Sample Case Study On Merck-Medco Merger

When Merck purchased the Medco, a PMB, for $6 billion, chairman and chief executive at the time for Merck described the move as an “aggressive but carefully considered strategic move to keep Merck close to patients and customers in a rapidly changing and highly competitive health-care market” (Uhlman, 1993). PBMs are third party administrators of prescriptions drug programs that historically were independent of other facets of the health care system, such as pharmaceutical companies. Historically, the drug companies developed new drugs, doctors prescribed them, and PBM were third party administrations of prescription drug programs (Harvard Business School, 1998). This represented a way for Merck to keep its medicines close to the consumers of the medicine.
This merger occurred at a time when mergers of other companies was common, as companies used the newfound technologies to further integrate with each other to make themselves harder to compete against. People took note when this occurred in the healthcare industry, since while the industry ostensibly exists in order to help people with their health problems, like any capitalistic industry what drives it mostly is a profit margin. So Merck’s acquisition of Medco was part of a bid in order to keep itself healthy and profitable as a company. While the relationship between pharmaceutical company products and consumers is traditionally one in which a doctor is the third party that the pharmaceutical company lands with the buy-in of the doctor. The merger of pharmaceuticals and PBMs represents a further way to efficiently deliver (sell) the medicines developed by a particular pharmaceutical company such as Medco.
The merger makes sense because in 1990s were a time that the health care industry underwent a rapid move towards vertical “integration” of different function to “achieve greater efficiencies” (Garret, 2008). From a profit perspective, there is not doubt that these mergers are a good move. It keeps the company producing the drugs close to a way to sell the drugs. But there are risks that border ethical business considerations at this point. Allen Garret points out “Most concerns have focused on the potential of these mergers to be anticompetitive under the antitrust laws” (Garret, 2008). That is a concern for any business, but with companies producing life-saving medicines, it is one of particular concern, since the health care industry like any industry can be blinded by efficiencies and profit margins and forget that it’s overall mission is one of saving people’s lives.
Looking solely at both of the business, the merger made sense, it it represented a period where such a merger made sense to all the big pharmaceutical companies and all the major players acquired a PBM as part of their business. Since PBM typically supplied products to wholesalers, chain and independent pharmacy retailers, by owning the middle man, Merck could count on increased profitability for it’s sales of prescription medications (Harvard Business School, 1998). A PBM’s goal is to reduce cost and optimize the use of medications, while maintaining a high quality of drugs for patients who need them.
In theory, this merger could lead to cheaper drugs for patients, better access to better drugs, and a more streamlined system where information can be easily shared between the PBM and the pharmaceutical company since they were part of the same institution. What Merck gets from Medco is a distribution arm in order to get its drugs efficiently into the market where they are needed. What Medco gets from Merck is a direct relationship to a producer of the drugs, which it supplies.
One of the disadvantages of these mergers falls to consumers, who now have to wonder whether or not these companies are driven to help them with their health problems or whether they exist to profit from them. This is one of the enduring problems with the healthcare industry. One central concern with PBMs in recent years has been transparency. Pharmavail writes, “Continuous growth in pharmacy expenditures, and unsatisfactory levels of customer service and support has also added to the current distrust.”
A vertical integration makes sense because of the similarity of the businesses. They both service different steps within the process of drugs coming form the developers to the distributors. A related example of a merger of this sort in which a vertical integration makes the most sense was when United Airlines acquired Hertz car rental and Westin Hotels in order to hit all the steps in which profit could be derived from a traveler. (Chatterjee, 2007). A vertical integration is necessary to fully capitalize on these benefits, and allow for each arm of the business to be part of the overall business strategy. This is coupled with the ethical concerns of if such a business structure is the best paradigm for patients who ultimately have the most to lose or benefit from a health care system, which exists in order to provide them with live-saving care and medicines. The pharmaceutical industry is frequently in the uses for business moves made for profit, but not for increased care.

References:

Merck-Medco: Vertical Integration in the Pharmaceutical Industry. Harvard Business School. (1998).
Chatterjee, S. (n.d.). Why is synergy so difficult in mergers of related businesses? Retrieved February 21, 2015, from http://karhen.home.xs4all.nl/Papers/M&A/Chatterjee (2007).pdf
Merck Will Buy Major Manager Of Drug Benefits It Will Acquire Medco Containment For $6 Billion. Medco's Mission Is To Hold Down Drug Prices. (1993, July 29). Retrieved February 21, 2015, from http://articles.philly.com/1993-07-29/business/25977798_1_merck-deal-merck-shares-mail-order-drug-firm
The New PBM: PBMs step up as leaders call for true transparency. (n.d.). Retrieved February 21, 2015, from https://www.pharmavail.com/news/the_new_pbm_pbms_step_up_as_leaders_call_for_true_transparency/
What's Driving the Vertical Integration. (n.d.). Retrieved February 21, 2015, from http://corporate.findlaw.com/law-library/what-s-driving-the-vertical-integration.html