INDUSTRY STRUCTURE AND COMPETITIVE ADVANTAGE

Merck's acquisition of Medco Containment Services in November 1993 set off a wave of controversial mergers between pharmaceutical companies and prescription-benefits-management companies. Drug-company executive s argue that PBMs can provide valuable information about the way drugs are prescribed and used. But critics of the mergers question the PBMs ' practices of offering incentives to retail pharmacists who persuade physicians to prescribe certain drugs. Critics also speculate that agg ressive growth of acquired PBMs contributes to price competition, whic h may decrease profits and incentives for new-drug research. The presc ription-pharmaceutical industry has been one of the most profitable in U.S. manufacturing for the past two decades, in part because of the i ntroduction of breakthrough drugs, but also because product differenti ation, the absence of pressure from buyers, and substantial entry barr iers have protected drug-company profits. But analysts now forecast th at the growth in managed care will diminish drug-company profits by th e end of the 1990s, regardless of the outcome of the current debate on health care reform. The PBM acquisitions are attempts to confront pro found changes in the industry, but does ownership of PBMs create compe titive advantage? Proponents of the mergers argue that a PBM can provi de a pharmaceutical company with superior information, better access t o customers, and the opportunity to introduce new products, such as ca pitation and disease management. But before drug companies can fully e xploit the potential of alliances with PBMs, they face enormous challe nges, including an environment that may favor less investment in R&D a nd important ethical and legal questions.