Merck 'exaggerated' revenue in accounts

Co-payments recorded as revenue:
2001: $5.5bn
2000: $4bn
1999: $2.8bn

In a filing to the US Securities and Exchange Commission (SEC), Merck's pharmacy-benefits unit Medco Health Solutions included payments from patients to pharmacies in its overall revenue figures.

But while the numbers did not affect the company's eventual profits, they offered an unrealistic picture of the overall financial health of Medco, which is shortly due for a partial spin-off from Merck.

There have been concerns over accounting at Medco for some time, since it - like its rivals - relies on so-called "co-payments", revenues to retail pharmacies that do not ultimately end up in Medco's coffers.

But the size of the recorded revenue was not disclosed until Friday, and the news has sparked a fresh bout of nerves among investors.

Contrary to expectations, however, Merck shares did not collapse as New York trading began, instead falling only 3%.

Funny money

The co-payment, typically $10-15, covers the consumer's portion of the cost of the medication under the insurance plan.

The pharmacy keeps the entire amount of the co-payment.

Merck records the co-payment amounts as expenses as well as as revenues, and as a consequence the practice does not affect its net profits.

The company disclosed the practice in the SEC filing to prepare for the listing of 20% of Medco's shares.

"We are proceeding with the offering and hope to price this week," Merck's general counsel, Kenneth Frazier, told the Wall Street Journal.

"However, we can't comment further because we are in the quiet period."