Perrigo Company (NYSE:PRGO; TASE:PRGO) lost $2.1 billion off its market cap on Friday when its share plunged 29.3% in New York after an announcement by the tax authorities in Ireland, followed by a similar drop (28%) in today's trading on the Tel Aviv Stock Exchange (TASE). Perrigo's current share price of $37, the same price as nine years ago, is 81% below its 2015 peak. Perrigo's current $5.1 billion market cap constitutes 6.9% of the entire Tel Aviv 35 Index.
Perrigo is a generic drug company specializing in private brand over-the-counter drugs. It completed its acquisition of Irish company Elan five years ago for $8.6 billion. Elan's main asset is royalties on Tysabri, a drug for treatment of multiple sclerosis. A few months before being acquired by Perrigo, Elan sold its rights to the drug to Biogen in exchange for royalties on sales of the drug. The Elan acquisition also improved Perrigo's tax structure, because corporate tax in Ireland is significantly lower than the US tax rate.
On Thursday after trading, Perrigo reported that it had received a revised €1.6 billion tax assessment, not including interest and penalties, in late November from the Irish tax authorities. Perrigo said that it strongly objected to the assessment, and believed that it was groundless.
The tax assessment involves the deal in which Elan sold the rights to Tysabri to Biogen in 2013. The Irish tax authorities say that 33% tax should have been paid on the deal, not the ordinary Irish corporate tax of 12.5%, because it was a sale of intellectual property, not of ordinary commercial activity. The tax rate also affects the period after the acquisition of Elan, in which Perrigo received royalties from the sale of Tysabri, until the asset was sold to Royalty Pharma in 2017 for $2.9 billion as part of Perrigo's focus on its core business.
Perrigo said in response, "In Perrigo's opinion, the Irish tax authority is mistaken in relying on both the existing law and relevant legal rulings, and according to the precedents on the matter published by the tax authority itself." Perrigo stresses, "For 20 years, Elan's commercial activity included broad management of intellectual property, including purchase, development, holding, and commercialization, as well as deals for its sale and use by the pharmaceutical industry. During this entire period, Elan submitted tax returns based on an ordinary 12.5% tax rate. Elan was involved in over 100 deals of the type described."
Perrigo also states, "It is important to note that there is no demand for payment of any amount of tax whatsoever in respect of this revised assessment, as long as discussions on the matter are still taking place between Perrigo and the Irish tax authority. Such discussions are likely to continue for a number of years. Perrigo intends to appeal the assessment and strongly oppose its implementation through all possible channels. Perrigo believes, based on a review of the facts and circumstances, that the matter will have no substantial impact on its financial statements for 2018."
The market appears to be in no hurry to take Perrigo's side. Perrigo's market cap fell $2.1 billion, compared with a $1.9 billion revised tax assessment, which Perrigo will appeal. As far as is known, there have been no precedents in which a biotech company payed a similar tax rate on intellectual property deals in Ireland.
According to Perrigo's report on Thursday, the five years during which the Irish tax authority can appeal the assessment, before the assessment becomes irrevocable, expire at the end of the current year. Perrigo addressed a letter on the matter to the authorities in October, which it listed in its quarterly report. It was unable to estimate the amount at the time, but wrote that it could be significant.
The revised tax assessment was issued shortly afterwards, concurrently with discussions that began between the parties. The tax authority may have been in a hurry to meet the deadline. The assessment was issued in November, but Perrigo waited before making an announcement to investors until the additional discussion with the tax authority made it clear to the company that there was no alternative to filing an official appeal.
IBI Investment House pharm and medical analyst Steven Tepper wrote today, "Although the company's dilemma about the proper time to report is a difficult one, what it did harmed investors' faith in the company, particular with the entry of a new CEO."
Tepper lowered his target price for Perrigo's share from $61 to $47, writing, "It is ironic that the main justification for Perrigo's acquisition of Elan was the tax benefits. It appears that Perrigo took on an Irish wolfhound, but it is still unclear whether he bites." Tepper predicted a legal contest over the assessment lasting for many years and predicted it would end in a compromise. "We believe that the expected damage is only 35% of the assessment, taking into account the legal uncertainty and length of time that the hearings will take," he wrote.
The tax assessment catches Perrigo in an already sensitive position. The company has already lost investors' confidence after replacing its CEO three times in 2.5 years and lowered its guidance almost every quarter in the wake of plunging prices in the US generics market. New CEO Murray Kessler, appointed only recently, wants to purse the company's strategy by completing its exit from the prescription drug market. It is believed that Kessler and Perrigo's management will not have to devote a degree of management attention to the tax issue that will distract them from their business focus; the matter will be handled mainly by the company's accountants, tax advisers, and lawyers.
With encouragement from Perrigo's management, the company's shareholders rejected a hostile takeover bid by Mylan in late 2015 that reflected a $26 billion value for Perrigo.
Published by Globes, Israel business news - en.globes.co.il - on December 23, 2018
© Copyright of Globes Publisher Itonut (1983) Ltd. 2018