With health maintenance organizations (HMO) sitting on billions ofdollars and with biotechnology companies desperately looking formoney to fund their drug development programs, some experts sayit's time the two get together.

"The HMOs combined have $35 billion available," said RobertEsposito, KPMG Peat Marwick's national director of biotechnologyand life sciences. "They have more money in the aggregate thanpharmaceutical companies."

Biotechnology firms, on the other hand, are experiencing a well-documented cash drought among conventional financing sources,such as the capital markets, and need to tap new funding pools tosupport their research.

"The linkage is obvious," Esposito observed. HMOs want cost-effective treatments and have access to patients for clinical trials aswell as records of past treatments. And biotechnology companies,targeting the underlying causes of disease, are searching for the kindsof breakthrough drugs that may reduce health care expenses.

The problem in getting the two industries together, Esposito said, isthat suppliers and payers usually are on opposite sides of the table.

In a recent Peat Marwick study, called "Blueprint for growth:building the biotechnology business," the Montvale, N.J.-basedprofessional services firm said HMOs and biotechnology companiesare only just beginning to realize the mutual benefits to be derivedfrom each other.

The report, sponsored by the Biotechnology Industry Organization,identified two deals _ Pennsylvania-based U.S. Healthcare'sinvestment in Neose Pharmaceuticals Inc., of Horsham, Pa., andCalifornia-based Kaiser Permanente's collaboration with SequanaTherapeutics Inc., of La Jolla, Calif. _ as models for HMO-biotechnology agreements.

However, Gregory Brown, an analyst for Vector SecuritiesInternational Inc., in Deerfield, Ill., suggested alliances betweenmanaged care groups and biotechnology companies more likely areborne of expediency than long-term commitment to innovative drugs.

Biotechnology companies see HMOs as a tremendous way to raisecapital, while HMOs view biotechnology as a source of informationon diseases they pay to treat as well as a marketing ploy to show theyare on the cutting edge of science.

"Managed care groups can't afford to risk capital," Brown said. "Ifthey happen to be lucky enough to lock in on a technology thatworks, that would be great."

As for biotechnology companies, he added, "Does it help them bycreating a pool of patients for drug discovery or does it help themwith a substitute for [conventional] clinical trials? That may happenat some point, but not now."

Shirrell Neff, who was with U.S. Healthcare when it invested inNeose and currently is the privately held biotechnology company'spresident and chief financial officer, has another perspective. He saidthe two industries were made for each other.

"As a matter of economic logic and public policy, it's a good thing,"Neff said. "Who better than managed care is in a position to identifytreatments that could be breakthroughs on cost and quality issues."

Neff said Neose, whose technology is based on complexcarbohydrates for drugs and diagnostics, has identified a fourth drugcandidate through its relationship with U.S. Healthcare. The potentialtreatment, he said, is being studied as a means of overcoming thehuman body's rejection of donor organs from pigs.

The drug could increase the availability of organs for transplant, Neffsaid, and reduce the high cost of long-term care for people who nowcannot get transplants for lack of human donors.

As for the wisdom of HMOs investing in biotechnology, Neff said,"Clearly there's a risk. But managed care companies are generatingmore money than they know what to do with." n

-- Charles Craig Staff Writer

(c) 1997 American Health Consultants. All rights reserved.