Posted on 07/07/2002 11:26:37 PM PDT by HAL9000
Drug giant Merck & Co. recorded $12.4 billion in revenue from the company's pharmacy-benefits unit over the past three years that the subsidiary never actually collected, according to a filing with the Securities and Exchange Commission, Monday's Wall Street Journal reported.Merck's Medco unit, which manages pharmacy-benefit programs for employers and health insurers, included as part of its revenue the co-payments collected by pharmacies from patients, even though Medco doesn't receive those funds. Between 1999 and 2001, co-payments represented nearly 10% of Merck's overall reported revenue.
Merck first disclosed the accounting treatment in an April SEC filing as it prepared to sell 20% of Medco in an initial public offering. But it wasn't until a subsequent SEC filing on Friday that the company said exactly how much revenue was involved.
Merck, based in Whitehouse Station, N.J., says its revenue-recognition policy conforms to generally accepted accounting principles. The company says the accounting treatment has no effect on its net income, because it subtracts the same amount as an expense. Medco is the country's second-largest pharmacy- benefits manager, with 65 million members. Medco reported revenue last year of $ 29.69 billion, or 59% of Merck's $50.69 billion in revenue.
"For a company such as Merck to reflect as revenues in its financial statements billions of dollars of co-payments a customer makes directly to another company, the pharmacy, which the pharmacy collects and never remits to Merck, just does not reflect the economics of what is occurring," said Lynn Turner, a former chief accountant at the SEC who is now an accounting professor and director of the Center for Quality Financial Reporting at Colorado State University in Fort Collins. "If that is what the SEC accepts, then investors are in trouble and our financial reporting indeed needs improving," he said.
Medco's accounting practice echoes a recent case involving Edison Schools Inc., a commercial operator of public schools, which was booking as revenue funds that school districts paid directly for teacher salaries and other costs. The SEC in May found that Edison "failed to disclose that a substantial portion of its reported revenues consist of payments that never reach Edison." Although Edison's accounting practice, which didn't affect net income, conformed to generally accepted accounting principles, the SEC said that "technical compliance with GAAP" doesn't insulate a company from enforcement action if it makes filings "that mischaracterize its business or omit significant information." The SEC ordered Edison to add a director of internal audit to its management team. The agency said that Edison would exclude most of those payments from its reported revenue in the future.
There isn't any indication that regulators have an issue with Medco's or Merck's accounting. The SEC hasn't asserted that inclusion of co-payments in revenues are inappropriate or not in accordance with GAAP, according to a Merck official. SEC officials couldn't be reached to comment late Sunday.
A pharmacy-benefits manager such as Medco uses the combined buying power of millions of people in its plans to extract discounts and rebates from drug makers and pharmacies. These companies then pass on some of the savings to clients -- employers and health-insurance companies -- looking to save money on prescription drug costs.
Medco's revenue in question is the co-payment -- $10 to $15 is typical in the industry -- 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 entire amount of the co-payment.
Merck contends that it has legal liabilities for the co-payment under certain circumstances, such as if it transmits electronically to the pharmacist incorrect information about how much co-payment the pharmacist should collect. But in its SEC filing, the company said it doesn't face a "credit risk," which would force it to reimburse pharmacies if a customer skipped out on making the co-payment.
The disclosure from Merck comes amid heightened scrutiny over many companies' accounting policies after several high-profile scandals. Last week, the SEC ordered that chief executive officers and chief financial officers of more than 900 of the nation's largest companies must swear under oath in writing that the numbers in their companies' recent financial reports are correct.
Merck declined to say whether the SEC required it to disclose the amounts of the co-payments in its latest filing, its fourth amended prospectus for the planned Medco initial public offering. But Kenneth C. Frazier, Merck's general counsel, said the latest filing has been thoroughly reviewed by the agency and " reflects the discussions we had with the SEC" over the co-payments. "We are proceeding with the offering and hope to price this week. However, we can't comment further because we are in the quiet period," he said. An SEC spokesman said the commission's approval of the latest filing is still pending.
-- Barbara Martinez, staff reporter of The Wall Street Journal, contributed to this report.
Copyright 2002 Dow Jones & Company, Inc.
All Rights Reserved.
It artificially inflated the gross revenue number. This would be like saying you sold so many widgets when you really didn't.
Trouble was, this piece of the equation wasn't published anywhere. Nobody knew that Merck didn't really have that robust a money flow.
DAX, CAC, and FTSE are taking a beating on this news. S&P futures are down .86% for us already.That said, anyone who thought that the corporate accounting scandals were over - must have been in denial. We've got at least six more months of these sorts of shoes left to drop.
It will be a good morning for the Shorts, though...
Please don't spoil the anti-capitalist party of the compassionate conservatives, but still Merck shouldn't have done what they did.
The problem is there is no economic leadership coming out of the Whitehouse, which should be pointing out the positive qualities of capitalism as our economy struggles. Instead we're getting government growth, tariffs, duties, and indifference toward investment and what should be the vibrant, rapidly gowing sectors of our economy. There are simply very few positives for the media to focus on, and the compassionate conservatives are marching in lockstep behind their leader.
http://finance.yahoo.com/q?s=mrk&d=c
They already are and it is not working.
JMO, but most people are blaming the ethics deprived Clinton years.
What do you mean six months? There have always been accounting scandals, and they will continue as long as we have accounting. The problem is there is very litle good economic news to take away the spotlight from the accounting scandals.
Could someone make a link?
I mean six months because we are going through a wave of disclosures right now, compounded by intense media/congressional/SEC scrutiny as well as by new accounting firms replacing Andersen (said firms want to clean out the garbage before they have to sign off on new reports).
Will we always have big accounting scandals? Not when we return to dividend investing. You can't fake cash dividend payouts to shareholders for very long, after all. It is the current fad of "growth" investing that has placed all public faith in paper accounting books which can easily be manipulated, and it is this "growth" stock fad that must die for things to get fundamentally better.
As to your claim that there is very little good economic news: Rubbish.
We've got low interest rates, low inflation, low unemployment, easy money, and high worker productivity.
What we are missing is good stock market news. High P/E ratios and accounting scandals do not make for a good market (well, unless you're a Short).
Let's try not to confuse our economy with our stock market. They may be related, but they can often take different paths until corporations and investors move back towards economic reality again.
Last Trade - Jul 5 - 48.86
During the 2000 Democratic convention, Johnson & Johnson, Novartis Pharmaceuticals and Merck all helped finance parties, dinners and breakfasts for Democratic delegates from New Jersey, including a reception honoring Senator Torricelli and the New Jersey congressional delegation, co-sponsored by Honeywell and drug giant Merck.
The industry also has had cordial relations with Senator John Breaux (D-LA), who co-chaired the Bipartisan Medicare Commission and has co-sponsored Medicare prescription drug legislation that agreed with the industry’s approach. Indeed, during the 2000 campaign, Merck & Co, Novartis and Bristol-Myers Squibb were among the corporate sponsors of a Mardi Gras event at Paramount Studios in Hollywood honoring Breaux.
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