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Alternative #3. Creating new capabilities may also be obtained through a spinout organization. Merck realizes that its resources and capabilities are insufficient to rapidly move into the pharmacy management area. Most of its resources are devoted to drug research and development. Christensen states that spinout organizations are appropriate when a separate organization is required when the mainstream organization's values are incapable of devoting resources on the new processes or innovation. 6 Furthermore, he states that spinouts should only be used when a threatening disruptive technology requires a different cost structure or when the current size of the opportunity is insignificant relative to the growth needs of the main organizations. Neither of these criteria is relevant to Merck. Services provided by PBM organizations are not disruptive to drug manufacturers. They may be considered as value-added to drug manufacturers. In addition, the size of the opportunity by acquiring a PBM can be significant to a drug manufacturer. Recommendation. It is recommended that Merck select Alternative #1, which is to acquire Medco. Acquiring Medco and its competencies makes the most sense for Merck. According to Merck's 1993 annual reports, its vision is to create the world's first coordinated pharmaceutical care company that will optimize discovery, development, selection, delivery, utilization, and value of prescription drugs. 2 The quickest and most effective manner in which to achieve this vision is through a PBM acquisition. The internal development of pharmacy benefit competencies would be very difficult and time-consuming for Merck. When making its decision, Merck should not view moving into the pharmacy benefit management area as enhancing existing competencies, but rather expanding into a different business within the pharmaceutical industry in which new competencies will be needed. Based on the aforementioned quote by Grant that
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As applied to pharmaceutical company-PBM mergers, the theory suggests that an integrated manufacturer might charge a rival PBM more for its unique products than it charges its own PBM, thereby placing rival PBMs at a competitive disadvantage. A review of the early market responses to the manufacturer-PBM mergers indicates the "realignment" theory, so far, best explains the effect of vertical integration. Independence may even be a benefit. Caremark, an independent PBM which has supply arrangements with four major drug manufacturers, recently renewed a pharmacy contract covering 150,000 lives when the employer "ruled out two other competing vendors - DPS and Medco - because of their alliance with drug makers." Robert Pfotenhauer, former chief executive officer of Pharmacy Direct Network (the pharmacy-owned PBM), said PDN "has an opportunity to help level the playing field and ensure that there will be fair competition" and is predicted to be "a significant entity that will have some fairly immediate impact on the prescription benefit management world." Bill Jenison, president of Pharmacy Gold, said the pharmaceutical company-PBM mergers will allow his independent PBM to "leverage more enrollment because of our clinical objectivity and independence." With existing PBMs prepared to handle increased market share, and new PBMs forming, the arguments that the manufacturer-PBM mergers increase the barriers to entry into the industry, or foreclose unique products or services, are weakened. Additionally, no pharmaceutical company makes every drug on a formulary list, so the possibility of strict foreclosure is diminished because the PBMs must maintain supplier relationships with other manufacturers. A different issue arises from these continued supplier relationships concerning more subtle ways in which
As applied to pharmaceutical company-PBM mergers, the theory suggests that an integrated manufacturer might charge a rival PBM more for its unique products than it charges its own PBM, thereby placing rival PBMs at a competitive disadvantage. A review of the early market responses to the manufacturer-PBM mergers indicates the "realignment" theory, so far, best explains the effect of vertical integration. Independence may even be a benefit. Caremark, an independent PBM which has supply arrangements with four major drug manufacturers, recently renewed a pharmacy contract covering 150,000 lives when the employer "ruled out two other competing vendors - DPS and Medco - because of their alliance with drug makers." Robert Pfotenhauer, former chief executive officer of Pharmacy Direct Network (the pharmacy-owned PBM), said PDN "has an opportunity to help level the playing field and ensure that there will be fair competition" and is predicted to be "a significant entity that will have some fairly immediate impact on the prescription benefit management world." Bill Jenison, president of Pharmacy Gold, said the pharmaceutical company-PBM mergers will allow his independent PBM to "leverage more enrollment because of our clinical objectivity and independence." With existing PBMs prepared to handle increased market share, and new PBMs forming, the arguments that the manufacturer-PBM mergers increase the barriers to entry into the industry, or foreclose unique products or services, are weakened. Additionally, no pharmaceutical company makes every drug on a formulary list, so the possibility of strict foreclosure is diminished because the PBMs must maintain supplier relationships with other manufacturers. A different issue arises from these continued supplier relationships concerning more subtle ways in which