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THE CUTTING EDGE

Merck, CVS to Merge Online Drug Business

Pharmaceuticals: The deal underscores trend toward mixing the real world with cyberspace in the retailing arena.

October 07, 1999|JONATHAN GAW | TIMES STAFF WRITER

Underscoring the trend toward merging online and offline operations, Merck & Co., the country's largest provider of pharmaceuticals, and CVS Corp., the largest retailer of prescription drugs, will integrate their Web retailing operations, the companies said Wednesday.

The deal, which allows members of Merck-Medco Managed Care to order drugs through CVS.com and makes CVS.com the exclusive provider of over-the-counter drugs from Merck's Web site, fills the last piece in the puzzle of how the Internet will figure in filling prescriptions.

The agreement also comes at a time when more companies, both online and offline, in a variety of retailing categories are merging the real world with cyberspace, recognizing it as just another delivery channel that is stronger when integrated with the rest of them.

The pharmaceuticals category has led the way because of the nature of how and why people buy and take drugs. But other categories are close behind as they try to leverage both the benefits of physical locations and the efficiencies of electronic commerce.

"The drugstore is a natural for advancing the convergence theme," said David Magee, a financial analyst at Robinson-Humphrey.

Buying prescription drugs from one pharmacy has medical benefits for those patients who take several medications and would have a better understanding of how they interact with each other if they purchased all of them from one place.

In addition, a drugstore with strong presences on the Internet and in the real world would address the needs of customers who may require some medications immediately--and thus would go to the corner drugstore--and those who could wait for medications to be mailed to them.

"Selling prescription medications is much more complex than selling, say, a book, and that's a big factor as to why we are seeing convergence happen here faster than others," said David Restrepo, a health-care analyst with Jupiter Communications. "It's more of a necessity here than elsewhere, but we will see it spread."

With the deal announced on Wednesday, CVS gets a leg up on its competitors by being able to sell drugs to Merck-Medco's 51 million members who last year generated 322 million prescriptions. The deal is not exclusive for either Merck-Medco or CVS.

"Without the support of prescription management companies like Merck-Medco, the efforts of CVS and all the big drugstores online were dead in the water," said Restrepo, who expects others to strike similar deals soon.

In May, CVS acquired Soma.com, the first online-only drugstore when it launched in January.

Competitor Rite Aid Corp. followed suit in June, acquiring a quarter-stake in Drugstore.com, an online pharmacy backed by technology venture capital powerhouse Kleiner, Perkins, Caufield & Byers. Earlier in the year, Rite Aid bought PCS Health Systems Inc., a strong competitor to Merck-Medco in managing prescriptions.

Walgreens has said it will begin online operations in the fall, and Wal-Mart Stores Inc. is also expected to enter the market, industry watchers said.

The CVS-Merck deal does call for Merck-Medco to handle all mail-delivered prescriptions ordered over the CVS.com site, allowing Merck-Medco to maintain strong control over customer relationships as well as a profitable business that has better margins than merely processing the prescriptions.

Merck-Medco mailed out more than 53 million prescriptions worth $6 billion last year. Company officials view the Internet as a way of growing that business. The firm's Web site currently receives 40,000 orders for prescription drugs every week.

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