What are the reasons for your recommendation?
s largest drug manufacturer announced that it pl Show more On July 28 1993 Merck & Company then the worlds 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 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 124125marketing 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. BENEFITS OF THE ACQUISITION 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 Medcos 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 Medcos database. First the database will allow Merck to identify prescriptions that could be switched from a competitors drug to a Merck drug. Merck pharmacists will then suggest the switch to a patients 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 Medcos 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 patients 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 Mercks sales force as a result of more precise marketing strategies brought about by Medcos database and the industry emphasis on marketing to plan managers instead of doctors. Merck & Companys 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 industryinformation. It also is intended to increase its competitive position in the growing managed care arena by aligning itself with a PBM. Merck & Companys 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. QUESTIONS C5.1.1 What was the major force driving this acquisition? C5.1.2 What is the role of prescription benefits management (PBM) companies? C5.1.3 What role was envisaged for the use of Medcos database? C5.1.4 What competitive reactions took place in response to Mercks acquisition of Medco? You are the Chairman and CEO of Merck. Make a recommendation to the Board of Directors of Merck & Co. regarding this acquisition based on the recommendations of the three associates and your own analysis. You are the Chairman and Chief Executive Officer of Merck & Company and you will make the final yes or no recommendation to the Board of Directors of the company. You are listening to the advice of various department heads regarding this acquisition. Based on your evaluations and additional analysis of the recommendations of your three associates make your recommendation to the Board of Directors. What will you recommend? Yes? No? Yes with some conditions? What are the reasons for your recommendation? Show less
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