Walgreen Co. (WAG) will offer prescription drugs directly to Caterpillar Inc. (CAT) for its workers and retirees, launching a program that will parallel the one Wal-Mart Stores Inc. (WMT) already has with the heavy equipment manufacturer.

The Walgreen program announced Wednesday takes effect Jan. 1, when Wal-Mart's pilot program with Caterpillar had been scheduled to end. Caterpillar also said Wednesday it has signed a two-year contract extension with Wal-Mart.

Caterpillar "has determined our pilot with Wal-Mart was a success," said Caterpillar pharmacy benefits manager Todd Bisping. "We will have a direct agreement with both Walgreen and Wal-Mart," he said.

With the parallel deals, 70,000 Caterpillar employees, retirees and dependents will have more options to meet their prescription-drug needs. The Caterpillar arrangement could serve as a template at other large corporations as retailers expand their efforts to provide employers with simple, cost-effective and transparent ways to manage their drug plans.

The move is seen as a competing pricing structure to that of standalone pharmacy benefits managers. Usually employers and governments contract with PBMs to administer coverage, which includes choosing what drugs are covered and how much they will cost companies and patients. PBMs can deliver lower prices because retail drug stores and pharmaceutical companies give them discounts for buying in bulk.

"We're in the midst of a retail pharmacy war right now that started about three years ago and in my opinion is only going to get more intense," said Adam Fein, president of Pembroke Consulting. A movement to this type of model is "one of the key battlegrounds by which larger and more efficient pharmacies are going to try to take market share" from other pharmacies.

Caterpillar said it went with Walgreen because it wants to expand its health benefits programs to other pharmacies, said Bisping, who added that other pharmacy chains could be added.

According to Walgreen, nearly 70% of all Americans live within five miles of a Walgreen and 50% live within two miles. Walgreen operates about 7,000 pharmacies across the U.S., while Wal-Mart has substantially less.

The Caterpillar pact is an extension of Walgreen's healthcare efforts working directly with employers. The drug store also manages a network of onsite health-care centers for major companies such as Walt Disney Co. (DIS) and Toyota Motor Corp. (TM)

"This is just Walgreen offering an even more holistic approach," said Andrew Wolf, an analyst at BB&T Capital Markets. "A lot of this may have to do with convenience. Walgreen's are nearly on every street corner, and people may also prefer to get their drugs at a traditional drug store."

A Wal-Mart spokesperson could not immediately be reached for comment. Wal-Mart started the prescription program with Caterpillar last September as a way of trying to define itself as a prescription supplier to corporations. Wal-Mart has said it wants to expand the program, but has so far not announced any other companies have joined.

As part of its arrangement with Caterpillar, Walgreen will offer Caterpillar employees discounts on non-pharmacy goods. Walgreen and Caterpillar are also talking about expanding the program to have retail clinics onsite at certain Caterpillar offices or near them, Bisping said.

It's not believed Wal-Mart has either arrangement with Caterpillar currently. But services, as well as prescription prices, could change once the formal contract with Wal-Mart is announced. Right now, Caterpillar is picking up the copay for employees on generics from Wal-Mart. Employees pay full price, under their health plans, on brand drugs.

Walgreen shares were up 1.7% at $33.09 in recent trading, while Wal-Mart shares were up 0.4% at $51.89

-By Karen Talley and Kelly Nolan, Dow Jones Newswires; 212-416-2196; karen.talley@wsj.com