Eli Lilly & Co. will pay $4 billion for the nation's largest manager of drug-benefit programs, joining competitors that have bought similar firms.
The acquisition of PCS Health Systems, a subsidiary of San Francisco-based McKesson, is the largest in Lilly's history. PCS manages drug benefits for 50 million people in more than 1,300 health plans. It expects to oversee $9 billion in drug prescriptions in its fiscal year ending March 31, 1995.
In recent months, pharmaceutical giant Merck & Co. bought Medco Containment Services, a large benefit manager, for $6.6 billion (Nov. 22, 1993, p. 16). Meanwhile, SmithKline Beecham acquired Diversified Pharmaceutical Services for $2.3 billion (May 9, p. 16).
Such acquisitions give manufacturers new opportunity to influence demand for their products. Drug-benefit managers save health plans money by encouraging physicians to prescribe drugs on their preferred lists. Those drugs often are bought at deep discounts from manufacturers, which cannot afford to lose so many potential customers.
Many pharmacists and others in the healthcare field view these partnerships warily. A conflict of interest exists between companies that sell drugs for profit and companies that are charged with ensuring the most cost-effective use of drugs, they argue. The companies, however, have said they can maintain objectivity and can work more effectively together.
After its acquisition was announced July 11, McKesson's stock price shot up 34% to close at $98 on the New York Stock Exchange. Lilly's stock fell 13% to $50. Some analysts think that the Indianapolis-based company might be paying too much for PCS, which had estimated revenues of $177 million in its fiscal year ended March 31. Exact revenues for PCS weren't broken out in McKesson's financial statements.
The transaction is expected to close in two to three months, pending regulatory clearance and shareholder approval.