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Analysis of Merck's Acquisition of Medco

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Please provide some assistance with the following paper for Merck's Acquisition of Medco. A 8-10 page paper (double-spaced) has to be a written analysis, including tables of financial calculations. It has to include the Key Players which are explained in the attachments. The attachments also include financial statement and instructions. The Grading Rubric is as follows: Understanding; Demonstrate a strong grasp of the problem at hand. Demonstrate understanding of how the course concepts apply to the problem. Analysis; Apply original thought to solving the business problem. Apply concepts from the course material correctly toward solving the business problem. Execution; Write your answer clearly and succinctly using strong organization and proper grammar. Use citations correctly. I'm adding a major part of the problem that I didn't.

On July 28, 1993, Merck & Company, then the world's largest drug manufacturer, announced that it planned to acquire, for $6.6 billion, Medco Containment Services Incorporated, the largest prescription benefits management company (PBM) and marketer of mail-order medicines in the United States. This merger reflected fundamental changes taking place in the pharmaceutical industry.


Perhaps the most significant change involves the growth of managed care in the health care industry. Managed care plans typically provide members with medical insurance and basic health care services, using volume and long-term contracts to negotiate discounts from health care providers. In addition, managed care programs provide full coverage for prescription drugs more frequently than do traditional medical insurance plans. Industry experts estimate that by the turn of the century, 90% of Americans will have drug costs included in some kind of managed health care plan, and 60% of all outpatient pharmaceuticals will be purchased by managed care programs.

The responsibility for managing the provision of prescription drugs is often contracted out by the managed care organizations to PBMs. The activities of PBMs typically include managing insurance claims, negotiating volume discounts with drug manufacturers, and encouraging the use of less expensive generic substitutes. The management of prescription benefits is enhanced through the use of formularies and drug utilization reviews. Formularies are lists of drugs compiled by committees of pharmacists and physicians on behalf of a managed care organization. Member physicians of the managed care organization are then strongly encouraged to prescribe from this list whenever possible. Drug utilization reviews consist of analyzing physician prescribing patterns and patient usage. They can identify when a patient may be getting the wrong amount or kind of medicine and when a member physician is not prescribing from a formulary. Essentially, this amounts to an additional opportunity for managed care or PBM administrators to monitor costs and consolidate decision-making authority.

The key aspect of the shift to managed care is that the responsibility for payment is linked more tightly to decision making about the provision of health care services than it is in traditional indemnity insurance plans. The implications for drug manufacturers are far reaching. With prescription decision-making authority shifting away from doctors to managed care and PBM administrators, drug manufacturers' marketing strategies similarly will shift their focus from several hundred thousand doctors to a few thousand formulary and plan managers. This, in turn, will result in a dramatic reduction in the sales forces of pharmaceutical manufacturers.

Several other significant changes in industry structure are expected to occur. Many industry experts predict that managed care providers will rely on a single drug company to deliver all of its pharmaceutical products and services rather than negotiating with several drug companies. This will favor those firms with manufacturing, distribution, and prescription management capabilities. In addition, many experts believe that only a handful of pharmaceutical companies will exist on the international scene in a few years. They point to intense competition, lower profits, and a decrease in the number of new drugs in the "research pipeline" as contributing factors.


Merck & Company and Medco Containment Services Incorporated believe that a merger between the two firms will create a competitive advantage that will allow for their survival. Merck executives identify Medco's extensive database as the key factor motivating the merger. Medco maintains a computer profile of each of its 33 million customers, amounting to 26% of all people covered by a pharmaceutical benefit plan. Medco clients include 100 Fortune 500 companies, federal and state benefit plans, and 58 Blue Cross/Blue Shield groups and insurance companies.

Numerous opportunities exist for Merck to utilize the information contained in Medco's database. First, the database will allow Merck to identify prescriptions that could be switched from a competitor's drug to a Merck drug. Merck pharmacists will then suggest the switch to a patient's doctor. This prospect of increasing sales is enormous. Second, the database will allow Merck to identify patients who fail to refill prescriptions. The failure to refill needed prescriptions amounts to hundreds of millions of dollars in lost sales each year. Finally, Merck will be able to use Medco's computerized patient record system as a real-life laboratory with the goal of proving that some Merck drugs are worth the premium price charged. This will take place by identifying who takes what pill and combining that information with the patient's medical records. This might allow Merck to establish the supremacy of its products.

Additional benefits of the merger include $1 billion annual savings in redundant marketing operations and a reduction in Merck's sales force as a result of more precise marketing strategies brought about by Medco's database and the industry emphasis on marketing to plan managers instead of doctors. Merck & Company's acquisition of Medco Containment Services Incorporated is essentially an attempt to increase market share in an industry with decreasing prices by capitalizing on the most valuable asset in the pharmaceutical industry—information. It also is intended to increase its competitive position in the growing managed care arena by aligning itself with a PBM.

Merck & Company's strategy was quickly emulated when British drug maker SmithKline Beecham announced plans to acquire Diversified Pharmaceutical Services Incorporated, one of the four largest drug wholesalers in the United States, from United Healthcare for $2.3 billion, and Roche Holdings Limited reported that it planned to acquire Syntex Corporation. Also, in the summer of 1994, Eli Lilly and Company announced its intention to acquire PCS Health Systems from McKesson Corporation for $4 billion. These mergers were not only a reaction to the changing industry structure but caused the change to accelerate.


1. What was the major force driving this acquisition?

2. What is the role of prescription benefits management (PBM) companies?

3. What role was envisaged for the use of Medco's database?

4. What competitive reactions took place in response to Merck's acquisition of Medco?

This help will be used to as a guideline and will not be represented as my own work.


Solution Preview

NOTE: Please know that this serves as a guide to help you write the 8-10 page paper analysis required for your class. I have formatted this guide based on the four questions that you have listed.
1. What was the major force driving this acquisition?
Survival or the sustainability of Merck & Company and Medco Containment Services Incorporated is the major force driving this acquisition. By merging, these two companies are increasing their chances of staying relevant given the changing dynamics of the pharmaceutical industry.
By consolidating its supply chain, the merger with Medco is an example of a forward-vertical merger, Merck ensures that when the industry stabilizes after the disruptions resulting from the several changes in the industry structure, it will be able to offer a complete pharmaceutical system - the one of a few - including manufacturing, distribution, and prescription management capabilities.
With this merger, Merck ensures that it has a captive market for its products, and that Medco ensures that it will have a ready supply of cheap drugs to provide to its managed health care organizations clients.
2. What is the role of prescription benefits management (PBM) companies?
Prescription benefits management (PBM) companies like Medco Containment Services Incorporated consolidate and manage the provision of prescription drugs made by managed care organizations. Given this responsibility, PBMs then (as listed in the case) manage insurance claims in behalf of the managed health care organizations, negotiate volume discounts ...

Solution Summary

This solution of 988 words provides an analysis of Merck's Acquisition of Medco and answers question's concerning major forces in the acquisition, role of PBM companies, database role and competitive reactions in the acquisition. All references used are included.