After a decade-long relationship that frequently drew conflict-of-interest claims, pharmaceutical giant Merck & Co. and its huge subsidiary, pharmacy benefit manager Medco Health Solutions Inc., have split up.
Merck spun off Medco as a tax-free dividend to current Merck shareholders late Tuesday, who got roughly one Medco share for every eight Merck shares they own. About 270 million Medco shares began trading Wednesday on the New York Stock Exchange under the ticker symbol MHS, and the stock becomes a component of the Standard & Poor's 500 index.
Merck closed yesterday at $52.12, up $1.28 from the previous close. Medco Health closed at $25.22, up $2.12.
Medco Health operates a 52,000-square-foot facility in North Versailles, providing prescription services for several companies and organizations, including U.S. Steel Corp. and HighMark Blue Cross Blue Shield in Western Pennsylvania. The facility employs 415 workers, 95 of them pharmacists, and fills more than 105,000 prescriptions each week, more than 5.4 million a year. The North Versailles facility is one of Medco's smallest mail service pharmacies, but it still makes more than 12,000 doctor calls each week.
Merck retains no ownership in Medco, which last week paid the drug maker $2 billion, $500 million from cash on hand and the rest borrowed from banks or raised by selling bonds. Merck plans to use the money to pay down debt.
Still, the two companies' fortunes will be somewhat intertwined until their current contract ends in July 2007. It requires Franklin Lakes, N.J.-based Medco to sell a larger percentage of Merck drugs than Merck's overall market share -- or pay Merck financial penalties.
"The relationship with Merck has been a good one, and we've learned a lot, but there's nothing more to be gained," said Medco Chairman David Snow, who took over in March. "Medco's ownership by Merck has been a lightning rod for criticism, although there's been nothing inappropriate."
Stock analysts and officials with both companies say the split will let the companies better pursue their growth strategies and let investors rate them against their own industries -- important because Medco's low-single-digit profit margin has been dragging Merck's down as Medco revenues overtook those from Merck drugs.
Merck is the world's No. 3 drugmaker, while former junior partner Medco now leads pharmacy benefit managers, the companies that process health plan prescription drug claims through pharmacies and ship medicines via mail.
Independence also should help dispel the lingering cloud of suspicion that Merck's main purpose in buying the oddly named Medco Containment Services 10 years ago was not -- as they claimed -- to improve health care and cut costs, but to boost sales of Merck drugs.
"Separating the two companies should end that speculation," said pharmaceuticals analyst David Moskowitz of Friedman, Billings, Ramsey.
Medco's contracts with 50-some other major drugmakers don't have the same potential penalties as the Merck relationship, but the rebates Medco extracts from manufacturers to help hold down its clients' drug costs decline along with sales, said Susan DeWitt, investor relations director.
The way Medco accounted for those rebates, and its practice of counting patient co-payments for prescriptions as part of its revenue, also drew criticism. However, the Securities and Exchange Commission has since ruled the practices are legal, Snow said.
Medco now handles prescription drug benefits for about 62 million Americans, including members of a dozen Blue Cross Blue Shield plans and 190 of the Fortune 500 companies. But it has slipped from about 65 million members in 2001 because several major health plans have not renewed contracts.
Of 548 million prescriptions Medco processed last year, 82 million were mail-order claims.
Medco CEO Snow is predicting net income will grow 20 percent to 25 percent this year, excluding interest on the money it borrowed to pay Merck. Last year, it earned $360 million on revenues of $33 billion.
