Accounting Questions For Merck?

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 paid by consumers with a prescription drug card to their retail pharmacy to cover their portion of the cost of a drug under an insurance plan. The pharmacy keeps the co-payment.

Merck, based in Whitehouse Station, N.J., said Monday 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. In morning trading on the New York Stock Exchange, Merck stock was down 96 cents a share to $47.90.

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, Merck said in the SEC filing on Friday.

The amount was $12.4 billion from 1999 through 2001, Merck said in the filing.

Medco, however, did not actually receive those co-payments.

"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.

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

Merck plans to spin off Merck-Medco in an initial public offering later this week, and Loder said he hoped the recent revelation wouldn't affect the deal. He added that as part of the company's registration statement for the offering, 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 and but the exact amount of reported but not collected revenue was reported for the first time in Friday's SEC filing.

Merck, the world's third-largest drug maker, hurt by slumping profits and a slowdown in its drug pipeline, has been under pressure to spin off its Merck-Medco subsidiary.

With $29.1 billion in revenues last year, the unit generated over half of its parent's overall sales. But Medco's razor-thin profit margin, barely 1 percent, hurt Merck's bottom line.

Medco is the nation's second-biggest pharmacy benefit manager, handling prescriptions for 65 million Americans through retail pharmacies, a mail-order program and its Internet pharmacy.