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Merck Acquisition Of Medco Essay

903 words - 4 pages

You Decide: Case 5.1 Merck Acquisition of Medco

You Decide: Case 5.1 Merck Acquisition of Medco
When Merck & Company announced plans to acquire Medco Containment Services Incorporated in July, 1993, it signified the changes taking place in the pharmaceuticals industry. At the time, Merck was the world’s largest drug manufacturer and Medco was the leader in prescription benefits management (PBM). The responsibility for managing prescription drug provisions are increasingly contracted out to PBMs who, in turn, manage claims, negotiate discounts with drug manufacturers, and push generics. One could conclude that the prescription decision making process has shifted away from the ...view middle of the document...

Merck will continue to operate under the direction of a strong top leadership.
The Executive VP of Sales and Marketing has voiced that he is in favor of the merger. This is an opportunity to gain market share in the Managed Care Market through Medco’s extensive customer database and will create market expansion. As seen in the chart below, pharmaceutical manufacturers, such as Merck, derive most of their revenue from wholesalers. Merging with a PBM will give us the expanded market share we need (http://keionline.org/, 2002).

As the graph below indicates, merging with Medco is the key to Merck’s success in the pharmaceutical industry at a time when competing manufacturers are acquiring drug marketing companies (Rasmussen, June).

Also in favor of the acquisition is the CFO. In her analysis, Merck should pay a premium for Medco at $6.6 billion. The combination of the two companies will create an immediate increase in earnings per share. However, she is concerned that the continuing stock price growth after the acquisition may not be sustainable. The CFO’s concerns are validated as Goldman Sachs analysts anticipate an 8% - 9% dilution in 1994 and a 4% - 5% dilution in 1995. Analysis shows that Merck should reach a break-even in 1996 (Weber & Shoretz, Augu).
In this vertical merger, Merck will be eliminating the middle man. For Merck, acquiring Medco gives primary access to the largest pharmaceutical distributor with the largest mail-order operation. Medco currently has access to 90% of U.S. pharmacies. Medco receives access to Merck’s products and a tremendous market presence. With this merger, Merck will retain its status in the pharmaceutical industry, as well as expand into the managed care services. This is evident in the graph below.

Impact of Acquisition
With acquiring...

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