CARDINAL/KMART PHARMACY INVENTORY OWNERSHIP AGREEMENT TO BEGIN AUG. 1 under a letter of intent announced June 3. Cardinal Health will own all prescription drug inventory in Kmart's 1,670 pharmacies and be responsible for directly restocking pharmacy inventories through an auto-replenishment system. Kmart will continue to operate the pharmacies.

Cardinal expects the five-year contract with Kmart to bring in $9 bil. in total revenues. The company bases its forecast on Kmart's expected pharmacy sales growth, Cardinal's new status as exclusive supplier and revenues from the assumption of Kmart's repackaging activities, worth about $150 mil. a year.

Cardinal became Kmart's primary supplier in February 1994 ("The Pink Sheet" Feb. 14, 1994, In Brief). In 1995, Kmart represented 10% of Cardinal's $9 bil. in revenues. Kmart previously also was supplied by Tennessee Wholesalers. Tennessee's share of the business was roughly $150 mil.-$200 mil. Kmart's willingness to enter into the agreement is in keeping with the retailer's efforts to cut its overall costs to shore up profitability.

Profit-sharing opportunities may be a part of the definitive agreement still being negotiated, Cardinal said. Kmart said selling its pharmacy inventory to Cardinal "will maximize the sales and profitability of our pharmacy operations and improve our inventory replenishment capabilities." Kmart fills about 61 mil. prescriptions annually, the chain said.

At the Alex. Brown health care conference in May, Cardinal CEO Robert Walter disclosed the news that the wholesaler was negotiating an inventory ownership contract with a chain customer. Walter acknowledged that the approach appears to involve spending more money "to make the same profit," but maintained that the increased expense will pay off "if there's an opportunity to upgrade the sophistication and the quality of the service" to its customers. In the long term, Walter indicated, wholesaler ownership of pharmacy inventory could be a stepping-stone to manufacturer ownership of product through to the dispensing stage ("The Pink Sheet" May 27, T&G-8).

Cardinal will link its Medicine Shoppe franchises to a data warehouse to show the pharmacy group can move market share for manufacturers, possibly beginning in August. Cardinal said the system will be similar to the CardinalCHOICE HQ information management system it offers its hospital and chain clients but with a few additions such as financial management software. In addition, Cardinal said it will build networks among its Leader independent pharmacy customers to compete for managed care contracts.

Cardinal/Kmart pharmacy inventory ownership contract valued at $9 bil. over five years.

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