Case Analysis - "Merck-Medco" Maureen Hergert MGT 362 - SPRING 2004 Professor Steven Francis Case Analysis

- "MerckMedco" March 7, 2004 Introduction. Merck & Company (Merck) was a pharmaceutical researcher and manufacturer while Medco Cost Containment Services, Inc. (Medco) was a pharmacy benefit manager (PBM). On November 18, 1993, Merck purchased Medco for $6.6 billion. Immediately after the merger, Medco operated as a subsidiary of Merck. In 1994, MerckMedco was formed. 2 Grant states that corporate strategy involves decisions that define the scope of the firm. In addition, he states the importance of vertical integration as it has caused companies to redesign their value chains within their organizational boundaries. 1 The acquisition of Medco by Merck is an example of Merck expanding its organizational boundaries while at the same time adding value. Merck added value to its operations by purchasing Medco. Pharmaceutical companies operated in a relatively stable environment that was characterized by solid profits and minimal pressure. Different organizations whose processes and values are a close match with the new task. * Try to change the processes and values of the current organization. * Separate out an independent organization and develop within it the new processes and values that are required to solve the new problem. 6 These alternatives and their ramifications are discussed below. Alternative #1. Acquiring an organization with the competency of pharmacy management to add to Merck's value chain is an option. This option is attractive due to short-circuiting the process of developing new, but time-consuming processes. Over the past few years, there has been increasing pressure to expedite the drug approval process and for manufacturers to increase the yield from their research and development activities. Taking into account these pressures and Merck's primary business being drug manufacturing, the acquisition of a PBM will be the quickest and most effective manner in which to acquire pharmacy management competencies. Yet, acquiring companies face difficulties in acquisitions, such as the integration of the acquiree's capabilities with its own. Alternative #2. Rather than acquiring or buying the pharmaceutical benefit management competencies of Medco, developing individual competencies, expansion of research and development, and establishment of closer relationships to customers is an option for Merck to consider. Grant says, " approach to capability development is to develop the human resources required for a particular capability." Yet, he states that developing human resource competencies can be effective in maintaining and developing existing competencies, but is limited in forming new capabilities. 1 Due to the highly competitive and time-to-market issues of new drugs, this option is not advisable for Merck. Development of new drugs and getting them to market is critical for remaining competitive in

6 Furthermore. and value of prescription drugs. Acquiring Medco and its competencies makes the most sense for Merck. It is recommended that Merck select Alternative #1. Neither of these criteria is relevant to Merck. Medco Health Solutions is considered one the top pharmacy benefit management companies in the US. Merck realizes that its resources and capabilities are insufficient to rapidly move into the pharmacy management area. Merck should not view moving into the pharmacy benefit management area as enhancing existing competencies. Merck should not use Alternative #3. it is not advisable to use Alternative #2. Merck's strengths were in the medical. According to Merck's 1993 annual reports. The case study states that despite the initial plans to integrate Merck and Medco upon the acquisition. They may be considered as value-added to drug manufacturers. Services provided by PBM organizations are not disruptive to drug manufacturers.the pharmaceutical industry. The new CEO says. Recommendation. plan sponsor. Conclusion. Based on the criteria presented by Christensen on when to use spinouts. and sciences areas while Medco had strong relationships with employers. The company assists health plans in . delivery. Creating new capabilities may also be obtained through a spinout organization. which is to acquire Medco. "Therefore. its vision is to create the world's first coordinated pharmaceutical care company that will optimize discovery. and managed care organizations. utilization. Alternative #3. 2 The quickest and most effective manner in which to achieve this vision is through a PBM acquisition. Based on the aforementioned quote by Grant that internally developing new human resource competencies for new capabilities is limiting. In addition. he states that spinouts should only be used when a threatening disruptive technology requires a different cost structure or when the current size of the opportunity is insignificant relative to the growth needs of the main organizations. at Merck and Medco we had critical and complementary skills to build our strategy looking forward. which is now named Medco Health Solutions. Specifically. 2 In August 2003. When making its decision. development. It currently serves about 65 million members. it states that management decided to preserve both cultures. Most of its resources are devoted to drug research and development. but rather expanding into a different business within the pharmaceutical industry in which new competencies will be needed. the companies remained independent. selection. clinical. the size of the opportunity by acquiring a PBM can be significant to a drug manufacturer. Christensen states that spinout organizations are appropriate when a separate organization is required when the mainstream organization's values are incapable of devoting resources on the new processes or innovation. Merck-Medco announced the spinout of Medco. The internal development of pharmacy benefit competencies would be very difficult and time-consuming for Merck.

Fourth Edition. HMOs. and last year. or the company's Internet pharmacy.M." 7 References 1 Grant. As a subsidiary of Merck. Gilmartin. the acquisition of Medco Health by Merck has been highly successful. We believe that by establishing Merck and Medco Health as two separate companies. 1. the market now has the ability to value each entity as 'pure plays' in their respective industries. Applications.. research and development in the pharmaceutical industry. In this way. we will enhance the potential for success of both businesses and. the Medco acquisition was beneficial for both companies. and federal employees. government-imposed price controls on the entire drug industry products are not likely to have the long-term desired effect that the government would like. This is because of the high cost of bringing new drugs to market. or at least radically constrict. Medco Health Solutions processes nearly 550 million prescriptions per year for clients that include unions.K. since the price controls would affect drugs already on the market and would be based on current (or recent) prices. On the other hand. R. price controls would eliminate medical rationing based only on economics and make more drugs available to more individuals. providing integrated prescription health care to 62 million Americans. increase shareholder value. "With the spin-off. the supply of drugs is unlikely to be affected. a mailorder program. insurance companies. corporations. Contemporary Strategy Analysis: Concepts.2 billion in 1992 to $33 billion in 2002.000 pharmacies. Pharmaceutical companies not only must pay for the development . (2002). 5 In retrospect. (1998). Medco Health grew to become the nation's leading pharmacy benefits management (PBM) company. & Bell. President and Chief Executive Officer Raymond V. Medco Health increased revenues from $2. Merck and Medco Health have enjoyed 10 years of growth and success. M. filled or processed approximately 548 million prescriptions. Patients may fill their prescriptions through a network of 60. V. MA: Blackwell Publishers Ltd.. Price controls imposed by the government would have the effect of making pharmaceuticals available to more consumers. While in the short-term.managing drug costs by negotiating rebates with pharmaceutical companies and processing claims. as a result. Malden. the long-term effect would be to shut down. Its website reports the following: Together. Merck-Medco: Vertical Integration in the Pharmaceutical . Techniques. particularly those in lower income brackets who either cannot afford expensive drugs or who lack insurance to pay for these drugs. 2 Rangan." said Merck Chairman. By all measures.

However. The reasons for not introducing a drug can be many. This is because the rumor of a takeover would drive up the price of the stock in anticipation of the takeover offer. The integration of pharmaceutical manufacturers and pharmacy benefit management firms (PBMs) has been the subject of criticism by some private groups. Current Quaker stockholders and speculators would benefit during the time that it takes to prove a takeover rumor false. including pharmacy associations. In this way. A market economist would argue that price controls are not necessary because the drug companies will continue to find ways to increase their profits without necessarily increasing prices. Merck was able to realize increased profits. and those who already own stock could sell it at a profit. 5. then sell their shares shortly after (and before the rumor is proved fal The health care industry of the 1990s is moving rapidly toward "integration" of various functions to achieve greater efficiencies. Most concerns have focused on the potential of these mergers to be anticompetitive under the antitrust laws. but also the development costs of drugs which are never introduced to the public. Restricting the prices that companies can charge for drugs would r to price controls since the drug companies will be viewed as less greedy by the public at large. Companies involved in the delivery of health care are trying different combinations and alliances in an effort to control health care costs while taking advantage of the synergies possible with new technologies. there is evidence that what's behind the integration is an effort by . Speculators would be able to purchase the stock immediately after the rumor begins circulating. The Merck-Medco merger illustrates the importance of maintaining a diverse business portfolio when a company's primary business (drugs. and scrutiny by government agencies. in Merck's case) has a high cost structure. notably the Federal Trade Commission (FTC). Quaker/Snapple Case 1. but generally are attributable to the drug failing to pass the rigorous FDA approval process. By eliminating the intermediary between the drug manufacturer and the consumer. the public would be willing to accept fewer controls on the drug companies if they perceive that the companies are co-operating with regulators.costs of drugs which are actually introduced to the market (and for which the patent life gives the companies some protection before the drugs are issued in generic form).

while the PBMs arranged large volume purchases of drugs and compiled patient information for managed care systems. was delayed by an FTC review of the deal. of PCS Health Systems by Eli Lilly & Co. which condemns mergers whose effect "may be substantially to lessen competition. agreed to buy Diversified Pharmaceutical Services last May for $2. from 9.C.5% in 1989 to 3. and are expected to include more than 200 million by the end of the decade. PBMs encourage physicians to prescribe more cost-effective drugs. Merck & Co. PBMs presently cover about 120 million lives. The proposed consent decree requires that Lilly-PCS maintain an open formulary and restricts the exchange of competitive information between Lilly and PCS. which it had previously approved. for $4 billion. Manufacturers produced and marketed the drugs. acquired Medco Containment Services for $6. The acquisitions of PBMs by pharmaceutical manufacturers fall into this second class of "vertical mergers" because the merging companies previously served different functions in the prescription drug market.l% in 1993. The ranking of drugs on the formulary is to reflect discounts and other cost reductions which PCS is required to accept from Lilly's competitors. . British pharmaceutical manufacturer SmithKline Beecham P." Mergers among competitors are called horizontal mergers. Under the decree. In the past two years. which by some measures comprise 80% of the pharmacy benefit management market. As a result of its examination of Lilly's acquisition of PCS. The most recent acquisition. which resulted in a proposed consent decree. the open formulary is to be composed of pharmaceuticals selected by an independent committee of health care professionals.6 billion.pharmaceutical manufacturers to move away from products and become service-oriented companies to better position themselves in a managed care world. The recent rise of PBMs has coincided with a reduction in drug price increases. and has announced that it is investigating other alliances between PBMs and pharmaceutical companies. The FTC's power to seek the restrictions contained in the Lilly proposed consent order arises from Section 5 of the Federal Trade Commission Act and Section 7 of the federal Clayton Act. Much of the contribution of PBMs to lowered prescription drug prices has resulted from demanding discounts from pharmaceutical manufacturers in return for placing their products on the formularies. the FTC has taken the unusual step of reopening its investigations of the Merck-Medco and SmithKline Beecham-DPS deals.L. They also monitor the effectiveness of particular drugs. Pharmacy-benefit management companies try to control prescription drug costs by creating formularies of approved drugs for use by participating physicians and pharmacists.3 billion. or to tend to create a monopoly. The decree also mandates a "fire wall" separating the drug manufacturer and the PBM to prevent Lilly's access to nonpublic information. while mergers among firms serving different functions in a given market are called vertical mergers. three pharmaceutical manufacturers have acquired the three largest PBMs. In July 1993.

a vertical merger. According to the Chicago school. as long as there are any unintegrated firms in the market. If the consumers remain with the integrated entities. The weight given to "foreclosure" as a theory of competitive harm has fluctuated according to changes in political and economic thinking. Eli Lilly Chairman Randall Tobias triggered similar concerns with his statement. By requiring that PCS maintain an open formulary. These scholars and judges emphasized the potential efficiencies of vertical mergers. as here. Vertical integration was especially quick to be condemned where. that the PCS merger "will help sell even more Prozac. the PBMs owned by Merck and SmithKline reportedly have closed their formularies to some extent. the magnitude of the recent pharmaceutical company-PBM combinations and the potential for structural marketplace changes has caused regulators to raise questions under several theories of competitive harm. The "facilitation of collusion" theory concerns the relationship of vertical integration to competition among drug manufacturers. at most. a group of therapeutically equivalent drugs are listed and ranked according to rebates or discounts promised by the drug manufacturer. with the PBM providing reimbursement for whichever medication is prescribed. The rise of the so-called "Chicago school" of antitrust analysis in the 1980s limited the application of the foreclosure theory. "Foreclosure" theories focus on the competitive harm which might result if pharmaceutical company-owned PBMs closed their formularies to competitors of the parent manufacturer. Enhancing these concerns are the actions and statements of the drug companies themselves. In contrast. limiting the foreclosure theory to those situations in which integration is so widespread in the industry that simultaneous entry into both markets is required to compete. at least some of which are passed on to the consumer. it is because the merger has produced efficiencies or other procompetitive benefits. there was a pattern of integration in the industry. In other words. While relatively few vertical mergers have been condemned as anticompetitive. the pharmaceutical manufacturer) or the distributor (PBM) market. any attempt by the vertically integrated firms to lower quality or increase prices will result in consumers. the FTC is responding to charges that pharmaceutical manufacturers might place their own drugs on closed formularies of their own PBMs. This would eliminate competition for formulary slots which might otherwise lead to lower drug prices. Already. a "closed" formulary contains a limited list of preferred drugs from any therapeutically equivalent class. would cause a "realignment" of the lines of distribution. the pharmaceutical manufacturers are said to "foreclose" these slots on the formulary from other pharmaceutical manufacturers." By automatically placing their own drugs on closed formularies of vertically integrated PBMs. In an "open" formulary such as the one required by the proposed Lilly consent order.Horizontal mergers are much more likely to raise antitrust concerns than vertical mergers. and the PBM will only reimburse for prescriptions which conform to the formulary. since the former directly eliminate a competing firm. Early Supreme Court vertical merger cases disallowed mergers which foreclosed more than a de minimis share of the supplier (here. . reported in the August issue of AMERICAN DRUGGIST. taking their business to the "independent" firms.

In recent years.DPS and Medco . explicit or implicit. an independent PBM which has supply arrangements with four major drug manufacturers. Merck was America's largest drug company. The degree of concentration in the pharmaceutical manufacturing market depends on whether the market is evaluated according to aggregate market share or market share within individual drug categories. and new PBMs forming. As applied to pharmaceutical company-PBM mergers. On the other hand. president of Pharmacy Gold. Price-fixing. so the possibility of strict foreclosure is diminished because the PBMs must maintain supplier relationships with other manufacturers. the FTC addresses the possibility that vertical mergers between pharmaceutical manufacturers and PBMs might lead to anticompetitive information exchanges. . the arguments that the manufacturer-PBM mergers increase the barriers to entry into the industry. government agencies such as the FTC may use their pre-merger review powers to ensure that a market does not become conducive to collusion as a result of the proposed acquisition. By requiring that Lilly maintain a "fire wall" to prevent access to competitive pricing information. are weakened. or foreclose unique products or services. although it only had a 10% share of the "highly fragmented" U. thereby placing rival PBMs at a competitive disadvantage. pharmaceutical market. Consequently. "post-Chicago" scholars have suggested that foreclosure need not rise to the level of requiring dual-market entry in order to be anticompetitive. Additionally. Independence may even be a benefit. competition in each of the major drug categories is limited typically to only a handful of manufacturers. best explains the effect of vertical integration. Until the Glaxo-Burroughs Wellcome merger. the theory suggests that an integrated manufacturer might charge a rival PBM more for its unique products than it charges its own PBM." With existing PBMs prepared to handle increased market share. former chief executive officer of Pharmacy Direct Network (the pharmacy-owned PBM). however. The risks of collusion are believed to be high in concentrated markets where a few competitors hold much of the business. A review of the early market responses to the manufacturer-PBM mergers indicates the "realignment" theory. so far. recently renewed a pharmacy contract covering 150. said the pharmaceutical company-PBM mergers will allow his independent PBM to "leverage more enrollment because of our clinical objectivity and independence. In 1993.S.because of their alliance with drug makers. no pharmaceutical company makes every drug on a formulary list. an agreement to fix prices is a per se violation of the antitrust laws." Robert Pfotenhauer.000 lives when the employer "ruled out two other competing vendors . said PDN "has an opportunity to help level the playing field and ensure that there will be fair competition" and is predicted to be "a significant entity that will have some fairly immediate impact on the prescription benefit management world. at least 18 companies had worldwide sales of over $3 billion. is one of the principal anticompetitive activities condemned by the antitrust laws." Bill Jenison. A different issue arises from these continued supplier relationships concerning more subtle ways in which vertical mergers can facilitate collusion among the drug manufacturers. In fact. Caremark.

disease state management could be a form of enhanced interbrand competition among pharmaceutical companies. By gaining access to patient data. it becomes apparent that what the PBMs offered manufacturers was a better chance for success in the managed care world of the future. and distribution.S. . the exchange of pricing information can be procompetitive. When a group of companies agree to form a cartel and fix prices. By placing these mergers in the context of changes to the pharmaceutical industry generally. PBMs are developing large databases of patient information gathered from health care providers which can be used to monitor' whether drug therapy has helped patients to avoid hospital or physician visits." If patient information is an insufficient justification for PBM mergers. Requiring a pharmaceutical manufacturer-PBM to open formularies might actually encourage such information monitoring. which will offer patient education. By stressing the greater cost-effectiveness of drug treatment as compared to other health care products. monitoring. the cartel has an interest in monitoring the prices charged by each of its members to ensure that prices do not go below the agreed-upon level. It is thus no surprise that the FTC joined its requirement of formulary access with restrictions on information exchanges between the PBM and its parent manufacturer. many wonder whether access to PBM databases was worth the $13 billion paid. Information from customers about the pricing practices of competitors often leads a company to lower its price. In addition to the PBM mergers. hospitals and other health care providers. as well as pharmaceuticals. The theory is that PBMs (and their manufacturer parents) will create a market for disease management systems. the potential benefits of lowered overall health costs should be recognized. The major precompetitive benefit claimed to result from manufacturer-PBM mergers is the assimilation of patient information from various sources. the acquired companies must have offered something more. By controlling PBMs. vertical mergers are thought to enhance the possibility of collusion by making it easier to monitor the prices of competitors. purchased U. On the other hand. since the PBM will gather price information on drugs directly competing with those manufactured by its parent. If the mergers encourage the development and utilization of patient information. such as doctor visits. Thus. Even absent collusion competitive pricing information could replace "blind" bidding with a bid which was only slightly below that offered by a competitor. during the last year Swiss drug manufacturer Roche Holding Ltd. drug manufacturers may learn the prices of pharmaceuticals being charged by their competitors. According to the Financial Times. Consolidation is widespread throughout the pharmaceutical industry. Indeed.If the market is evaluated in terms of individual drug categories and thus considered highly concentrated. health maintenance organizations hold far more complete treatment information than distributors and are quite willing to share it for relatively small consideration. "It is clear that there are less expensive ways of accessing such patient data. Nonetheless. pharmaceutical manufacturers hope to demonstrate that greater use of prescription drugs is a more efficient method of controlling diseases. individual companies have an incentive to cheat on the cartel by offering a slightly lower price and capturing a larger market share.

5 billion to purchase American Cyanamid Co. for $5. Case study analyzing the strengths.00 More Papers on This Topic . Through the acquisition of PBMs pharmaceutical companies may simply be trying to assure themselves of a more secure place in the evolving health care system of the future." Comments by Eli Lilly executives concerning PCS indicate a similar goal of expanding the company's role in health care to "become a broader organization.A. J.. Also. more capable of meeting our customers' expectations. & threats of pharmaceutical giant Merck.pharmaceutical company Syntex Corp. the German chemical and pharmaceutical giant. The $14. opportunities. Many analysts consider this pattern of consolidation the beginning of a general contraction of the pharmaceutical industry from its present 40 or so companies to perhaps four or five.8 billion deal is expected to be finalized this month... In describing the benefits of acquiring DPS. American Home Products offered $8.. made a surprise bid for Wellcome Plc.. called by some the best run company in America. APA Format $32. weaknesses. said." Some industry analysts characterize the manufacturer acquisitions of PBMs as the first step in moving away from a product orientation to a service orientation. Hoechst AG. and the pharmaceutical manufacturers acquired the PBMs in an attempt to diversify and enhance their chances of survival in the changing market. In light of market flaws which have removed the ultimate consumer from appreciating the full costs of prescription drugs in the past.. its British rival. Last August.3 billion in cash and French pharmaceutical company Elf Sanofi S. The theory of survival through diversification is logical in light of the uncertainty about the role of the government in health care. bought the prescription drug business of Sterling Winthrop Inc. it is likely that the pharmaceutical industry simply contained more companies than a competitive market could support. This is our future. 0 Citations. "SmithKline can move rapidly into the blossoming business of managed care. Glaxo Plc. In January. is in talks with Dow Chemical to buy Marion Merrell Dow for an estimated $7.1 billion.E Garnier. 8 Pages / 1800 Words 12 sources. SmithKline's executive vice-president. More.

The company has examined the external environment and changes taking place there. a medical distribution company.S." Employee Benefit Plan Review (October 1993). drug company that has also entered the evolving field of biotechnology." Business Week (June 1. The company is seeking to remain competitive. The Medco merger provides the company with a means of distribution that it formerly lacked as well as a source of information on the use of pharmaceuticals by the consumer that will serve the needs of the company in the long term."Drugs and Biotechnology. 9 -91. The company has committed$6 billion to the acquisition at a time when the company's R&D expenditureis facing a shortfall. while other companies have been very successful with small drugs. "Merck is showing its age. Hamilton. which can be threats as other companies are also turning to new techniques.S.Weber. "Merck Acquisition of Medco: Meaning & concerns. called by some the best run company in America." U. 72-74. Paper Introduction: Merck is a leading U. One way apharmaceutical company can improve its position is by finding new marketniches where the company can become a leader.Threats Most of the threats are clear to management. Merck is a leading U. as a way of diversifying within its field while also using the information gathered through Medco to develop new products and strategies. 1987). & threats of pharmaceutical giant Merck. and it merged with Medco. They have also examined the opportunities available because of new technologies. Abbott Is the Name of the Game. considered especially impressive given a 2 percent negative currency impact and an absence of help fromprice increases. Merck is in a strong position after posting a 17 percent year-over-year fourth-period increase in share earnings in the last quarter of 1993. Merck has lately started pressuring its researchers to pursue blockbuster drugs and thus has shunned the smaller sales potential of other drugs. opportunities." Business Week (August 23. a medical distribution company.S. Drug Company that has also entered the evolving field of biotechnology. Biotechnology is an opportunity for the . The company determined in 1992 that it needed to enhance its position. a gain far better than anticipated. 1993). "In Medical Testing. Two important drugs held by the company were Proscar andMevacor.Paper Abstract: Case study analyzing the strengths. A strategic plan for Merck today involves increased R&D. 1 -12. The company determined in 1992 that it needed to enhance its position.The full year showed a 13 percent gain. weaknesses. Joseph. and tap into a potentially lucrative means of developing new treatments for disease. as a way of diversifying within its field while also using the information gathered through Medco to develop new products and strategies. both up 22 percent. and it merged with Medco. The company desires the creation of an electronic information linkfrom patients to Merck marketers and laboratories. Merck has been the undisputed leader of the prescription drug industry.

Merck is thus saddled with an aging product line and the potential for further reduced sales. 1993). A strategic plan for Merck today involves increased R&D and the adoption of new technologies with the exercise of considerable control to assure that this R&D does not lead to dead ends and those opportunities are not missed any more than they are leaped on unthinkingly. and this was appreciated by Wall Street. And Europe. While the company continues to spend considerable sums on R&D. In the intermediate term. The competitive environment is only one aspect of that environment. The company intends to use data gathered through Medco to produce drugs with greater appeal and directed toward specific problems uncovered by Medco's information. "Is this Rx too costly for Merck?" Business Week (August 9. Once the systems are working. developing these systems is vital. which could also be weakness. 1993). Kathleen and Joan O'C. Strengths a SWOT analysis shows first the strengths on which the company can build. among others.S.Weber. and health-maintenance organizations are also pressing for lower prices. The strategy will be considered . The company pledged to keep price increases below the U. Biotechnology may provide away of accomplishing this task today. Dow Chemical. Many of the new products offered by Merck have grown more slowly than desired. American Cyanamid. Bausch & Lomb. Merck was willing to cut the work force while profits were still strong. the corporate bureaucracy has grown in such a way that it has slowed down the pipeline for new products and made R&D less effective at creating new products and sending them through the marketing process. The company has worked to maintain is lead and to increase its strengths. though it is also a risky proposition. Such an assessment should be made an ongoing part of the system to provide feedback and evaluation of every project undertaken. "A week of woes raises more questions about Saint Merck. efforts to develop new drugs for complex diseases have combined with a reluctance to embrace new research methods through biotechnology to reduce the product flow. the company has a bureaucracy that has slowed the scientific process even more." Newsweek (August 2. 28. decide which drugs doctors may prescribe. rather than private physicians. and many analysts believe they will not. Procter & Gamble. but which is clearly an opportunity to introduce needed change and to redirect the fortunes of the company. Today. In to enter a new area that will provide new products and new problems to be addressed by R&D. Merck will need to develop a decision-making system that assesses the information. Du Pont. The acquisition of Medco poses a threat if the two companies do not mesh. and Unilever. The company has a new biotechnology plant in Pennsylvania to work with vaccine operations. The fit between Merck and Medco must be monitored carefully to assure that the operations of neither are suffering from the new structure and that each is benefiting the other because of the merger. The key competition for this company includes other pharmaceutical giants such as Johnson & Johnson. Government regulation and other legal strictures are an important part of the business environment. The company also faces changes in its traditional markets as managed-care providers. Joseph. Merck is presently under new leadership. Based on the available information the system must be guides to what products to research or how to reshape the production of existing products to fit better with the marketplace. and the possibilities raised by that information.Deveny. 35.

the acquisition of Medco reduced overall profits by 6 cents ashore. In addition. The drug industry as a whole is seen as a growth industry at this time. Companies with a leadership position generally have a strong R&Dprogram to develop new products on an . the budgeting for R&D. The strategy will give Merck an advantage over its competition in that the competition does not have access to the same distribution data and instead relies on outside companies for drug distribution to pharmacies. a form of vertical integration that allows the company to distribute the products it makes. The company is seeking to remain competitive. but decision-making is centralized and bureaucratic. Much scientific talent has fled the company to work for the competition. 9). and if costs can be reduced on products already being produced. but at some point the "patent ³on the drugs expires so that other companies can distribute the drugs.successful if new products are put into the mix. This ability to spend has allowed the company to move quickly into the fast-growing markets as they are identified (Deveny and Hamilton. Opportunities The Medco acquisition is an opportunity as well as a potential weakness. hospitals. Inflation rate and so cannot use price hikes to make up the difference. Merck spreads its risk in some cases with joint ventures with some of the other major firms in the industry. but Merck had been best at doing things the old way. often at a lower price. and the product mix offered by the company. and that has now slowed. The company's labs are found all over the world. 1987. and doctors. A second prong of the strategy is to use the data gathered from Medco on drug use and distribution to plan for the next generation of drugs. and tap into a potentially lucrative means of developing new treatments for disease. All drug companies face this change. Merck has already undertaken a means of improving its competitive position by its merger with Medco. Industrial Outlook 1993. The board of directors must also decide on the viability of the biotechnology program and determine its future direction. At the same time. This allows the company to recoup its investment and make a profit. In the past Merck succeeded with a product pipeline that was always full. Merck's recent acquisition of Medco is a case of vertical integration between the world's largest pharmaceuticals company and the world's largest distributor of pharmaceuticals. Peter and Anne Underwood. This includes data on patient use and misuse. Merck had a steady 27 percent growth rate in the late 198 s. the acquisition price of $6 billion will put a strain on Merck in the near future. The company is entering the biotechnology field but is admittedly new at it and will have some difficulty catching up to companies already in the field. Some of the top drugs offered by the company have been hit by sagging sales. and so needs to make the biggest adjustment now. and this requires an assessment of the program to date. ReferencesAnnin. Further research efforts have been slowed by the company culture that has developed. an analysis of the field of biotechnology as it has developed throughout the industry and the nature of the specific projects being undertaken by Merck. The purchase of Medco may not solve these problems. such as lapses in taking medication that can help with the creation of new drugs. Merck has had a joint venture with Du Pont for marketing drugs in the U. with a growing demand from elderly Americans for new chroniccare medicines. In the longer term.S. the working system will alter the way Merck makes decisions. Merck's company objective is to improve its position in the pharmaceutical field through product diversification and on the basis of its merger with Medco. Since 1991.

The external environment has a major impact on the operation of Merck. and today Merck is one of the healthiest pharmaceutical companies. a key to much of its success. 6 -64. leading to decisions that will lead to actual products or to achange in how products are produced. The company is developing a line of generic drugs toappeal to health-maintenance organizations and third-party payers such asinsurance companies and corporate benefit plans. Consider the successof competitor Abbott Laboratories. preventing new products frombeing produced as rapidly and economically as in the past. Merck . The pharmaceutical industry is highly competitive. and such coordination includes developing a strong programfor the transfer of the needed data from Medco to Merck on an ongoing basisand for a system of evaluation of the data involved in a way that servesthe needs of Merck and contributes to the development of new products. which has an annualresearch and development budget of more than $15 million. They have also examined theopportunities available because of new technologies. 1993). The company has examined the externalenvironment and changes taking place there.Coordinating the merger is a major element in the strategic plan for theorganization. self- . Pharmacy Benefit Management Pharmacy benefit managers (PBMs) are companies that administer drug benefit programs for employers and health insurance carriers. the merger may put a strain on the company becauseof the debt involved.Weaknesses The weaknesses of the company include its merger with Medco." Fortune (September 2 . Merck has been the undisputed leader of theprescription drug industry. but Merck is in a good position to weather this.ongoing basis. but this is subject to the vagaries of research as wellas difficulties associated with the development of biotechnology ingeneral. Merck isalso noted for a dedication to R&D. and most companiesbase the bulk of their business on a few major drugs which they havedeveloped and which they have exclusive control over for a certain periodof time. Drugs developed by a company are marketableexclusively by that company for a period of time. Any restructuring shouldaddress the problems noted for the excessive bureaucratic structure whichreduces the value of R&D for the company. Success in the biotechnology field would also giveMerck an advantage. Richard O.Ullman.Medco Merck-Medco 1. which can be threatsas other companies are also turning to new techniques. for instance. Health-care cost containment is also threatening growth andprofits for the company. which is alsomore than the total sales of many of its competitors. The drug market is expected expand over the next several years. seen bymany competitors as weakening Merck's position. In the short term. A feedback system is also to bebuilt into the fit between Merck and Medco to assure that the informationflow continues and that the information is used properly and to the benefitof Merck. companies must work constantly toproduce new drugs and new treatments. For this reason. which is one reason the industry hasbeen structured in this fashion. PBMs contract with managed care organizations. "Why Merck married the enemy.

The pharmacist was provided the alternatives on the screen. Initially. They educated patients and physicians on measures to be taken to prevent diseases wherever possible. They stayed in touch with patients through newsletters and information hotlines. encouraged the use of lower cost. Physicians and pharmacists fell in line because the PBMs represented big clients and gave them large volumes of business. When an enrollee presented a prescription. Medicaid and Medicare managed care plans. 2. and local government entities to provide managed prescription drug benefits. insurance companies. reviewed prescriptions.. PBMs focused on claims processing.. They negotiated big discounts with pharmacy networks and branded drugs manufacturers. dispensing and. PBMs also analyzed the usage of drugs by patients and did not hesitate to contact doctors if they felt that inappropriate drugs had been prescribed. PBMs worked with patients to make them accept good health practices. processed prescription drug claims. Relationship between Pharma & PBMs: Pharmacy benefit managers (PBMs) are private companies that administer pharmacy benefits and manage the purchasing. they looked at various other ways to control costs. the PBM¶s information system determined whether there was a cheaper alternative. .insured employers. state. PBMs also saw an opportunity to cut costs through disease management. Essentially. generic and branded drugs and dispensed drugs through mail service pharmacies. They designed the pharmacy benefit plan. Later. the Federal Employees Health Benefits Program and other federal. PBMs reduced the cost of health care by improving efficiency of the usage of prescription drugs without compromising with the quality of patient care. unions.

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