Merck Sued Over Statements
Pharmaceutical giant Merck & Co. may have followed an acceptable accounting practice in reporting $12 billion in income it never received at its Medco Health Solutions pharmacy benefits unit, but experts say drug makers and mail- order drug firms now will be pressured to unveil all of their accounting and business arrangements.
A class-action lawsuit was filed Monday on behalf of Merck shareholders, charging Merck officers and directors with “issuing false and misleading statements concerning [the] business and financial condition” of Merck and its wholly owned subsidiary, Medco Health Solutions Inc.
Medco reported in Securities and Exchange Commission documents that it had booked as revenue $12 billion from patient co-payments to pharmacies it had never collected. The news followed on the heels of devastating admissions by WorldCom Inc. and other major companies that their revenues had been inflated by billions of dollars.
Experts and analysts differed on the effect on Merck and the planned initial public offering of 20% of Medco shares that still is scheduled for today.
“The issue here is more accounting confusion rather than Merck actually doing anything wrong,” said H&R; Block Financial Advisors analyst Jason I. Fox. But Fox added that as long as Merck owns most of Medco, it still would be “a cloud over the company.”
But there was considerable agreement that consumers have had their fill of accounting practices that do not make sense to the average citizen.
“We know that these companies are going to have to be geared up to talk about how and what they count as earnings,” said California-based health-care expert Peter Boland.
Medco is the largest of the nation’s 75 pharmacy benefit managers, which compete with chain and independent pharmacies with cheaper prices and mail-order service.
Others suggested that the accounting questions would lead to more scrutiny of another long-standing practice. The public, experts said, may be more disturbed about the rebates PBMs earn from pharmaceutical companies for guaranteeing to sell specific amounts of a certain pharmaceutical company’s drug or drugs.
These rebates are, in part, supposed to be passed on to consumers as savings, but in Medco’s June 13 SEC filing, the company acknowledged that it pockets most of the rebates and that “without rebates earned from pharmaceutical companies, Medco would not have been profitable in 1999, 2000 or 2001.”
Critics have filed lawsuits charging that the rebates are really an incentive program to push one manufacturer’s drugs over another’s even though the drug might be more expensive and without clear medical benefit. Critics charge this is how PBMs reap higher profits.
The pharmacy benefit managers deny any wrongdoing.
Mike Deskin is president of the Pharmacy Benefit Management Institute, a consultant group that provides information on PBMs to employers, health plans and unions. Most clients, said Deskin, are concerned about basic issues such as how quickly prescription discount cards and prescriptions are processed.
“How these PBMs account for their revenue really doesn’t come up,” Deskin said, adding that his clients must take it on faith that the PBMs are offering the best drug at the best price and not pushing one drug over another in order to reach a rebate quota.
“I think the public is going to be far more concerned about the rebates than about accounting practices,” Deskin said.
Merck stock closed at $47.81 Monday, down $1.05, on the New York Stock Exchange.
