Perrigo's $1.9B Tysabri Irish tax bill adds lingering negative: analyst

In a Christmas scare at Perrigo, the drugmaker’s shares fell to a new low since around late 2009. Why? The company unveiled that it might owe the Irish government a large tax bill.

The Irish Office of the Revenue Commissioners figured Perrigo’s subsidiary Elan Pharma had paid an incorrect tax rate related to a 2013 transaction with Biogen over multiple sclerosis blockbuster Tysabri, Perrigo said in a filing with the Securities and Exchange Commission on Dec. 20. All told, the Irish agency said Perrigo should pay back €1.64 billion ($1.87 billion), the company said, citing a Notice of Amended Assessment (NoA) dated Nov. 29.

Though Perrigo “strongly disagrees with this assessment” and swore to fight tooth and nail against it, worried investors sent its stock south by nearly 30% on Dec. 21.

What exactly caused the huge tax gap? It’s all about a deal dated back to 2013 around Biogen’s MS drug Tysabri, which turned in nearly $2 billion sales in 2017, the Irish company explained in the filing.

Biogen bought full ownership of Tysabri from then-partner Elan Pharma, which was later acquired by Perrigo in December 2013. The payments were listed as trading income in Elan’s tax returns with a 12.5% tax rate. However, the Irish government said Elan should have paid a rate of 33%. That leads to the €1.64 billion deficit, even without interest or additional penalties.

Perrigo has until Friday to appeal the decision, and it plans very much to do so.

“Perrigo strongly disagrees with both the basis on which Elan Pharma has been assessed and the methodology used to calculate the amount set out in the NoA,” the company said, stressing it will “timely” file an appeal and will use any available administrative or judicial pathways.

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While Perrigo pointed out that there were “numerous” examples of similar IP trade cases where such tax filings were not questioned by Ireland, the government clearly thinks otherwise. According to Perrigo, the company first knew of the Irish revenue agency’s intention on Oct. 30, but as they were communicating, the government went ahead with the NoA.

In the next few weeks after the letter, the company tried but failed to obtain further clarification from the agency, hence the difference in timing between the letter and the SEC filing, said RBC Capital analyst Randall Stanicky in a Dec. 21 note to investors.

No payment is required immediately even if it loses the appeal, and Perrigo said the whole proceeding could take years. But that uncertainty “adds another new and unexpected negative which will likely linger,” wrote Stanicky.

The Dublin drugmaker is currently in the process of divesting its specialty pharma business as the result of activist investor pressure to focus on OTC products. Management said it doesn’t expect any impact on the split-up or its future bolt-on strategy of smaller deals as laid out by both its former CEO John Hendrickson and new helmsman Murray Kessler, according to Stanicky.