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Executive Summary

MEDCO CONTAINMENT's MARKETING AGREEMENT WITH UNITED HEALTHCARE CORP. provides Medco with an experience base in retail pharmacy formularies that could accelerate the introduction of Medco's msil-order preferred product prescription plan into the retail market. The two companies announced a "non-exclusive joint marketing agreement" on July 9 to facilitate the marketing of "formulary-based prescription drug benefit programs to Medco's customers" and the marketing of Medco's "mail service pharmacy programs to United HealthCare's customers." United HealthCare's Diversified Pharmaceutical Services manages third-party prescription plans, primarily for HMOs. It describes itself as "the first company to develop a mandatory generic drug program, install point-of-sale claims processing and implement a drug formulary in an open-panel system." As of mid- December 1991, DPS had contracts to provide prescription drug management and administrative services for 4.7 mil. lives. The type of services offered by DPS include "the establishment of a pharmacy network and formulary, installation and operation of a pharmacy claims processing system and maintenance of a prescription information database." The firm also says that it works with clients to arrange volume purchasing deals with drug manufacturers. The experience of DPS with formulary plans for retail pharmacies is a key drawing card for Medco, which has recently begun defining one of its major objectives as the diversification into "integrated" mail-order and retail plans for its customers. Medco is the leader in the mail-order business, providing mail- service pharmacy to 29 mil. lives in 1,200 benefit plans. Through the marketing deal, Medco can work with DPS to create new formulary options for the retail sector, patterned on Medco's "Prescriber's Choice" plan for its mail-order clients. By linking with DPS, Medco may shorten the amount of time that it would have taken to create its own retail formularly plan. Medco and DPS have been competitors for prescription plan management contracts in the past, including the Empire State Blue Cross plan won by DPS in mid-1991. Medco and DPS have growing competition in the area of formularly-based programs for retail pharmacy. PCS, for example, has had a formulary program, Premier Rx, in place with the Maryland State Employee Benefit Program and CapCare in Southern California since the beginning of the year. PCS recently added two more Premier Rx programs and has another four close to signing. The PCS sales-force officially began marketing the Premier Rx program nationwide on July 1. Medco's Prescriber's Choice mail-order plan (which has been rolling out since the beginning of 1991) offers selected products in each of 10 therapeutic categories to its clients at reduced prices. Medco negotiates sharply reduced rates for those products from manufacturers based on the allure of larger prescription volumes and encourages physicians to change prescriptions through counterdetailing methods and telephone calls to MDs. In May, Medco said that about half of the covered lives using its mail services (or approximately 14 mil. lives) are in plans using Prescriber's Choice ("The Pink Sheet" May 11, p. 7). The open formulary is relatively easy for Medco to operate through its in-house mail-service pharmacy. Medco recognizes that implementation of a version of that system through networks of retail pharmacies is more difficult. Medco has said that it expects the introduction of the preferred product plan to the retail pharmacy segment will require a different type of arrangement from the Prescriber's Choice. The Medco/DPS marketing agreement was described by the two firms as the offshoot of "discussions [that] have occurred relative to other transactions between the companies, including different types of business combinations." The Wall Street community has speculated on a purchase of DPS by Medco or a larger combination between the full firms. UHC's full lines of business take it into more diffuse areas of medical care management than Medco's traditional focus on the pharmaceutical segment of medical care. Medco recently took a first step outside the pharmaceutical field and entered into an agreement last April to acquire Personal Performance Consultants (PPC) of St. Louis-based California Inc. PPC provides employee assistance programs and managed health care systems.

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