Merck Acquisition of Medco Study and Analysis

Corporate mergers and acquisitions (M&A) have become popular across the globe during the last two decades due to globalization, liberalization, technological developments, and competitive business environment (Fisher & Siburg, 2009). The synergistic gains from M&A may result from efficient management, economies of scale, profitable use of assets, exploitation of market power, and the use of complementary resources (Mitchell et al, 2004). Theoretically it is assumed that mergers improve the performance of the acquiring firm due to increased market share and synergy impact. This paper reviews the acquisition of Medco Medco Containment Services, Inc. (Medco) by Merck & Company (Merck) and cites reasons for acquisition of Medco. Merck’s acquisition of Medco represents a $6.6 billion bet on where the future of the pharmaceutical industry lies (Nichols, 1994).

In today’s managed-care environment, Vagelos (CEO of Merck in 1993) argues, the company that best controls the information flow from doctor to patient to pharmacist to plan sponsor has the greatest chance of succeeding. Medco has information on 38 million patients, which allows Merck to learn a lot more about how its drugs are prescribed and used and, ultimately, how effective they are in fighting disease. Owning Medco can also help Merck increase its market share in an industry in which no company has more than 5% (Nichols, 1994). Medco pharmacists make about 2 million phone calls a year to doctors, and when it’s appropriate medically, Merck can use these calls to ask physicians to choose Merck products.

Merck stands to benefit from acquisition of Merck. AN OVERVIEW Pharmaceutical Market in U.S.A: The United States is the world’s largest market for pharmaceuticals and the world leader in biopharmaceutical research. According to the Pharmaceutical Research and Manufacturers Association (PhRMA), U.S. firms conduct the majority of the world’s research and development in pharmaceuticals and hold the intellectual property rights on most new medicines. The biopharmaceutical pipeline also has over 5,000 new medicines currently in development around the world with approximately 3,400 compounds currently being studied in the United States – more than in any other region around the world. More than 810,000 people work in the biopharmaceutical industry in the United States as of 2012, and the industry supports a total of nearly 3.4 million jobs across the U.S. economy, including jobs directly in biopharmaceutical companies, jobs with vendor companies in the broad biopharmaceutical supply chain, and jobs created by the economic activity of the biopharmaceutical industry workforce.

The biopharmaceutical sector is one of the most research and development (R&D)-intensive in the United States, with companies investing more than 10 times the amount of R&D per employee than all manufacturing industries overall. The U.S. market is the world’s largest free-pricing market for pharmaceuticals and has a favorable patent and regulatory environment. Product success is largely based on competition in product quality, safety and efficacy and price. U.S. government support of biomedical research, along with its unparalleled scientific and research base and innovative biotechnology sector, make the U.S. market the preferred home for growth in the pharmaceutical industry.

The pharmaceutical market in general is consisting of many stockholders and it consist of many layers and markets; the primary market where the producing companies is selling the products to pharmacies and convincing doctors and health care companies to subscribe their products to the patients, this what we call the secondary market. The industry sub-sector consists of brand name drugs, genetic products, over-the-counter medication, animal health and biotech. The United States has the largest pharmaceutical revenue in the world. This industry has grown greatly within the past decade with companies merging such as Schering Plough/Merck, Pfizer/Wyeth, etc. The majority of today’s pharmaceutical companies were founded in 19th and beginning of the 20th century. Essential discoveries such as insulin and penicillin became mass-manufactured and distributed.

In the 1950s legislation was created to test and approve drugs which required approved labeling. In early 1900s, the US Food and Drug Administration (FDA) was formed to protect and promote public health through regulations and overseeing prescriptions and over the counter drugs. They ensure that drugs meet all requirements prior to being approved for consumers. Companies background: Merck & CO Merck is a global research-driven pharmaceutical products and services company that discovers, develops, manufactures and markets a broad range of innovative products to improve human and animal health, directly and through its joint ventures. Mercks core values are driven by a desire to improve life, achieve scientific excellence, operate with the highest standards of integrity, expand access to our products and employ a diverse workforce that values collaboration.

Merck was founded in 1887 when German chemist Theodore Weicker came to the US to set up a branch of German firm E. Merck AG. In 1933 the company opened its first research lab. Merck & Co. has grown dramatically due to its successful products. The robust pipeline indicates that they will have a prosperous future for many years to come. It currently holds a total of one hundred and five (105) active products in the open market. It also has developed seven new products since 2006, and with the acquisition of Schering Plough, it tripled their product portfolio. Merck’s bread and butter comes from their product innovation (R&D) and acquisitions. Without new products coming out into the market the company can’t continue having the success that it has obtained throughout the years.

Medco Cost Containment Services Incorporated: The Company was incorporated in the State of New York on February 15, 1989, under the name “American Nisshin Insurance Company”, a property and casualty insurance corporation. The Company received its licensing authority from New York State on July 15, 1989, and commenced writing business on July 31, 1989. Medco is a leading healthcare company that is pioneering the world’s most advanced pharmacy. Medco provides clinically driven pharmacy services designed to improve the quality of care and lower total healthcare costs for private and public employers, health plans, labor unions and government agencies of all sizes, and for individuals served by Medicare Part D Prescription Drug Plans. Medco provides online pharmacy services as well as prescription insurance services to companies and individuals.

They also help streamline and design leading edge pharmacy services. and here are some of their activities such as Benefit design and management, Pharmacy network management, Specialty pharmacy solutions, diabetes management, home healthcare product and Medicare specialists, Clinical management, personalized medicine, retiree solutions, and optimal health. This market is very important to Merck & co for it contains huge data base of pharmacies, Patients witch represents the main components of the secondary market for any pharmaceutical company. The responsibility for managing the provision of prescription drugs is often contracted out by the managed care organizations to a prescription benefits management company (PBM); these companies 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. 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 sales forces of pharmaceutical manufacturers. this change will make this market a demandable target to pharmaceutical manufacturers, which is clear in the mergers and acquisitions going on in this market. Several other significant changes in this market structure are expected to happen. Many market experts expect that managed care provider is going to depend on one drug company to deliver all of its pharmaceutical products and services instead of dealing with several drug companies. of course this will give a competitive advantages to those companies with regards to manufacturing, distribution, and prescription management capabilities. the following is the opinion of some of the market leaders published in NY times, “

In a few years, there will be only a handful of big drug makers left in the world because of falling drug profits, murderous competition and a sparse research pipeline of new drugs, predicts Mr. Wygod, chairman of Medco Containment Services, a drug discount and mail-order concern.”. His views are widely shared. “The rest of the industry is going to be one long, hyphenated name,” Henry A. McKinnell, a Pfizer Inc. executive vice president, said only half jokingly. Larry Feinberg, a partner at Oracle Investors, a money managing firm, said: “Five years from now there will only be four or five drug companies left,” compared with several dozen big companies now. “Each will be a broad provider of 100 percent of drug needs,” he continued.

The decision of acquisition should be studied and analyzed from all aspects and taken in response to the new threat of managed-care companies. now other companies such as Eli Lilly & Co. and SmithKline Beecham subsequently are looking to acquired pharmacy benefits management firms of their own. Merck & Co is planning to make an acquisition of Medco, which is from the previously mentioned information seems to be a good decision, this vertical integration is expected to benefit both companies and create many competitive advantages to help in growing their market share and maximize shareholders earnings. Merck & Company and Medco Containment Services Incorporated Executives have various point of views regarding this acquisition, some of Merck executives identify Medco’s extensive database as the key factor motivating this acquisition.

Medco maintain a computer profile of 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. This 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 database as a real life laboratory with goal of providing that some Merck drugs are worth the premium charged.

Additional benefits of the mergers include $ 1 billion annual savings in redundant marketing operations and reductions in sales force and selling and marketing expenses. this merger is an attempt to increase market share in an industry with decreasing prices by capitalizing on the most valuable asset in the pharmaceutical industry which is information. it is worth mentioning that there is a laying risk in those benefits, which is the regulatory acts that maybe taken against such acts as using and enforcing patients database to the favorite of Merck company, which may lead to legal suit cases. Merck directors team have the following point of views regarding the acquisitions, Merck COO mentioned that he is concerned about synergy and integration issues between our highly research-oriented development of pharmaceuticals here at Merck, and a prescription medicine marketing company like Medco.

I am concerned that the cultures and operations of the two companies aren’t going to mix well, and that this deal would result in an expensive failure. Merck’s Executive Vice President, Sales & Marketing mentioned that he is all for this acquisition! It will open new marketing leverage opportunities in the Managed Care market. Medco’s marketing database will create market expansion opportunities. This is the perfect answer for the current competitive environment, where other pharmaceutical manufacturers are acquiring drug marketing companies. Merck’s CFO mentioned that she wants to make sure that Merck pays a premium for Medco at $6.6 billion dollars. The combination of the two companies will immediately result in increase in Earnings Per Share for the combination vs. Merck as a stand- alone company.

Although, I’m still concerned about continuing the growth of the stock price of Merck after the target company is acquired. We should look forward to confirm that we are going to have an efficient synergy with Medco. in many articles and news about this acquisition there are different point of views, in Forbs web it was mentioned that” it won’t stop many analysts from speculating that the real purpose of the Medco divestment is to create a massive war chest that Merck will use to buy new drugs–or perhaps to merge with another drug firm like Schering-Plough , with which it co-promotes several drugs, or Eli Lilly .” and it was also mentioned that “One potential problem brought up on the call: Many other players in the pharmaceutical benefits field are also in the higher-margin business of distributing injectable drugs as well as pills.

Medco is not in this business, a fact that could further crimp its earnings.” so from my point of view, I am concerned with the speed we are going to perform this acquisition and after all the previously mentioned I see a great opportunity of synergies and benefits, but we need to further investigate the risks laying in this acquisition, then we will be able to take the efficient decision.

References
http://selectusa.commerce.gov/industry-snapshots/pharmaceutical-and-biotech-industries-united-states https://sites.google.com/a/email.vccs.edu/bus100lshepard/home/about-medco-health-solutions http://www.merck.com/about/our-history/home.html http://merck-research-paper.blogspot.com/ http://www.scribd.com/doc/44578271/Case-Analysis http://www.nytimes.com/1993/08/05/business/merck-s-big-gamble-on-a-merger.html Takeovers, Restructuring and Corporate Governance, Fourth Edition By J. Fred Weston, Mark L. Michell, and J. Harold Mulherin