Merck admits accounting shenanigans

Accounting concerns hit the US drugs giant Merck after it said it had booked as revenue $14.1bn (£9.3bn) that the company never received.

The company's Medco Health Solutions subsidiary, a drug education and pharmacy business, includes as revenues all payments made to pharmacies in its network, even though much of this cash is kept by the pharmacists.

The practice inflated Merck's reported revenues by more than 10 per cent last year.

The revelations threatened to derail the company's plans to float Medco next week and have attracted a raft of lawsuits accusing the company of issuing misleading financial statements.

Merck is the world's number four drugs company with a market value of $108bn (£70bn). Investors reacted nervously to the questioning of its accounting policies, which comes on top of concerns over its pipeline of new drugs and the expiry of patents covering its existing products.

The company's shares fell $1.05 to close at $47.81 on Wall Street, while the issue unsettled other pharmaceuticals shares around the world.

The scale of the distortion to reported revenues was revealed in a document filed with the Securities & Exchange Commission late last week.

Merck insisted the practices were approved by the company's auditors, PricewaterhouseCoopers, and by the SEC, and said they did not cause a misleading impression of profits.

A company spokesman said: "Merck-Medco's practice of recognising 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."

In the SEC filing the co-payments included in product net revenues amounted to $2.84bn in 1999, $4.04bn in 2000, $5.54bn in 2001, plus $1.64bn in the first quarter of 2002, "each with a corresponding equivalent amount recorded in cost of product net revenues".

Analysts said the issues raised could scupper the company's plans for the partial flotation of Medco next week in an attempt to raise $1bn.