Irish $1.9bn Tax Bill 'Out Of Nowhere' Perplexes Perrigo, Troubles Analysts
Executive Summary
Perrigo appeals tax assessment Ireland levied in late December on Rx ingredient royalty rights firm gained when it became incorporated in Dublin but no longer owns, Analysts allowed President and CEO Murray Kessler. benefit of doubt he'll lead Perrigo out of prolonged slump when he joined firm in November after extensive executive experience with tobacco firms and in other consumer goods markets, but they're more circumspect about its chances of prevailing in Irish tax disagreement.
Murray Kessler knew he had a lot to learn about the consumer health market and about ending Perrigo Co. PLC's earnings slump when he took the helm in November. But his steepest learning curve came in a problem he didn't anticipate and that analysts aren't confident the firm will resolve.
A €1.6bn ($1.9bn) tax assessment Ireland levied against Perrigo in late December "came out of nowhere," said Kessler at the recent JP Morgan Healthcare Conference.
The assessment is linked to Rx ingredient royalty rights Perrigo gained when it became incorporated in Dublin but no longer owns.
In his first investor conference presentation as Perrigo's president and CEO, Kessler elaborated about the company's problems and market influences that have contributed to a prolonged slump in its earnings and its share price. He outlined plans to spark a turnaround and forecast the firm's return to delivering profits with an exclusively consumer health focus (see sidebar).
About the Irish tax assessment, though, he had fewer answers. "I didn't expect, as a CEO coming into Perrigo, that, that one area I would need to deal with," Kessler said, adding, "it smacked the stock significantly right at the end of the year."
Perrigo's share price, already severely lower than when it traded at around $200 as the firm fought off a hostile takeover by Mylan NV in 2015, dropped 22% from $52.33 on Dec. 20, the day it informed the Securities and Exchange Commission about the Irish assessment, to $40.77 the next day. The price continued downward to $36.50 on Dec. 24 before starting a gradual rise on Jan. 14, , reaching $45.72, but slipped to $45.20 on Jan. 15.
20 Years Of Sales Taxed
At the conference in San Francisco, Kessler said Perrigo still doesn't understand how the Irish Office of the Revenue reached the decision it submitted to the firm in a "Notice of Amended Assessment" for 20 years of taxes on sales of the multiple sclerosis drug Tysabri (natalizumab).
Perrigo owned rights to a royalty stream for Tysabri through its acquisition of Elan Corp. PLC in 2013; it sold the rights in 2017. (Also see "Perrigo Trims Workforce, Ships Tysabri License, Stays European Course" - Pink Sheet, 1 Mar, 2017.)
The NoA from Irish regulators contends that Elan's recognition of the payments as trading income, which was taxed at a lower rate, was incorrect and should have been a chargeable gain at a higher effective tax rate.
"We don't have a clear understanding yet of why they believe 20 years of filings are wrong. And we have the best advisers and they are working on that," Kessler said.
Perrigo is appealing the Irish agency's ruling, which stated that the firm's liability could increase on interest or applicable penalties, according to Perrigo's Securities and Exchange Commission filing reporting the development.
The firm stated in the filing that Irish tax regulators in October, "two months before the expiry of the applicable five-year statutory limitation period," submitted to it findings from an audit asserting that Elan's intellectual property sales of Tysabri should have been treated as chargeable gains subject to an effective 33% tax rate, rather than the 12.5% tax rate applicable to trading income. The regulatory agency also claimed that all amounts Perrigo received from Tysabri sales transaction and from its sale of the royalty rights should be taxed in Elan's 2013 tax year.
Perrigo said the audit letter stated areas of disagreement could be submitted to the Irish Office of the Revenue and the firm's representatives "promptly met" with the agency and made two written submissions. "However, less than a month later – at a time when Perrigo believed that discussions concerning the matter were ongoing – Irish Revenue issued the NoA," according to Perrigo's SEC filing.
Another Turnaround Obstacle?
Analysts allowed Kessler the benefit of doubt that he'll lead Perrigo out of its prolonged slump when he joined the firm in October after extensive executive experience with US tobacco firms and nearly 20 additional years in other consumer packaged goods markets. (Also see "Perrigo Moves From Health Care To 'Self Care'" - Pink Sheet, 8 Nov, 2018.)They're more circumspect about Perrigo's chances of prevailing in the Irish tax disagreement.
In a note included in a Jan. 14 summary of JP Morgan Conference presentations, Jefferies analysts pointed out Perrigo intends to file litigation if the Irish regulators' ruling stands."Hence, as discussed in [the SEC filing], it could take several years for the appeals process to play out," they said.
"While Perrigo management indicated that it strongly disagrees with this assessment and has appealed it, we believe there is uncertainty around whether Perrigo may be able to win the appeal and how long it will take to get an appeals decision," said Leerink analyst Ami Fadia in a Dec. 24 research note.
At Morgan Stanley, analyst David Risinger said the potential $1.9bn tax liability "represents a new overhang for Perrigo's stock that may take years to resolve" and faulted the firm for not informing SEC and investors about the Irish tax assessment sooner.
"Not only is this a negative surprise, but the disclosure indicated that Perrigo was initially notified by the Irish tax authority on Nov 29 and the [SEC filing] was only issued on Dec. 20," Risinger wrote on Dec. 21. "Might investors potentially question new management transparency?" he added.
Risinger said investors should consider whether the Irish tax assessment could affect Perrigo's sales of its Rx generics operation due to "potential apportionment of liability" assigned to that part of its business.
Similarly, while Kessler has said Perrigo is interested in acquisitions to strengthen its OTC drug, nutritional product and infant formula operations, making deals could be off the table for the firm. "The potential tax liability could create an environment in which it is difficult for PRGO to execute substantial bolt-on deals," Risinger said.
BTIG's Timothy Chiang said "any sort of resolution with the tax authorities could take several years" as Perrigo appeals the assessment, which "adds another layer of uncertainty to [Perrigo's] share price" on top of sales growth slumps in consumer health and Rx ingredients businesses.
"While we do think [Kessler] may take more aggressive steps to refocus PRGO’s consumer segments in 2019, we don’t expect a quick turnaround in fundamentals, as its generic Rx segment continues to face price erosion headwinds," Chiang said.