption due to failures or errors in our systems and service disruptions at our data centers may adversely affect our reputation and relationships with existing members, which could have a negative impact on our business, financial condition and results of operations.
Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our members regard as significant. Complex software such as ours may contain errors or failures that are not detected until after the software is introduced or updates and new versions are released. We continually introduce new software and updates and enhancements to our software. Despite testing by us, from time to time we have discovered defects or errors in our software, and such defects or errors may be discovered in the future. Any defects or errors could expose us to risk of liability to members and the government and could cause delays in the introduction of new products and services, result in increased costs and diversion
of development resources, require design modifications, decrease market acceptance or member satisfaction with our products and services or cause harm to our reputation.
Furthermore, our members might use our software together with products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts, impact our reputation and lead to significant member relations problems.
Moreover, our internal data centers and service provider locations store and transmit critical member data that is essential to our business. While these locations are chosen for their stability, failover capabilities and system controls, we do not directly control the continued or uninterrupted availability of every location. In addition to the services we provide from our offices, we are currently in the process of migrating some of our data center operations to third-party data-hosting facilities. Data center facilities are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism, cyber-attacks and similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our service. These service interruption events could impair our ability to deliver services or deliverables or cause us to fail to achieve service levels required in agreements with our members, which could negatively affect our ability to retain existing members and attract new members.
If our security measures are breached or fail and unauthorized access to a member’s data is obtained, or our members fail to obtain proper permission for the use and disclosure of information, our services may be perceived as not being secure, members may curtail or stop using our services and we may incur significant liabilities.
Our services involve the web-based storage and transmission of members’ proprietary information and protected health information of patients. From time to time we may detect vulnerabilities in our systems, which, even if not resulting in a security breach, may reduce member confidence and require substantial resources to address. If our security measures are breached or fail as a result of third-party action, employee error, malfeasance, insufficiency, defective design or otherwise, someone may be able to obtain unauthorized access to member or patient data. As a result, our reputation could be damaged, our business may suffer and we could face damages for contract breach, penalties for violation of applicable laws or regulations and significant costs for remediation and efforts to prevent future occurrences.
We rely upon our members as users of our system for key activities to promote security of the system and the data within it. On occasion, our members have failed to perform these activities. Failure of members to perform these activities may result in claims against us that could expose us to significant expense and harm our reputation. In addition, our members may authorize or enable third parties to access their data or the data of their patients on our systems. Because we do not control such access, we cannot ensure the complete propriety of that access or integrity or security of such data in our systems. Any breach of our security could have a material adverse effect on our business, financial condition and results of operations.
Additionally, we require our members to provide necessary notices and to obtain necessary permissions and waivers for use and disclosure of the information that we receive. If our members do not obtain necessary permissions and waivers, then our use and disclosure of information that we receive from them or on their behalf may be limited or prohibited by state or federal privacy laws or other laws. Any such failure to obtain proper permissions and waivers could impair our functions, processes and databases that reflect, contain or are based upon such data and may prevent use of such data. Moreover, we may be subject to claims or liability for use or disclosure of information by reason of our lack of a valid notice, permission or waiver. These claims or liabilities could subject us to unexpected costs and adversely affect our business, financial condition and results of operations.
We could suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm, and other serious negative consequences if we sustain cyber attacks or other data security breaches that disrupt our operations or result in the dissemination of proprietary or confidential information about us or our members or other third parties.
We manage and store proprietary information and sensitive or confidential data relating to our operations. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of our systems.
The costs to us to eliminate or address the foregoing security problems and security vulnerabilities before or after a cyber incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays or cessation
of service and loss of existing or potential members. In addition, breaches of our security measures and the unapproved use or disclosure of proprietary information or sensitive or confidential data about us or our members or other third parties could expose us, our members or other affected third parties to a risk of loss or misuse of this information, result in litigation, governmental inquiry and potential liability for us, damage our brand and reputation or otherwise harm our business. Furthermore, we are exposed to additional risks because we rely in certain capacities on third-party data management providers whose possible security problems and security vulnerabilities are beyond our control.
Any restrictions on our use of, or ability to license, data or our failure to license data and integrate third-party technologies, could have a material adverse effect on our business, financial condition and results of operations.
We depend upon licenses from third parties, most of which are non-exclusive, for some of the technology and data used in our applications, and for some of the technology platforms upon which these applications are built and operate. We also obtain a portion of the data that we use from government entities and public records and from our members for specific member engagements. We cannot assure you that our licenses for information will allow us to use that information for all potential or contemplated applications and products. In addition, if our members revoke their consent for us to maintain, use, de-identify and share their data, our data assets could be degraded.
In the future, data providers could withdraw their data from us or restrict our usage due to competitive reasons or because of new legislation or judicial interpretations restricting use of the data currently used in our products and services. In addition, data providers could fail to adhere to our quality control standards in the future, causing us to incur additional expense to appropriately utilize the data. If a substantial number of data providers were to withdraw or restrict their data, or if they fail to adhere to our quality control standards, and if we are unable to identify and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, our ability to provide products and services to our members would be materially and adversely impacted, resulting in a material adverse effect on our business, financial condition and results of operations.
We also integrate into our proprietary applications and use third-party software to maintain and enhance, among other things, content generation and delivery, and to support our technology infrastructure. Some of this software is proprietary and some is open source. Our use of third-party technologies exposes us to increased risks, including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs. These technologies may not be available to us in the future on commercially reasonable terms or at all and could be difficult to replace once integrated into our own proprietary applications. Our inability to obtain, maintain or comply with any of these licenses could delay development until equivalent technology can be identified, licensed and integrated, which would harm our business, financial condition and results of operations.
Most of our third-party licenses are non-exclusive and our competitors may obtain the right to use any of the technology covered by these licenses to compete directly with us. Our use of third-party technologies exposes us to increased risks, including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs. In addition, if our data suppliers choose to discontinue support of the licensed technology in the future, we might not be able to modify or adapt our own solutions.
Our use of “open source” software could adversely affect our ability to sell our products and subject us to possible litigation.
The products or technologies acquired, licensed or developed by us may incorporate so-called “open source” software, and we may incorporate open source software into other products in the future. There is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses, and therefore the potential impact of these terms on our business is unknown and may result in unanticipated obligations or litigation regarding our products and technologies. For example, we may be subjected to certain conditions, including requirements that we offer our products that use particular open source software at no cost to the user, that we make available the source code for modifications or derivative works we create based upon, incorporating or using the open source software, and/or that we license such modifications or derivative works under the terms of the particular open source license. In addition, if we combine our proprietary software with open source software in a certain manner, under some open source licenses we could be required to release the source code of our proprietary software, which could substantially help our competitors develop products that are similar to or better than ours. If an author or other party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal costs defending ourselves against such allegations and could be subject to significant damages.
Changes in industry pricing benchmarks could materially impact our financial performance.
Contracts in the prescription drug industry, including our contracts with our specialty pharmacy members, generally use “average wholesale price,” or AWP, which is published by a third party, as a benchmark to establish pricing for prescription drugs.
Various federal and state government agencies and prosecutors, as well as legislators and private litigants, have challenged the use of AWP for prescription drug reimbursement, as well as the manner by which AWP is calculated. Thus, some publishers have ceased providing AWP information, and the uncertainty related to continued AWP industry pricing benchmarks and the lack of reliable alternate pricing sources could have a material adverse effect on our business, financial condition and results of operations in future periods.
Prescription volumes may decline, and our net revenues and profitability may be negatively impacted, if the safety risk profiles of drugs increase or if drugs are withdrawn from the market, including as a result of manufacturing issues, or if prescription drugs transition to over-the-counter products.
We dispense significant volumes of brand-name and generic drugs from our specialty pharmacies. When increased safety risk profiles or manufacturing issues of specific drugs or classes of drugs result in utilization decreases, physicians may cease writing or otherwise reduce the numbers of prescriptions for these drugs. Additionally, negative press regarding drugs with higher safety risk profiles may result in reduced global consumer demand for such drugs. On occasion, products are withdrawn by their manufacturers or transition to over-the-counter products. In cases where there are no acceptable prescription drug equivalents or alternatives for these prescription drugs, our volumes, net revenues, profitability and cash flows may decline.
Our ability to grow our specialty pharmacy could be limited if we do not maintain and expand our existing base of drugs, if we lose patients or if manufacturers limit or cease doing business with us.
Our specialty pharmacy focuses on complex and high-cost medications that serve a relatively small patient population. Accordingly, our future growth relies in part on maintaining and expanding our base of drugs or penetration in certain treatment categories. Sales volumes at our specialty pharmacy could also be negatively impacted due to increases in the safety risk profiles or manufacturing issues of specific drugs, product withdrawals by manufacturers or transitions to over-the-counter products. Any loss of patient base or reduction in demand for any reason for the medications we currently dispense could have a material adverse effect on our business, financial condition and results of operations.
In addition, industry trends may result in health plans contracting with a single provider for specialty pharmacy services and manufacturers limiting their business with regional providers of these services. If we are unable to obtain managed care contracts in the areas in which we provide specialty pharmacy services or are unable to obtain specialty pharmacy products at reasonable costs or at all, our business, financial condition and results of operations could be adversely affected.
Our direct sourcing activities depend on contract manufacturing facilities located in various parts of the world, and any physical, financial, regulatory, environmental, labor or operational disruption or product quality issues could result in a reduction in sales volumes and the incurrence of substantial expenditures.
As part of our direct sourcing activities, we contract with manufacturing facilities in various parts of the world, including facilities in China. Operations at these manufacturing facilities could be curtailed or partially or completely shut down as the result of a number of circumstances, most of which are outside of our control, such as unscheduled maintenance, an earthquake, hurricane, flood, tsunami or other natural disaster or significant labor strikes, work stoppages or political unrest. Any significant curtailment of production at these facilities, or production issue resulting in a substandard product, could result in litigation or governmental inquiry or materially reduced revenues and cash flows in our direct sourcing activities. In addition our business practices in international markets are subject to the requirements of the U.S. Foreign Corrupt Practices Act of 1977, as amended, any violation of which could subject us to significant fines, criminal sanctions and other penalties. We expect all of our contracted manufacturing facilities, including facilities located in China, to comply with all applicable laws, including labor, safety and environmental laws, and to otherwise meet our standards of conduct. Our ability to find manufacturing facilities that uphold these standards is a challenge, especially with respect to facilities located outside the United States. We also are subject to the risk that one or more of these manufacturing facilities will engage in business practices in violation of our standards or applicable laws, which could damage our reputation and adversely impact our business and results of operations.
A substantial portion of the manufacturing for our direct sourcing activities is conducted in China. As a result, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including the degree of government involvement, the level of development, the growth rate, the control of foreign exchange, access to financing and the allocation of resources. Additionally, the facilities in China with which we contract are particularly susceptible to rising labor costs and interruptions as a result of minimum wage laws, scheduling and overtime requirements, labor disputes and strikes.
If we lose key personnel or if we are unable to attract, hire, integrate and retain key personnel, our business would be harmed.
Our future success depends in part on our ability to attract, hire, integrate and retain key personnel, including our executive officers and other highly skilled technical, managerial, editorial, sales, marketing and customer service professionals. Competition for such personnel is intense. We have from time to time in the past experienced, and we expect to continue to experience in the
future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. We cannot be certain of our ability to identify, hire and retain adequately qualified personnel. Failure to identify, hire and retain necessary key personnel could have a material adverse effect on our business, financial condition and results of operations.
Failure to protect our intellectual property and claims against our use of the intellectual property of third parties could cause us to incur unanticipated expense and prevent us from providing our products and services, which could adversely affect our business, financial condition and results of operations.
Our success depends in part upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including trade secrets, copyrights and trademarks, as well as customary contractual and confidentiality protections and internal policies applicable to employees, contractors, members and business partners. These protections may not be adequate, however, and we cannot assure you that they will prevent misappropriation of our intellectual property. In addition, parties that gain access to our intellectual property might fail to comply with the terms of our agreements and policies and we may not be able to enforce our rights adequately against these parties. The disclosure to, or independent development by, a competitor of any trade secret, know-how or other technology not protected by a patent could materially and adversely affect any competitive advantage we may have over such competitor. The process of enforcing our intellectual property rights through legal proceedings would likely be burdensome and expensive and our ultimate success cannot be assured. Our failure to adequately protect our intellectual property and proprietary rights could adversely affect our business, financial condition and results of operations.
In addition, we could be subject to claims of intellectual property infringement, misappropriation or other intellectual property violations as our applications’ functionalities overlap with competitive products, and third parties may claim that we do not own or have rights to use all intellectual property used in the conduct of our business. We could incur substantial costs and diversion of management resources defending any such claims. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. Such claims also might require indemnification of our members at significant expense.
A number of our contracts with our members contain indemnity provisions whereby we indemnify them against certain losses that may arise from third-party claims that are brought in connection with the use of our products.
Our exposure to risks associated with the protection and use of intellectual property may be increased as a result of acquisitions, as we have limited visibility into the development process of acquired entities or businesses with respect to their technology or the care taken by acquired entities or businesses to safeguard against infringement risks. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition thereof.
If we are required to collect sales and use taxes on the products and services we sell in certain jurisdictions or online, we may be subject to tax liability for past sales, future sales may decrease and our financial condition may be materially and adversely affected.
Sales tax is currently not imposed on the administrative fees we collect in connection with our GPO programs. If sales tax were imposed in the future on such fees, the profitability of our GPO programs may be materially and adversely affected.
Rules and regulations applicable to sales and use tax vary significantly by tax jurisdiction. In addition, the applicability of these rules given the nature of our products and services is subject to change.
We may lose sales or incur significant costs should various tax jurisdictions be successful in imposing sales and use taxes on a broader range of products and services than those currently so taxed, including products and services sold online. A successful assertion by one or more taxing authorities that we should collect sales or other taxes on the sale of our solutions could result in substantial tax liabilities for past and future sales, decrease our ability to compete and otherwise harm our business.
If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our products and services, including products and services sold online, we may be liable for past taxes in addition to taxes going forward. Liability for past taxes may also include very substantial interest and penalty charges. If we are required to collect and pay back taxes (and the associated interest and penalties) and if our members fail or refuse to reimburse us for all or a portion of these amounts, we will have incurred unplanned costs that may be substantial. Moreover, imposition of such taxes on our services going forward will effectively increase the cost of such services to our members and may adversely affect our ability to retain existing members or to gain new members in the areas in which such taxes are imposed.
We may need to obtain additional financing which may not be available or may be on unfavorable terms and result in dilution to, or a diminution of the rights of, our then-existing stockholders and cause a decrease in the price of our Class A common stock.
We may need to raise additional funds in order to:
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• | finance unanticipated working capital requirements; |
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• | develop or enhance our technological infrastructure and our existing products and services; |
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• | fund strategic relationships; |
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• | respond to competitive pressures; and |
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• | acquire complementary businesses, assets, technologies, products or services. |
Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion strategy, take advantage of unanticipated opportunities, develop or enhance technology or services or otherwise respond to competitive pressures would be significantly limited. If we raise additional funds by issuing equity or convertible debt securities, our then-existing stockholders may be diluted and holders of these newly issued securities may have rights, preferences or privileges senior to those of our then-existing stockholders. The issuance of these securities may cause downward pressures on the trading price of our Class A common stock.
Our indebtedness could adversely affect our business and our liquidity position.
We have a five-year $750 million unsecured revolving credit facility, which includes an accordion feature granting us the ability to increase the size of the facility by an additional $250 million on terms and conditions mutually acceptable to the parties. As of June 30, 2016, we had no amounts outstanding under this credit facility.
Our indebtedness may increase from time to time in the future for various reasons, including fluctuations in operating results, capital expenditures and potential acquisitions. Any indebtedness we incur and restrictive covenants contained in the agreements related thereto could:
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• | make it difficult for us to satisfy our obligations, including making interest payments on our debt obligations; |
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• | limit our ability to obtain additional financing to operate our business; |
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• | require us to dedicate a substantial portion of our cash flow to payments on our debt, reducing our ability to use our cash flow to fund capital expenditures and working capital and other general operational requirements; |
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• | limit our flexibility to execute our business strategy and plan for and react to changes in our business and the healthcare industry; |
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• | place us at a competitive disadvantage relative to some of our competitors that have less debt than us; |
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• | limit our ability to pursue acquisitions; and |
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• | increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates or a downturn in our business or the economy. |
The occurrence of any one of these events could have a material adverse effect on our business, financial condition and results of operations or cause a significant decrease in our liquidity and impair our ability to pay amounts due on our indebtedness.
Our unsecured revolving credit facility contains, among other things, restrictive covenants that will limit our and our subsidiaries’ ability to finance future operations or capital needs or to engage in other business activities. The credit facility restricts, among other things, our ability and the ability of our subsidiaries to incur additional indebtedness or issue guarantees, create liens on our assets, make distributions on or redeem equity interests, make investments, transfer or sell properties or other assets, and engage in mergers, consolidations or acquisitions. Furthermore, the credit facility includes cross-default provisions and requires us to meet specified financial ratios and tests. In addition, any debt securities we may issue in the future may have similar or more restrictive financial or operational covenants that may limit our ability to execute our business strategies or operate our Company.
Our quarterly revenues and results of operations have fluctuated in the past and may continue to fluctuate in the future.
Fluctuations in our quarterly results of operations may be due to a number of factors, some of which are not within our control, including:
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• | our ability to offer new and innovative products and services; |
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• | regulatory changes, including changes in healthcare laws; |
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• | unforeseen legal expenses, including litigation and settlement costs; |
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• | the purchasing and budgeting cycles of our members; |
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• | the lengthy sales cycles for our products and services, which may cause significant delays in generating revenues or an inability to generate revenues; |
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• | pricing pressures with respect to our future sales; |
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• | the timing and success of new product and service offerings by us or by our competitors; |
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• | member decisions regarding renewal or termination of their contracts, especially those involving our larger member relationships; |
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• | the amount and timing of costs related to the maintenance and expansion of our business, operations and infrastructure; |
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• | the amount and timing of costs related to the development, adaptation, acquisition, or integration of acquired technologies or businesses; |
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• | the financial condition of our current and potential new members; and |
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• | general economic and market conditions and conditions specific to the healthcare industry. |
We believe that our quarterly results of operations may vary significantly in the future and that period-to-period comparisons of our results of operations may not be meaningful. You should not rely on the results of one quarter as an indication of future performance. If our quarterly results of operations fall below the expectations of securities analysts or investors, the price of the Class A common stock could decline substantially. In addition, any adverse impacts on the Class A common stock may harm the overall reputation of our organization, cause us to lose members and impact our ability to raise additional capital in the future.
Risks Related to Healthcare Regulation
The healthcare industry is highly regulated. Any material changes in the political, economic or regulatory environment that affect the GPO business or the purchasing practices and operations of healthcare organizations, or that lead to consolidation in the healthcare industry, could reduce the funds available to providers to purchase our products and services or otherwise require us to modify our services.
Our business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally and hospitals and health systems particularly, as well as our ability to increase the number of programs and services that we sell to our members. The healthcare industry is highly regulated by federal and state authorities and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare industry, regulation, litigation and general economic conditions affect the purchasing practices, operations and the financial health of healthcare organizations. In particular, changes in regulations affecting the healthcare industry, such as increased regulation of the purchase and sale of medical products, or restrictions on permissible discounts and other financial arrangements, could require us to make unplanned modifications of our products and services, result in delays or cancellations of orders or reduce funds and demand for our products and services.
In March 2010, President Obama signed into law the Affordable Care Act. The Affordable Care Act is a sweeping measure designed to expand access to affordable health insurance, control healthcare spending and improve healthcare quality. In addition, many states have adopted or are considering changes in healthcare laws or policies in part due to state budgetary shortfalls. Regulations for implementing various provisions of the Affordable Care Act are being released on an ongoing basis, and we do not know what effect the federal Affordable Care Act or any state law proposals may have on our business. Further, disparate political views regarding the Affordable Care Act create uncertainty regarding the law’s continued existence in its current form or an amended form or a total replacement. This uncertainty as to the law’s future, or the amendment or replacement of the law in the future, could adversely affect our business.
If we fail to comply with complex federal and state laws governing financial relationships among healthcare providers and submission of false or fraudulent claims to government healthcare programs, we may be subject to civil and criminal penalties or loss of eligibility to participate in government healthcare programs.
Anti-Kickback Regulations
We are subject to federal and state laws and regulations designed to protect patients, government healthcare programs and private health plans from fraudulent and abusive activities. These laws include anti-kickback restrictions and laws prohibiting the submission of false or fraudulent claims. These laws are complex, and their application to our specific products, services and relationships may not be clear and may be applied to our business in ways that we do not anticipate. Federal and state regulatory and law enforcement authorities have over time increased enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations and other reimbursement laws and rules. From time to time, we and others in the healthcare industry have received inquiries or requests to produce documents in connection with such activities. We could be required to expend significant time and resources to comply with these requests, and the attention of our management team could be diverted to these efforts.
Furthermore, if we are found to be in violation of any federal or state fraud and abuse laws, we could be subject to civil and criminal penalties and we could be excluded from participating in federal and state healthcare programs such as Medicare and Medicaid. The occurrence of any of these events could significantly harm our business, financial performance and financial condition.
Provisions in Title XI of the Social Security Act, commonly referred to as the federal Anti-Kickback Statute, prohibit the knowing and willful offer, payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to influence the purchase, lease or ordering of healthcare items and services regardless of whether the item or service is covered under a governmental health program or private health plan. Although certain statutory and regulatory safe harbors exist, these safe harbors are narrow and often difficult to comply with. Congress has appropriated an increasing amount of funds in recent years to support enforcement activities aimed at reducing healthcare fraud and abuse. We cannot assure you that our arrangements will be protected by such safe harbors or that such increased enforcement activities will not directly or indirectly have an adverse effect on our business, financial condition or results of operations. Any determination by a state or federal agency that any of our activities, or those of our suppliers or members, violate any of these laws could subject us to civil or criminal penalties, could require us to change or terminate some portions of our operations or business or could disqualify us from providing services to healthcare providers doing business with government programs and, thus, could have a material adverse effect on our business, financial condition and results of operations.
In 2005, the Department of Health and Human Services, or HHS, Office of Inspector General conducted an extensive audit of the business practices of three GPOs, including us, and published a report thereon. Subsequently, CMS provided specific guidance on the proper treatment on Medicare cost reports of revenue distributions received from GPOs, including us. Our members that report their costs to Medicare are required under the terms of the Premier Group Purchasing Policy to appropriately reflect all elements of value received in connection with the Reorganization and our IPO (including, without limitation, increases in the fair market value of equity held by such member owners, proceeds from the purchase of Class B common units from such member owners immediately following our IPO and as a result of subsequent exchanges, Premier LP cash distributions, administrative fee revenue share paid by Premier LP to our members based upon their owned, leased, managed and affiliated facilities’ purchases through GPO supplier contracts and payments under the tax receivable agreements) on their cost reports. We are required to furnish applicable reports to such members setting forth the amount of such value, to assist their compliance with such cost reporting requirements. We cannot assure you, however, that the HHS Office of Inspector General or the U.S. Department of Justice, or DOJ, would concur with such approach. Any determination by a state or federal agency that the provision of such forms of value violate any of these laws could subject us to civil or criminal penalties, could require us to change or terminate some portions of our operations or business, or could disqualify us from providing services to healthcare providers doing business with government programs, and, thus could have a material adverse effect on our business, financial condition and results of operations.
In the lead-up to our 2013 IPO, we received correspondence from a former GPO competitor expressing concern that the manner in which our IPO was explained to our current and prospective member owners could violate the Anti-Kickback Statute. We believe that our discussions with then-current and prospective member owners regarding our IPO were conducted in compliance with the Anti-Kickback Statute and other applicable laws. However, enforcement authorities could question or disagree with our assessment. Although a process exists for requesting advisory opinions from the HHS Office of Inspector General regarding compliance of particular arrangements with the Anti-Kickback Statute, we have not sought such an opinion and do not believe that the issues raised in the competitor’s correspondence are capable of being addressed in an advisory opinion because the content and specifics of each discussion would be at issue. Any determination by a state or federal agency that the manner in which the opportunity to participate in our IPO was presented to our member owners and prospective member owners, either in and of itself or when viewed in conjunction with the requirements for ownership in Premier LP and participation in our group purchasing program or the various forms of value received by our member owners in connection with or related to our IPO, violated any of these laws could subject us to civil or criminal penalties, could require us to change or terminate some portions of our operations or business or could disqualify us from providing services to healthcare providers doing business with government programs and, thus, could have a material adverse effect on our business, financial condition and results of operations.
We periodically receive and respond to questions from government agencies on various matters, and we responded to an informal request in July 2014 from the HHS Office of Inspector General to analyze our Reorganization and to discuss how the GPO Participation Agreements comply with the discount safe harbor to the Anti-Kickback Statute. We have had no further correspondence or interaction, oral or written, with the HHS Office of Inspector General regarding Anti-Kickback Statute compliance since that time. There is no safe harbor to the Anti-Kickback Statute that is applicable to the Reorganization in its entirety across all of the agreements, and no assurance can be given that the HHS Office of Inspector General or other regulators or enforcement authorities will agree with our assessment. Any determination by a state or federal agency that the terms of our Reorganization or our relationship with our members violate the Anti-Kickback Statute or any other federal or state laws could
subject us to civil or criminal penalties, could require us to change or terminate some portions of our operations or business or could disqualify us from providing services to healthcare providers doing business with government programs and, thus, could have a material adverse effect on our business, financial condition and results of operations.
False Claims Regulations
Our business is also subject to numerous federal and state laws that forbid the submission or “causing the submission” of false or fraudulent information or the failure to disclose information in connection with the submission and payment of claims for reimbursement to Medicare, Medicaid, other federal healthcare programs or private health plans. In particular, the False Claims Act, or FCA, prohibits a person from knowingly presenting or causing to be presented a false or fraudulent claim for payment or approval by an officer, employee or agent of the United States. In addition, the FCA prohibits a person from knowingly making, using, or causing to be made or used a false record or statement material to such a claim. Violations of the FCA may result in treble damages, significant monetary penalties and other collateral consequences, potentially including exclusion from participation in federally funded healthcare programs. The scope and implications of the amendments to the FCA pursuant to the Fraud Enforcement and Recovery Act of 2009, or FERA, have yet to be fully determined or adjudicated, and as a result it is difficult to predict how future enforcement initiatives may impact our business. The minimum and maximum per claim monetary damages have roughly doubled effective August 1, 2016 for violations occurring on or after November 2, 2015, from $5,500.00 to $11,000.00 per claim to $10,781.40 to $21,562.80 per claim, and will be periodically readjusted for inflation hereafter. If enforcement authorities find that we have violated the FCA, it could have a material adverse effect on our business, financial condition and results of operations. Pursuant to the 2010 healthcare reform legislation, a claim that includes items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA.
These laws and regulations may change rapidly and it is frequently unclear how they apply to our business. Errors in claims submitted by our specialty pharmacies and pharmacy benefits management businesses, as well as errors created by our products or advisory services that relate to entry, formatting, preparation or transmission of claim or cost report information by our members may be determined or alleged to be in violation of these laws and regulations. Any failure of our businesses or our products or services to comply with these laws and regulations, or the assertion that any of our relationships with suppliers or members violated the Anti-Kickback Statute and therefore caused the submission of false or fraudulent claims, could (i) result in substantial civil or criminal liability, (ii) adversely affect demand for our services, (iii) invalidate all or portions of some of our member contracts, (iv) require us to change or terminate some portions of our business, (v) require us to refund portions of our services fees, (vi) cause us to be disqualified from serving members doing business with government payers, and (vii) have a material adverse effect on our business, financial condition and results of operations.
If current or future antitrust laws and regulations are interpreted or enforced in a manner adverse to us or our business, we may be subject to enforcement actions, penalties and other material limitations on our business.
We are subject to federal and state laws and regulations designed to protect competition which, if enforced in a manner adverse to us or our business, could have a material adverse effect on our business, financial condition and results of operations. Over the last decade or so, the group purchasing industry has been the subject of multiple reviews and inquiries by the U.S. Senate and its members with respect to antitrust laws. Additionally, the U.S. General Accounting Office, or GAO, has published several reports examining GPO pricing, contracting practices, activities and fees. We and several other operators of GPOs have responded to GAO inquiries in connection with the development of such reports. No assurance can be given regarding any further inquiries or actions arising or resulting from these examinations and reports, or any related impact on our business, financial condition or results of operations.
Congress, the DOJ, the Federal Trade Commission, or FTC, the U.S. Senate or another state or federal entity could at any time open a new investigation of the group purchasing industry, or develop new rules, regulations or laws governing the industry, that could adversely impact our ability to negotiate pricing arrangements with suppliers, increase reporting and documentation requirements, or otherwise require us to modify our arrangements in a manner that adversely impacts our business, financial condition and results of operations. We may also face private or government lawsuits alleging violations arising from the concerns articulated by these governmental factors or alleging violations based solely on concerns of individual private parties.
If we are found to be in violation of the antitrust laws we could be subject to civil and criminal penalties or damages. The occurrence of any of these events could significantly harm our business, financial condition and results of operations.
Complex federal and state privacy, security and breach notification laws may increase the costs of operation and expose us to civil and criminal government sanctions and third-party civil litigation.
We must comply with extensive federal and state requirements regarding the use, retention, security and re-disclosure of patient/beneficiary healthcare information. The Health Insurance Portability and Accountability Act of 1996, as amended, and the regulations that have been issued under it, which we refer to collectively as HIPAA, contain substantial restrictions and complex
requirements with respect to the use and disclosure of certain individually identifiable health information, referred to as “protected health information.” The HIPAA Privacy Rule prohibits a covered entity or a business associate (essentially, a third party engaged to assist a covered entity with enumerated operational and/or compliance functions) from using or disclosing protected health information unless the use or disclosure is validly authorized by the individual or is specifically required or permitted under the Privacy Rule and only if certain complex requirements are met. The HIPAA Security Rule establishes administrative, organization, physical and technical safeguards to protect the privacy, integrity and availability of electronic protected health information maintained or transmitted by covered entities and business associates. The HIPAA Breach Notification Rule requires that covered entities and business associates, under certain circumstances, notify patients/beneficiaries and HHS when there has been an improper use or disclosure of protected health information.
Our specialty pharmacy, our self-funded health benefit plan, and our healthcare provider members (provided that these members engage in HIPAA-defined standard electronic transactions with health plans, which will be all or the vast majority) are directly regulated by HIPAA as “covered entities.” From time to time, as part of our specialty pharmacy business, certain of our affiliates act as business associates of retail and other pharmacies in connection with co-branding initiatives. As such, we are subject to HIPAA and other risks discussed herein associated with being a business associate. Additionally, because most of our U.S. hospital members disclose protected health information to us so that we may use that information to provide certain data analytics, benchmarking, advisory or other operational and compliance services to these members, we are a “business associate” of those members and are required to protect such health information under HIPAA. With the enactment of the HITECH Act, the privacy and security requirements of HIPAA were modified and expanded, including further restrictions on the disclosure of protected health information by business associates of covered entities in certain cases when the disclosure is part of a remunerated transaction, and modifying the HIPAA Breach Notification Rule, which has been in effect since September 2009, to create a rebuttable presumption that any improper use or disclosure of protected health information requires notice to affected patients/beneficiaries and HHS.
Any failure or perceived failure of our products or services to meet HIPAA standards and related regulatory requirements could expose us to certain notification, penalty and/or enforcement risks, damage our reputation and adversely affect demand for our products and services and force us to expend significant capital, research and development and other resources to modify our products or services to address the privacy and security requirements of our members and HIPAA.
In addition to our obligations under HIPAA there are other federal laws that include specific privacy and security obligations, above and beyond HIPAA, for certain types of health information and impose additional sanctions and penalties. These rules are not preempted by HIPAA. Finally, most states have enacted patient and/or beneficiary confidentiality laws that protect against the disclosure of confidential medical information, and many states have adopted or are considering adopting further legislation in this area, including privacy safeguards, security standards, data security breach notification requirements and special rules for so-called “sensitive” health information, such as mental health, genetic testing results or HIV status. These state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements, and we are required to comply with them as well.
We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or how those changes could affect our business or the associated costs of compliance. For example, the federal Office of the National Coordinator for Health Information Technology, or ONCHIT, is coordinating the development of national standards for creating an interoperable health information technology infrastructure based on the widespread adoption of electronic health records in the healthcare sector. We are yet unable to predict what, if any, impact the creation of such standards and the further developments at ONCHIT will have on the necessary specifications, demand for our products and services or associated compliance costs.
Failure to comply with any of the federal and state standards regarding patient privacy, identity theft prevention and detection and data security may subject us to penalties, including civil monetary penalties and, in some circumstances, criminal penalties. In addition, such failure may materially injure our reputation and adversely affect our ability to retain members and attract new members and, accordingly, adversely affect our financial performance.
Our specialty pharmacy operations are subject to governmental regulations, procedures and requirements; our noncompliance or a significant regulatory change could adversely affect our business, the results of our operations or our financial condition.
In addition to the other laws and regulations we face, our specialty pharmacy business is subject to numerous federal, state and local laws and regulations. Changes in these regulations may require extensive system and operating changes that may be difficult to implement. The regulations to which our specialty pharmacy operations are subject include, but are not limited to, federal, state and local registration and regulation of pharmacies; supply chain security; dispensing and sale of controlled substances; applicable Medicare and Medicaid regulations, including the Medicare Part D program; HIPAA; regulations governing aspects of healthcare plan arrangements; regulations relating to the protection of the environment and health and safety matters, including those governing exposure to and the management and disposal of hazardous substances; regulations enforced by the U. S. Federal Trade Commission, the U. S. Department of Health and Human Services and the Drug Enforcement Administration, as well as state boards of pharmacy and other state regulatory authorities, governing the sale, advertisement and promotion of products we
sell; anti-kickback laws; false claims laws and federal and state laws governing the practice of the profession of pharmacy. Untimely compliance or noncompliance with applicable regulations could result in the imposition of civil and criminal penalties that could adversely affect the continued operation of our business, including: (i) suspension or disgorgement of payments from government programs; (ii) loss of required government certifications; (iii) loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; (iv) loss of licenses; or (v) significant fines or monetary penalties.
Certain risks are inherent in providing pharmacy services; our insurance may not be adequate to cover any claims against us.
Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, such as with respect to improper filling or labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit, defective, expired or contaminated drugs, product tampering or recalls, and changes to shipping regulations or costs. Errors in the dispensing and packaging of pharmaceuticals could lead to serious injury or death. In addition, federal and state laws that require our pharmacists to offer counseling, without additional charge, to their customers about medication, dosage, delivery systems, common side effects and other information the pharmacists deem significant can impact our business. Our pharmacists may also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce, negate or help manage these effects. Product liability or personal injury claims may be asserted against us with respect to any of the products or pharmaceuticals we sell or services we provide. Should a product or other liability issue arise, the coverage limits under our insurance programs and the indemnification amounts available to us may not be adequate to protect us against claims. We also may not be able to maintain this insurance on acceptable terms in the future. Damage to our reputation in the event of a product liability or personal injury issue, material financial judgment against us, or a product recall could have a material adverse effect on our business operations, financial condition and results of operations.
Risks Related to Our Structure
Premier, Inc. is a holding company with no material business operations of its own, and it depends on distributions from Premier LP to pay taxes, make payments under the tax receivable agreements and pay any cash dividends, if declared, on our Class A common stock.
Premier, Inc. is a holding company with no material operations of its own, and it currently has no independent ability to generate revenue. Consequently, Premier, Inc.’s ability to obtain operating funds currently depends upon distributions from Premier LP to Premier GP and then from Premier GP to Premier, Inc. In accordance with the LP Agreement, subject to applicable laws and regulations and the terms of Premier LP’s financing agreements, Premier GP causes Premier LP to make quarterly distributions to Premier GP and to the holders of Class B common units to facilitate the payment of taxes, as may be required. Premier GP distributes any amounts it receives from Premier LP to Premier, Inc., and Premier, Inc. uses such amounts to (i) pay applicable taxes, (ii) meet its obligations under the tax receivable agreements and (iii) meet its obligations to the member owners under the Exchange Agreement if such member owners elect to exchange their Class B common units for shares of our Class A common stock and we elect to pay some or all of the consideration to such member owners in cash.
In addition, pursuant to the GPO participation agreements, Premier LP generally is contractually required to pay each member owner a 30% revenue share, and pay other designated revenue shares to some members, of all gross administrative fees collected by Premier LP based upon purchasing by such member owner’s owned, leased, managed and affiliated facilities through our GPO agreements and contracts. Additionally, our two largest regional GPO member owners, which represented approximately 16% of our gross administrative fee revenue for the year ended June 30, 2016, each remit gross administrative fees collected by such member owner based upon purchasing by such member owner’s owned, leased, managed and affiliated facilities through the member owner’s own GPO supplier contracts, in accordance with their Premier GPO Agreement, and receive revenue share from Premier LP equal to 30% of such gross administrative fees remitted to us.
To the extent that Premier, Inc. needs funds and Premier LP is restricted from making distributions under applicable law or regulation or under the terms of our unsecured revolving credit facility or is otherwise unable to provide such funds, Premier, Inc.’s liquidity and financial condition could be materially and adversely affected. The declaration and payment of future dividends by us, if any, will be at the discretion of our board of directors and will depend on, among other things, financial results and cash flows from Premier LP’s operations, our strategic plans and such other factors as our board of directors considers relevant. In addition, Premier LP is generally prohibited under Delaware law from making a distribution to a partner to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of the limited partnership (with certain exceptions) exceed the fair value of its assets.
Different interests among our member owners or between our member owners and us, including with respect to related party transactions, could prevent us from achieving our business goals.
For the foreseeable future, we expect that a majority of our board of directors will include directors and executive officers of our member owners and other directors who may have commercial relationships with our member owners. Certain of our member owners could have business interests that may conflict with those of the other member owners, which may make it difficult for us to pursue strategic initiatives that require consensus among our member owners.
In addition, our relationship with our member owners, who are both our members and own a significant percentage of our common stock and the units of Premier LP, could create conflicts of interest among the member owners, or between the member owners and us, in a number of areas relating to our past and ongoing relationships. For example, certain of our products and services compete (or may compete in the future) with various products and services of our member owners. In addition, conflicts of interest may arise among the member owners based on certain allocations of net profits that the member owners may receive in proportion to their relative participation in our products and services. Except as set forth in the tax receivable agreements, the GPO participation agreements and the LP Agreement, there are not any formal dispute resolution procedures in place to resolve conflicts between us and a member owner or between member owners. We may not be able to resolve any potential conflicts between us and a member owner and, even if we do, the resolution may be less favorable to us than if we were negotiating with an unaffiliated party.
Our member owners are able to exercise significant control over us, including through the election of all of our directors.
In addition to board members that are employees of member owners, our member owners beneficially own, in the aggregate, 100% of our outstanding shares of Class B common stock, giving them control of approximately 68% of the combined voting power of our Class A common stock and Class B common stock as of June 30, 2016. Our member owners may also own, from time to time, shares of our Class A common stock, thereby further increasing their aggregate voting power. Pursuant to the terms of a voting trust agreement (the "Voting Trust Agreement"), the trustee will vote all of the member owners’ Class B common stock as a block in the manner determined by the plurality of the votes received by the trustee from the member owners for the election of directors to serve on our board of directors, and by a majority of the votes received by the trustee from the member owners for all other matters. As a result, our member owners have the ability to elect all of the members of our board of directors and thereby control our management and affairs. In addition, our member owners will be able to determine the outcome of substantially all matters requiring action by our stockholders, including amendments to our certificate of incorporation and bylaws, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions even if such actions are not favored by our other stockholders. This concentration of ownership may also prevent a change in the composition of our board of directors or a change in control of our company that could deprive other stockholders of an opportunity to receive a premium for their Class A common stock as part of a sale of our company and might ultimately affect the market price of our Class A common stock.
In addition, at June 30, 2016 our member owners owned 100% of our outstanding Class B common units, representing approximately 68% of the outstanding units of Premier LP. Because they hold their economic ownership interest in our business through Premier LP, rather than through Premier, Inc., due to the fact that shares of Class B common stock are not entitled to any economic rights, these member owners may have conflicting interests with holders of shares of our Class A common stock. For example, many of our member owners are not-for-profit organizations which, as a result of their tax-exempt status, could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new, or refinance existing, indebtedness, and whether and when Premier should terminate the tax receivable agreements and accelerate its obligations thereunder. In addition, the structuring of future transactions may be influenced by these member owners’ tax or other considerations even where no similar benefit would accrue to us.
Our member owners are able to exercise a greater degree of influence in the operation of our business and that of Premier LP and the management of our affairs and those of Premier LP than is typically available to stockholders of a publicly-traded company. Even if our member owners own a minority economic interest in Premier LP, they may be able to continue to exert significant influence over us and Premier LP through their ownership of our Class B common stock and the Voting Trust Agreement among the member owners and the trustee of Premier Trust.
We are exempt from certain corporate governance requirements because we are a “controlled company” within the meaning of NASDAQ rules. As a result, our stockholders do not have the protections afforded by these corporate governance requirements, which may make our Class A common stock less attractive to investors.
Our member owners, acting as a group pursuant to the terms of the Voting Trust Agreement, own more than 50% of the total voting power of our outstanding common stock and we are a “controlled company” under NASDAQ corporate governance standards. As a controlled company, we are not required by NASDAQ for continued listing of Class A common stock to (i) have a majority of independent directors, (ii) maintain an independent compensation committee or (iii) maintain an independent nominating function. We are taking advantage of all of these exemptions from NASDAQ listing requirements. Accordingly, our
stockholders do not have the same protection afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements and the ability of our independent directors to influence our business policies and affairs may be reduced. As a result, our status as a “controlled company” could make our Class A common stock less attractive to some investors or could otherwise harm our Class A common stock price.
The agreements between us and our member owners were made in the context of an affiliated relationship and may contain different terms than comparable agreements with unaffiliated third parties.
The contractual agreements that we have with each of our member owners were negotiated in the context of an affiliated relationship in which representatives of our member owners and their affiliates comprised a significant portion of our board of directors. As a result, the financial and other terms of these agreements, including covenants and other contractual obligations on our part and on the part of our member owners and termination and default provisions, may be less favorable to us than terms that we might have obtained in negotiations with unaffiliated third parties in similar circumstances. These potentially different terms could have a material adverse effect on our business, financial condition and results of operations.
Any payments made under the tax receivable agreements with our member owners will reduce the amount of overall cash flow that would otherwise be available to us. In addition, we may not be able to realize all or a portion of the tax benefits that are expected to result from the acquisition of Class B common units from the limited partners.
As a result of Premier, Inc.’s acquisition of Class B common units of Premier LP from the member owners in connection with our IPO, and any subsequent exchanges of Class B common units with us for shares of Class A common stock, we expect to become entitled to special tax benefits attributable to tax basis adjustments involving amounts generally equal to the difference between our purchase price for the acquired Class B common units (or, in the case of an exchange, the value of the shares of Class A common stock issued by us) and our share of the historic tax basis in Premier LP’s tangible and intangible assets that is attributable to the acquired Class B common units. Pursuant to an agreement with each of our member owners in connection with our IPO, we must pay to the member owners 85% of the amount, if any, by which our tax payments to various tax authorities are reduced as a result of these special tax benefits. We are also obligated to make certain other payments on the occurrence of certain events that would terminate the agreement with respect to certain member owners. The tax basis adjustments, as well as the amount and timing of any payments under the tax receivable agreements, will vary depending upon a number of factors, including the timing of any exchanges between us and the member owners, the amount and timing of our income and the amount and timing of the amortization and depreciation deductions and other tax benefits attributable to the tax basis adjustments.
As a result of the tax basis adjustments from our IPO and subsequent exchanges, presuming that Premier is able to timely realize the anticipated tax benefits, the future aggregate amount of payments to be made by the Company to the member owners is approximately $279.7 million as of June 30, 2016. Pursuant to the tax receivable agreements, payments are due to member owners to the extent that the Company recognizes the tax benefits attributable to the initial purchase of Class B common units from the member owners in the Reorganization and subsequent quarterly exchanges between the Company and its member owners. We expect Premier, Inc. to fund the required payments from distributions received from Premier LP.
The tax receivable agreements provide that, in the event we exercise our right to early termination or in the event of a change in control or a material breach by us of our obligations, the agreements will terminate and the Company will be required to make a lump-sum payment equal to the present value of all forecasted future payments that would have otherwise been made under the tax receivable agreements. These payments could be substantial and could exceed the actual tax benefits that we eventually receive as a result of acquiring Class B common units from the member owners. In the event that we do not have available capital on hand or access to adequate funds to make these payments, our financial condition would be materially adversely impacted.
Additionally, our ability to realize our 15% share of the total tax savings that we are entitled to retain under the tax receivable agreements depends on a number of assumptions. If our actual taxable income were insufficient or there were adverse changes in applicable law or regulations, we may be unable to realize all or a portion of these expected benefits and our cash flows and stockholders’ equity could be negatively affected.
Changes to Premier LP’s allocation methods may increase a tax-exempt limited partner’s risk that some allocated income is unrelated business taxable income.
The LP Agreement provides for the allocation of retained income to the limited partners of Premier LP, in part, according to the number of units owned rather than relative participation of the limited partners. A member owner that is a tax-exempt limited partner of Premier LP whose relative Class B common unit ownership is high compared to its relative participation may conclude, based on an analysis of its own facts and circumstances, that it has more unrelated business taxable income, or UBTI, subject to tax than it had reported in the past, or may be at increased risk that the Internal Revenue Service, or IRS, will seek to increase the amount of income reported by the tax-exempt limited partner as UBTI. Further, the LP Agreement provides for the allocation of distributed income to be adjusted based on facts and circumstances as are determined appropriate by Premier GP. Such adjustments
may also increase the amount of income reported by certain tax-exempt limited partners as UBTI. Any increase in UBTI may cause a limited partner to leave Premier LP, which could have an adverse effect on our business, financial condition and results of operations.
Our certificate of incorporation and bylaws and the LP Agreement and provisions of Delaware law may discourage or prevent strategic transactions, including a takeover of our company, even if such a transaction would be beneficial to our stockholders.
Provisions contained in our certificate of incorporation and bylaws and the LP Agreement and provisions of the Delaware General Corporation Law, or DGCL, could delay or prevent a third party from entering into a strategic transaction with us, even if such a transaction would benefit our stockholders. For example, our certificate of incorporation and bylaws:
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• | divide our board of directors into three classes with staggered three-year terms, which may delay or prevent a change of our management or a change in control; |
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• | authorize our board of directors to issue “blank check” preferred stock in order to increase the aggregate number of outstanding shares of capital stock and thereby make a takeover more difficult and expensive; |
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• | do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; |
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• | do not permit stockholders to take action by written consent other than during the period following our IPO in which we qualify as a “controlled company” within the meaning of NASDAQ rules; |
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• | provide that special meetings of the stockholders may be called only by or at the direction of the board of directors, the chair of our board or the chief executive officer; |
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• | require advance notice to be given by stockholders of any stockholder proposals or director nominees; |
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• | require a super-majority vote of the stockholders to amend our certificate of incorporation; and |
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• | allow our board of directors to make, alter or repeal our bylaws but only allow stockholders to amend our bylaws upon the approval of 662/3% or more of the voting power of all of the outstanding shares of our capital stock entitled to vote. |
In addition, we are subject to the provisions of Section 203 of the DGCL which limits, subject to certain exceptions, the right of a corporation to engage in a business combination with a holder of 15% or more of the corporation’s outstanding voting securities, or certain affiliated persons.
The Exchange Agreement contains rights of first refusal in favor of the other member owners and Premier LP in the event that a member owner desires to exchange its Class B common units for shares of our Class A common stock, cash or a combination of both. In addition, the Tax Receivable Agreements contain a change of control provision which, if triggered, would require us to make a one-time cash payment to the member owners equal to the present value of the payments that are forecasted to be made under the Tax Receivable Agreements based on certain assumptions.
These restrictions and provisions could keep us from pursuing relationships with strategic partners and from raising additional capital, which could impede our ability to expand our business and strengthen our competitive position. These restrictions could also limit stockholder value by impeding a sale of Premier, Inc. or Premier LP and discouraging potential takeover attempts that might otherwise be financially beneficial to stockholders.
Risks Related to Our Class A Common Stock
If we fail to maintain an effective system of integrated internal controls, we may not be able to report our financial results accurately, which could have a material adverse effect on our business, financial condition and results of operations.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. Section 404 of the Sarbanes-Oxley Act requires public companies to conduct an annual review and evaluation of their internal controls and attestations of the effectiveness of internal controls by independent auditors. Maintaining effective internal controls has been and will continue to be costly and may divert management’s attention.
Our evaluation of our internal controls over financial reporting may identify material weaknesses that may cause us to be unable to report our financial information on a timely basis and thereby result in adverse regulatory consequences, including sanctions by the SEC or violations of NASDAQ listing rules. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect our business, financial condition and results of operations and could also lead to a decline in the price of our Class A common stock.
The substantial number of shares of Class A common stock that will be eligible for sale or exchange by our member owners in the near future could cause the market price for our Class A common stock to decline or make it difficult for us to raise financing through the sale of equity securities in the future.
We cannot predict the effect, if any, that market sales of shares of Class A common stock or the availability of shares of Class A common stock for sale by our member owners will have on the market price of our Class A common stock from time to time. At June 30, 2016, we had 45,995,528 shares of our Class A common stock outstanding. Sales of substantial amounts of shares of our Class A common stock in the public market, or the perception that those sales will occur, could cause the market price of our Class A common stock to decline or make future offerings of our equity securities more difficult. If we are unable to sell equity securities at times and prices that we deem appropriate, we may be unable to fund our future growth.
At June 30, 2016, there were 96,132,723 Class B common units of Premier LP outstanding. In connection with the Reorganization and IPO, Premier, Inc., Premier LP and the member owners entered into an Exchange Agreement which became effective upon the completion of the Reorganization and IPO. Under this agreement, subject to certain restrictions, commencing on October 31, 2014, and during each year thereafter, each member owner has the cumulative right to exchange up to one-seventh of the Premier LP Class B common units initially allocated to such member owner (or subsequently purchased by such member owner pursuant to the related right of first refusal set forth in the Exchange Agreement), for shares of our Class A common stock, cash or a combination of both, the form of consideration to be at the discretion of the audit and compliance committee of our board of directors, subject to certain restrictions. Currently, we expect to settle these exchanges with our Class A common stock for the foreseeable future. This exchange right can generally be exercised on a quarterly basis (subject to rights of first refusal in favor of the other holders of Class B common units and Premier LP). In November 2014, we filed a registration statement with the SEC that registered under the Securities Act the resale of shares of Class A common stock received under the Exchange Agreement. On October 31, 2016, the third tranche of Class B common units, representing 15,441,618 units, will become eligible for exchange. Including Class B common units eligible for exchange as of the date of this Annual Report, a cumulative amount of 33,042,602 Class B common units are expected to be eligible for exchange on October 31, 2016.
We do not intend to pay any cash dividends on our Class A common stock in the foreseeable future.
We do not expect to pay any dividends on our Class A common stock in the foreseeable future. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. As a result, capital appreciation in the price of our Class A common stock, if any, may be your only source of gain on an investment in our Class A common stock.
Our future issuance of common stock, preferred stock, limited partnership units or debt securities could have a dilutive effect on our common stockholders and adversely affect the market value of our Class A common stock.
In the future, we could issue a significant number of shares of Class A common stock or Class B common stock, which could dilute our existing stockholders significantly and have a material adverse effect on the market price for the shares of our Class A common stock. Furthermore, the future issuance of shares of preferred stock with voting rights may adversely affect the voting power of our common stockholders, either by diluting the voting power of our common stock if the preferred stock votes together with the common stock as a single class or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote even if the action were approved by the holders of our common stock. The future issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect the market price for our Class A common stock by making an investment in the Class A common stock less attractive.
Moreover, Premier LP may issue additional limited partnership units to third parties without the consent of Class A common stockholders, which would reduce Premier, Inc.’s ownership percentage in Premier LP and would have a dilutive effect on the amount of distributions made to Premier, Inc. by Premier LP. Any newly admitted Premier LP limited partners will receive Class B common units in Premier LP and an equal amount of shares of our Class B common stock. Any such issuances could materially and adversely affect the market price of our Class A common stock.
In addition to potential equity issuances described above, we also may issue debt securities that would rank senior to shares of our Class A common stock.
Upon our liquidation, holders of our preferred shares and debt securities and instruments will receive a distribution of our available assets before holders of shares of our Class A common stock. We are not required to offer any such additional debt or equity securities to existing stockholders on a preemptive basis. Therefore, additional issuances of our Class A common stock, directly or through convertible or exchangeable securities (including Class B common units), warrants or options, will dilute the holders of shares of our existing Class A common stock and such issuances, or the anticipation of such issuances, may reduce the
market price of shares of our Class A common stock. Any preferred shares, if issued, would likely have a preference on distribution payments, periodically or upon liquidation, which could limit our ability to make distributions to holders of shares of our Class A common stock. Because our decision to issue debt or equity securities or otherwise incur debt in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future capital raising efforts.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
We occupy our Charlotte, North Carolina headquarters under a long-term lease which expires in 2026 and includes options for us, at our discretion, to renew the lease for up to fifteen years in total beyond that date. We also lease our specialty pharmacy location in Fort Lauderdale, Florida, our advocacy public affairs office in Washington, DC, and several other smaller facilities. Our headquarters and other properties are suitable for their respective uses and are, in all material respects, adequate for our present needs. As of June 30, 2016, we occupy and lease the following facilities:
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Tenant | Location | Lease Expiration Date |
Aperek, Inc. | Raleigh, NC | June 30, 2019 |
Commcare Pharmacy FTL, LLC | Ft. Lauderdale, FL | August 31, 2016 |
Commcare Pharmacy Plantation | Plantation, FL | November 30, 2022 |
Commcare Pharmacy MIA, LLC | Miami, FL | January 31, 2018 |
Commcare Pharmacy WPB, LLC | West Palm Beach, FL | November 15, 2016 |
CECity.com, Inc. | Homestead, PA | August 31, 2020 |
Meddius, LLC | Charlottesville, VA | November 1, 2017 |
MEMdata, LLC | College Station, TX | April 3, 2017 |
Premier, Inc. | Charlotte, NC | February 28, 2026 |
Premier, Inc. | Washington, DC | April 30, 2019 |
Premier Insurance Management Services, Inc. | San Diego, CA | November 30, 2019 |
SVS, LLC | Charlotte, NC | October 30, 2016 |
SVS, LLC | Rockville, MD | November 30, 2017 |
SYMMEDRx, LLC | Overland Park, KS | November 30, 2019 |
TheraDoc, Inc. | Salt Lake City, UT | March 31, 2017 |
Leases approaching their stated expiration dates are generally extended pursuant to their terms or renegotiated as required. With respect to leases with stated expiration dates during the next year, we believe we will be able to extend or renegotiate such leases as necessary to meet our business needs.
Item 3. Legal Proceedings
We participate in businesses that are subject to substantial litigation. We are periodically involved in litigation, arising in the ordinary course of business or otherwise, which from time to time may include claims relating to commercial, product liability, employment, antitrust, intellectual property or other regulatory matters, among others. If current or future government regulations are interpreted or enforced in a manner adverse to us or our business, specifically those with respect to antitrust or healthcare laws, we may be subject to enforcement actions, penalties, damages and other material limitations on our business.
From time to time we have been named as a defendant in several lawsuits brought by suppliers of medical products. Typically, these lawsuits have alleged the existence of a conspiracy among manufacturers of competing products and operators of GPOs, including us, to deny the plaintiff access to a market for its products. We believe that we have at all times conducted our business affairs in an ethical and legally compliant manner and have successfully resolved all such actions. No assurance can be given that we will not be subjected to similar actions in the future or that such matters will be resolved in a manner satisfactory to us or which will not harm our business, financial condition or results of operations.
Additional information relating to certain legal proceedings in which we are involved is included in Note 22 - Commitments and Contingencies, to the accompanying consolidated financial statements, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not Applicable
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A common stock is publicly traded on the NASDAQ Global Select Market under the ticker symbol "PINC." Our Class B common stock is not publicly traded. The following table sets forth, for the periods indicated, the high and low prices of our Class A common stock on the NASDAQ Global Select Market.
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| Price Range of Common Stock |
| High | Low |
Fiscal Year Ended June 30, 2016 | | |
Fourth Quarter | $ | 35.11 |
| $ | 30.36 |
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Third Quarter | $ | 37.00 |
| $ | 29.68 |
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Second Quarter | $ | 37.24 |
| $ | 33.27 |
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First Quarter | $ | 39.11 |
| $ | 32.62 |
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Fiscal Year Ended June 30, 2015 | | |
Fourth Quarter | $ | 39.81 |
| $ | 36.04 |
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Third Quarter | $ | 39.20 |
| $ | 31.36 |
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Second Quarter | $ | 35.27 |
| $ | 29.29 |
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First Quarter | $ | 32.98 |
| $ | 27.95 |
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Holders
Based on the records of our Class A common stock transfer agent, as of August 19, 2016, there were 47,394,515 shares of our Class A common stock issued and outstanding, held by 29 holders of record. Because substantially all of our Class A common stock is held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of beneficial owners currently holding our Class A common stock. As of August 19, 2016, 94,809,069 shares of our Class B common stock are issued and outstanding, held by one holder of record, the trustee of the Class B common stock voting trust. However, as of August 19, 2016, our Class B common stock is beneficially owned by our 171 member owners.
Dividend Policy
We did not pay any dividends during the fiscal years ended June 30, 2016 and 2015. We do not anticipate paying any cash dividends for the foreseeable future. Furthermore, shares of our Class B common stock are not entitled to any dividend payments. The payment of dividends, if any, is subject to the discretion of our board of directors and will depend on many factors, including our results of operations, financial condition and capital requirements, earnings, general business conditions, restrictions imposed by our current and any future financing arrangements, legal restrictions on the payment of dividends and other factors our board of directors deems relevant. Our current credit facility includes restrictions on our ability to pay dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by Item 201(d) of Regulation S-K is provided under Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters incorporated herein by reference.
Purchases of Equity Securities
There were no repurchases of equity securities during the year ended June 30, 2016. We do not have any publicly announced or other repurchase plans regarding our Class A common stock.
Company Stock Performance
The performance graph below shows a 33-month comparison of the total cumulative return, assuming reinvestment of all dividends, had $100 been invested at the close of business on September 26, 2013 (our first trading day), in each of:
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• | our Class A common stock; |
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• | the NASDAQ Composite stock index (“NASDAQ Composite index”); and |
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• | a customized peer group of fourteen companies selected by us (the “Peer Group”). |
We have used the Peer Group, a group selected in good faith and used by our compensation committee for benchmarking purposes, for peer comparison purposes because we believe this group provides an accurate representation of our peers. The Peer Group consists of the following fourteen companies: Advisory Board Co, Allscripts Healthcare Solutions Inc., Athenahealth Inc., Cerner Corp, HMS Holdings Corp, Huron Consulting Group Inc., IHS Inc., IMS Health Holdings Inc., Magellan Health Inc., MedAssets Inc., Navigant Consulting Inc., Owens & Minor Inc., Patterson Companies Inc. and Quality Systems Inc.
Our compensation committee last reviewed and selected the fourteen companies in our Peer Group in August 2015. For the performance graph below, MedAssets Inc. has been included in the Peer Group through November 1, 2015, the day before it announced it would be acquired. As we grow and develop as a public company, and as the companies in our Peer Group change, our Compensation Committee will continue to review and reconfigure our Peer Group as applicable.
The information contained in the performance graph below shall not be deemed “soliciting material” or to be “filed” with the SEC nor shall such information be deemed incorporated by reference into any future filing under the Securities Act or the Exchange Act except to the extent we specifically incorporate it by reference into such filing.
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| | | | | | | | | | | | |
Value of Investment as of Stated Date: | | | | |
Company/Index Name | 9/26/2013 | 6/30/2014 | 6/30/2015 | 6/30/2016 |
Premier, Inc. Class A Common Stock(a) | $ | 100.00 |
| $ | 94.62 |
| $ | 125.48 |
| $ | 106.69 |
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NASDAQ Composite | $ | 100.00 |
| $ | 117.85 |
| $ | 133.69 |
| $ | 130.50 |
|
Peer Group(b) | $ | 100.00 |
| $ | 106.38 |
| $ | 119.55 |
| $ | 107.42 |
|
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(a) | As noted above, we have not paid any cash dividends during the period covered by the graph. |
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(b) | Includes the performance of MedAssets Inc. through November 1, 2015, the date before it announced it would be acquired. |
We will neither make nor endorse any predictions as to future stock performance or whether the trends depicted in the graph above will continue or change in the future. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Item 6. Selected Financial Data
As of June 30, 2016, the Company, through its wholly-owned subsidiary, Premier GP, held a controlling general partner interest of approximately 32% in, and, as a result, consolidated the financial statements of, Premier LP. The limited partners' ownership of Premier LP of approximately 68% at June 30, 2016 is reflected as redeemable limited partners' capital in the Company's consolidated balance sheets, and their proportionate share of income in Premier LP is reflected within net income attributable to non-controlling interest in Premier LP in the Company's consolidated statements of income and within comprehensive income attributable to non-controlling interest in the consolidated statements of comprehensive income.
After the completion of the Reorganization following the consummation of our IPO, PHSI became our consolidated subsidiary and is considered our predecessor for accounting purposes. Accordingly, PHSI's consolidated financial statements are our historical financial statements, for periods prior to October 1, 2013. The historical consolidated financial statements of PHSI are reflected herein based on PHSI's historical ownership interests of Premier LP and its consolidated subsidiaries.
We derived the selected historical consolidated financial data presented below for the years ended June 30, 2016, 2015, 2014, 2013 and 2012 from the audited consolidated financial statements and related notes of Premier, Inc. and PHSI, as applicable, included elsewhere in this Annual Report or as presented in previous SEC filings. You should refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the notes to the accompanying consolidated financial statements for additional information regarding the financial data presented below, including matters that might cause this data not to be indicative of our future financial position or results of operations.
We have reclassified certain prior period amounts for deferred income tax assets to be consistent with the current period presentation (see Note 3 - Significant Accounting Policies).
The following tables set forth selected historical consolidated financial and operating data for the five-year period ended June 30, 2016 and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and our audited consolidated financial statements contained elsewhere herein.
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| | | | | | | | | | | | | | | |
(In Thousands, Except Per Share Amounts) | Year ended June 30, |
Consolidated Statements of Income Data: | 2016 (1) | 2015 (2) | 2014 (3) | 2013 | 2012 (4) |
Net revenue: | | | | | |
Net administrative fees (5) | $ | 498,394 |
| $ | 457,020 |
| $ | 464,837 |
| $ | 519,219 |
| $ | 473,249 |
|
Other services and support | 337,554 |
| 270,748 |
| 233,186 |
| 205,685 |
| 178,552 |
|
Services | 835,948 |
| 727,768 |
| 698,023 |
| 724,904 |
| 651,801 |
|
Products | 326,646 |
| 279,261 |
| 212,526 |
| 144,386 |
| 116,484 |
|
Net revenue | 1,162,594 |
| 1,007,029 |
| 910,549 |
| 869,290 |
| 768,285 |
|
Cost of revenue | 457,056 |
| 396,910 |
| 307,625 |
| 237,413 |
| 189,719 |
|
Gross profit | 705,538 |
| 610,119 |
| 602,924 |
| 631,877 |
| 578,566 |
|
Operating expenses: | | | | | |
Selling, general and administrative | 403,611 |
| 332,004 |
| 294,421 |
| 248,301 |
| 240,748 |
|
Research and development | 2,925 |
| 2,937 |
| 3,389 |
| 9,370 |
| 12,583 |
|
Amortization of purchased intangible assets | 33,054 |
| 9,136 |
| 3,062 |
| 1,539 |
| 3,146 |
|
Operating expenses | 439,590 |
| 344,077 |
| 300,872 |
| 259,210 |
| 256,477 |
|
Operating income | 265,948 |
| 266,042 |
| 302,052 |
| 372,667 |
| 322,089 |
|
Other income, net (6) | 18,934 |
| 5,085 |
| 58,274 |
| 12,145 |
| 12,808 |
|
Income before income taxes | 284,882 |
| 271,127 |
| 360,326 |
| 384,812 |
| 334,897 |
|
Income tax expense | 49,721 |
| 36,342 |
| 27,709 |
| 9,726 |
| 8,229 |
|
Net income | 235,161 |
| 234,785 |
| 332,617 |
| 375,086 |
| 326,668 |
|
Net (income) loss attributable to non-controlling interest in S2S Global (7) | — |
| (1,836 | ) | (949 | ) | 1,479 |
| 608 |
|
Net income attributable to non-controlling interest in Premier LP (8) | (193,547 | ) | (194,206 | ) | (303,336 | ) | (369,189 | ) | (323,339 | ) |
Net income attributable to non-controlling interest | (193,547 | ) | (196,042 | ) | (304,285 | ) | (367,710 | ) | (322,731 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | 776,750 |
| (904,035 | ) | (2,741,588 | ) | — |
| — |
|
Net income (loss) attributable to stockholders | $ | 818,364 |
| $ | (865,292 | ) | $ | (2,713,256 | ) | $ | 7,376 |
| $ | 3,937 |
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| | | | | |
Weighted average shares outstanding: | | | | | |
Basic | 42,368 |
| 35,681 |
| 25,633 |
| 5,858 |
| 6,183 |
|
Diluted | 145,308 |
| 35,681 |
| 25,633 |
| 5,858 |
| 6,183 |
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| | | | | |
Earnings (loss) per share attributable to stockholders: | | | | | |
Basic | $ | 19.32 |
| $ | (24.25 | ) | $ | (105.85 | ) | $ | 1.26 |
| $ | 0.64 |
|
Diluted | $ | 1.33 |
| $ | (24.25 | ) | $ | (105.85 | ) | $ | 1.26 |
| $ | 0.64 |
|
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| | | | | | | | | | | | | | | |
(In Thousands) | June 30, |
Consolidated Balance Sheets Data: | 2016 | 2015 | 2014 | 2013 | 2012 |
Cash, cash equivalents and marketable securities, current | $ | 266,576 |
| $ | 387,189 |
| $ | 291,606 |
| $ | 255,619 |
| $ | 241,669 |
|
Working capital (9) | 136,827 |
| 275,533 |
| 188,527 |
| 212,490 |
| 189,680 |
|
Property and equipment, net | 174,080 |
| 147,625 |
| 134,551 |
| 115,587 |
| 101,630 |
|
Total assets | $ | 1,855,383 |
| $ | 1,530,191 |
| $ | 1,246,656 |
| $ | 598,916 |
| $ | 554,939 |
|
Deferred revenue (10) | 54,498 |
| 39,824 |
| 15,694 |
| 18,880 |
| 19,820 |
|
Total liabilities | $ | 669,614 |
| $ | 568,461 |
| $ | 472,293 |
| $ | 213,513 |
| $ | 196,990 |
|
Redeemable limited partners' capital (11) | 3,137,230 |
| 4,079,832 |
| 3,244,674 |
| 307,635 |
| 279,513 |
|
Class A common stock | 460 |
| 377 |
| 324 |
| 57 |
| 61 |
|
Additional paid-in capital | — |
| — |
| — |
| 28,866 |
| 35,427 |
|
(Accumulated deficit) retained earnings | (1,951,878 | ) | (3,118,474 | ) | (2,469,873 | ) | 50,599 |
| 43,223 |
|
Total stockholders' (deficit) equity | $ | (1,951,461 | ) | $ | (3,118,102 | ) | $ | (2,470,311 | ) | $ | 77,768 |
| $ | 78,436 |
|
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(1) | Amounts include the results of operations of InFlowHealth, LLC ("InFlow"), CECity.com, Inc. ("CECity") and Healthcare Insights, LLC ("HCI"), all in our performance services segment, from October 1, 2015, August 20, 2015 and July 31, 2015, respectively, the dates of acquisition of all the membership interests of InFlow for $6.1 million and HCI for $64.3 million, respectively, and all the outstanding shares of CECity for $398.3 million. See Note 4 - Business Acquisitions to the audited consolidated financial statements of this Annual Report for further information related to acquisitions completed during the year ended June 30, 2016. |
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(2) | Amounts include the results of operations of TheraDoc, Inc. ("TheraDoc") and Aperek, Inc. ("Aperek"), both in our performance services segment, from September 1, 2014 and August 29, 2014, respectively, the dates of acquisition of all the outstanding shares of common stock of TheraDoc for $108.6 million and Aperek for $47.4 million. Further, on February 2, 2015, we purchased the remaining 40% of the outstanding limited liability company membership interests of S2S Global, our direct sourcing business, for approximately $14.5 million. See Note 4 - Business Acquisitions to the audited consolidated financial statements of this Annual Report for further information related to acquisitions completed during the year ended June 30, 2015. |
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(3) | Amounts include the results of operations of MEMdata, LLC ("MEMdata"), Meddius, L.L.C. ("Meddius") and SYMMEDRx, LLC ("SYMMEDRx"), all in our performance services segment, from April 7, 2014, October 31, 2013 and July 19, 2013, respectively, the dates of acquisition of all the outstanding shares of common stock of MEMdata for $6.1 million, Meddius for $7.7 million and SYMMEDRx for $28.7 million. |
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(4) | Amounts include the results of operations of S2S Global in our supply chain services segment from December 6, 2011, the date of acquisition of 60% of the outstanding limited liability company membership interests of S2S Global for $0.5 million. |
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(5) | Following the completion of the Reorganization and IPO, we are contractually required under the GPO participation agreements to pay each member owner revenue share from Premier LP generally equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such member owner's owned, leased, managed and affiliated facilities through our GPO supplier contracts. Prior to the Reorganization and IPO, we did not generally have a contractual requirement to pay revenue share to member owners participating in our GPO programs, but paid semi-annual distributions of partnership income. In addition, certain non-owner members have historically operated under, and, following the Reorganization and IPO, continue to operate under contractual relationships that provide for a specific revenue share that differs from the 30% revenue share that we provide to our member owners under the GPO participation agreements following the Reorganization and IPO. As a result, our revenue share expense as a percentage of gross administrative fees increased for the years ended June 30, 2016, 2015 and 2014 which resulted in a decrease in net administrative fees for the years ended June 30, 2016, 2015 and 2014 when compared to the actual net administrative fees for the prior fiscal years. |
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(6) | Other income, net consists primarily of equity in net income of unconsolidated affiliates related to our 50% ownership interest in Innovatix, interest income, net and realized gains and losses on our marketable securities (which represent our interest and investment income, net) and gain or loss on disposal of assets. |
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(7) | PSCI currently owns a 100% voting and economic interest in S2S Global as a result of its February 2, 2015 purchase of the remaining non-controlling interest (40%) in S2S Global. Prior to February 2, 2015, PSCI owned a 60% voting and economic |
interest in S2S Global. Net (income) loss attributable to non-controlling interest in S2S Global represents the portion of net (income) loss attributable to the non-controlling equity holders of S2S Global (40%) prior to the February 2, 2015 purchase.
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(8) | PHSI, through Premier Plans, owned a 1% controlling general partnership interest in Premier LP prior to the Reorganization. Net income attributable to non-controlling interest in Premier LP represents the portion of net income attributable to the limited partners of Premier LP, which was 78% following the Reorganization and 99% prior to the Reorganization and may change each period as member ownership changes. |
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(9) | Working capital represents the excess of total current assets over total current liabilities. |
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(10) | Deferred revenue is primarily related to deferred subscription fees and deferred advisory fees in our performance services segment and consists of unrecognized revenue related to advanced member invoicing or member payments received prior to fulfillment of our revenue recognition criteria. |
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(11) | Redeemable limited partners' capital consists of the limited partners' approximately 68% ownership of Premier LP after the Reorganization and IPO and subsequent quarterly exchanges pursuant to the Exchange Agreement and 99% ownership of Premier LP prior to the Reorganization and IPO. Pursuant to the terms of the existing limited partnership agreement of Premier LP, Premier LP is required to repurchase a limited partner's interest upon the withdrawal of such limited partner and therefore the interest in Premier LP is classified as temporary equity in the mezzanine section of the consolidated balance sheets. The Company records redeemable limited partners' capital at the greater of the book value or redemption amount per the LP Agreement at the reporting date, with the corresponding offset to additional paid-in-capital and retained earnings (accumulated deficit). |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report. This discussion is designed to provide the reader with information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our consolidated financial statements. In addition, the following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our business and other factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see "Item 1A, Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" contained in this Annual Report.
Business Overview
Our Business
Premier, Inc. ("Premier", the "Company", "We", or "Our") is a leading healthcare improvement company, uniting an alliance of approximately 3,750 U.S. hospitals and more than 130,000 other providers to transform healthcare. We unite hospitals, health systems, physicians and other healthcare providers with the common goal of improving and innovating in the clinical, financial and operational areas of their business to meet the demands of a rapidly evolving healthcare industry. We deliver value through a comprehensive technology-enabled platform that offers critical supply chain services, clinical, financial, operational and population health software-as-a-service ("SaaS") informatics products, advisory services and performance improvement collaborative programs.
As of June 30, 2016, we were controlled by 171 U.S. hospitals, health systems and other healthcare organizations that represent approximately 1,400 owned, leased and managed acute care facilities and other non-acute care organizations, through the ownership of Class B common stock, which they received upon the completion of a series of transactions (the "Reorganization") concurrent with the consummation of our Initial Public Offering ("IPO"), and collectively with the Reorganization, the "Reorganization and IPO") on October 1, 2013. As of June 30, 2016, the Class A common stock and Class B common stock represented approximately 32% and 68% of our combined Class A and Class B common stock, collectively (the "Common Stock"). All of our Class B common stock was held beneficially by our member owners and all of our Class A common stock was held by public investors, which may include member owners that have received shares of our Class A common stock in connection with previous quarterly exchanges pursuant to the Exchange Agreement.
We generated net revenue of $1,162.6 million, $1,007.0 million and $910.5 million, net income of $235.2 million, $234.8 million and $332.6 million and Adjusted EBITDA of $441.0 million, $393.2 million and $392.3 million for the years ended June 30, 2016, 2015 and 2014, respectively. On a Non-GAAP pro forma basis, after giving effect to the Reorganization and the IPO, we generated net revenue of $869.3 million, net income of $294.6 million and Adjusted EBITDA of $351.0 million for the year
ended June 30, 2014. Non-GAAP pro forma adjustments reflect the impact of the Reorganization and IPO for periods prior to October 1, 2013 and accordingly, do not impact operating results for the years ended June 30, 2016 and 2015.
Our Business Segments
Our business model and solutions are designed to provide our members access to scale efficiencies, spread the cost of their development, provide actionable intelligence derived from anonymized data in our data warehouse provided by our members, mitigate the risk of innovation and disseminate best practices that will help our member organizations succeed in their transformation to higher quality and more cost-effective healthcare. We deliver our integrated platform of solutions that address the areas of total cost management, quality and safety improvement and population health management through two business segments: supply chain services and performance services.
Our supply chain services segment includes one of the largest healthcare group purchasing organizations ("GPO") in the United States, serving acute and alternate sites, a specialty pharmacy and our direct sourcing activities. Supply chain services net revenue grew from $738.3 million for the year ended June 30, 2015 to $829.4 million for the year ended June 30, 2016, representing net revenue growth of 12%, and accounted for 71% of our overall net revenue. Supply chain services net revenue grew from $678.1 million for the year ended June 30, 2014 to $738.3 million for the year ended June 30, 2015, representing net revenue growth of 9%, and accounted for 73% of our overall net revenue. We generate revenue in our supply chain services segment from fees received from suppliers based on the total dollar volume of supplies purchased by our members and through product sales in connection with our specialty pharmacy and direct sourcing activities.
Our performance services segment includes one of the largest informatics and advisory services businesses in the United States focused on healthcare providers. Performance services net revenue grew from $268.8 million for the year ended June 30, 2015 to $333.2 million for the year ended June 30, 2016, representing revenue growth of 24%, and accounted for 29% of our overall net revenue. Performance services net revenue grew from $232.4 million for the year ended June 30, 2014 to $268.8 million for the year ended June 30, 2015, representing net revenue growth of 16%, and accounted for 27% of our overall net revenue. Our SaaS informatics products utilize our comprehensive data set to provide actionable intelligence to our members, enabling them to benchmark, analyze and identify areas of improvement across three main categories: cost management, quality and safety and population health management. This segment also includes our advisory services and technology-enabled collaboratives.
Reorganization and IPO
On October 1, 2013, we completed our IPO by issuing 32,374,751 shares of our Class A common stock at a price of $27.00 per share, raising net proceeds of approximately $821.7 million, after underwriting discounts and commissions, but before expenses. In addition, on October 1, 2013, upon the consummation of the IPO, we completed the Reorganization. See Note 2 - Initial Public Offering and Reorganization to the audited consolidated financial statements contained herein for more information.
We incurred strategic and financial restructuring expenses in connection with the Reorganization and IPO of approximately $0.3 million, $1.4 million and $3.8 million during the years ended June 30, 2016, 2015 and 2014, respectively. During the years ended June 30, 2016 and 2015, strategic and financial restructuring expenses were incurred in connection with the quarterly exchanges pursuant to the Exchange Agreement and the company-directed offerings related to the Registration Rights Agreement discussed in Note 2 - Initial Public Offering and Reorganization to the accompanying audited consolidated financial statements, respectively.
We may incur additional strategic and financial and restructuring expenses in connection with future quarterly exchanges pursuant to the Exchange Agreement and company-directed offerings pursuant to the Registration Rights Agreement.
Acquisitions
Acquisition of InFlowHealth, LLC
On October 1, 2015, we acquired all of the limited liability company membership interests of InFlowHealth, LLC (“InFlow”), a SaaS-based software developer specializing in improving the operational, financial and strategic performance of physician practices, for $6.1 million in cash. The acquisition provides selling members an earn-out opportunity of up to $26.9 million based on InFlow’s future annual contractual subscription revenues through December 31, 2019. The selling members also received restricted stock units of Premier with an aggregate equity grant value of $2.1 million which vest over a three-year period with restrictions tied to continued employment. We utilized available funds on hand to complete the acquisition. Assets acquired and liabilities assumed were recorded at their estimated fair values as of October 1, 2015, with the remaining unallocated purchase price recorded as goodwill (see Note 4 - Business Acquisitions).
Acquisition of CECity.com, Inc.
On August 20, 2015, we acquired 100% of the outstanding shares of capital stock of CECity.com, Inc. ("CECity"), a cloud-based healthcare solutions provider specializing in performance management and improvement, pay-for-value reporting and professional education, for $398.3 million in cash. The Company funded the acquisition with $250.0 million of cash and $150.0 million of borrowings under the Company’s unsecured credit agreement (the "Credit Facility") (see Note 13 - Debt). Assets acquired and liabilities assumed were recorded at their estimated fair values as of August 20, 2015, with the remaining unallocated purchase price recorded as goodwill (see Note 4 - Business Acquisitions).
Acquisition of Healthcare Insights, LLC
On July 31, 2015, we acquired all of the limited liability company membership interests of Healthcare Insights, LLC ("HCI"), a financial management software developer that provides hospitals and healthcare systems with budgeting, forecasting, labor productivity and cost analytic capabilities, for $64.3 million in cash. The acquisition also provides selling members with an earn-out opportunity of up to $4.0 million based on HCI’s revenues during the twelve months ended December 31, 2017. We utilized available funds on hand to complete the acquisition. Assets acquired and liabilities assumed were recorded at their estimated fair values as of July 31, 2015, with the remaining unallocated purchase price recorded as goodwill (see Note 4 - Business Acquisitions).
Acquisition of Non-Controlling Interest in S2S Global
On February 2, 2015, we purchased the remaining 40% of the outstanding limited liability company membership interests of SVS LLC d/b/a S2S Global ("S2S Global"), our direct sourcing business, for approximately $14.5 million. In connection with the purchase, we repaid the $14.2 million balance outstanding under the S2S Global line of credit and terminated the line of credit (see Note 13 - Debt). We utilized available funds on hand to complete the acquisition and payoff the S2S Global line of credit (see Note 4 - Business Acquisitions).
Acquisition of TheraDoc, Inc.
On September 1, 2014, we completed the acquisition of TheraDoc, Inc. ("TheraDoc"), a leading provider of clinical surveillance software to healthcare organizations across the country that bring together disparate data from a hospital's source systems and helps alert clinicians to potential risks, for $108.6 million. We utilized available funds on hand to complete the acquisition (see Note 4 - Business Acquisitions).
Acquisition of Aperek, Inc.
On August 29, 2014 we completed the acquisition of Aperek, Inc. ("Aperek"), (formerly Mediclick), a SaaS-based supply chain solutions company focused on purchasing workflow and analytics, for $47.4 million. We utilized available funds on hand to complete the acquisition (see Note 4 - Business Acquisitions).
See Note 24 - Subsequent Events to the accompanying audited consolidated financial statements for more information regarding our acquisition activities subsequent to June 30, 2016.
Market and Industry Trends and Outlook
We expect that certain trends and economic or industry-wide factors will continue to affect our business, both in the short-term and long-term. We have based our expectations described below on assumptions made by us and on information currently available to us. To the extent our underlying assumptions about, or interpretation of, available information prove to be incorrect our actual results may vary materially from our expected results. See "Cautionary Note Regarding Forward-Looking Statements."
Trends in the U.S. healthcare market affect our revenues in the supply chain services and performance services segments. The trends we see affecting our current healthcare business include the implementation of healthcare reform legislation, enactment of new regulatory and reporting requirements, expansion of insurance coverage, intense cost pressure, payment reform, provider consolidation, shift in care to the alternate site market and increased data availability and transparency. To meet the demands of this environment, there will be increased focus on scale and cost containment and healthcare providers will need to measure and report on and bear financial risk for outcomes. We believe these trends will result in increased demand for our supply chain services and performance services solutions in the areas of cost management, quality and safety, and population health management.
Key Components of Our Results of Operations
Net Revenue
Net revenue consists of (i) service revenue, which includes net administrative fees revenue and other services and support revenue and (ii) product revenue. Net administrative fees revenue consists of GPO administrative fees in our supply chain services segment. Other services and support revenue consists primarily of fees generated by our performance services segment in connection with our SaaS informatics products subscriptions, license fees, advisory services and performance improvement collaborative subscriptions. Product revenue consists of specialty pharmacy and direct sourcing product sales, which are included in the supply chain services segment.
Supply Chain Services
Supply chain services revenue consists of GPO net administrative fees (gross administrative fees received from suppliers, reduced by the amount of any revenue share paid to members), specialty pharmacy revenue, direct sourcing revenue and managed service revenue.
The success of our supply chain services revenue streams are influenced by the number of members that utilize our GPO supplier contracts and the volume of their purchases, the number of members that utilize our specialty pharmacy, as well as the impact of changes in the defined allowable reimbursement amounts determined by Medicare, Medicaid and other managed care plans and the number of members that purchase products through our direct sourcing activities and the impact of competitive pricing. Our managed services line of business is a fee for service model created to perform supply chain related services for members.
Performance Services
Performance services revenue consists of SaaS informatics products subscriptions, license fees, performance improvement collaborative and other service subscriptions, professional fees for advisory services, insurance services management fees and commissions from endorsed commercial insurance programs.
Our performance services growth will depend upon the expansion of our SaaS informatics products, performance improvement collaboratives and advisory services to new and existing members, impact of applied research initiatives, renewal of existing subscriptions to our SaaS informatics products and expansion into new markets with potential future acquisitions.
Cost of Revenue
Cost of service revenue includes expenses related to employees (including compensation and benefits) and outside consultants who directly provide services related to revenue-generating activities, including advisory services to members and implementation services related to SaaS informatics products. Cost of service revenue also includes expenses related to hosting services, related data center capacity costs, third-party product license expenses and amortization of the cost of internal use software.
Cost of product revenue consists of purchase and shipment costs for specialty pharmaceuticals and direct sourced medical products. Our cost of product revenue will be influenced by the cost and availability of specialty pharmaceuticals and the manufacturing and transportation costs associated with direct sourced medical products.
Operating Expenses
Selling, general and administrative expenses consist of expenses directly associated with selling and administrative functions and support of revenue-generating activities including expenses to support and maintain our software-related products and services. In general, selling, general and administrative expenses are comprised of compensation and benefits related costs, travel-related expenses, business development expenses including costs for business acquisition opportunities and indirect costs such as insurance, professional fees and other general overhead expenses. General and administrative expenses have increased as a result of being a public company, including stock-based compensation expense related to the equity incentive plan established in connection with the Reorganization and IPO.
Research and development expenses consist of employee-related compensation and benefit expenses and third-party consulting fees of technology professionals, net of capitalized labor, incurred to develop our software-related products and services.
Amortization of purchased intangible assets includes the amortization of all identified intangible assets resulting from acquisitions.
Other Income, Net
Other income, net consists primarily of equity in net income of our unconsolidated affiliates, primarily generated from our 50% ownership interest in Innovatix, LLC ("Innovatix"). A change in the number of, and use by, members that participate in our
GPO programs through Innovatix could have a significant effect on the amounts earned from this investment. Other income, net also includes interest income, net, and realized gains and losses on our marketable securities as well as gains or losses on the disposal of assets.
Income Tax Expense
Income tax expense includes the income tax expense attributable to Premier, Premier Healthcare Solutions, Inc. ("PHSI") and Premier Supply Chain Improvement ("PSCI"). For federal and state income tax purposes, income realized by Premier LP is taxable to its partners. As such, the low effective tax rate is attributable to the flow through of Premier LP income, which is not subject to federal and state income tax at Premier.
Net Income Attributable to Non-Controlling Interest
As of June 30, 2016, we owned an approximate 32% controlling general partner interest in Premier LP through Premier GP. Net income attributable to non-controlling interest represents the portion of net income attributable to the limited partners of Premier LP (approximately 68%), and the portion of net income or loss attributable to the 40% non-controlling equity interest in S2S Global prior to our February 2, 2015 purchase when we increased our 60% ownership in S2S Global to 100%. Our non-controlling interest attributable to limited partners of Premier LP was reduced from 99% to approximately 78% upon the Reorganization, and further reduced to approximately 68% as of June 30, 2016, as a result of completed quarterly exchanges pursuant to the Exchange Agreement (see Note 15 - Redeemable Limited Partners' Capital).
Other Key Business Metrics
The other key business metrics we consider are EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow.
We define EBITDA as net income before interest and investment income, net, income tax expense, depreciation and amortization and amortization of purchased intangible assets. We define Adjusted EBITDA as EBITDA before merger and acquisition related expenses and non-recurring, non-cash or non-operating items and including equity in net income of unconsolidated affiliates. For all financial measures not determined in accordance with generally accepted accounting principles (“Non-GAAP”), we consider non-recurring items to be expenses and other items that have not been incurred within the prior two years and are not expected to recur within the next two years. Such expenses include certain strategic and financial restructuring expenses. Non-operating items include gain or loss on the disposal of assets.
We define Segment Adjusted EBITDA as the segment's net revenue less operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses and non-recurring or non-cash items and including equity in net income of unconsolidated affiliates. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative, and product development activities specific to the operation of each segment. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of Segment Adjusted EBITDA.
We define Adjusted Fully Distributed Net Income as net income attributable to Premier (i) excluding income tax expense, (ii) excluding the impact of adjustment of redeemable limited partners' capital to redemption amount, (iii) excluding the effect of non-recurring and non-cash items, (iv) assuming the exchange of all the Class B common units into shares of Class A common stock, which results in the elimination of non-controlling interest in Premier LP and (v) reflecting an adjustment for income tax expense on Non-GAAP fully distributed net income before income taxes at our estimated effective income tax rate. Adjusted Fully Distributed Net Income is a Non-GAAP financial measure because it represents net income attributable to Premier before merger and acquisition related expenses and non-recurring or non-cash items, the effects of non-controlling interests in Premier LP and the impact of the adjustment of redeemable limited partners' capital to redemption amount.
We define Adjusted Fully Distributed Earnings per Share as earnings per share attributable to Premier (i) excluding income tax expense, (ii) excluding the impact of adjustment of redeemable limited partners' capital to redemption amount, (iii) excluding the effect of non-recurring and non-cash items, (iv) assuming the exchange of all the Class B common units into shares of Class A common stock, which results in the elimination of non-controlling interest in Premier LP and (v) reflecting an adjustment for income tax expense on Non-GAAP fully distributed net income before income taxes at our estimated effective income tax rate. Adjusted Fully Distributed Earnings per Share is a Non-GAAP financial measure because it represents earnings per share attributable to Premier before merger and acquisition related expenses and non-recurring or non-cash items, the effects of non-controlling interests in Premier LP, and the impact of the adjustment of redeemable limited partners' capital to redemption amount.
We define Free Cash Flow as net cash provided by operating activities less distributions and tax receivable agreement payments to limited partners and purchases of property and equipment. Free Cash Flow is a Non-GAAP financial measure because it does not represent net cash provided by operating activities alone but takes into consideration the ongoing distributions to limited partners and purchase of property and equipment that are necessary for ongoing business operations and long-term value creation.
We believe Free Cash Flow is an important measure because it represents the cash that we generate after payment of tax distributions to limited partners and capital investment to maintain existing products and services as well as development of new and upgraded products and services to support future growth. Free Cash Flow is important because it allows us to enhance stockholder value through acquisitions, partnerships, joint ventures, investments in related business and/or debt reduction. Also, Free Cash Flow does not represent discretionary cash available for spending as it excludes certain contractual obligations such as debt repayment.
Adjusted EBITDA and Free Cash Flow are supplemental financial measures used by us and by external users of our financial statements. We consider Adjusted EBITDA and Free Cash Flow to be indicators of the operational strength and performance of our business. Adjusted EBITDA and Free Cash Flow measures allow us to assess our performance without regard to financing methods and capital structure and without the impact of other matters that we do not consider indicative of the operating performance of our business. Segment Adjusted EBITDA is the primary earnings measure we use to evaluate the performance of our business segments.
We use Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance with generally accepted accounting principles (“GAAP”), provides a more complete understanding of factors and trends affecting our business than GAAP measures alone. We believe Adjusted EBITDA and Segment Adjusted EBITDA assist our board of directors, management and investors in comparing our operating performance on a consistent basis from period to period because they remove the impact of our asset base (primarily depreciation and amortization) and items outside the control of our management team, e.g. taxes, as well as other non-cash (such as impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (such as strategic and financial restructuring expenses), from our operations. We believe Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share assist our board of directors, management and investors in comparing our net income and earnings per share on a consistent basis from period to period because it removes non-cash (such as impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (such as strategic and financial restructuring expenses), and eliminates the variability of non-controlling interest as a result of member owner exchanges of Class B common units into shares of Class A common stock (which exchanges are a member owner’s cumulative right, but not obligation, which began on October 31, 2014, and occur each year thereafter, and are limited to one-seventh of the member owner’s initial allocation of Class B common units).
Despite the importance of these Non-GAAP financial measures in analyzing our business, determining compliance with certain financial covenants in our Credit Facility, measuring and determining incentive compensation and evaluating our operating performance relative to our competitors, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow are not measurements of financial performance under GAAP, may have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, net income, net cash provided by operating activities, or any other measure of our performance derived in accordance with GAAP.
Some of the limitations of EBITDA, Adjusted EBITDA and Segment Adjusted EBITDA include that they do not reflect: our capital expenditures or our future requirements for capital expenditures or contractual commitments; changes in, or cash requirements for, our working capital needs; the interest expense or the cash requirements to service interest or principal payments under our Credit Facility; income tax payments we are required to make; and any cash requirements for replacements of assets being depreciated or amortized. In addition, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA and Free Cash Flow are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flows from continuing operating activities.
Some of the limitations of Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share are that they do not reflect income tax expense or income tax payments we are required to make. In addition, Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share are not measures of profitability under GAAP.
We also urge you to review the reconciliation of these Non-GAAP measures included elsewhere in this Annual Report. To properly and prudently evaluate our business, we encourage you to review the consolidated financial statements and related notes included elsewhere in this Annual Report, and to not rely on any single financial measure to evaluate our business. In addition, because EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow are susceptible to varying calculations, the EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow measures, as presented in this Annual Report, may differ from, and may therefore not be comparable to, similarly titled measures used by other companies.
As discussed in more detail below under "Results of Operations," we also use a non-GAAP pro forma presentation in this Annual Report for consolidated operating results prior to October 1, 2013, the effective date of the Reorganization and IPO. We believe this presentation is useful because our consolidated operating results prior to the Reorganization and IPO are not indicative of our results for periods after the Reorganization and IPO. This non-GAAP pro forma presentation is for informational purposes only and does not purport to reflect our historical results or operations or financial position. This non-GAAP pro forma presentation should not be relied upon as being indicative of our financial condition or results of operations had the Reorganization and IPO
occurred on the dates assumed. Further, this presentation does not project our results of operations or financial position for any future period or date. You should carefully review our historical actual results presented herein.
Results of Operations
Years Ended June 30, 2016 and 2015
The following table summarizes our results of operations for the years ended June 30, 2016 and 2015 (in thousands, except per share data):
|
| | | | | | | | | | | |
| Year Ended June 30, |
| 2016 | | 2015 |
Net revenue: | Amount | % of Net Revenue | | Amount | % of Net Revenue |
Net administrative fees | $ | 498,394 |
| 43 | % | | $ | 457,020 |
| 45 | % |
Other services and support | 337,554 |
| 29 | % | | 270,748 |
| 27 | % |
Services | 835,948 |
| 72 | % | | 727,768 |
| 72 | % |
Products | 326,646 |
| 28 | % | | 279,261 |
| 28 | % |
Net revenue | 1,162,594 |
| 100 | % | | 1,007,029 |
| 100 | % |
Cost of revenue: | | | | | |
Services | 163,240 |
| 14 | % | | 143,290 |
| 14 | % |
Products | 293,816 |
| 25 | % | | 253,620 |
| 25 | % |
Cost of revenue | 457,056 |
| 39 | % | | 396,910 |
| 39 | % |
Gross profit | 705,538 |
| 61 | % | | 610,119 |
| 61 | % |
Operating expenses: | | | | | |
Selling, general and administrative | 403,611 |
| 35 | % | | 332,004 |
| 33 | % |
Research and development | 2,925 |
| — | % | | 2,937 |
| — | % |
Amortization of purchased intangible assets | 33,054 |
| 3 | % | | 9,136 |
| 1 | % |
Operating expenses | 439,590 |
| 38 | % | | 344,077 |
| 34 | % |
Operating income | 265,948 |
| 23 | % | | 266,042 |
| 26 | % |
Other income, net | 18,934 |
| 1 | % | | 5,085 |
| 1 | % |
Income before income taxes | 284,882 |
| 24 | % | | 271,127 |
| 27 | % |
Income tax expense | 49,721 |
| 4 | % | | 36,342 |
| 4 | % |
Net income | 235,161 |
| 20 | % | | 234,785 |
| 23 | % |
Net income attributable to non-controlling interest in S2S Global | — |
| — | % | | (1,836 | ) | — | % |
Net income attributable to non-controlling interest in Premier LP | (193,547 | ) | (17 | )% | | (194,206 | ) | (19 | )% |
Net income attributable to non-controlling interest | (193,547 | ) | (17 | )% | | (196,042 | ) | (19 | )% |
Adjustment of redeemable limited partners' capital to redemption amount | $ | 776,750 |
| nm |
| | $ | (904,035 | ) | nm |
|
Net income (loss) attributable to stockholders | $ | 818,364 |
| nm |
| | $ | (865,292 | ) | nm |
|
| | | | | |
Weighted average shares outstanding: | | | | | |
Basic | 42,368 |
| nm |
| | 35,681 |
| nm |
|
Diluted | 145,308 |
| nm |
| | 35,681 |
| nm |
|
| | | | | |
Earnings (loss) per share attributable to stockholders: | | | | | |
Basic | $ | 19.32 |
| nm |
| | $ | (24.25 | ) | nm |
|
Diluted | $ | 1.33 |
| nm |
| | $ | (24.25 | ) | nm |
|
| | | | | |
Certain Non-GAAP Financial Data: | | | | | |
Adjusted EBITDA (1) | $ | 440,975 |
| 38 | % | | $ | 393,175 |
| 39 | % |
Adjusted Fully Distributed Net Income (2) | $ | 233,259 |
| 20 | % | | $ | 208,169 |
| 21 | % |
Adjusted Fully Distributed Earnings Per Share (3) | $ | 1.61 |
| nm |
| | $ | 1.43 |
| nm |
|
nm = Not meaningful
| |
(1) | The following table shows the reconciliation of net income to Adjusted EBITDA and the reconciliation of Segment Adjusted EBITDA to income before income taxes for the periods presented (in thousands): |
|
| | | | | | |
| Year Ended June 30, |
| 2016 | 2015 |
Net income | $ | 235,161 |
| $ | 234,785 |
|
Interest and investment loss (income), net (a) | 1,021 |
| (866 | ) |
Income tax expense | 49,721 |
| 36,342 |
|
Depreciation and amortization | 51,102 |
| 45,186 |
|
Amortization of purchased intangible assets | 33,054 |
| 9,136 |
|
EBITDA | 370,059 |
| 324,583 |
|
Stock-based compensation (b) | 49,081 |
| 28,498 |
|
Acquisition related expenses (c) | 15,804 |
| 9,037 |
|
Strategic and financial restructuring expenses (d) | 268 |
| 1,373 |
|
Adjustment to tax receivable agreement liability (e) | (4,818 | ) | — |
|
Loss on investment (f) | — |
| 1,000 |
|
ERP implementation expenses (g) | 4,870 |
| — |
|
Loss on disposal of long-lived assets | — |
| 15,243 |
|
Acquisition related adjustment - deferred revenue (h) | 5,624 |
| 13,371 |
|
Other expense, net (i) | 87 |
| 70 |
|
Adjusted EBITDA | $ | 440,975 |
| $ | 393,175 |
|
| | |
Segment Adjusted EBITDA: | |
|
Supply Chain Services | $ | 439,013 |
| $ | 391,180 |
|
Performance Services | 110,787 |
| 90,235 |
|
Corporate (j) | (108,825 | ) | (88,240 | ) |
Adjusted EBITDA | 440,975 |
| 393,175 |
|
Depreciation and amortization | (51,102 | ) | (45,186 | ) |
Amortization of purchased intangible assets | (33,054 | ) | (9,136 | ) |
Stock-based compensation (b) | (49,081 | ) | (28,498 | ) |
Acquisition related expenses (c) | (15,804 | ) | (9,037 | ) |
Strategic and financial restructuring expenses (d) | (268 | ) | (1,373 | ) |
Adjustment to tax receivable agreement liability (e) | 4,818 |
| — |
|
ERP implementation expenses (g) | (4,870 | ) | — |
|
Acquisition related adjustment - deferred revenue (h) | (5,624 | ) | (13,371 | ) |
Equity in net income of unconsolidated affiliates | (21,647 | ) | (21,285 | ) |
Deferred compensation plan income | 1,605 |
| 753 |
|
Operating income | 265,948 |
| 266,042 |
|
Equity in net income of unconsolidated affiliates | 21,647 |
| 21,285 |
|
Interest and investment (loss) income, net (a) | (1,021 | ) | 866 |
|
Loss on investment (f) | — |
| (1,000 | ) |
Loss on disposal of long-lived assets | — |
| (15,243 | ) |
Other expense, net (i) | (1,692 | ) | (823 | ) |
Income before income taxes | $ | 284,882 |
| $ | 271,127 |
|
| |
(a) | Represents interest expense (income), net and realized gains and losses on our marketable securities. |
| |
(b) | Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016. |
| |
(c) | Represents legal, accounting and other expenses related to acquisition activities. |
| |
(d) | Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection with quarterly exchanges pursuant to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights Agreement. |
| |
(e) | Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June 30, 2016. |
| |
(f) | Represents the loss on investment for the year ended June 30, 2015. |
| |
(g) | Represents implementation and other costs of new enterprise resource planning ("ERP") system. |
| |
(h) | Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, the full amount of such revenues. |
| |
(i) | Represents loss on sale of assets and unrealized loss on deferred compensation plan assets. |
| |
(j) | Corporate consists of general and administrative corporate expenses that are not specific to either of our reporting segments. |
| |
(2) | The following table shows the reconciliation of net income (loss) attributable to stockholders to Non-GAAP Adjusted Fully Distributed Net Income for the periods presented (in thousands): |
|
| | | | | | |
| Year Ended June 30, |
| 2016 | 2015 |
Net income (loss) attributable to stockholders | $ | 818,364 |
| $ | (865,292 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | (776,750 | ) | 904,035 |
|
Income tax expense | 49,721 |
| 36,342 |
|
Amortization of purchased intangible assets | 33,054 |
| 9,136 |
|
Stock-based compensation (a) | 49,081 |
| 28,498 |
|
Acquisition related expenses (b) | 15,804 |
| 9,037 |
|
Strategic and financial restructuring expenses (c) | 268 |
| 1,373 |
|
Adjustment to tax receivable agreement liability (d) | (4,818 | ) | — |
|
Loss on investment (e) | — |
| 1,000 |
|
ERP implementation expenses (f) | 4,870 |
| — |
|
Loss on disposal of long-lived assets | — |
| 15,243 |
|
Acquisition related adjustment - deferred revenue (g) | 5,624 |
| 13,371 |
|
Net income attributable to non-controlling interest in Premier LP (h) | 193,547 |
| 194,206 |
|
Non-GAAP adjusted fully distributed income before income taxes | 388,765 |
| 346,949 |
|
Income tax expense on fully distributed income before income taxes (i) | 155,506 |
| 138,780 |
|
Non-GAAP Adjusted Fully Distributed Net Income | $ | 233,259 |
| $ | 208,169 |
|
| |
(a) | Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016. |
| |
(b) | Represents legal, accounting and other expenses related to acquisition activities. |
| |
(c) | Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection with quarterly exchanges pursuant to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights Agreement. |
| |
(d) | Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June 30, 2016. |
| |
(e) | Represents the loss on investment for the year ended June 30, 2015. |
| |
(f) | Represents implementation and other costs of new ERP system. |
| |
(g) | Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, the full amount of such revenues. |
| |
(h) | Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common units for shares of Class A common stock. |
| |
(i) | Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes. |
| |
(3) | The following table shows the reconciliation of the numerator and denominator for earnings (loss) per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share for the periods presented (in thousands): |
|
| | | | | | |
| Year Ended June 30, |
| 2016 | 2015 |
Reconciliation of numerator for earnings (loss) per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share: | | |
Net income (loss) attributable to stockholders | $ | 818,364 |
| $ | (865,292 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | (776,750 | ) | 904,035 |
|
Income tax expense | 49,721 |
| 36,342 |
|
Amortization of purchased intangible assets | 33,054 |
| 9,136 |
|
Stock-based compensation (a) | 49,081 |
| 28,498 |
|
Acquisition related expenses (b) | 15,804 |
| 9,037 |
|
Strategic and financial restructuring expenses (c) | 268 |
| 1,373 |
|
Adjustment to tax receivable agreement liability (d) | (4,818 | ) | — |
|
Loss on investment (e) | — |
| 1,000 |
|
ERP implementation expenses (f) | 4,870 |
| — |
|
Loss on disposal of long-lived assets | — |
| 15,243 |
|
Acquisition related adjustment - deferred revenue (g) | 5,624 |
| 13,371 |
|
Net income attributable to non-controlling interest in Premier LP (h) | 193,547 |
| 194,206 |
|
Non-GAAP adjusted fully distributed income before income taxes | 388,765 |
| 346,949 |
|
Income tax expense on fully distributed income before income taxes (i) | 155,506 |
| 138,780 |
|
Non-GAAP Adjusted Fully Distributed Net Income | $ | 233,259 |
| $ | 208,169 |
|
| | |
Reconciliation of denominator for earnings (loss) per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share: | | |
Weighted average: | | |
Common shares used for basic and diluted earnings (loss) per share | 42,368 |
| 35,681 |
|
Potentially dilutive shares | 2,366 |
| 1,048 |
|
Conversion of Class B common units | 100,574 |
| 108,518 |
|
Weighted average fully distributed shares outstanding - diluted | 145,308 |
| 145,247 |
|
| |
(a) | Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016. |
| |
(b) | Represents legal, accounting and other expenses related to acquisition activities. |
| |
(c) | Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection with quarterly exchanges pursuant to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights Agreement. |
| |
(d) | Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June 30, 2016. |
| |
(e) | Represents the loss on investment for the year ended June 30, 2015. |
| |
(f) | Represents implementation and other costs of new ERP system. |
| |
(g) | Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, the full amount of such revenues. |
| |
(h) | Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common units for shares of Class A common stock. |
| |
(i) | Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes. |
The following table shows the reconciliation of earnings (loss) per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share for the periods presented:
|
| | | | | | |
| Year Ended June 30, |
| 2016 | 2015 |
Earnings (loss) per share attributable to stockholders: | $ | 19.32 |
| $ | (24.25 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | (18.33 | ) | 25.34 |
|
Impact of additions: | | |
Income tax expense | 1.17 |
| 1.02 |
|
Stock-based compensation (a) | 1.16 |
| 0.80 |
|
Acquisition related expenses (b) | 0.37 |
| 0.25 |
|
Strategic and financial restructuring expenses (c) | 0.01 |
| 0.04 |
|
ERP implementation expense (d) | 0.11 |
| — |
|
Adjustment to tax receivable agreement liability (e) | (0.11 | ) | — |
|
Loss on investment (f) | — |
| 0.03 |
|
Acquisition related adjustment - deferred revenue (g) | 0.13 |
| 0.37 |
|
Loss on disposal of long-lived assets | — |
| 0.43 |
|
Amortization of purchased intangible assets | 0.78 |
| 0.26 |
|
Net income attributable to non-controlling interest in Premier LP (h) | 4.57 |
| 5.44 |
|
Impact of corporation taxes (i) | (3.67 | ) | (3.90 | ) |
Impact of increased share count (j) | (3.90 | ) | (4.40 | ) |
Non-GAAP Adjusted Fully Distributed Earnings per Share | $ | 1.61 |
| $ | 1.43 |
|
| |
(a) | Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016. |
| |
(b) | Represents legal, accounting and other expenses related to acquisition activities. |
| |
(c) | Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection with quarterly exchanges pursuant to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights Agreement. |
| |
(d) | Represents implementation and other costs of new ERP system. |
| |
(e) | Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June 30, 2016. |
| |
(f) | Represents the loss on investment for the year ended June 30, 2015. |
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(g) | Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, the full amount of such revenues. |
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(h) | Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common units for shares of Class A common stock. |
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(i) | Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes. |
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(j) | Reflects impact of increased share counts assuming the conversion of all Class B common units into shares of Class A common stock. |
Net Revenue
The following table summarizes our net revenue for the years ended June 30, 2016 and 2015, indicated both in dollars (in thousands) and as a percentage of net revenue:
|
| | | | | | | | | | | |
| Year Ended June 30, |
| 2016 | | 2015 |
Net Revenue: | Amount | % of Net Revenue | | Amount | % of Net Revenue |
Supply Chain Services | | | | | |
Net administrative fees | $ | 498,394 |
| 43 | % | | $ | 457,020 |
| 45 | % |
Other services and support | 4,385 |
| — | % | | 1,977 |
| — | % |
Services | 502,779 |
| 43 | % | | 458,997 |
| 45 | % |
Products | 326,646 |
| 28 | % | | 279,261 |
| 28 | % |
Total Supply Chain Services | 829,425 |
| 71 | % | | 738,258 |
| 73 | % |
Performance Services | 333,169 |
| 29 | % | | 268,771 |
| 27 | % |
Total | $ | 1,162,594 |
| 100 | % | | $ | 1,007,029 |
| 100 | % |
Total net revenue for the year ended June 30, 2016 was $1,162.6 million, an increase of $155.6 million, or 15% from $1,007.0 million for the year ended June 30, 2015. Our supply chain services net revenue was 71% and 73% of total net revenue for the years ended June 30, 2016 and 2015, respectively.
Supply Chain Services
Our supply chain services segment net revenue for the year ended June 30, 2016 was $829.4 million, an increase of $91.1 million, or 12%, from $738.3 million for the year ended June 30, 2015.
Net administrative fees revenue in our supply chain services segment for the year ended June 30, 2016 was $498.4 million, an increase of $41.4 million, or 9%, from $457.0 million for the year ended June 30, 2015. The increase in net administrative fees revenue was primarily attributable to the further contract penetration of existing members. We may experience quarterly fluctuations in net administrative fees revenue due to periodic variability associated with the receipt of supplier member purchasing reports and administrative fee payments at quarter-end; however, we expect our net administrative fees revenue to continue to grow to the extent our existing members increase the utilization of our contracts and additional members convert to our contract portfolio.
Product revenue in our supply chain services segment for the year ended June 30, 2016 was $326.6 million, an increase of $47.3 million, or 17%, from $279.3 million for the year ended June 30, 2015. Product revenue in our supply chain services segment increased for the year ended June 30, 2016 primarily due to $28.0 million of increased direct sourcing revenue as a result of ongoing expansion of member participation in our direct sourcing business, resulting from higher demand for exam and food services gloves and patient apparel, and $19.6 million of increased revenue from specialty pharmaceuticals for disease states such as oncology and rheumatoid arthritis, offset by a decrease in Hepatitis C pharmaceutical sales. We expect our direct sourcing and specialty pharmacy product revenue to continue to grow to the extent we are able to increase our product offerings, expand our product sales to existing members and additional members begin to utilize our programs.
Performance Services
Our performance services segment net revenue for the year ended June 30, 2016 was $333.2 million, an increase of $64.4 million, or 24%, from $268.8 million for the year ended June 30, 2015. The increase was primarily driven by revenues from the Company's CECity and HCI acquisitions of $31.0 million, growth in our SaaS subscription and license revenue of $14.9 million, including increased revenue from TheraDoc, which was lower in the prior year due to purchase accounting, and growth of $12.7 million in our advisory services engagements primarily from cost management, population health and applied research.
We believe that additional growth from our CECity acquisition during the year was constrained by the impact of the Centers for Medicare & Medicaid Services (“CMS”) regulatory developments that allowed certain exemptions to CMS’ Meaningful Use reporting requirements. In addition, the market’s continued evolution to more integrated technology solutions has resulted in lengthier implementations for some of our more complex solutions, and has also impacted growth of certain less-integrated, acute focused solutions. Similarly, growth in our advisory services was more limited due to delays and re-scoping of certain large projects during the year.
We expect to experience variability in revenues generated from our performance services segment due to the timing of revenue recognition from certain advisory services and performance-based engagements in which our revenue is based on a percentage of identified member savings and recognition occurs upon approval and documentation of the savings. We expect our performance services net revenue to continue to grow to the extent we are able to expand our sales to existing members and additional members begin to utilize our products and services.
Cost of Revenue
The following table summarizes our cost of revenue for the years ended June 30, 2016 and 2015 indicated both in dollars (in thousands) and as a percentage of net revenue:
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| | | | | | | | | | | |
| Year Ended June 30, |
| 2016 | | 2015 |
Cost of revenue: | Amount | % of Net Revenue | | Amount | % of Net Revenue |
Services | $ | 163,240 |
| 14 | % | | $ | 143,290 |
| 14 | % |
Products | 293,816 |
| 25 | % | | 253,620 |
| 25 | % |
Total cost of revenue | $ | 457,056 |
| 39 | % | | $ | 396,910 |
| 39 | % |
Cost of revenue by segment: | | | | | |
Supply Chain Services | $ | 296,939 |
| 25 | % | | $ | 255,794 |
| 25 | % |
Performance Services | 160,117 |
| 14 | % | | 141,116 |
| 14 | % |
Total cost of revenue | $ | 457,056 |
| 39 | % | | $ | 396,910 |
| 39 | % |
Cost of revenue for the year ended June 30, 2016 was $457.1 million, an increase of $60.2 million, or 15%, from $396.9 million for the year ended June 30, 2015. Cost of product revenue increased by $40.2 million, which was primarily attributable to the increases in direct sourcing and specialty pharmacy revenue. We expect our cost of product revenue to increase as we sell additional direct-sourced medical products to new and existing members and enroll additional members into our specialty pharmacy program. Cost of service revenue increased by $20.0 million primarily due to an increase in personnel to support growth in SaaS-based implementations and population health advisory services. We expect cost of service revenue to increase to the extent we expand our performance improvement collaboratives and advisory services to members, increase sales of our population health management SaaS informatics products under reseller agreements, continue to develop new and existing internally-developed software applications, and expand into new product offerings as a result of our acquisitions of CECity, HCI and InFlow.
Cost of revenue for the supply chain services segment for the year ended June 30, 2016 was $296.9 million, an increase of $41.1 million, or 16%, from $255.8 million for the year ended June 30, 2015. The increase is primarily attributable to the growth in the direct sourcing and specialty pharmacy businesses, which have higher associated cost of revenue as compared to group purchasing. As a result, there is a higher increase in cost of revenue relative to net revenue because product revenue is growing at a higher rate than net administrative fees.
Cost of revenue for the performance services segment for the year ended June 30, 2016 was $160.1 million, an increase of $19.0 million, or 13%, from $141.1 million for the year ended June 30, 2015 primarily due to an increase in personnel to support growth in SaaS-based implementations and population health advisory services. We expect cost of service revenue to increase to the extent we expand our performance improvement collaboratives and advisory services to members, continue to develop new and existing internally-developed software applications, and expand into new product offerings as a result of our acquisitions of CECity, HCI and InFlow.
Operating Expenses
The following table summarizes our operating expenses for the years ended June 30, 2016 and 2015 indicated both in dollars (in thousands) and as a percentage of net revenue:
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| | | | | | | | | | | |
| Year Ended June 30, |
| 2016 | | 2015 |
Operating expenses: | Amount | % of Net Revenue | | Amount | % of Net Revenue |
Selling, general and administrative | $ | 403,611 |
| 35 | % | | $ | 332,004 |
| 33 | % |
Research and development | 2,925 |
| — | % | | 2,937 |
| — | % |
Amortization of purchased intangible assets | 33,054 |
| 3 | % | | 9,136 |
| 1 | % |
Total operating expenses | 439,590 |
| 38 | % | | 344,077 |
| 34 | % |
Operating expenses by segment: | | | | | |
Supply Chain Services | $ | 120,692 |
| 10 | % | | $ | 116,240 |
| 12 | % |
Performance Services | 155,728 |
| 14 | % | | 105,252 |
| 10 | % |
Total segment operating expenses | 276,420 |
| 24 | % | | 221,492 |
| 22 | % |
Corporate | 163,170 |
| 14 | % | | 122,585 |
| 12 | % |
Total operating expenses | $ | 439,590 |
| 38 | % | | $ | 344,077 |
| 34 | % |
Selling, General and Administrative
Selling, general and administrative expenses for the year ended June 30, 2016 were $403.6 million, an increase of $71.6 million, or 22%, from $332.0 million for the year ended June 30, 2015 primarily attributable to (i) increased salaries and benefits of $20.8 million primarily due to increased staffing to support growth, additional expense due to the acquisitions of CECity and HCI and severance expense, (ii) an increase in stock-based compensation of $20.2 million due to the layering of an additional plan year of stock compensation along with the achievement for performance based shares, (iii) an increase in professional services expenses of $10.3 million, (iv) increased acquisition-related expenses of $6.8 million and (v) ERP system implementation expenses of $4.9 million.
We expect general and administrative expenses to decline in fiscal 2017 as a result of a reduction in anticipated stock compensation expense. On a longer term basis, we would expect selling, general and administrative expenses to increase as we grow our business.
Research and Development
Research and development expenses consist of employee-related compensation and benefit expenses and third-party consulting fees of technology professionals, net of capitalized labor, incurred to develop our software-related products and services.
Research and development expenses were $2.9 million for each of the years ended June 30, 2016 and 2015. Including capitalized labor, total research and development expenditures were $64.0 million for the year ended June 30, 2016, an increase of $3.2 million from $60.8 million for the year ended June 30, 2015. We experience fluctuations in our research and development expenditures across reportable periods due to the timing of our software development lifecycles, with new product features and functionality, new technologies and upgrades to our service offerings.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets for the year ended June 30, 2016 was $33.1 million, an increase of $24.0 million, from $9.1 million for the year ended June 30, 2015. The increase was primarily as a result of the additional amortization of purchased intangible assets related to our acquisitions. As we execute on our growth strategy and further deploy capital, we expect further increases in amortization of purchased intangible assets in connection with recent and future potential acquisitions.
Corporate
The increase in corporate expenses is primarily attributable to stock compensation expense as well as incremental corporate infrastructure, primarily in technology services, finance and legal due to growth and the current year acquisitions.
Other Non-Operating Income and Expense
Other Income, Net
Other income, net for the year ended June 30, 2016 was $18.9 million, an increase of $13.8 million from $5.1 million for the year ended June 30, 2015 due to a loss on disposal of assets of $15.2 million during the prior year.
Income Tax Expense
For the years ended June 30, 2016 and 2015 the Company recorded tax expense of $49.7 million and $36.3 million, respectively, which equates to an effective tax rate of 17.5% and 13.4%, respectively. The effective tax rate has increased from the prior year primarily due to the recording of a valuation allowance against deferred tax assets at PHSI and tax expense at Premier associated with the revaluation of deferred tax assets in connection with a reduction in the North Carolina state income tax rate for years 2016 and beyond. The Company’s effective tax rate differs from income taxes recorded at the statutory rate primarily due to partnership income not subject to federal income taxes, state and local taxes and nondeductible expenses.
Net Income Attributable to Non-Controlling Interest
Net income attributable to non-controlling interest for the year ended June 30, 2016 was $193.5 million, a decrease of $2.5 million, or 1%, from $196.0 million for the year ended June 30, 2015, primarily as a result of a decrease in non-controlling interest in Premier LP from approximately 74% at June 30, 2015 to approximately 68% at June 30, 2016 and the Company's purchase of the remaining 40% ownership in S2S Global that resulted in the elimination of non-controlling interest in S2S Global for the year ended June 30, 2016.
Non-GAAP Adjusted EBITDA
The following table summarizes our Non-GAAP Adjusted EBITDA for the years ended June 30, 2016 and 2015 indicated both in dollars (in thousands) and as a percentage of net revenue:
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| | | | | | | | | | | |
| Year Ended June 30, |
| 2016 | | 2015 |
Non-GAAP Adjusted EBITDA by segment: | Amount | % of Net Revenue | | Amount | % of Net Revenue |
Supply Chain Services | 439,013 |
| 38 | % | | 391,180 |
| 39 | % |
Performance Services | 110,787 |
| 9 | % | | 90,235 |
| 9 | % |
Total Segment Adjusted EBITDA | 549,800 |
| 47 | % | | 481,415 |
| 48 | % |
Corporate | (108,825 | ) | (9 | )% | | (88,240 | ) | (9 | )% |
Total Adjusted EBITDA | $ | 440,975 |
| 38 | % | | $ | 393,175 |
| 39 | % |
Total Adjusted EBITDA for the year ended June 30, 2016 was $441.0 million, an increase of $47.8 million, or 12%, from $393.2 million for the year ended June 30, 2015. The increase in Adjusted EBITDA is primarily driven by revenue growth in the supply chain segment, as well as growth from the performance services segment, including contributions from the acquisitions of CECity and HCI, partially offset by higher selling, general and administrative expenses at the corporate level.
Segment Adjusted EBITDA for the supply chain services segment of $439.0 million for the year ended June 30, 2016 reflects an increase of $47.8 million, or 12%, compared to $391.2 million for the year ended June 30, 2015, primarily as a result of increased net administrative fees and products revenue.
Segment Adjusted EBITDA for the performance services segment of $110.8 million for the year ended June 30, 2016 reflects an increase of approximately $20.6 million, or 23%, compared to $90.2 million for the year ended June 30, 2015, primarily driven by contributions from the acquisitions of CECity and HCI.
Adjusted EBITDA at the corporate level of $(108.8) million reflects a decrease of $20.6 million, or 23%, compared to $(88.2) million for the year ended June 30, 2015, reflecting increased selling, general and administrative expenses primarily driven by higher incremental corporate infrastructure costs, primarily in technology services, finance and legal due to growth and the current year acquisitions.
Years Ended June 30, 2015 and 2014
The first three months of our fiscal year ended June 30, 2014 occurred prior to the Reorganization and IPO on October 1, 2013. As a result, our consolidated operating results prior to October 1, 2013 do not reflect (i) the Reorganization, (ii) the IPO and the use of the proceeds from the IPO or (iii) additional expenses we incur as a public company. As a result, our consolidated operating results prior to the Reorganization and IPO are not indicative of what our results of operations are for periods after the Reorganization and IPO. In addition to presenting the historical actual results, we have presented Non-GAAP pro forma results reflecting the following for the year ended June 30, 2014, to provide a more indicative comparison between current and prior periods. The Non-GAAP pro forma consolidated financial information is included for informational purposes only and does not purport to reflect our results of operations or financial position that would have occurred had we operated as a public company during the year ended June 30, 2014. The Non-GAAP pro forma consolidated financial information should not be relied upon as being indicative of our financial condition or results of operations had the Reorganization and IPO occurred prior to the start of our fiscal year ended June 30, 2014. The Non-GAAP pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date. The Non-GAAP pro forma results reflect the following for the year ended June 30, 2014:
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• | The contractual requirement under the GPO participation agreements to pay each member owner revenue share from Premier LP equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such member owner's owned, leased, managed and affiliated facilities through Premier LP's GPO supplier contracts. Historically, Premier LP did not generally have a contractual requirement to pay revenue share to member owners participating in its GPO programs, but paid semi-annual distributions of partnership income. |
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• | Additional U.S. federal, state and local income taxes with respect to its additional allocable share of any taxable income of Premier LP. |
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• | A decrease in non-controlling interest in Premier LP from 99% to approximately 78%. |
The following table summarizes our actual results of operations for the years ended June 30, 2015 and 2014 and Non-GAAP pro forma results of operations for the year ended June 30, 2014 (in thousands, except per share data):
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| | | | | | | | | | | | | | | | | | | | | |
| Year Ended June 30, |
| 2015 | | 2014 |
| Actual | | Actual | | Adjustments | (1) | Non-GAAP Pro Forma |
| Amount | % of Net Revenue | | Amount | % of Net Revenue | | Amount | | Amount | % of Net Revenue |
Net revenue: | | | | | | | | | | |
Net administrative fees | $ | 457,020 |
| 45 | % | | $ | 464,837 |
| 51 | % | | $ | (41,263 | ) | (2) | $ | 423,574 |
| 49 | % |
|