Merck & Co., Whitehouse Station, N.J., is the latest public company to become embroiled in an accounting controversy after it revealed that over the past three years it recorded $12.4 billion in revenue from its pharmacy-benefits unit that wasn't actually collected.
The uncollected revenue concerned copayments consumers made to retail pharmacies as their share of costs under drug-benefit plans managed by Merck-Medco. Pharmacies always keep such payments.
Merck said recording the copayments as revenue is a generally accepted accounting practice that did not impact earnings because the copayments also were recorded as an expense. The company originally reported the practice in an April filing with the Securities and Exchange Commission; it disclosed the amount of uncollected revenue in a separate filing last week.
"Merck is confident that the Merck-Medco practice of recognizing retail copayments as revenue is in accordance with general accounting principles," Merck spokesman Chris Loder said. The practice "has no impact on Merck's net income or earnings per share because the corresponding equivalent amount is also included in the cost of revenues," Loder said.
He would not comment on why copayments were accounted for in such a manner but said Merck's independent accountant, PricewaterhouseCoopers, agreed that the treatment was acceptable.
The news sparked a mixed reaction on Wall Street as Merck was poised to sell 20% of Medco in an initial public offering. Loder said plans have not changed and the company hopes to price the stock this week. The company's registration statement has been "thoroughly reviewed" by the SEC, he said, "including recognition of the copayment as revenue."
At least two class-action shareholder lawsuits have been filed against the company in relation to its accounting of copayments. Schiffrin & Barroway, a law firm in Bala Cynwyd, Pa., said today that it filed suit in federal court in New Jersey, accusing Merck officials of issuing "false and misleading statements" concerning the company's business and financial condition, in large part by recording the copayments as revenue. Merck as a matter of practice declined to comment on the litigation, Loder said.
Merck announced plans to spin off the pharmacy-benefits management subsidiary in January, a strategy intended to strengthen both companies as their business environments take different directions, officials said. Merck was the first large drugmaker to venture into the PBM business in 1993, a highly controversial trend because it put drugmakers in the position of being their own middlemen to health insurance plans. Federal regulators eventually required several safeguards to protect health plans contracting with PBMs.