Medco Containment Services Inc.

The pharmaceutical industry was worth $65 billion U.S in 1997, composed of three major product types; brand name drugs, generic of off-patent brand drugs and over the counter (OTC) drugs. The first two types of drugs require a doctor’s prescription in-order to be obtained. Prescription drugs accounted for 80% of the industry’s sales and profits in the early 1990s where OTC drugs accounted for the rest, 20%.  There are two channels of distribution, wholesaler to retailer as wholesalers made 5-8% of gross margin. The second channel of distribution is the pharmacy mail service where wholesalers are not needed. Pharmaceutical companies operated at relatively stable environments that were characterized by solid profits and minimal pressure. Merck & Company Inc. (Merck) is a global research driven pharmaceutical company which specializes in the production of healthcare products for humans and animals through vaccines, biologic therapies and prescription medication.  Medco Cost Containment Services Inc. (Medco) was a pharmacy benefit manager also known as (PBM). PBMs had huge market coverage and assisted in various ways such as they created pharmacy benefit plans, prescription reviews, and so on. PBM also had the ability to provide information for total quality approach which helped to integrate the needs of all stakeholders in the industry. On November 18, 1993, Merck had purchased Medco for $6.6 billion. Immediately after the merger, Medco operated as a subsidiary of Merck and in 1994 Merck-Medco was formed. Vertical integration has enabled companies to redesign their value chains within their organizational boundaries. With the acquisition of Medco, Merck expanded its organizational boundaries while at the same time added value to its operations. Merck’s profits increase four folds while Medco doubled its number of clients.

Should the company choose to redesign itself and change the processes and its values of the current organization to solve the issues?

Advantages of Acquiring Medco Containment Services Inc. is the specialization of the firm, in integrated drug benefit plans and pharmacy services to managed care markets. With Marty Wygod foreseeing an opportunity to revolutionize the distribution system through centralized mailing service distributions that would save the cost associated with intermediate margins. Merck found that Medco’s client base was complementary to chronic care drugs and therapies although prove to be more expensive in the short-term but would save costs over the life of a patient. With integrated pharmacy services, Medco had competitive strengths that lied in the mail services that offered efficient and economical delivery. Medco also offered a retail card program that was a clinically driven program dispensed from PAID network. These programs included patient profiling and outcomes research but needed further clinical expertise. With the ability to economically deliver long term prescriptions via its 23 pharmacies, Merck can enter the market with an advantage. PBMs also give the ability to purchase drugs and from manufacturers and pharmacies at reduced prices for health issuers. PBMs can also use their patient’s information to their strategic advantage to understand how drugs are prescribed, used and how they impact certain diseases preventing inappropriate drug interactions and under/over usage of medication.