Newly issued shares of pharmacy benefits manager Medco Health Solutions are up nearly 11% in less than two days of trading, following the Franklin Lakes, N.J.-based company's spinoff from pharmaceutical manufacturer Merck & Co.
Merck completed the long-delayed separation Tuesday by distributing 270 million shares of Medco stock to its own shareholders. Medco trading on the New York Stock Exchange began Wednesday morning at a price of $23.10.
Standard & Poors immediately added Medco to its benchmark S&P 500 stock index as one of the largest publicly traded companies in the United States. Merck, also an S&P 500 member, remains a component of the Dow Jones Industrial Average.
Today, the American Stock Exchange launched trading in Medco options, with initial contract expirations in September, October, January and April.
Coinciding with the spinoff, Medco named seven independent directors to its reconstituted board, which replaces the three Merck employees who had served as Medco directors. The new board includes two physicians: Edward Shortliffe, M.D., a medical informaticist at Columbia University in New York; and Brian Strom, M.D., an epidemiologist at the University of Pennsylvania.
Strom currently serves on the Drug Safety and Risk Management Committee at the FDA.
Even after the separation, Medco will continue to have close business ties with Merck, despite previous statements that Medco has been an independently operated company all along.
In a prospectus filed two weeks ago with the Securities and Exchange Commission, Medco discloses that, under a five-year contract signed in July 2002, it must give preferred treatment on its standard formularies to all Merck patented drugs and allow Merck to market its products to Medco enrollees. Medco stands to lose lucrative rebates and become liable for damages if it does not hold up its end of the bargain.
"In some respects, the agreement also imposes greater obligations on us than similar agreements we have with other pharmaceutical manufacturers. Accordingly, the agreement may have a significant impact on our profitability," the Medco filing says.
Medco spokesperson Ann Smith says the PBM has more than 50 similar contracts with other pharmaceutical companies to include specific drugs on its formularies. However, only the Merck deal contains the penalty clauses.
Medco also says its executive officers controlled nearly 315,000 shares of Merck common stock and held options on another 2.1 million Merck shares as of July 1. The PBM acknowledges that this cross-ownership could create conflicts of interest.
The close ties have brought scrutiny from federal investigators, who are probing Medco and rival AdvancePCS regarding the rebates that drug companies often pay to PBMs.