Introduction
Merck & Company is a leading manufacturer of pharmaceutical drugs. Its products are very popular in the pharmaceutical industry. The company has announced that it is planning to purchase Medco containment Services. The cost of acquisition is estimated at $ 6.6 billion. Medco is a major prescription management corporation and vendor of mail-order medications in America. Being the CEO of Merck, I am required to come up with a recommendation about the acquisition of Medco containment Services. I will present my recommendations to the board of directors of my company. To come up with my recommendation, I have analyzed the commendations of three other associates and my own inquiry. After a thorough analysis of all the stakeholders’ recommendations, I recommend that Merck should initiate the acquisition of Medco Containment Services. Indicated below is how I arrived at my recommendation.
Associates recommendation
As such, the company’s chief operating officer’s main concern is the interaction and incorporation issues that will arise because of the acquisition of Medco. Merck is a research-oriented pharmaceutical company, whereas Medco is a prescription promotion corporation. In this regard, the chief operations officer believes that the structural values and operations of the two firms will be in conflict with one another. The vice-president of sales & marketing supports the idea of purchase. He postulates that through the acquisition, Merck will realize new marketing advantage opportunities. According to him, tapping into Medco’s promotion catalog result in market growth opportunities. The vice president suggests that the acquisition came in handy at a time of increased global competition. On the other hand, the chief financial officer is concerned about the viability of the acquisition. He wants to ascertain that our company recompenses a premium for Medco at $6.60 billion dollars. He postulates that the merger of the two firms will lead to a growth in earnings per share for the two companies. Although, he is still worried about the progress of the growth of the stock price of our company after Medco is purchased.
Major force driving this purchase
In the face of increased competition and changing health care settings, pharmaceutical companies must reinvent and restructure to remain competitive (Baker 45). In this regard, I believe that Merck should follow suit to guarantee its future success. Unlike in the past, managed care in the health care is gaining momentum in the United States. Through managed care plans, clients are offered medical cover and fundamental health care services. The services are offered through volume and long-standing contracts. Additionally, managed care programs offer comprehensive coverage for prescription medicines more often compared with conventional medical cover policies. Healthcare experts in America have projected that in the next 10 years, 90% of Americans will be accessing health care services through the managed care platforms.
The strategic feature of the change to managed care is that the accountability for the expense is based on decision-making with respect to the delivery of health care services unlike it is in conventional insurance policies (Weston & Mark 23). Through this approach, the repercussions for drug manufacturers like Merck are enormous. With medicine decision-making power moving away from medics to managed care experts and PBM managers, our marketing policies will swing their attention from thousands of medics to a few PMG managers. Owing to this, our company will experience an intense reduction in the sale powers of pharmaceutical manufacturers.
Merck should also expect other momentous deviations in industry structure. According to a number of industry specialists, with the growth in the number of managed care providers, it will become common for PBM to depend on a particular pharmaceutical firm to supply all of its medical merchandise and facilities instead of relying on a number of drug firms (Weston & Mark 63). The move will be an advantage to companies with manufacturing, delivery, and prescription management competencies. Furthermore, several professionals assert that only a few drug companies will survive on the international market in the coming years. Several firms are going to be eliminated in the market due to increased competition, and reduced profits. Based on the above illustrations, it is apparent that our company should acquire Medco to retain its competitive advantage in the market.
Role of prescription benefits management (PBM) companies
The duty of overseeing the delivery of prescription medicines is usually tendered out by the managed care companies to PBMs. The role of PBM firms comprises overseeing insurance claims, negotiating volume reductions with pharmaceutical makers, and enhancing the usage of cheaper generic alternatives. The administration of prescription assistance is boosted by the utilization of formularies and drug use appraisals. Formularies comprise lists of medicines hoarded by boards of pharmacologists and doctors in place of a managed-care firm. Associate doctors of the managed care organization are then intensely reinvigorated to recommend from the list during his or her daily roles. On the other hand, drug use appraisals comprise of assessing doctors’ prescribing arrangements and patients’ habits. Through this, the experts can recognize when a client may be getting the incorrect quantity or kind of drug and when an associate medic is not recommending it from a formulary. Fundamentally, this illustrates that an opportunity has been created for managed care firms to oversee prices and amalgamate decision-making power. Based on the above roles, I believe that our company should acquire Medco to seize the opportunity created by the growth of managed care in the health care sector.
Purpose predicted for the usage of database
Our company has identified Medco’s wide-ranging database as the key motivator for the purchase. With its database, the firm manages computer profiles of more than 33.1 million clients. The percentage represents 26% of all persons covered through pharmaceutical benefit policies. The company’s clients comprise treasure companies, national and state-run benefit plans, and a number of Blue Shield groups and assurance firms.
Countless prospects exist for our company to exploit the statistics enclosed in the company’s database. As such, the database will enable our company to recognize the medicines that could be swapped from an opponent’s medicine to a Merck’s medicine. After the acquisition, our pharmacists will recommend the shift to a patient’s medic. Through this, our opportunity of boosting sales is huge. Similarly, the database will enable our company to detect clients who fail to replenish their prescriptions. According to health records, failure by patients to replenish their medications leads to huge annual losses. In addition, through the acquisition, our company will have the capability to utilize Medco’s electronic patient catalog system. The above will act as a realistic laboratory with the objective of demonstrating to our clients that our drugs are worth the premium fee charged. The above will be achieved by recognizing the specific pills taken by our clients and merging the information with the clients’ medical records. In the long term, the strategy will enable Merck to launch the sovereignty of its products.
Further advantages of the union comprise $1 billion yearly savings in redundant advertising performances and a decrease in our sales team owing to additional detailed marketing plans resulting from the acquisition of Medco’s database. The saving will also be a result of the industry’s stress on delegating marketing to plan managers rather than the medics. Our acquisition of Medco is fundamentally an effort to intensify our market share in an industry with declining profits by exploiting the greatest valued strength in the pharmacological industry, which is information. Our acquisition is also aimed at enhancing our competitive rank in the emerging managed care pitch by associating with a PBM.
Competitive reactions that have taken place in response to our intentions to acquire Medco
Notably, our intentions to merge with PBM firms have been copied by our competitors. Based on this, we have to move with haste to ensure that the acquisition is attained within the shortest time possible. One company that has emulated our intention includes SmithKline Beecham. The company has publicized its intentions to purchase Diversified Pharmaceutical Services Incorporated. Another company that has emulated our strategy includes Roche Holdings Limited. The company has announced that they are planning to purchase Syntex Corporation. The above mergers are not only aimed at transforming the industry structure but also aimed at enhancing viability in the future.
Financial analysis
The financial gains of the acquisition of the company are manifold. I believe the purchase will create cost-efficacy through economies of scale. In the long term, the initiative will increase our company’s income through gains in market share. Through the proposed acquisition, our company will realize an increased value generation. I expect the company’s shareholder value to increase after the acquisition process is completed. The increase will surpass the summation of the shareholder values of the mother companies. The acquisition is also expected to result in tax gains. As indicated earlier, Merck’s acquisition of Medco will result in the generation of more value than the current generation of both companies. By exploiting Medco’s wide-ranging database, our company will be able to increase its sales and gain direct contact with millions of clients across the America. Through this, our company should expect to enhance its shareholder value.
In the last few years, Merck’s sales have stagnated. The situation has been caused by changing healthcare settings and increased competition. In this regard, there is an urge for the company to implement strategies aimed at enhancing its sales. Therefore, the acquisition of Medco will come in handy. The acquisition of this company will be beneficial to Merck in these financially challenging times. Based on our financial analysis, our company will lose millions of dollars in the near future if it fails to merge with a PBM firm. Medco’s experience in marketing will be a great asset to Merck. Through the acquisition, our company will emerge as a more competitive and cost-efficient company. The acquisition will enable Merck to survive through the difficult situation currently faced by a number of pharmaceutical companies because of increased competition and dwindling profits.
Equally, the acquisition will result in cost efficiency for Merck. Financial experts assert that when companies merge the united corporation benefits concerning cost-efficiency. A union between Merck and Medco will result in economies of scale. The situation will result in cost efficiency. As such, the union will enable Merck to focus on its core responsibility of manufacturing drugs. On the other hand, Medco will be able to focus on its role of marketing and promoting the drugs. Through specialization, the companies will be able to perfect their responsibilities ensuring that their products and services become affordable and competitive in the ever-changing health care market. Equally, the union of the two companies is likely to result in a new and robust company. With a bigger company, production will be enhanced. Thus, the cost of manufacturing pharmaceutical drugs per unit will lessen. The table below shows the projected sales in the next three years after the acquisition:
Table 1: the projected sales in the next three years after the acquisition
The table below illustrates the expected treasury stock transactions in millions after the acquisition in the next three years:
Table 2: the expected treasury stock transactions in millions after the acquisition in the next three years
Recommendation
Based on the above analysis, I recommend that Merck’s Acquisition of Medco should acquire Medco. As suggested by the executive vice president of sales & marketing, it is beyond doubt that through the acquisition Merck will realize new marketing advantage opportunities. The acquisition will enable us to exploit Medco’s promotion database for increased market growth. The financial benefits of the acquisition of Medco by our company are manifold. I believe the purchase will create cost-efficacy through economies of scale. In the long term, the initiative will increase our company’s income through gains in market share. Through the proposed acquisition, our company will realize an increased value generation. I expect the company’s shareholder value to increase after the acquisition process is completed. The increase will surpass the summation of the shareholder values of the mother companies. The acquisition is also expected to result in tax gains.
Our chief operating officer’s main concern of interaction and incorporation issues will be addressed through training and enhancing awareness of the importance of the proposed changes. By doing so, our employees will be physically and emotionally prepared to adjust to the proposed changes. Regarding the chief financial officer‘s concern, it is apparent that our company will recompense a premium for Medco at $6.60 billion dollars. Similarly, financial evidence suggests that the growth of Merck’s stock price will continue to progress after Medco is purchased.
Works Cited
Baker, H. Kent. The Art of Capital Restructuring Creating Shareholder Value through Mergers and Acquisitions. Hoboken, N.J.: Wiley, 2011. Print.
Weston, Fred, and Mark Mitchell. Takeovers, Restructuring, and Corporate Governance. 4th ed. Upper Saddle River, N.J.: Pearson Prentice Hall, 2004. Print.