Company Acquisition of Medco - Research Paper Example

Merck and Company Acquisition of Medco Introduction Acquisition, also termed as takeoveris a situation where one company known as the predator takes over another company known as the target whereby after the acquisition process, the target loses its original identity whereas the predator retains its original identity. On the other hand, mergers refer to the combination of two or more equally reliable firms to form a complete new entity. The firms lose their original identities after the merger, and none of the companies dominate the other (Miller, 2011). The benefits of the acquisition include the tax savings, whereby a company paying higher taxes because of high income can acquire another firm with accumulated losses, which after the acquisition will reduce the overall taxable income and tax liability. The other advantage of acquisition is that it allows the company to achieve short term growth. The target would benefit from the predator since, in most cases, predators are well-established companies; thus fasten the growth of the target (Finkelstein, 2010). Asset backing is another merit behind the acquisition. For instance, Merck would benefit from the well-established database set up by Medco and would allow Merck to achieve its objectives by using these valuable resources, which would be acquired from the target company Medco. Therefore, the decision to buy Medco Containment Services by Merck, and Company should be driven by the above factors. Major forces driving Medco acquisition by Merck and Company One of the major forces driving the acquisition of Medco Containment Services by Merck and Company is the growth in the managed health care, which has been contracted by the managed health care organization to Medco Containment Services. Managed health care is a new phenomenon in the health care industry and the health expert (Kolassa & Greg, 2012) predicts that by the end of the current century, at least 90% of the Americans will have the cost of their drugs included in some managed health care plan. Besides, at least 60% of all the outpatient medicine will be able to be purchased by the managed health care programs (Merck and Company Inc., 2002). Therefore, the planned acquisition of Medco Containment Services by Merck and Company would be timely since it would allow the predator to benefit from these lucrative business deals being enjoyed by the Medco Containment Services. As such, a substantial beneficial synergy would be created since Merck and Company is the manufacturer of drugs and Medco Containment Services manages the insurance claims, hence will encourage patients to utilize cheap generic substitute drugs while negotiating volume discounts with the manufacturers of drugs on behalf of the managed care organizations. Thus, it is like Merck and Company would have created a ready-made market for their drugs since from the acquisition, it would take over the responsibility of assisting managed care organization to look for cheap generic substitute drug prescription to patients. The synergy created by the acquisition of Medco Containment Services Incorporated by Merck and Company will enable the two firms to create a competitive edge over their competitors (PricewaterhouseCoopers LLP, 2001). The database maintained by the target company would allow Merck and Company to manufacture drugs that perfectly fit the demands of the market. In addition, Merck and Company would benefit greatly from the number of clients doing business with Medco Containment, which include 58 Blue Cross, 100 Fortune and 500 companies, in addition to the state and federal benefit plans. Other factors driving the acquisition are the benefits that both companies include $ 1 billion savings in the marketing operations. This is possible because more precise marketing plans would be put in place since it would be borrowed from Medco’s database. In addition, the mergers between the two companies would increase the market share in the healthcare industry with the reduction in prices by capitalizing on most of the valuable assets found in the pharmaceutical industry (Duncan, 2006). Generally, the acquisition of the Medco Containment Services is timely since the changes in the health care industry such as managed care providers relying on one drug firm to deliver all pharmaceutical services and products other than negotiating with a number of drug manufacturers. Therefore, Merck and Company will be in a better position to offer manufacturing, prescription management and distribution of drugs, thus would perfectly satisfy the demands of the dynamic health care industry. The Role of Prescription Benefits Management (PBM) Companies The purpose of the prescription benefits management (PBM) firms like Medco Containment Services include negotiating on behalf of the managed care organizations for volume discounts with drug manufacturers. Also, it assists in managing insurance claims for the patients; hence the insurance needs of the patients will be attended effectively and efficiently. These Companies also encourage doctors to prescribe less expensive drugs to patients since these generic drugs are effective, just like those non-generic drugs, which are very expensive, bearing in mind that most patients cannot afford such drugs (PricewaterhouseCoopers LLP, 2001). These benefits from PBMs are enhanced by drug utilization reviews and formularies. Member physicians are actively encouraged to prescribe from these formularies and drug utilization reviews since these formularies contain lists of drugs compiled by committees of the physicians and pharmacists on behalf of the managed care organization. PBMs companies also assist in analyzing of the physicians prescribing patient and patterns usage of the drugs, thereby, determine whether patients get the wrong type and amount of medicine using their drug prescription and usage expertise. Furthermore, PBMs together with managed care administrators monitor costs since PBMs are offered the overall responsibility of prescribing drugs to the patients, hence consider all factors favoring patients (Schweitzer, 2007). The role envisaged for the use of Medco’s database The Medco database has been identified as a key factor motivating the merger between the two companies. It contains a computer data profile of all the 33 million customers of Medco Containment Services. The database would be beneficial for Merck and Company since it will facilitate the identification of prescriptions that could be switched from the competitors medicine to the Merck and Company drugs; thus increase the sales volumes of Merck and Company drugs (Kumar, 2012). The other role envisaged for the use of Medco’s database is that the database will allow the company to be able to identify patients who did not refill their prescriptions. Any failure to disclose the needed prescriptions would lead to the loss of hundreds of millions of dollars annually. As such, Merck and Company should merge with Medco in order to utilize this database so as not to lose large sums of money due to failing to refill the right prescription. Merck will use the Medco database that contains computerized patient record system as one of the real-life laboratory with the aim of proving that Merck manufactured drugs were appropriately priced. This is possible through identifying patients with their respective drugs and combining such vital information with patients’ medical computerized records in the database to fix the price appropriately (PricewaterhouseCoopers LLP, 2001). Medco’s database will also allow Merck and Company to undertake precise marketing strategies that are more beneficial to the company. This is possible because the firm will utilize this database to design proper marketing structures and strategies that will be targeting a particular group of customers using a particular type of drugs since all the information concerning the drug usage is all contained in the Medco database. The competitive reactions that took place in response to Mercks acquisition of Medco The strategy that was put in place by Merck and Company was immediately imitated by its competitors. One of its competitors SmithKline Beecham made its intention to acquire Diversified Pharmaceutical Services for a fee of $2.3 billion official. Roche Holding Limited, which is one of the competitors of Merck and Company, is planning to acquire Syntex Corporation for an undisclosed fee. Eli Lilly and Company officially announced that it would acquire PCS Health Systems, owned by McKesson Corporation for a fee of $4 billion. All the above mergers and acquisitions were forced by the ever dynamic changes in the healthcare industry, besides the need for fast growth by these companies to meet the demands of the shareholders (Kolassa & Greg, 2012). The above planned acquisitions facilitated by the fact that many of the industry experts predicted that managed care providers would majorly rely on a single firm to deliver all their pharmaceutical services and products other than negotiating with a number of drug firms. Therefore, companies operating in the healthcare industry should manufacture and distribute drugs while doing prescription management for their customers (Gaughan, 2014). Besides, the majority of experts in the pharmaceutical industry believe that only a few numbers of pharmaceutical firms will exist on the international scene in the next few years to come. This indicates a strong competition resulting in the decrease in profitability of the healthcare industry. Therefore, pharmaceutical companies are restructuring themselves to remain more competitive in the market by meeting demands of their customers. Conclusion Changes in the health care industry should act as a pointer for companies aiming to change their marketing strategies for a competitive advantage gain in the industry. Merck and Company are not exceptional in the adoption of new strategies that will enable them gain the competitive edge over its competitors. The intention of Merck and Company to acquire Medco Containment Services is welcome and timely for the company in order to compete favorably with its competitors who are also acquiring other companies with the primary aim of meeting customers’ (PricewaterhouseCoopers LLP, 2001). As the chairman and chief executive officer of Merck and Company, I would advise the board of directors to acquire Medco Containment Services because of the tremendous benefit that the company would get from Medco Containment Services. One of the benefits from the acquisition is the updated and useful database that would enable Merck and Company to produce drugs that meet the needs of patients. This is possible because the database contains the medical records of 33 million customers, amounting to 26% of all customers covered by the pharmaceutical benefits plan. The acquisition of Medco Containment Services will allow Merck and Company to manufacture drugs while Medco as one of their department will distribute and prescribe management of drugs. This will perfectly meet the demands of the health care organizations, which according to the industry experts will require only one firm to be delivering all its pharmaceutical services and products, other than negotiating with a number of drug companies. Also, with expert in the industry predicting that only a few pharmaceutical firms will be in existence on the international scene in a few years (Kaplan, 2007), there will be an intensive competition in the industry, implying that the profitability would decrease significantly in the sector. Therefore, if Merck and Company will not acquire Medco Containment Services, it may fail to remain competitive in the market, leading to the overall collapse of the company. The acquisition of Medco Containment Services is inevitable since other competitors in the industry have started to plan for some acquisition, mainly to gain a competitive advantage in the industry. Reference Duncan, W. L. (2006). Enterprise Optimization: Making Acquisitions Pay Off. London: Dog Ear Publishing. Finkelstein, S. (2010). Advances in Mergers and Acquisitions, Volume 8. Bingley, West Yorkshire: Emerald Group Publishing. Gaughan, P. (2014). Mergers, Acquisitions, and Corporate Restructurings. New Jersey: John Wiley & Sons. Kaplan, S. N. (2007). Mergers and Productivity. Chicago: University of Chicago Press. Kolassa, E., & Greg, P. (2012). Pharmaceutical Marketing: Principles, Environment, and Practice. London: Taylor & Francis Group. Kumar, R. (2012). Mega Mergers and Acquisitions: Case Studies from Key Industries. Basingstoke: Palgrave Macmillan. Merck and Company Inc. (2002). Merck and Company Inc.Annual report. Washington D.C: Merck and Company Inc. Miller, E. (2011). Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide. New Jersey: John Wiley & Sons. PricewaterhouseCoopers LLP. (2001). Study of Pharmaceutical Benefit Management. Business Journal, 1-156. Schweitzer, S. (2007). Pharmaceutical Economics and Policy. London: Oxford University Press. Read More