Fi561 Case Study: Merck

Topics: Mergers and acquisitions, Due diligence Pages: 7 (2456 words) Published: July 24, 2011
Case Study: Merck Acquisition of Medco
Professor Daniel Weiss
January 23, 2011

Case Study: Merck Acquisition of Medco


The purpose of this case study is to determine whether it would be beneficial to merge Merck Corporation with Medco Containment Services Incorporated. The merger and acquisition between the world’s largest drug manufacturer and the largest prescription benefits management company (PBM) and marketer of mail order medicines in the United States would result in a successful campaign to take over the drug industry if handled appropriately. As Chairman and CEO of Merck Corporation, I have to consider all sides of the arguments, financially, marketing and cultural wise and come to a conclusion as to whether this merger would be a good idea for the company. Like any other investment and merger, there are risks, and I have to decide what would be best in the interest of this company. The details as to whether the decision to acquire or not acquire Medco will be described in this paper. Along with data that helps make that final decision.

There are a few things one must take into account before making a decision. You have to look at the long term run, whether or not the merger and acquisition will be successful. You also have to take synergy into account; it is the most important reason why there are a lot of mergers and acquisitions. Synergy would be when two companies join forces to create additional value and cut costs that would be unnecessary. You would also have to take into account changes in forces, like technological changes, economies of scales, type of merger you want to have and the process it takes to make a decision especially when it comes to a merger and acquisition worth millions if not billions of dollars. In the case of Merck and Medco, the role of prescription benefits management companies are to “manage the provision of prescription drugs which include managing insurance claims, negotiating volume discounts with drug manufacturers and encouraging the use of less expensive generic substitutes” ( Weston, Mitchell and Mulherin, 2004, p. 124). The management is enhanced through lists of drugs that are compiled by committees or pharmacists and physicians. With Medco’s database, Merck will be able to have an advantage; they’ll be able to identify prescriptions that could be switched from that of a competitor’s to Merck. The database will also allow Merck to identify patients who fail to refill prescriptions. Medco’s patient record system will also be used a lab with the goal of proving that some of Merck drugs are worth the price.

As was stated earlier, there are definitely a few things to consider before the final recommendation is made. We at Merck want to expand and create a competitive advantage that will allow for longer life and survival of the company. We know that managed care is a growing industry and will keep expanding over the years. It has been estimated that by the turn of the century, 90% of Americans will have drug costs that include some kind of managed health care plan. It’s also been said that 60% of all outpatient medications will be purchased by managed care programs. Some of the responsibilities that PBM companies will have when contracted will be the management of insurance claims, negotiations of discounts with drug manufacturers and managing the lists of drugs that are gathered by pharmacists and physician committees.

The benefits of merging with Medco, which is the largest PBM Company and marketer of mail order medicines in the United States, are convincing to go ahead with this acquisition. By merging with Medco, Merck will have a strong competitive advantage in the drug industry. There are plenty of opportunities that are waiting for Merck if we use the database that Medco has accordingly. That database will help identify possible prescriptions that can be switched to our drugs, when this happens the pharmacists will be suggesting doctors...
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