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Neuroscience: Reward Mechanisms

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Initial Market Reaction to the Deal

After the deal announcement on July 28th, 1993, the market obviously reacted to both side of the acquisition.

Merck Side

At the announcement of the deal, the stock price of Merck fell from $17.39 to $13.06 (see graph below).

At the time, the deal was not supposed to be easily digested by Merck investors. The main reason for this market reaction was the risk of antitrust review. With $9.7 billion in 1992 revenues, Merck has about 10% of the fragmented American drug market. Medco, with $1.8 billion in sales in the fiscal year that ended June 30, 1992, has about half of the mail-order drug business and 22% of those eligible for employer-financed drug benefits.

Medco indeed virtually counted every major drugmaker among its suppliers, among which several were likely to object to Merck’s influence, as a matter of conflict of interest. Even if that matter would be cleared up by Merck, some of its competitors privately already took the decision to drop or cut back their dealings with Medco in case the deal was settled and thus look for alternative retailers, either as clients or as potential targets to perform vertical integration.

As Wygod (Medco’s Chairman at the time) said, “some manufacturers are going to look at this as a strong competitive move, and they will perhaps tie up with other pharmacy management companies."

Moreover, drug industry specialists insisted on the fact that the customer base of Medco would not be crucial to help efforts on research and marketing new products, since data services among which PMSI already provide similarly useful information for a far more reasonable price than the $6 billon paid for the deal.

Medco Side
On the other hand, at the announcement of the deal, the target’s stock price rose from $27.75 to $36.95 (see graph below), showing that the shareholders

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