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MEDCO CONTAINMENT SERVICE's $400 MIL. ACQUISITION OF NATIONAL DATA CORP

Executive Summary

MEDCO CONTAINMENT SERVICE's $400 MIL. ACQUISITION OF NATIONAL DATA CORP. and its point-of-sale pharmacy management systems provides an immediate tie-in with Medco's PAID drug claims processing business. One of the principal long-term goals of the merger, Medco indicated, is the establishment of a credit card system for pharmaceuticals and other health care services. "NDC's point of sale capabilities combined with Medco's position in claims processing will . . . allow us to offer healthcare providers on-line benefit eligibility verification and even claim adjudication," Medco Chairman Martin Wygod noted. "Eventually, the combined resources of the two companies will enable us to expand the potential of credit card based payment systems for the health care industry." In addition to its credit authorization and cash management services to banks, NDC is also involved in computer-based pharmacy management systems and telemarketing. Based in Atlanta, NDC is approaching annual revenues of $200 mil. For the first six months of fiscal 1988, NDC reported net earnings of $7.6 mil. on revenues of $86 mil. NARD announced on March 15 that it terminated an agreement with NDC, under which the Atlanta-based firm would provide electronic claims submission services for RxNet, NARD's national pharmacy services administrative organization. The association said it has begun "to evaluate immediately our legal options." NARD has been an active opponent of mail service pharmacies like Medco. Medco cited four areas where the NDC merger complements its mail order pharmacy and claims processing business: NDC's point-of-sale technology should improve PAID's position in the pharmacy; NDC's telemarketing capability link up with Medco's recent efforts to step up consumer marketing program, reflected in a recent agreement with Citibank; NDC's data processing abilities allow Medco's mail order pharmacy business and PAID to maintain their current growth rates without being limited by existing information systems; and NDC's core business in transaction processing may in the future, enable Medco to hook up with large financial institutions interested in getting involved in health care payment systems. Initially, NDC's "strengths" in data processing and telecommunications, Wygod said, "give Medco the ability to design programs to deliver substantial savings to insurance company customers and more cost effective benefit plan designs to our existing customers." Wygod predicted that NDC's networking capabilities will also allow Paid customers "to access other health care provider networks such as those supplying vision, dental and homecare services." Medco's Paid Prescriptions is running second to McKesson's PCS, Inc. subsidiary in the drug claims processing business. In a 1986 prospectus, Medco reported that PCS was processing "approximately 50%" more claims than Paid. The NDC merger appears to be aimed at giving Paid an advantage over PCS at the point-of-sale as well as long-term technological edge as health benefit plans seek new ways to hold down reimbursement costs. Under the merger agreement, Medco is swapping 26.9 mil. shares of stock, valued at $14.88 per share on March 18, for NDC's 11.7 mil. shares, or 2.3 Medco shares per NDC share. Medco currently has about 44 mil. shares outstanding. After the merger, NDC will operate under current management as a wholly-owned subsidiary of Medco. NDC Chairman L. C. Whitney and President Mark Braunstein will sit on Medco's board and will hold corporate senior exec VP titles. NDC said it will "continue to concentrate on its core financial services businesses" after the merger with Medco.
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