Investors sue Merck over 'false revenue claims'
July 4, 2002
London Times
From Abigail Rayner in New York
SHAREHOLDERS are suing Merck, alleging that the
American pharmaceuticals company artificially inflated
its revenues by $4.6 billion (£3 billion) in 2001 by
including revenues that are actually retained by
pharmacies.
Investors who bought Merck shares between July 23,
1999, and June 20, 2002, allege that they were duped
into thinking that the company was performing better
than it actually was.
In a lawsuit, they claim that Merck improperly included
co-payments in its revenues. Co-payments are typically
$10 to $15 per prescription, and are contributed by the
patient to the price of their prescription drugs. The
remainder of the cost is met by the patient's insurance
company. The plaintiffs say that this artificially enhanced
the company's apparent performance because the
co-payments are actually paid to, and retained by, the
pharmacy.
The lawsuit, which is being brought by the US law firm
Milberg Weiss Bershad Hynes & Lerach LLP, alleges
that Merck filed "materially false and misleading"
statements to the Securities and Exchange
Commission regarding its financial performance. The
complaint says Merck overstated its revenues by $4.6
billion "in 2001 alone". It adds that the company's
financial statements were not prepared in accordance
with generally accepted accounting principles.
The accounting entries, which have no impact on the
company's reported net income, were first disclosed by
Merck in April in a filing to the SEC as it prepared for the
initial public offering of Medco, its pharmacy benefits
unit.
Merck used Andersen as its external auditor until earlier
this year, when it joined a raft of companies in firing the
accountancy firm in the wake of the scandal
surrounding its audit of Enron.
Last month Andersen was found guilty of obstructing
justice by shredding documents related to its audit of
Enron. Merck now uses PricewaterhouseCoopers.
Christopher Loder, a spokesman for Merck, said:
"Merck is confident that its recording of retail
co-payments is in accordance with generally accepted
accounting principles.
"PricewaterhouseCoopers concur with this accounting
treatment. This practice has no impact on net income
because an equivalent amount is also included in our
costs of revenues."
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