Merck – Medco

1. What was the rationale for PBMs?

A PBM is an intermediary who buys drugs for health insurers from manufacturers and
pharmacies at a lower price. PBMs have lower-cost drugs. Scale savings in pharmacy benefits can
be achieved by serving multiple plans sponsors PBMs can use their patient information to their
strategic advantage (e.g., 60 m patients from Medco). How drugs prescribed, used, impact on
disease Can prevent inappropriate drug interactions, under/over medication.

2. Does Medco fit with Merck’s strategy?

The needs of Merck are, a R&D firm looking for Increased sales of their drugs.
Industry Back ground in USA:
Declining share of traditional distribution channel
Increasing share of Mail service channel for repeat filling required medicines (Low cost in
comparison to retailers)
Medco provides mail service channel, connectivity to Wholesalers, retailers and Health
management organizations. Merck-Medco evolves the elimination of key information gaps like
price, demand etc. Readymade platform for market research. Just in 3 years’ o merger, covered
lives increased by 6%, Drug spending increased by 40%. Critical role of Medco’s Health
management programs in Merck growth rate goals of 15-20%

3. What does Medco bring to Merck? What are the advantages and disadvantages?
Advantages:
 Medco Containment services Inc. a firm that specialised in integrated drug benefit plans and
pharmacy services to managed care markets
 Marty Wygod, saw an opportunity to revolutionise the distribution system through centralised
mail service distribution that would save the cost associated with intermediary’s margins
 Merck found that Medco’s clients base was complementary to chronic care drugs
 Their clients were predominantly Fortune 500 companies, Blue Cross/ Blue Shield plans,
insurance carriers, Federal, State, and local governments, and union plans which covered their
enrolees for life
 These clients would be more interested in chronic care therapies which, although more expensive
in the short term, would likely save cost over the life of patient
Disadvantages:
 Medco offered “integrated pharmacy services”
 Medco’s competitive strength lied in mail service which offered efficient, economic delivery
 Medco offer retail card program, clinically driven programs
 Medco again challenged the industry by offering its clients benefit plans with built in cost savings
 Retail card program for prescriptions dispensed from PAID network
 Medco delved further into clinically driven programs such as patients profiling and outcomes
research, however, it recognized a need for further clinical expertise
 Medco’s strength was in mail service which offered efficient, economical delivery of long term
prescriptions via its 23 pharmacies
4. What does Medco get from the Merck acquisition?
Acquisition would eliminate key information gaps in the drug delivery system. Acquisition of
Medco - Step for a new paradigm for pharmaceutical industry. Vision to create the world’s first
coordinated pharmaceutical care. Merck - America’s most admired company, 7th straight time in
Fortune magazine, a repeat winner of Best Sales Force in the Industry. 6/8, Recruiting Top
Salespeople, Quality of training, Opening New Accounts, Holding Accounts, and Reputation
Among Customers. No company had a better example than Merck of the resistance of the drug
industry to managed care. Merck had $9.6 billion in sales, Medco had $1.8 billion in sales, and by
driving the very cycle that threatened to capsize Merck, it is rising at 35 percent a year.

5. Is health management the future?

Health management: Specific chronic disease treatment programs planned. Based on existing
medical research, programs have been developed that suggest better therapy and low-cost
treatment. More for less, a rarely found marketing strategy. That's always what customers want.
Using this customer program saved an average of $440 per year. Fifty million patients targeted
population. The era of rising medical costs, the HMO Act of 1973–to respond to that. Increase in
HMO and subsequent decline in hospital and private care.