MERCK ACQUISITION OF MEDCO

Thomas Banks
F561 Mergers & Acquisitions
Professor Watson
May 26, 2013

Introduction
On July 28, 1993, Merck & Company, then the world’s 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
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