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Managed Care, Niche By Niche


Finance

MANAGED CARE, NICHE BY NICHE

The framed pink slip hangs proudly on Robert E. Patricelli's office wall. As he sees it, the elimination of his job in a 1986 reorganization at CIGNA Corp. may have been the best thing that ever happened to him. It cleared the way for the 53-year-old executive to capitalize on an idea he had broached with the insurer right before leaving: Start a specialty managed-care business to focus on neglected niche markets such as prescription drugs, workers' compensation, and mental health. CIGNA had turned down the idea, preferring to focus on its core health business.

CIGNA's loss has been Patricelli's gain. By buying and combining usually small, regional players and offering their services nationwide, Patricelli has built Value Health Inc.'s revenues to almost $1 billion. The Avon (Conn.) company has achieved a 70% annual growth rate over the past three years, and its stock is up 450% since it went public in 1991. "Bob Patricelli just had a lot of foresight," says Edward C. Bessey, vice-chairman of drugmaker Pfizer Inc., which has entered into a joint venture with Value Health. "It was a terrific strategic move."

When Patricelli hit the streets in 1986, he didn't need to do a hard sell. He had a stellar track record, having built CIGNA's health maintenance organization business into a big moneymaker. Past government positions, such as Deputy Under Secretary at the Health, Education & Welfare Dept., gave him access to policymakers. Armed with a two-page business plan that didn't even have financial projections, he quickly persuaded investment banker E.M. Warburg, Pincus & Co. to pony up $30 million.

Working out of a bedroom in his West Simsbury (Conn.) home, Patricelli made his first purchase in 1987, buying 40% of American PsychManagement Inc. for an undisclosed amount. Since then, he has bought 18 other companies. "We move a lot faster than our competitors," he says. Recent forays include a deal with Pfizer to create a company to test managed care in high-cost ailments such as cancer, diabetes, and heart disease. As part of the deal, Pfizer will sell drugs to Value Health's pharmacy management business at a discount. Also in May, Patricelli purchased Community Care Network Inc., a managed-care workers' compensation company, for $40 million.

RARE INSIGHT. Value Health has become a major force in its markets. Value Behavioral Health, a provider of managed-care mental-health services, is the largest such supplier in the nation, covering 14 million people. Another big moneymaker is Value Rx, a prescription-drug management unit that provides about 60%, or $530 million, of the corporation's revenues. Other subsidiaries aren't as big but play vital roles. Lewin-VHI, Value Health's Washington-based policy consulting company, was hired by the Congressional Budget Office to do the first independent review of the financial impact of the Clinton health-care plan, giving the firm an insight into reform afforded few others.

Also impressive is Value Health's client list. It includes some of the nation's largest corporations, such as Ford, Chrysler, and United Technologies. And big insurers, such as Prudential Insurance Co. of America, often subcontract to Value Health.

Although the company's growth rate is likely to slow from 70% to 40% for the next two years, Wall Street is bullish. The company "more than meets analysts' expectations every quarter," says Gary L. Pilgrim, president of Pilgrim, Baxter & Associates, a money manager holding 4% of Value Health's stock.

Are there any clouds on the horizon? One big issue is increased competition in the prescription-drug management business. But analyst Ken Lauden of Montgomery Securities says there's room for Value Health to grow, since its $1 billion in revenue is only a tiny fraction of the $220 billion health-care bill in its target areas. And Value Health says there could be $1 billion in revenue in cross-selling services to clients. If that's so, the company may become something of an oxymoron: a giant niche player.

BULKING UP

NOVEMBER, 1992 Pays $44.2 million total for Complete Pharmacy Network and Stokeld Health Services, prescription drug management companies; Lewin-ICF, a health-policy firm; and Wellington Life Insurance.

JULY, 1993

Buys the Raleigh Group, a consultant to insurers; Center for Human Resources, an employee assistance company; and Associated Prescription Services, a drug management company, for a total of $10.2 million.

DECEMBER, 1993

Acquires biggest competitor in the mental-health-benefits field, Preferred Health Care, for $400 million.

MAY, 1994

Invests $50 million in a joint venture with drug giant Pfizer to develop a separate disease management company. Buys Community Care Network Inc., the country's largest managed-care workers'compensation company, for $40

million.Chris Roush in Avon, Conn.


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