Tuesday, July 09, 2002

Merck books raise suspicions

Accounting aired; investors sell

Enquirer staff and news services

        NEW YORK — Merck & Co. recorded more than $12 billion in revenue over the past three years from its pharmacy benefits unit even though the subsidiary never collected the money.

        The revenue in question is the co-payment — typically $10 to $15 — paid by consumers with a prescription drug card to their retail pharmacy to cover their portion under an insurance plan. The pharmacy keeps the co-payment.

        Whitehouse Station, N.J.-based Merck, the second-largest U.S. drug maker, Monday said its treatment was in accord with generally accepted accounting practices and had no impact on its earnings since the revenue was offset in its financial reports as an expense.

        But its stock fell amid heightened investor suspicion about accounting issues. On the New York Stock Exchange, Merck stock closed down $1.05 to $47.81.

        “Are there other bugs left to crawl out from under the rocks? I don't think so but as an investor, you have to ask,” said Rita Freedman, an analyst at PNC Advisors, which manages $60 billion and holds Merck shares. “I'm going to give them the benefit of the doubt but there is that Andersen tinge to it.”

        Merck counted patients' co- payments to druggists as revenue generated by its Medco unit, which manages pharmacy-benefit programs for businesses and health insurance companies.

        The co-payments amounted to about $2.84 billion in 1999, $4.04 billion in 2000, $5.54 billion last year and $1.64 billion in the first quarter of this year, Merck said in a filing Friday with the Securities and Exchange Commission.

        “Merck-Medco's practice of recognizing retail co-payments as revenue has no impact on net income or earnings per share because a corresponding, equivalent amount is also included in cost of revenues,” Merck spokesman Chris Loder said.

        Mr. Loder said Merck's independent accountants, PricewaterhouseCoopers, concurs with this accounting treatment.

        Merck plans to spin off Merck-Medco in an initial public offering today. The Medco IPO has been delayed twice and its price slashed because of market conditions. Mr. Loder said that the company's accounting practices at Merck-Medco were thoroughly reviewed by the Securities and Exchange Commission. The accounting practice itself was reported in an April SEC filing, but the exact amount of reported but not collected revenue was reported for the first time in Friday's SEC filing.

        “In the current market environment with concern over inflated accounting, this is very bad,” said Mathias Christmann ofDelbrueck Asset Management, who recommends keeping Merck “underweight.” “It won't lead to a profit adjustment. It's a case of sentiment.”


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