Saturday, June 22, 2002

BY ED SILVERMAN
Star-Ledger Staff

Merck & Co. shares fell more than 4 percent yesterday following a report questioned accounting practices at its Medco pharmacy-benefits unit.

At issue is whether Medco was too aggressive in counting co-payments as revenue. Co-payments are the fees paid to pharmacies by customers when they fill prescriptions.

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The news came just as Merck is scheduled to sell 20 percent of Medco to the public as the first step in a spinoff, which is expected to be completed next year.

A Merck spokeswoman, Gwen Fisher, maintained the revenue was booked in accordance with generally accepted accounting principles.

"We're confident our accounting is appropriate," she said.

Merck stock fell $2.22, or 4.25 percent, closing at $49.98, a new four-year low, on more than twice the normal daily trading volume. The report first appeared in yesterday's Wall Street Journal.

Analysts were divided over the ramifications, but few were surprised at Wall Street's reaction, given ongoing concerns over accounting practices at large companies.

They noted that until recently, Merck's auditor was Arthur Andersen & Co., which was convicted last week for obstructing a government investigation into Enron Corp.

"I imagine a lot of people are just shaking their heads," said David Menlow of IPO Financial Networks. "This has got to be squeaky clean."

Menlow raised the possibility that Merck may have to redo the Medco prospectus, a document that analyzes company finances and is distributed to investors before an offering.

The Merck spokeswoman declined to comment.

One tax expert, however, said Merck didn't appear to violate accounting rules and that investor reaction may have been overblown.

"I think they're accounting for revenue correctly," said Robert Willens, a tax and accounting analyst at Lehman Bros. "There's been a lot of legitimate accounting issues raised lately, but this doesn't strike me as one of them."

For the same reason, Hemant Shah, an independent securities analyst who tracks the drug industry, downplayed the disclosure.

"Certainly, people may be more cautious toward the offering," said Shah. "But this practice doesn't effect net income or cash flow. So at the end of the day, it's a non-issue."

Pharmacy benefit managers, such as Medco, negotiate with drug makers to buy medicines on behalf of insurers and large employers.

Ed Silverman can be reached at (973) 392-1542 or esilverman@starledger.com.