US drugs giant accused of overstating revenue

Shares in US drugs giant Merck fell sharply in Europe following a report in the Wall Street Journal claiming the group inflated revenues by $12.4bn (£8bn) over the past three years.

The Journal said Merck recorded $12.4bn in revenue from Medco, its drugs discount subsidiary. But Medco, which buys drugs in bulk and then resells to chemists, never received the revenue in the first place. Instead the money was paid to retail chemists from customers to cover the cost of medical insurance. The pharmacy keeps those payments.

Between 1999 and 2001, Medco, acquired by Merck in 1993, recorded a total of $12.4bn in funds it did not collect. The Journal says there is no indication that regulators are reviewing Medco's and Merck's accounting.

Merck revealed the accounting practice in April in a filing with the US stock market watchdog, the securities and exchange commission (SEC). But the size of the recorded revenue was not disclosed until Friday.

Shares in Europe opened lower following the Journal report with the FTSE 100 down 38 points at 4,577.6 in early trading. Shares in Merck fell 11.5% in European trading to 43 euros (27.6p). The markets had rallied on Friday, with the Dow Jones industrial average jumping 320 points, but investors remain jittery after a spate of financial scandals.

Beginning with the collapse of US energy trader Enron last December, Wall Street has been battered by a blizzard of financial scandals. Quick on the heels of Enron, its auditor, Arthur Andersen, disintegrated as clients deserted in droves. Now WorldCom, America's second largest long distance phone company, is teetering on the verge of bankruptcy, after admitting to having inflated profits by $3.8bn.

"As before, the frayed confidence of investors in corporate America, with the never-ending series of balance sheet scandals, is weighing heavily on markets," Swiss brokerage company ZKB said in a note to clients, quoted by Reuters. "Lost confidence can only be won back through convincing profit figures and rigorous management changes at the top of the companies that have fallen into disgrace."

Moving to crack down on "creative accounting practices", the SEC last week ordered that officials of more than 900 companies must swear an oath in writing that the numbers in their recent financial reports are correct.