Merck-Medco, CVS link sites

Under the terms of the agreement, CVS (NYSE:CVS) will sell over-the-counter products on a site operated by Merck's Merck-Medco Managed Care LLC unit. Merck-Medco (NYSE:MRK) will allow its members to order prescriptions on CVS's site.

The move is just the latest in a string of deals in the burgeoning online drugstore business. Drugstore.com (Nasdaq:DSCM) partnered with Rite Aid Corp. (NYSE:RAD) to gain access to the members of Rite Aid's pharmacy-benefit-management business. PlanetRx.com, which is expected to go public Thursday, did the same to get access to members of Express Scripts Inc.'s pharmacy benefit plan.

The Merck-CVS alliance also underscores the value of name recognition with consumers that the bricks-and-mortar retailers command in such Internet deals. Other retailers are expected to leverage their name recognition with consumers in other online alliances.

Because CVS, of Woonsocket, R.I., is the nation's second-largest drugstore chain in terms of sales, Merck-Medco President Per Lofberg said the unit benefits from CVS's strong brand recognition. "They have a tremendous consumer franchise," he said.

Merck-Medco is a pharmacy benefit manager, or PBM, which administers and controls prescription benefits for nearly 51 million Americans with health insurance. It also offers mail-order prescriptions to those plan members, a service it has offered over its Internet site for the last year. Merck is based in Whitehouse Station, N.J.

Selling CVS products
Merck-Medco's site will contain a CVS site, selling the same 7,000 over-the-counter products that CVS sells through its Internet drugstore. Those products include private-label, non-prescription medications and health and beauty aids.

Lofberg said it was more efficient to contract with CVS for over-the-counter products than to develop its own online drugstore. The products will be mailed from a 25,000-square-foot facility in Cincinnati that CVS acquired with its recent acquisition of Soma.com, an Internet drugstore.

In return, Merck-Medco will allow its members to order prescriptions over CVS's Internet site. They can either pick up the prescriptions at a CVS store or have the order mailed to them by Merck-Medco.

The alliance also calls for CVS's ProCare unit to become the exclusive mail-order provider to Merck-Medco members who require complex and expensive therapies, such as those for AIDS patients.

Heated issue
The arrangement resolves a fractious issue between PBMs and Internet drugstores. PBMs have wanted to keep the mail-order portion of the Internet drugstore business to themselves. They have been able to do this by refusing to reimburse Internet drugstores for prescriptions.

The obstacle has led to other alliances. Executives for Merck-Medco and CVS declined to disclose the financial terms of the five-year agreement.

Tom Ryan, chief executive of CVS, said the alliance holds the prospect of pumping more volume through his company's distribution system and extending its customer base via the Internet to Western States, where its presence is small.

The Internet drugstore business is small so far. Merck-Medco's site handles about 40,000 prescriptions a week, or an indicated 2.1 million a year. CVS's stores handle about 255 million prescriptions a year. But the business is rapidly growing.

In New York Stock Exchange composite trading Tuesday, Merck rose 87.5 cents to $70.125, and CVS fell 12.5 cents to $37.0625.