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Premier's strong performance
Shares up 17% on second day of trading

By Beth Kutscher
Posted: September 28, 2013 - 12:01 am ET

Premier's $760 million IPO—priced above the upper end of its expected range and trading strong out of the gate—shows investor confidence in its diversified array of services and expectations under healthcare reform.

The Charlotte, N.C.-based company, which generates the majority of its revenue with its group purchasing business but offers a growing portfolio of consulting and data analytics, closed its second day of trading at $31.69, 17% higher than the $27 price where shares started Thursday morning.

“It's not a big surprise,” said David Francis, managing director at the JAAG Group, an investment advisory and research firm. “It was a deal that was highly anticipated by the industry.”

Premier's core business has long been as a GPO, and it remains the biggest one in healthcare. But the company has moved into other promising areas such as quality improvement and population health management. It also has pharmacy benefit and insurance offerings.

“There's a lot of focus among investors on the data and analytics business,” Francis said. He added, however, that it will take time to fully develop. On the other hand, “the GPO business is pretty mature—it's a highly competitive space,” he said. “It's a less sexy business, but it's a steady and predictable business.”

Bret Jones, an analyst at Oppenheimer who follows Premier competitor MedAssets (the only other publicly traded healthcare GPO), called the GPO space the “ugly sister,” pointing for instance to criticism from analysts and shareholders that Alpharetta, Ga.-based MedAssets overpaid in its $850 million deal for GPO Broadlane in 2010. “That's not the business they want to be in,” he said.

In its IPO prospectus, Premier said supply-chain services accounted for 76% of its fiscal 2013 net revenue, or $664.1 million, growing 12%. Performance services brought in the remaining $205.2 million, with 16% year-over-year growth.

“We believe the future for healthcare providers in the United States will require transformational change, due to intense cost pressures, a shifting competitive landscape, a changing regulatory environment, the evolving use of data and analytics and the transition to a fundamentally different payment model,” the company said in an Aug. 26 regulatory filing laying the groundwork for the IPO.

The IPO steers nearly 20% of the proceeds, after underwriters' standard 6% take, to the company for working capital.

About three-quarters will go to Premier's 181 member-owner hospitals in the form of stock that can be sold during the next seven years.

Premier had suggested a price range of $23 to $26 in a Sept. 16 filing with the Securities and Exchange Commission. The company said it expected to raise about $648.3 million, or $745.6 million if underwriters exercise their overallotment option. Underwriters have a 30-day option to buy another 4.2 million shares at the IPO price.

New investors were issued Class A shares, while Premier's hospital owners received Class B shares. Under a new organizational structure, Premier's owners will retain 80% of the voting power in the company. Class A shareholders will have about 20% of the voting power.

Proceeds from the IPO will be used for working capital and general corporate purposes, including potential acquisitions and unspecified development opportunities, according to the IPO prospectus.

Although Premier has historically been member-owned, MedAssets sent Premier a series of letters last year suggesting its plan might run afoul of the anti-kickback statute by recruiting new members with a sales pitch promising them equity in the company. MedAssets referred calls to its outside attorney, who could not be reached at deadline.

MedAssets solicited an opinion from HHS' Office of the Inspector General on a proposal to offer equity to potential members and was told that doing so could draw sanctions.

But neither Jones nor Francis saw a substantial risk of the OIG investigating what Premier may have said to prospective customers in the lead-up to the IPO. “Why wouldn't (hospitals) get an ownership stake in an IPO—every other customer does,” Jones said.

Francis called MedAssets' move “competitive bluster.” “That's two very tough competitors going at it with each other,” he said.

Follow Beth Kutscher on Twitter: @MHbkutscher



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