Merck to buy mail-order drug firm Discount distributor to help contain costs

July 29, 1993|By New York Times News Service

Heralding the far-reaching changes in the business of health care, Merck & Co., the world's largest pharmaceutical company, announced yesterday that it would spend $6 billion to buy the country's largest mail-order drug company.

The purchase of Medco Containment Services Inc. gives Merck a discount drug distribution arm at a time when prescription drugs, its main business, are coming under increasing price pressure from Washington and employers eager to curtail rising health care costs.

The cash-and-stock acquisition is the latest of several moves by large drug companies to try to fit into the emerging world of managed health care, in which consumers' choices are limited and costs are reduced.

Having lost their virtually unrestrained ability to raise prices, many prescription-drug makers are striking deals to get their products into other segments of the market in the hopes of keeping sales and profits growing. For instance, Warner-Lambert Co. announced yesterday that it was forming joint ventures with two British companies, Glaxo PLC and Wellcome PLC, to develop versions of two widely used drugs that will soon be available without a doctor's prescription.

And Marion Merrell Dow Inc. said recently that it would buy the Rug by-Darby Group Cos., the biggest maker of low-priced generic versions of drugs whose patent protection has run out.

Merck estimated yesterday that 90 percent of all prescription drugs will be provided free or at reduced prices by government or employer health plans within 10 years. About half of current prescriptions are financed this way. Medco provides drugs under these plans through its mail-order business and through pharmacy sales to health-plan members who carry a card.

Medco, based in Montvale, N.J., says it supplies drugs to employer health plans with 33 million members.

In the case of its mail-order business, Medco seeks the lowest-priced drug for each type of illness. Merck had balked until recent years at offering the price cuts demanded by Medco and other managed-care buyers.

Companies like Medco and other large drug buyers like health maintenance organizations increasingly influence which drugs are prescribed by giving their members incentives to choose certain drugs.

But discount drugs are not the only services provided by Medco. It makes phone calls to customers' physicians to urge them to prescribe selected drugs. It also keeps elaborate electronic records of each patient's drug purchases, and it alerts pharmacists of side effects that might endanger people who take multiple drugs.

P. Roy Vagelos, Merck's chairman, said Merck would study the Medco electronic records to try to show health maintenance organizations and employers that Merck's products would generate large savings for patients who might otherwise need expensive hospital care, which would mean lost days of work.

The acquisition will produce "the first complete vertical integration of a pharmaceutical company from the discovery of drugs to the patient's mouth," said Stephen W. Schondelmeyer, a pharmaceutical economist at the University of Minnesota.

Merck, based in Whitehouse Station, N.J., said the Federal Trade Commission would review the Medco acquisition for potential problems with antitrust laws. Merck, with $9.7 billion in 1992 revenues, has about 10 percent of the fragmented American drug market.

Medco, with $1.8 billion in sales in the year that ended June 30, 1992, has about half of the mail-order drug business and 22 percent of those eligible for employer-financed drug benefits.

"That's a colossus in an industry that is highly fragmented," said Samuel Isaly, an analyst at Mehta & Isaly Worldwide Pharmaceutical Research. He said Merck executives hope to NTC double their American market share, to 20 percent, in 10 years. But at least for now, he said, the combined Merck and Medco business would not be large enough to be "anti-competitive."

Under terms of the agreement signed yesterday morning after an all-night drafting session, Medco shareholders would get $39 in cash, or 1.21401 Merck shares for each Medco share. The cash payments would be limited to 40 percent of the total, to keep the transaction tax free, the companies said.

Merck shares closed at $30.75 yesterday, down $1.375, in heavy trading on the New York Stock Exchange. Medco gained $4.375, to close at $34.125, in Nasdaq trading.

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