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Executive Summary

Value Health finished its first year as a public company by moving up 2-1/2 points in March to close at 34-3/4. The managed health care firm's 7.8% gain was notable as an exception-to-the- rule in a month that ended with declines for nearly 90% of the 86 pharmaceutical, diversified, drugstore chain and wholesaler stocks that make up the "F-D-C" Index of NASDAQ-traded firms. In the midst of growing disenchantment with the speculative nature of some recent healthcare startups, Value Health offers investors concrete evidence of its potential: the March 3 release of Value Health's 1991 sales and earnings reported a more than five-fold increase in net earnings to $8 mil. from $1.5 mil. the previous year; revenues were ahead by 60% to $154.7 mil. Value Health also announced that it has "implemented 35 new managed prescription drug, mental health, and clinical review program accounts through early February," which amounts to "annualized revenues well in excess of $200 mil." The firm also added $55.4 mil. to its capital resources with the Feb. 5 completion of a 2.8 mil. share offering. Value Health noted in the prospectus for the offering that its clients include 23 of the top 200 U.S. corporations, and its products serve over 20 mil. people as of February. Managed prescription drug programs account for roughly 70% of Value Health's revenues, but the firm's program to manage mental health services has been cited by several analysts as a particularly attractive niche with higher profit margins than prescription drug cost containment. Value Health's American PsychManagement subsidiary offers preferred provider networks, clinically-based utilization review and case management, as well as a 24-hour toll-free "clinical referral line." Exactly half of the 64 pharmaceutical stocks on the "F-D-C" Index were down by 10%-20% for the month. An additional 16 issues had losses under 10%, while prices for 11 stocks dropped by more than 20%. Only five drug stocks survived the month with increases, which ranged from 1/4 point for Enzon to a 2-3/4 gain for Genetics Institute. Agouron, Aphton and Teva rounded out the small group of winners. One of the previously hot technologies in the biotech start-up field -- liposomes -- was among the biggest losers. The Liposome Company dropped 3-5/8 to 12-3/4, while Liposome Technology slid 5- 1/2 to 14-1/4. Vestar dropped 4-3/4 to close at 14-1/4. The average decline for the three firms was 25%. Most of the pharmaceutical stocks losing more than 20% were biotechs that went public within the last year, suggesting that investors are reacting negatively to early-stage development healthcare companies as a group rather than to any specific lack of progress in the firms' R&D programs. The tyros with the most significant stock declines in March included Athena Neurosciences (down 21.8%); Genelabs (down 21.4%); IDEC Pharmaceuticals (off 21.4%); Magainin Pharmaceutical (21.9% lower); Matrix Pharmaceutical (down 23.7%); and Protein Design Labs (off 25%).

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