Merck accounting tactic worries US investors

US stocks fell yesterday after pharmaceutical giant Merck recorded $12.4 billion (€12.57 billion) in revenue that it had never received, and the dollar resumed its slide on the international money markets.

The Dow Jones Industrial Average lost 104.6 points, or 1.12 per cent, to close at 9,274.9. Analysts said that Merck had not acted fraudulently as the $12.4 billion was offset against earnings, but the perception of yet another accounting irregularity in corporate America shook investors.

The New Jersey drug-maker, which employs more than 450 people in the Republic, told the Securities and Exchange Commission (SEC) that over three years it recorded $12.4 billion in revenue from its pharmacy-benefits unit Medco, amounting to 10 per cent of Merck's overall reported revenue. However, Medco, the second-largest pharmacy-benefits manager in the US with 65 million members, did not receive the funds, which were co-payments collected by chemists' stores.

Merck admitted to the accounting device in April when it was preparing to sell 20 per cent of Medco, which leverages discounts and rebates from drug-makers and pharmacies, in an initial public offering. The amount involved was not revealed until a SEC filing on Friday.

Merck said its accounting tactic did not breach Generally Accepted Accounting Principles (GAAP) and there would be no effect on net income, because it deducted the same amount as an expense.

Medco's revenue last year was reported to be $29.69 billion, or 59 per cent of Merck's $50.69 billion in revenue. In a recent similar case involving Edison Schools, the SEC said that technical compliance with GAAP did not exempt a company from enforcement action if its filings were made in such a way as to omit significant information or mis-characterised its business.

Merck's shares declined 3.2 per cent in early trading on the Dow where it is a leading component.

The slide of the US dollar came after speculation that the Bank of Japan would end its policy of intervention to keep the yen low, giving investors another reason to sell.

Shares in Warren Buffett's Berkshire Hathaway group rose sharply after it announced it would invest $500 million in fibre-optic carrier Level 3 Communications. Level 3 shares surged 64 per cent amid hopes that this would provide a long-awaited breakthrough for the telecom sector.

The online auction giant, themost successful internet company, eBay, saw its shares slip after it agreed to acquire online payment service PayPal in a stock-swap transaction worth $1.5 billion.