Shares in Perrigo slump to 9-year low

Shares in pharma group Perrigo slumped to a nine-year low on Friday after the company confirmed it faced a Revenue demand for €1.64 billion in back taxes.

The shares dropped sharply as US markets opened and they continued to fall, shedding over a quarter of their value and wiping about $1.75 billion off the value of the business.

The company has said it will appeal the Revenue finding.

"Perrigo strongly disagrees with this assessment and believes that the Notice of Amended Assessment is without merit and incorrect as a matter of law," the company said in a statement after it was approached by The Irish Times.

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It said its treatment of the transaction in the 2013 tax return was "consistent with Elan Pharma's activities for two decades relating to the active management of intellectual property rights, which includes acquiring, developing, holding, exploiting, dealing in and disposing of intellectual property rights for use in the pharmaceutical industry".

The Perrigo statement, in a filing to the US regulator, the SEC, added that Revenue had, until now, never questioned this interpretation.

The company confirmed that it was not obliged to pay any of the disputed tax until the appeal system runs its course – a process that could involve a lengthy period in the courts.

“No payment of any amount related to this assessment is required to be made, if at all, until all applicable proceedings have been completed, which could take a number of years.”

But the news could yet get worse for Perrigo, which operates largely in the United States, as the Revenue assessment does not include interest charges and penalties. That could add significantly to the final bill for Perrigo if it ultimately loses the appeal.

The bill relates to the sale in 2013 of rights to the company’s blockbuster multiple sclerosis drug Tysabri. It was owned at the time by Elan, which was subsequently acquired by Perrigo.

At issue is whether the $3.25 billion upfront payment for its share of the drug as well as ongoing royalty payments should be treated as income or as a capital gain.

‘Sceptical’

Perrigo acquired Elan months after the sale of the Tysabri rights and, in its 2013 return, declared the payment as income, subject to 12.5 per cent corporation tax. However, as the company had accrued trading losses, no actual tax was paid.

Revenue says the money should have been treated as the sale of an asset subject to capital gains tax at 33 per cent.

Wells Fargo analyst David Maris on Friday slashed his target price from $64 to $46, the lowest among Wall Street brokers, as markets struggled to digest the implications of the decision.

He expressed concern that Perrigo found out about the Revenue’s assessment in late November, but didn’t alert investors for three weeks.

“While there may be a simple explanation for the delay in telling investors, we believe without one, investors will be sceptical of why it had not been disclosed earlier,” he said in a note to investors.

Acknowledging confusion over how to interpret the relevant Irish tax rules, Mr Maris added that “given the tax authority makes the rules, it seems reasonable to think they may have the upper hand in this argument”.

Other analysts were more sanguine. Wells Fargo’s new price target suggests it believes Perrigo has a 50/50 chance of winning its appeal.

Even before news of the tax decision broke, Perrigo had closed Thursday’s market session at a year low.