Merck Defends Accounting Practice

By Agence France-Presse Merck & Co Inc. fiercely defended its accounting practices July 8 on news that its pharmacy-benefits unit had booked $12.4 billion in revenue it never collected. Merck said its Medco unit had included $12.4 billion in "copayments" collected by pharmacies from patients as revenue, even though Medco never received the cash. The copayments -- $2.838 billion in 1999, $4.036 billion in 2000 and $5.537 billion in 2001 -- were revealed July 5 in a filing with the Securities and Exchange Commission (SEC) prior to the sale of 20% of Medco to the public. Merck first informed the SEC of the copayments system in April. "Merck is confident that Medco's practice of recognizing retail copayments as revenue is in accordance with generally accepted accounting principles," Merck spokesman Christopher Loder said. "The practice has no impact on Merck net income or earnings per share because a corresponding equivalent amount is also included in the cost of revenue." Merck, based in Whitehouse Station, N.J., had included an explanation of the copayments in its registration of the Medco initial public offering with the SEC, Loder said. Plans for the Medco sale were proceeding. "We are proceeding with the offering and hope to price [the stocks] this week," Loder said. Merrill Lynch & Co. analyst Steven Tighe downgraded his rating on Merck from a "buy" recommendation to a "neutral" position. While the accounting treatment had no impact on the net profit of Medco or Merck, the size of the sums involved was significant, he said in a report. The increased investor and SEC scrutiny threatened to delay the initial public offering in Medco, Tighe said. In its SEC filing, Merck said it had booked the copayments as gross revenue because the company had special responsibilities to customers that made it the "principal" actor in the transaction under official accounting rules. Copyright Agence France-Presse, 2002