The share price of Perrigo Company (NYSE:PRGO; TASE:PRGO) is down 9.5% today on the Tel Aviv Stock Exchange (TASE), following a 6.2% drop yesterday on Wall Street. The company reported a tax demand by the US authorities.
Perrigo announced that the Internal Revenue Services (IRS) had demanded $843 million in taxes for activity in 2011-2013 by Athena, a subsidiary of Elan, which Perrigo acquired. Perrigo received a previous notice from the IRS in the matter in 2017, but according to the revised report, the current assessment adds 40% to the tax and fines, not including interest.
Perrigo said that it gave the IRS many documents last year and conducted discussion with it on the matter, but had received no further announcements since June 2018 until the past few days. Perrigo added that it was determined to oppose the IRS's stance, and believed that the IRS's methodology was flawed, and that fines should not be demanded from it.
The company further stated that it would utilize all of the available administrative and legal remedies, including those pertaining to the tax convention between the US and Ireland. Perrigo stated that the subsidiaries had already reported this revenue in Ireland. At the same time, Perrigo emphasized that if the matter is not solved in accordance with the company's stance, it could have a substantial negative impact on the liquidity of the company' resources. No major effect on its reports is expected at this stage.
The tax demand in the US comes on top of a $1.9 billion (€1.6 billion) assessment for Perrigo in Ireland in late 2018, before interest and penalties. This assessment, which Perrigo is appealing, also involves Elan. That assessment sent Perrigo's share price tumbling, thereby reducing its market cap by over $2 billion, but the share subsequently recovered and returned to its level before this assessment was reported. Perrigo's market cap is nevertheless far short of its 2015 peak, when it was the subject of an attempted hostile takeover by drug company Mylan.
Perrigo acquired Elan for $8.6 billion. Elan's main asset is royalties from Tysabri, a drug for the treatment of multiple sclerosis. A few months before its acquisition by Perrigo, Elan sold the rights to the drug to its partner, Biogen, and received royalties on sales of the drug. The Elan acquisition also improved Perrigo's tax structure, because the corporate tax rate in Ireland is lower than in the US.
Perrigo manufactures generic drugs, but focuses mainly on private brand over-the-counter (OTC) drugs. The company, listed on the Tel Aviv Stock Exchange (TASE) and New York Stock Exchange (NYSE), has a $6.6 billion market cap.
"Legal proceedings will probably last for years"
IBI investment house pharma and medical analyst Steven Tepper wrote today in response to the report that the IRS was claiming that its revised tax assessment resulted from tax owed on royalties attributable to Athena, which developed the Tysabri drug.
"How ironic it is that Perrigo's biggest acquisition, which was intended to improve its tax profile through a reverse merger into Irish company Elan, has become a tax trap, with demands for back taxes by both Ireland and the US," Tepper writes. "We nevertheless believe that a legal contest lasting many years will ensue, and it is reasonable to assume that the parties will eventually compromise on a much lower settlement than the amounts stated." He predicts that the new tax event will lower Perrigo's share price by $2-3.
Published by Globes, Israel business news - en.globes.co.il - on April 30, 2019
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