Premier: IPO Has Competition, Obamacare And High Compensation Issues

Sep.26.13 | About: Premier, Inc. (PINC)

Premier (NASDAQ:PINC), a national alliance of healthcare services with principal offices in Charlotte, North Carolina, plans to raise $690 million in its upcoming IPO. PINC will offer 28,151,958 shares at an expected price range of $23.00-$26.00. At the midpoint of that range at $24.50 per share, Premier would command a market value of $3.4 billion.

PINC filed confidentially on May 31, 2013.
Joint Managers: J.P. Morgan, Merrill Lynch, Wells Fargo
Co-Managers: CitiGroup, Piper Jaffray, Raymond James, William Blair

PINC is an alliance of hospitals, physicians, health systems and various other healthcare providers, including some 2,900 hospitals, 100,000 alternate sites and 400,000 physicians. PINC offers a platform that includes supply chain services, clinical, financial, operational and population health Software-as-a-Service, informatics, advisory services, and performance improvement collaborative services. PINC is currently owned by 181 member hospitals and other healthcare organizations, including Adventist Health, Banner Health, Catholic Health Partners, and many others.

PINC delivers products and services through a pair of differentiated business segments: the supply chain services segment and the performance services segment. Competition is intense within both of these segments, though the competitors differ, as described below.

PINC offers the following figures in its S-1 balance sheets for the fiscal year ending June 30, 2013:
Total Net Revenue: $869,290,000
Net Income: $375,086,000
Total Assets: $598,916,000
Total Liabilities: $213,513,000
Stockholders' Equity: $77,768,000

In fiscal 2013, PINC generated a net revenue of $869.3 million, which means that it achieved a total net revenue compound growth rate (OTCPK:CAGR) of 13% from fiscal 2011 through fiscal 2013. The healthcare alliance generated a net income of $375.1 million for fiscal 2013, translating to an overall net income CAGR of 10% over the same period.

Despite PINC's positive financials, we recommend caution concerning this IPO and rate it neutral to avoid if it prices at or above the mid-range of $24.50 due to the extremely high degree of competition that the firm faces, excessive executive compensation and the impending enactment of the Patient Protection and Affordable Care Act (Obamacare). The combination of the Obamacare and the competition factors may lead to a highly unpredictable shakeup in the healthcare sector, and the diversity of services offered and facilities owned by PINC mean that at least some elements of the business will likely be negatively affected.

PINC faces intense competition in both the its supply chain services segment and performance services segment, sometimes from firms with better resources and more advanced niche technology. In the supply chain services segment, major competitors include Amerinet Inc., HealthTrust Purchasing Group, Managed Health Care Associates, Inc., MedAssets, Inc. (NASDAQ:MDAS) and Novation LLC (NOVC). In the performance services segment, competitors include Allscripts Healthcare Solutions, Inc (NASDAQ:MDRX), Oracle Corporation (NASDAQ:ORCL), and Epic Systems Corporation. PINC's specialty pharmacy must compete against well-known firms like CVS Caremark (NYSE:CVS). PINC's GPO-style organization is becoming a more and more popular model in the healthcare industry, meaning that direct competition will only increase in the future.

Like all healthcare stocks, PINC has a somewhat murky future due to the impending enactment of the Obamacare. The diversity of facilities owned and services offered by PINC makes it very difficult to predict precisely what effect the new law will have on the healthcare alliance's finances, especially given the politically charged nature of the law and the possibility that any changes, once enacted, might be immediately reversed in the event of a repeal of the law. Any change, regardless of its ultimate effect, will certainly lead to significant short-term costs in administrative overhead and reorganization. The public's negative perception and poor understanding of Obamacare also bode poorly for healthcare stocks in the near future.

President and CEO Susan D. DeVore has served PINC since its inception in May. She served in the same positions with predecessors PHSI and Premier LP and also as a member of the board of directors of PHSI and as a member of the board of managers of Premier Plans since July 2009. Devore previously spent over 20 years at my former accounting firm, Ernst & Young LLP, as a Senior Healthcare Industry Management Practice Leader. Her total compensation for the fiscal year ending June 30,2013 was $7,512,366 which we find excessive.

CFO Craig McKasson has had a lengthy tenure with the firm, having been with PINC or its predecessors since 1997. Craig's compensation for fiscal 2013 was $4,296,214 which also seems high.

We would expect that with the help of consultants and the company's compensation committee that their 2014 compensation will be even higher if they are successful with this IPO. Hopefully the Patient Protection and Affordable Care Act will rein in this high level of excess compensation for these dedicated healthcare workers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written for informational purposes and partly based on the company's S-1. Investors should read the S-1 in great detail and review any investments with their financial adviser.