Biotechnology Partners with HMOs to Boost Bottom Line, Bring Breakthrough Products to Market.

PRINCETON, N.J.--(HealthWire)--November 20, 1995-- Biotechnology companies are increasingly teaming up with managed care organizations to help them finance growth, leverage technology, and market products, according to a KPMG Peat Marwick industry guide book, "Blueprint for Growth: Building the Biotechnology Business."

Industry restructuring, including new alliances between biotech and managed care companies, is a key finding in the 83-page KPMG industry guide book, which creates a profile of a complex industry in the process of self renewal. Based on survey data collected from 374 biotech executives, the guide book provides a prescription for industry growth.

According to the guide book, managed care providers will account for 90 percent of the prescription drug customers in the United States by the turn of the century. Although this linkage between biotech companies and managed care organizations has yet to be fully embraced by the industry, some progressive biotechs have joined forces with HMOs.

Collaborations make sense for both parties, according to Robert S. Esposito, national director of biotechnology and life sciences for KPMG Peat Marwick's Health Care & Life Sciences Practice. Biotechnology companies are affected by the health care environment emphasis on providing care more efficiently and more cost-effectively; an emphasis that is even more pronounced in the managed care area. Biotechnology companies can fulfill that joint requirement by developing a product that can, for example, eliminate a costly procedure or reduce a hospital stay due to its efficacy. The challenge is for those companies to build efficiencies into their product development process that will help reduce the burden of their R&D costs on the bottom line.

HMOs and other health care payers have access to billions of investment dollars; biotech companies need partners to fund drug development programs. "HMOs combined have in excess $35 billion in reserves available for investment," Esposito says, "which is more money in the aggregate than the major pharmaceutical companies," he points out.

Pharmaceutical companies have historically provided biotech firms with an important source of equity and revenue streams. Some 61 percent of the biotech companies responding to a KPMG survey have licensed technology to drug companies in exchange for cash and a future royalty stream.

This year marked a significant turnaround in the biotech industry, according to Esposito. "It is the first time that revenue units (premiums) are not going to increase faster than the rate of inflation. Clearly, biotechnology products have to be incrementally efficacious; but they're also going to have to be cheaper," says Esposito.

Pharmacoeconomic studies, conducted as early in the development process as possible, will become more important in bringing drugs to market, Esposito predicts. "If they don't conduct these studies," Esposito cautions, "companies run the risk of losing out to the competition on what may have been a breakthrough therapy."

Esposito adds, "Pharmaceuticals are going to be used increasingly in a very different way. Key to that is pharmacoeconomics. These studies will be critical for HMOs for the next five years or so."

Pharmacoeconomic studies are developed with one overriding objective: cost effectiveness. "Biotech companies have to make their drugs compelling and to be ahead of the competition in order to make a solid pharmacoeconomic argument; not just a better drug or that it has a higher cure rate. Instead, the company must be able to support its product by stating it will save the system money versus some alternative drugs or no-drug therapies."

Those companies that incorporate pharmacoeconomic studies in preclinical trials will be positioned substantially better to meet changing market trends, including increasing competition. "Plus," says Esposito, "HMOs will list those drugs on their formularies. That's a marketing reality."

The KPMG survey data report that about 64 percent of companies in clinical trials made an effort to conduct pharmacoeconomic studies before they launched their product. The use of such studies is on the rise. The number of pharmacoeconomic studies per company rose from 1.7 in 1988 to 23.7 in 1994, according to the guide book.

The publication's other findings describe an industry in transition. They include:

o The emergence of a new industry structure based on customer focus in product development. Although nearly 9 in 10 executives (89 percent) report that they are focused on creating breakthrough therapies, a traditional business strategy, companies realize that mastering the clinical approval process is key to future development.

o Steady industry growth, despite recent downsizing. Between 1990 and 1993, the average number of employees at a company rose from 62 to 99. The average amount of space occupied rose from 30,150 square feet to 56,661 square feet.

o Recruitment and competitive compensation are the two most challenging human resource issues. Companies are out-sourcing functions such as money management, regulatory affairs, legal counsel, and facility compliance to remain as lean as possible.

o The year 1994, while one of the dimmest years for equity financing, also saw companies focused on raising capital. Some 70 percent of survey respondents report that senior management and business development teams are actively marketing their technologies to investors. Moreover, the marketing process is beginning earlier. For copies of the KPMG report, Blueprint for Growth: Building the Biotechnology Business, contact Anna Le Goff, KPMG national life sciences at (800) 330-KPMG or via FAX at [phone].

KPMG Peat Marwick LLP is the U.S. practice of KPMG, the Global Leader among professional services firms.

Worldwide, KPMG has more than 6,000 partners as well as 67,000 professionals serving clients in more than 134 countries. In the United States, KPMG delivers a wide range of value-added assurance, tax, international and performance improvement services. KPMG serves biotechnology and life sciences companies at all stages of development. As part of its commitment to the industry, KPMG actively participates in business and investment forums and conferences, regularly publishes industry-focused research and benchmarking information, and produces issue-specific technical publications.

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