Merck & Co. has decided to establish Merck-Medco, its pharmacy benefits management subsidiary, as a separate company.

	Gilmartin

Merck acquired Medco in 1993 in an attempt to deal with the managed-care industry's control over drug purchases. Other companies such as Eli Lilly & Co. and SmithKline Beecham subsequently acquired pharmacy benefits management firms of their own, only to sell them a few years later at a loss.

In contrast, Merck's foray into the field has been fairly successful. Medco has blossomed under Merck ownership, with revenues growing from $2.2 billion in 1992 to $26 billion by 2001, or about 55% of Merck's total. The company is the leading U.S. pharmacy benefits manager, handling more than 537 million prescriptions annually.

But "given the evolution of the distinct and highly competitive environments in which Merck and Merck-Medco operate, we believe the best way to enhance the success of both businesses going forward is to enable each one to pursue independently its unique and focused strategy," says Merck chairman, president, and CEO Raymond V. Gilmartin.

The action takes place against the backdrop of Merck's struggle to rescue an ailing drug business. Merck has warned that earnings growth will stop in 2002. Five of the company's top-selling drugs--accounting for close to one-third of its pharmaceutical sales--face generic competition because all will lose patent protection by June.

Selling Medco will make the slow growth of Merck's drug business painfully clear. However, it will leave a more manageable company and may provide funds for future acquisitions. Merck intends to make an initial public offering of Merck-Medco stock by mid-2002 and complete the separation of the two firms within the following year.

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