Merck & Co., Whitehouse Station, N.J., said it plans to spin off its pharmacy benefits management subsidiary, Merck-Medco, as a publicly traded company-a sea change in strategy aimed at strengthening both businesses as their rapidly evolving environments take different directions.
Merck plans an initial public offering of a portion of Merck-Medco by mid-2002. Alternatives for distributing the remaining shares are under evaluation. Full separation should be completed within 12 months, officials said, subject to market conditions, an Internal Revenue Service ruling that the transaction would be tax-free to shareholders and other regulatory approvals.
Merck's 1993 acquisition of what was then called Medco was viewed as the beginning of a new era in drug retailing, with drugmakers effectively becoming their own middleman in negotiations with health plans. It prompted similar acquisitions by rival drug companies afraid of falling behind the curve.
The move into uncharted territory was controversial and ultimately costly, as antitrust concerns forced some companies to revise their strategies.
Although the Federal Trade Commission initially cleared Merck's $6.6 billion acquisition of Medco, it later intervened, saying the combined company's behavior was a threat to consumer choice and to price and service competition.
Merck settled with the FTC in 1998, agreeing to maintain an "open formulary" chosen by independent pharmacists and physicians without financial interests in Merck. The company said it had been voluntarily maintaining "operational independence" between the divisions for three years.
Since the pharmaceutical giant acquired Merck-Medco, the division's revenue grew to $26 billion in 2002 from $2.2 billion in 1992. Also, the number of covered enrollees increased to 65 million from 33 million, officials said. The largest pharmacy benefits manager in the nation in terms of revenue, Merck-Medco manages more than 537 million prescriptions annually and operates the world's leading Internet pharmacy, they said.
But a four-month strategic review of the two businesses made it "clear that Merck-Medco is a much different company than it was nine years ago, and the environment in which it operates has also changed dramatically," Merck CEO Raymond Gilmartin said in a written statement. The best way to ensure both businesses' future success is to separate them so that they can focus on their unique strategies, he said.