If you think $1.9 billion in back taxes sounds bad, try tacking another $873 million onto the bill. For struggling Perrigo, which has now been knocked by two countries for incorrect bookkeeping around its sale of MS drug Tysabri, that nightmare is its reality.
On Monday, Perrigo disclosed it was hit with an $873 million tax bill from the IRS as part of an audit related to a 2013 transaction between Elan Corporation, a Perrigo subsidiary, and Biogen over MS blockbuster Tysabri.
At issue was Elan’s 1996 acquisition of Tysabri creator Athena Pharmaceuticals, which the IRS said was owed a higher royalty rate for its IP and development of the drug. Elan later sold Tysabri outright to Biogen. Perrigo said in its filing it disagreed with the IRS decision and planned to appeal the ruling.
The IRS order followed the Irish Office of the Revenue Commissioners’ decision in December to pursue $1.9 billion in back taxes from the Dublin drugmaker, saying it paid a tax rate on the Tysabri sale that was roughly 20% lower than it should have been.
For analysts, the impact of the two bills together cast serious doubt on Perrigo’s internal financial controls as the company aims to divest its prescription drug unit.
“In our experience, sometimes many investors and companies with a large assessment from one tax authority explain it away as a disagreement, but to us, when two tax authorities are seeking nearly $3 billion in taxes, we would suggest assuming that this isn’t some sort of complete misunderstanding of the rules and tax laws and one or both are likely to extract some sizable concessions from the company,” Wells Fargo analyst David Maris said in a Monday note to investors.
RBC Capital Markets Analyst Randall Stanicky said there was a possibility Perrigo could settle the $1.9 billion bill but predicted the appeals process could take years and leave a cloud over the company’s financial position in the near future.
Maris said Perrigo’s tax hits come at a bad time for the company, which is attempting to divest or spin out its prescription drug business. He said the company’s board could be wary of using proceeds from a sale for the repurchase of stock.
“Given the news today and the previous Irish tax disagreement, we are not sure a board would authorize using the entire proceeds for the repurchase of stock,” he said.
Perrigo’s board voted last August to OK the prescription split through a sale, merger, or “tax-efficient separation to shareholders.” The decision was no surprise: In 2016, the company handed five board seats to activist investor Starboard Value, which immediately lobbied for the split.
All of those financial woes have coincided with the departure of two CEOs in the last three years, a shareholder lawsuit alleging the company misled investors on a hostile takeover attempt by Mylan, and the paring down of the company’s workforce, including the elimination of 750 jobs in February 2017.