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Merck Medco

In: Business and Management

Submitted By mohindera
Words 1795
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Executive Summary
RECOMMENDATION
My recommendation to the Board is to approve the merger with Medco. Medco is one of the top benefit management companies and with the right preparation prior to merger the downside of the merger can be minimized. The potential upside given industry trends and where it is headed are too great to ignore. Medco’s position in the market and success as a company, have proven it would be a valuable asset. The insight it can give Merck and the access to the market to increase share and give insight to Merck’s drug treatments will be invaluable.
MARKETING & SALES CONSIDERATIONS
Currently Merck has to send out its own reps to doctors where Medco does the same to doctors and companies. This will eliminate that area for Merck and result in a $1 billion annual savings in redundant marketing costs by a reduction of Merck’s sales force by using the marketing strategies of Medco’s database and ideology of marketing to plan managers as opposed to doctors.
OPERATERATIONAL CONSIDERATIONS
Medco’s database that allows Merck to identify prescriptions that can be switched from competitors to their brand will help increase market share while weakening competition. Merck pharmacists will be able to suggest these switches to the patient’s doctor.
FINANCIAL CONSIDERATIONS
Medco has about 33 million customers in the United States and manages 95 million prescriptions a year for government, unions, insurance firms and companies. Revenues for Medco were $2.2 billion.
OTHER FACTORS (REGULATORY ISSUES – HUMAN RESOURCES ISSUES – SYNERGY ISSUES)
Synergy between Merck and Medco could be achieved by IT integration, non-duplication of efforts and using Medco’s approach of working with plan managers instead of doctors to reduce costs of marketing.

Company Backgrounds
Merck & Co., Inc. (NYSE: MRK), dba Merck Sharp & Dohme, MSD outside the United States and Canada, is one of the largest pharmaceutical companies in the world. Merck headquarters is located in Whitehouse Station, New Jersey. The company was established in 1891 as the United States subsidiary of the German company now known as Merck KGaA. Merck & Co. was confiscated by the US government during World War I and subsequently established as an independent American company. It is currently one of the world's seven largest pharmaceutical companies by market capitalization and revenue. Merck discovers, develops, manufactures and markets a broad range of innovative products to improve human and animal health, directly and indirectly through its joint ventures. The products of Merck & Company include Antivenin (for the treatment of black widow spider bites), Cosopt (reduces intraocular pressure in people with glaucoma or ocular hypertension), Cozaar/Hyzaar (used to treat hypertension, to reduce the risk of strokes and to treat diabetic nephropathy), Crixivan (a protease inhibitor HIV medication), Fosamax (osteoporosis medication), Singulair (an asthma medication that blocks leukotrienes), Recombivax HB (a vaccine that protects against hepatitis B), Zocor (a cholesterol-lowering statin), and Zostavax (a vaccine for prevention of shingles in adults older than 60 years of age).
Medco Health Solutions, Inc. is an American managed health care company currently serving the needs of more than 65 million people. Medco provides pharmacy services for private and public employers, health plans, labor unions, government agencies, and individuals served by Medicare Part D Prescription Drug Plans. Medco was originally founded as National Pharmacies in 1983. In 1984, after an IPO, National Pharmacies became Medco Containment Services, LLC. In 1990. Wygod eliminated the vitamin business and built up the mail-order drug business. Although Medco was not the first mail-order prescription company, it was the first company that aggressively sold its services to large corporations, labor unions, and health plans. Through the computer network system Medco was able to gather information on consumer prescription drug spending and sell that information to the nation's largest health plan sponsors. This system forms the core competency of Medco (Datamonitor, 2004). Medco specialized in maintenance drugs for high blood pressure, arthritis, diabetes, and other chronic diseases. Patients still shopped at local pharmacies for antibiotics and other prescriptions needed for acute illnesses, but chronic ailments which called for regular drug therapy were increasingly being serviced by Medco and smaller mail-order companies. Medco claimed to save at least 20 percent on most prescriptions because it encouraged the use of generic drugs and it could negotiate healthy discounts from manufacturers.
Analysis
The two companies are both health care firms. Merck & Co. manufactures develops and manufactures drug related products. Medco as a health care retailer designs and manages prescription drug benefit plans to control plan sponsors costs. As part of its PBM services, Medco maintains drug formularies, which are listings, by therapeutic category, of ambulatory drug products that are approved for use by the U.S. Food & Drug Administration, and which are used by pharmacies, physicians, third-party payers, and other persons, to guide in the prescribing and dispensing of pharmaceuticals. Merck pharmaceutical products are included on Medco's formularies. Medco also provides other PBM services, including claims processing, drug utilization review, pharmacy network administration, mail service, and related services. Medco negotiates with pharmaceutical manufacturers, including Merck, concerning placement of drugs on Medco's formularies, rebates, discounts, prices to be paid for pharmaceutical products purchased pursuant to pharmacy benefit plans managed by Medco, and similar matters. Medco thereby influences the prices of pharmaceutical products and the availability of such products under the Medco pharmacy benefit plans.
Merck's strengths are in the medical, clinical, and sciences areas while Medco had strong relationships with employers, plan sponsor, and managed care organizations. Merck and Medco have critical and complementary skills to build their strategy looking forward. The Merck-Medco merger illustrates the importance of maintaining a diverse business portfolio when a company's primary business (drugs, in Merck's case) has a high cost structure. By eliminating the intermediary between the drug manufacturer and the consumer, Merck can realize increased profits.
Reasons why Merck should target a company for a merger and whether or not Medco would meet these criteria (M&A).
• Economies of Scale, ‘cut duplicate costs to improve profits’
• Market Share, ‘target has unique market position’, ‘access to new customer base’
• Synergy, ‘Complimentary skill sets’
• Eliminate competition
• Increase depth and diversity of product line
• Keeping opportunities from competitors
Economies of Scale in this instance won’t be in the way of increased or leveraged buying power, but, by eliminating duplicate costs. Currently Merck has to send out its own reps to doctors where Medco does the same to doctors and companies. This will eliminate that area for Merck and result in a $1 billion annual savings in redundant marketing costs by a reduction of Merck’s sales force by using the marketing strategies of Medco’s database and ideology of marketing to plan managers as opposed to doctors. This will open new marketing leverage for the Managed Care market. And that Medco’s marketing database will create new market expansion opportunities. It will aid in the current competitive environment we find ourselves in where other pharmaceutical manufacturers are also acquiring drug marketing companies like Medco.
Synergy between Merck and Medco could be achieved by IT integration, non-duplication of efforts and using Medco’s approach of working with plan managers instead of doctors to reduce costs of marketing.
Medco’s database that allows Merck to identify prescriptions that can be switched from competitors to their brand will help increase market share while weakening competition. Merck pharmacists will be able to suggest these switches to the patient’s doctor.
Merck’s product line can benefit as well. Medco’s database and computerized patient record system will be able to be used like a real-life laboratory. This will hopefully allow Merck to show proven results with their drugs and justify a premium price by identifying who takes what pill and referencing and combining the patient’s medical record information. By identifying what drugs are most and least effective Merck would be able to direct research and development funds more accurately and efficiently to the area most needed.
Noticing the growing industry of the managed care area Merck will secure a competitive position by merging with Medco a top PBM. This will give Merck an edge over competitors given this new emerging market. It will only be a matter of time till other drug makers align themselves with PBMs. By Merck being one of the first it will allow them to acquire one of the top PBMs with over 25% of the market share already prior to another.

RECOMMENDATION
Reasons to merge are the decreased cost of marketing saving and estimated $1 billion in annual sales and marketing with reduction of Merck’s sales force and Medco’s strategy of going through plan managers instead of doctors. Merck will gain the ability to increase market share using Medco’s database of 33 million patients and 26% of the people covered by a pharmaceutical benefit plan. Merck will also have access to Medco’s patient records database and by tracking prescriptions of competitors and making recommendation to doctors to change to Merck prescriptions will aid in acquiring market share.
The merger would also allow Merck the ability to track Merck’s prescriptions along with patient’s medical records to determine effectiveness of drugs and help to qualify any premiums charged for Merck’s drugs.
Areas of caution that Merck needs to take in the acquisition of Medco. Merck needs to ensure the corporate cultures are compatible. Merck also needs to ensure the integration of IT will be smooth as to make use of Medco’s database to achieve the desired synergy to yield the estimated $1 billion in savings annually. Lastly, Merck needs to ensure the bid of $6.6 billion is a fair bid and beneficial to Merck’s stockholders.
My recommendation to the Board is to approve the merger with Medco. Medco is one of the top benefit management companies and with the right preparation prior to merger the downside of the merger can be minimized. The potential upside given industry trends and where it is headed are too great to ignore. Medco’s position in the market and success as a company, have proven it would be a valuable asset. The insight it can give Merck and the access to the market to increase share and give insight to Merck’s drug treatments will be invaluable.
BIBLIOGRAPHY
Course book - Takeovers, Restructuring, and Corporate Governance, 4th Ed. Prentice Hall http://en.wikipedia.org/wiki/Merck_%26_Co. http://www.referenceforbusiness.com/history2/23/Merck-Co-Inc.html http://www.nytimes.com/1993/08/05/business/merck-s-big-gamble-on-a-merger.html?pagewanted=all&src=pm http://www.forbes.com/2002/01/29/0129merck.html http://www.fundinguniverse.com/company-histories/medco-containment-services-inc-history/ http://www.ftc.gov/opa/1998/08/merck.shtm http://www.bizjournals.com/philadelphia/stories/2002/01/28/daily15.html http://articles.philly.com/1993-07-29/business/25977798_1_merck-deal-merck-shares-mail-order-drug-firm

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