HMO-biotech partnerships failing to materialize.

Most biotech ventures may be too risky for HMOs

While some financial analysts and medical experts have been predicting a nationwide proliferation of partnerships between managed care providers and the biotechnology industry for more than a year now, that trend has yet to make much headway with health maintenance organizations based in Los Angeles County. And, key industry observers said, it probably won't go any further than it already has.

A survey of the county's biggest HMOs in late December showed that very few partnerships between HMOs and biotech companies materialized in 1995.

Woodland Hills-based Health Systems International has worked with Thousand Oaks-based Amgen Inc. on what company officials described as a "new AIDS-management process," but that project is now complete. The partnership involved a onetime grant of $40,000, said Dr. William Popik, a senior vice president and chief medical officer of Health Systems. And the grant was from Amgen to Health Systems, not the other way around.

A spokesman for another Woodland Hills-based HMO. WellPoint Health Networks, said that company is "negotiating" an agreement with Amgen for capped costs on new, key chemotherapy drugs. But the deal has not yet been completed, said Rick Bleil, general manager of WellPoint Pharmacy Management, a wholly-owned subsidiary of WellPoint Health that negotiates all of the company's pharmaceutical purchasing agreements.

On the other side of the county, meanwhile, a spokesman for Cigna HealthCare in Glendale said that company is not involved in any partnerships with biotech companies, nor are they looking for them. And a spokesman for downtown Los Angeles-based Maxicare Health Plans Inc. said only that discussions are "ongoing" between Maxicare and "a variety of companies doing a variety of things." But there are no "formal relationships" between Maxicare and any biotech firms, added Ed Coghlan, vice president of advertising and communications.

Perfect partners?

The party line among financial analysts in early 1995 was that the nation's largest HMOs, flush with ready cash, would make perfect partners for the nation's 1,300 biotech companies, which themselves were facing a cash crunch. Fuel for those speculations came from a detailed financial report from Salomon Brothers Inc., which said, for example, that Health Systems had $475 million in cash and investments, while WellPoint had nearly $2 billion on hand. At the same time, there were reports then that venture capital funding of medical technology was off sharply. So the two types of companies seemed to be a perfect fit.

And in fact, a report on the biotechnology industry published by KPMG Peat Marwick in July stated that partnerships between health care providers and biotechs were "a trend to watch for."

But other industry analysts said the fact that HMOs nationwide, including those in Los Angeles County, have not been jumping into any long-term relationships with biotech companies should come as no surprise.

"For biotech investors, it's a crapshoot deciding which new drugs will work and which won't and which ones will get the approval of the Food and Drug Administration," said Robin Strongin, an analyst with The Lash Group, a health care technology consulting firm based in Washington, D.C.

Michael Hildreth, a Palo Alto, Calif.-based partner in the life sciences practice at accounting firm Ernst & Young, concurred.

"Venture capital was really the only source with the appetite for the enormous risks involved in biotech," said Hildreth, who represents 50 California biotech clients.

As for all that cash on hand just waiting to be invested, Popik of Health Systems said the figures are misleading.

"There's a great misconception about our cash position," said Popik. "Most of it is going to pay for health care. Our profit levels are right down there with the grocery business." Last year, Health Systems had a 3-percent profit margin, according to Popik.

Price controls gone

There's also a big-picture explanation as to why the predicted HMO/biotech melding did not come to pass, said Hildreth. And it can be summed up in three words: health care reform.

"HMOs and biotech seemed like a good pairing," he said. "But with health care reform out of the way and the threat of drug price controls gone, venture capital is back in the biotech business."

The amount of venture capital investment now in play in the biotech industry is at a level at or exceeding that of three years ago, before the bottom dropped out, Hildred continued. And that expanding pool of investor capital exists in a market with fewer biotech companies than in 1993.

Officials at the major HMOs doing business in L.A. County said there is a future for limited partnerships between managed care and biotech companies, but those partnerships will be on an ad hoc basis only. And, stressed one official in particular, just because the biotech industry is again operating in a cash-rich environment doesn't mean it won't have to work on its relations with HMOs.

"I still believe that biotech companies don't embrace managed care companies as they should," said Joyce Lloyd, vice president of sales and marketing for WellPoint Pharmacy Management. "Most of them (biotech companies) believe that their drugs can and will be used wherever and whenever necessary. They don't believe that they have to work with managed care companies to see whether their drugs are being used appropriately and with due regard for cost."

And while the pool of venture capital available to biotech companies is currently expanding, industry insiders said the trend could easily shift again.

"Just because health care reform is a dead issue today, doesn't mean it won't be an issue again," said WellPoint's Bleil. "It's gone in Washington, but not forgotten." In other words, if Clinton-style reform resurfaces with talk of pharmaceutical price-controls, skittish venture capitalists could once again head for the exits.