Drug giant Merck reported billions in pharmacy benefit revenue it never collected

Monday, July 8th 2002, 12:00 am
By: News On 6

NEW YORK (AP) _ 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 news sent its stock down nearly 2 percent.

The revenue in question is the co-payment that consumers with insurance plan prescription drug cards pay to retail pharmacies. The pharmacy keeps the co-payment.

Merck, based in Whitehouse Station, N.J., said Monday its practice had no effect on earnings since the revenue was offset in its financial reports as an expense. It said its treatment was in accord with generally accepted accounting practices.

Merck spokesman Chris Loder said the company's independent accountants, PricewaterhouseCoopers, concurs with this accounting method.

However, Merck stock fell amid heightened investor suspicion about accounting issues. In morning trading on the New York Stock Exchange, Merck 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 a Securities and Exchange Commission filing on Friday.

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

Medco did not actually receive those co-payments.

Merck plans to spin off Merck-Medco in an initial public offering later this week. Loder said that as part of the company's registration statement for the offering, accounting practices were thoroughly reviewed by the SEC.

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.