Merck Acquisition of Medco Essay

4747 Words Jun 23rd, 2013 19 Pages
MERCK ACQUISITION OF MEDCO

Thomas Banks
F561 Mergers & Acquisitions
Professor Watson
May 26, 2013

Introduction
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. GROWTH IN MANAGED CARE
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.
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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

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