Healthy Skepticism Library item: 1073
Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.
Publication type: news
Martinez B.
Merck Kills Medco IPO Plan,Will Spin Off Unit to Holders : Drug Firm Says Market
THE WALL STREET JOURNAL 2003 Apr 23
Full text:
Merck & Co. said it plans to spin off its Medco Health pharmacy-benefits subsidiary completely to Merck shareholders this year because of what it says is an unfavorable initial public offering market.
The decision to spin off Medco to Merck shareholders — rather than attempt once again to take a portion of the pharmacy-benefits manager public in an IPO — could help Merck avoid the problems it encountered last year.
Merck canceled the planned IPO last year when it became apparent that it wouldn’t get the price it wanted for Medco — which some investors blamed on the company’s inability to explain the business properly during the roadshow. A Merck spokeswoman said the IPO was pulled “solely due to market conditions.”
Under the current plan, existing Merck shareholders would receive shares in Medco. The shareholders would then be able to sell their Medco shares on the open market. Merck, based in Whitehouse Station, N.J., can then focus on its drug pipeline and the effects of losing patent protection on several drugs.
In announcing the plan at the company’s annual meeting Tuesday, Raymond V. Gilmartin, Merck’s chairman and chief executive, echoed what he said 15 months ago when he announced plans to separate the companies: “We continue to believe that by establishing Merck and Medco Health as two separate companies we will enhance the potential for success of both businesses, thereby increasing shareholder value.”
Medco is the nation’s second-largest PBM. The company controls the drug benefits of more than 65 million Americans who either get their prescriptions filled at retail drugstores or from Medco’s mail-order facilities. Health plans, like Blue Cross and Blue Shield plans, and major employers, such as General Motors Corp., hire Medco to provide pharmacy benefits and control the rising costs of pharmaceuticals.
In the early to mid-1990s, many drug companies purchased PBMs in order to promote their own drugs. But after regulators and others began complaining about such conflicts of interest, all but Merck sold off their PBMs.
Merck bought Medco for $6.6 billion in 1993. When the company first began to market the Medco IPO in the spring of 2002, many analysts estimated the unit’s value at about $10 billion. But disclosures about Medco’s business, and an inability of its management to explain how exactly Medco makes its money, began to push down what investors were willing to pay for the new stock. The IPO was delayed twice before it was scuttled.
Of particular concern to investors was that even after a separation from Merck, Medco would still have to continue to heavily promote Merck products to its clients. Medco still faces lawsuits that accuse it of favoring Merck drugs over others, which plaintiffs contend increased their pharmaceuticals costs.
Still, the prospects for a publicly traded Medco depend on the value Merck places on the unit at the time of the spinoff. If Merck sets the valuation too high, Merck shareholders seeking to sell their Medco stock may see the value fall in the market.
But stocks of PBMs have performed extremely well in the past several years, up 14% year to date and up nearly three times in the past three years, according to Kevin Berg, PBM analyst at First Albany Corp. By contrast, the S&P 500 index is up 4% so far this year and is down about 37% over the past three years. But Mr. Berg cautions that Medco’s profit-growth rate is likely to be slower over the next three quarters than that of the other publicly owned PBMs. Mr. Berg says that based on Medco’s projection to investors this week, its profit will likely grow between 10% and 16% over the next three quarters, compared with other PBMs’ 22% to 38% predicted profit growth over the same period.
