EUR 850.00 For Business Accounts Only

Morningstar | Perrigo Faces Potential $1.9 Billion Tax Liability From Past Tysabri Transactions

Following a Notice of Amended Assessment received from the Irish Office of the Revenue Commissioners for a tax liability of EUR 1.6 billion, we’re lowering our fair value estimate for Perrigo to $51 per share after adding in the future tax plus estimated interest and other potential fees into our model. Perrigo is appealing the NoA issuance, which will delay the timing of payments, and will theoretically reverse the potential liability. We’re leaving our no-moat rating for Perrigo unchanged.

We estimate Perrigo could afford to pay the future liability if pushed a few years out. Perrigo most recently reported a cash balance of $444 million in Sepember 2018, and we estimate nearly $700 million in operating cash flow annually over the next five years. However, the large potential liability would likely limit share repurchases, debt pay down, and the possibility of  future acquisitions.

The NoA stems from Elan's handling of Biogen’s purchase of full rights to Tysabri in 2013, which included $3.25 billion upfront cash plus royalties. Perrigo inherited the royalty stream in late 2013 as part of its $6.7 billion cash and stock merger with Elan as part of a tax inversion strategy. Perrigo sold its rights to the royalty stream to Royalty Pharma in 2017 for $2.2 billion in cash and up to $650 million in milestone payments. The NoA contends that Elan's recognition of the payments as trading income, which benefitted from a lower tax rate, was incorrect and should have been a chargeable gain at the higher effective tax rate.