Merck to Buy Marketer of Drugs for $6 Billion : Mergers: Union with Medco is expected to intensify price competition. Health reform called key concern.
In the latest sign of radical change sweeping the U.S. health care industry, pharmaceutical giant Merck & Co. agreed Wednesday to pay $6 billion for one of the nation’s biggest drug distributors.
By acquiring Medco Containment Services Inc., Merck is engineering perhaps the largest health care industry merger ever and one of the biggest U.S. corporate unions in recent years.
Industry analysts said the move could further intensify price competition in the pharmaceutical industry--good news for consumers--while putting Merck in a better position to cope with possible federal price controls or other health care reforms that might emerge from the Clinton Administration.
Moreover, the deal is expected to solidify Merck’s dominance in the cutthroat pharmaceuticals industry by giving it a direct conduit to the health care providers that are exerting ever increasing influence over the type and price of prescription drugs.
The agreement is one of several recent health care deals--including two other drug pacts announced Wednesday--that are designed to prepare companies for health care reform.
Even the promise of government reform is spurring hospitals, drug makers, managed-care companies and others to look for new ways--such as mergers and other business alliances--to squeeze costs and gain more clout in the market.
“We’re going to see phenomenal consolidation in the health care industry in the next few years,” said Leonard Yaffe, health care analyst at the investment firm Montgomery Securities in San Francisco. “The health care industry has gone from being a kid to an adult without going through the teen years. It’s being told to grow up now.”
Consumer groups have targeted the pharmaceutical industry, complaining about soaring drug prices and the industry’s “excessive” profit margins. Drug prices rose at about three times the rate of inflation during the 1980s.
“Merck sees that society is demanding cost-effective pharmaceuticals, and it thinks that by teaming up with Medco it will be able to offer a premier program in pharmaceutical cost-containment benefits,” said Kenneth Abramowitz, health care analyst at the investment firm Sanford C. Bernstein & Co. in New York.
The pharmaceutical industry is very worried that the Adminstration’s health care reforms could include federal price controls, which would limit pharmaceutical companies’ ability to raise prices. To head off that possibility, Merck in April proposed avoluntary price-restraint program to First Lady Hillary Rodham Clinton’s task force on health care reform. Under the Merck plan, drug makers would voluntarily pledge to keep overall price hikes in line with the consumer price index.
Merck’s proposal, as well as its decision to buy Medco, is an acknowledgment that the nation’s movement toward managed care programs will mean more drug price cuts, analysts said. Managed care plans--exemplified by health maintenance organizations and other health insurers--hold down costs by requiring pre-admission approval for hospital stays and closely monitoring medical services, such as drug prices.
“I think this deal is clearly the wave of the future and you’re going to see more and more of these kind of arrangements that are really tailor-made for the health care marketplace of the future,” said Rep. Ron Wyden (D-Ore.), a leading health care watchdog in Congress. “Hopefully, it will mean lower prices and more products that are clinically superior than what is out there today.”
Medco, headquartered in Readington Township, N.J., has been a fast-growing player in the mail-order drug delivery business. Medco and similar companies, such as PCS Health Services, work with employers and managed-care plans, using sophisticated computer systems to track drug prices. Medco, which had 1992 revenue of $2.2 billion, said it works with about 90% of U.S. pharmacies and manages drug-benefit programs serving 33 million Americans.
By acquiring Medco, Merck in effect eliminates a “middleman” between it and major drug purchasers like health-maintenance organizations. Analysts said that could help cut Merck’s distribution and marketing expenses and also give it better access to Medco’s customers. Merck’s big sellers are the heart drug Vasotec and its cholesterol-lowering Mevacor.
But Medco could face resistance from customers like drug makers Bristol-Myers Squibb and Pfizer Inc., who might be suspicious of Medco’s cozy relationship with rival Merck. “If I’m Bristol-Myers, why should I believe (Medco) is giving me a fair shake?” said Kenneth R. Nover, drug analyst at A.G. Edwards & Sons Inc. in St. Louis.
The Medco-Merck deal is the latest of several major mergers in the health care field. In June, Columbia Healthcare Corp., of Ft. Worth and Galen Health Care Inc., of Louisville, Ky., announced plans to merge in a $3-billion deal that would create the nation’s second-largest hospital management company. Also last month, Blue Shield of California and UniHealth America announced an agreement to form a $6.5-billion managed care organization to compete with giant Kaiser Permanente.
Under terms of the deal, Merck would pay about $6 billion in stock and cash for Medco. The companies said the transaction, which is subject to antitrust review by the Justice Department, is expected to be completed in the fourth quarter.
Yaffe, of Montgomery Securities, called the sales price “a very fair price for both companies. It’s a combination of strengths.”
Merck stock on Wednesday was off $1.375 a share to close at $30.75 in New York Stock Exchange trading, while Medco’s shares jumped $4.425 to finish the day $34.125 on the NASDAQ market.
The Merck acquisition is one of the largest corporate deals in recent years. Other large deals include Bank of America’s purchase of Security Pacific Bank last year for $4.2 billion; Matsushita Electrical Industrial Co. acquisition of MCA Inc. for $6.7 billion in 1991, and Sony’s purchase of Columbia Pictures for $3.4 billion in 1989.
Merck Chairman P. Roy Vagelos described the deal as “an aggressive but carefully considered strategic move to keep Merck close to patients and customers in a rapidly changing and highly competitive health care market. He said the deal, which had been rumored for weeks, came after an “intensive, yearlong strategic review that led us to identify and approach Medco as the ideal partner for Merck.”
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