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Merck-Medco to become stand-alone PBM

Nearly a decade after it shocked the pharmacy world by buying Medco Containment Services for $6.6 billion, Merck & Co. has decided to spin off its pharmacy benefit management subsidiary as a separate publicly traded company.

Merck plans an initial public offering of Merck-Medco stock by mid-year, depending on market conditions. The full separation of the two companies will be completed within 12 months of the initial offering. Merck did not reveal financial details of the IPO, such as the initial stock price, the number of shares to be offered, or how much money the offering is expected to generate.

Noting that both Merck and Medco have benefited from the 1993 merger, chairman-CEO-president Raymond Gilmartin added that different times call for different strategies. "Given the evolution of the distinct and highly competitive environments in which Merck and Merck-Medco operate, we believe the best way to enhance the success of both businesses going forward is to enable each one to pursue independently its unique and focused strategy," he said.

Merck anticipates a return to double-digit earnings in 2003, Gilmartin said during a press conference. He added that the firm will file applications for or win approval of 11 new medications and vaccines over the next five years. Long an opponent of mega-mergers, he said that Merck will continue to pursue licensing agreements on compounds and targeted acquisitions.

The National Community Pharmacists Association is "cautiously optimistic that the separation will put Merck in a position to work more closely with community pharmacy on projects of mutual interest," said spokesman Todd Dankmyer, senior v.p.-strategic initiatives.

The deal is a "good thing for Merck and a good thing for the PBM industry," commented Perry Cohen, partner in The Pharmacy Group. While he foresees no impact on pharmacy, he thinks a total divestiture eliminates the conflict of interest aspect of drug company ownership of a PBM. "Merck needed Medco for a while but now it can go back to its core business," he said. "If Merck gets, say, $5 billion for Medco, that's a lot of money for drug discovery. Besides, Medco had been increasing the use of generics and that's not what Merck wants to see."

The Merck move came after four months of strategy sessions about a possible divestiture of the PBM. Wall Street has been grumbling over the firm's lackluster stock performance last year, key patent expirations, and the drop-off of Vioxx sales after a study tied COX-2 inhibitors to higher than expected risk of heart attacks. In addition, Merck-Medco's $26 billion in annual revenues generated more than half of Merck's sales, but the PBM's razor-thin margins contributed very little to its parent's bottom line.

The divestiture of Merck-Medco completes the retreat of the pharmaceutical industry from its earlier foray into pharmacy benefit management. Eli Lilly & Co. shed PCS Health Systems for a $2.4 billion loss in 1997, and the then SmithKline Beecham took a $1.6 billion loss to dump DPS in 1999. The original acquisitions led to charges that the PBMs would boost the sales of the products of their parent companies at the expense of other drugs. The Federal Trade Commission then forced the drug companies to build firewalls around their PBMs.

Carol Ukens

 

Carol Ukens. Merck-Medco to become stand-alone PBM. Drug Topics 2002;4:12.