Murray Kessler was retired when the call came from Perrigo. After a career in the tobacco and food sectors in the United States, he had turned his attention to his first love – showjumping.
Perrigo, Kessler recalls, were looking for someone to get the business back on track. What had started out over 100 years earlier in rural Michigan as a company selling over the counter wellness products had down the years moved more into generic medicines.
“It frankly was not the company’s expertise and, over time, the stock price performed poorly and the company had a lot of lawsuits,” Kessler says. “I was hired to come in and transform the company.
“I’m a consumer guy who has run very big businesses and who has a similar formula every time. I go into companies that are very solid, great companies that have kind of gone off strategy or had some big overhang involved with them and [I’ve] seen them through that trouble spot and leave them in great shape going forward.”
Kessler was barely two months into the job when Ireland's Revenue Commissioners issued what is called a Notice of Amended Assessment. It informed Perrigo that the Irish tax authorities wanted $1.9 billion, a figure that translated as just under €1.64 billion from it.
It was a bombshell. It was, and remains, the largest tax bill ever issued by the Irish tax authorities – with the larger Apple tax bill coming from Europe. Landing just ahead of Christmas, it rocked the company, knocking almost 30 per cent off its share value in just one day.
“It was like I got my legs chopped out from under me,” Kessler recalled.
Disputed transaction
The bill dated back to the sale by an Irish pharma company called Elan of the rights to Tysabri, a multiple sclerosis treatment it had developed, to its partner in that drug, Biogen.
The sale had taken place in 2013, before Perrigo even acquired what was left of Elan later that year in what was then a controversial practice known as corporate inversion. This involved a foreign company, most often American, backing itself into an Irish business to avail of our lower corporate tax rate.
Alongside tax, a key attraction of the $8.6 billion deal was the stream of royalty income attached to Tysabri. Talking to Kessler, you suspect that selling point would put the Irish deal squarely in the category of "off-strategy" business moves that he was brought in to knock back into shape. In many ways, Elan at that time would have been a better fit for patent revenue business Royalty Pharma, which Perrigo saw off to clinch the deal.
The problem was that Elan had accounted for the deal as the sale of intellectual property with the proceeds counting as trading income subject to corporation tax at 12 per cent. This was in line with the way it treated previous such deals, Perrigo insisted.
Revenue took the view that it was a capital transaction, with any gains liable to be taxed at 33 per cent.
The €1.64 billion figure has been like a sword of Damocles hanging over the company since, even as Kessler busied himself with the task of transforming the business.
Transformation
Out went its Latin American operations and animal health businesses, along with the UK generic pharma business, Rosemont. Research and development facilities in India were closed down.
On the flip side, Perrigo bought a number of oral care businesses as well as the Steripod toothbrush accessories business, heartburn remedy Prevacid, the US rights to the Dexcel brand of over the counter meds, and three skincare and hair loss brands in eastern Europe from Sanofi. And it invested in a cannabidiol (CBD) business.
The final piece of the jigsaw was the sale this month of the group’s remaining generics pharma business in a $1.55 billion deal.
It leaves Perrigo, in Kessler’s words, as a pure-play consumer selfcare group with around $4 billion in sales. It also leaves him with a cash pile of around $2 billion to grow the business.
The one remaining blot on the business plan was the unresolved and hotly contested tax bill. It is, by Kessler’s admission, a distraction to the business.
Tax battle
Tax experts and lawyers have been working in the background to address the issue. Perrigo launched a high court challenge, claiming it had a legitimate expectation Revenue would not raise such an assessment, but lost. It has also appealed the bill to Ireland's Tax Appeals Commission which is scheduled to hear the case in November.
More importantly, it opened discussions with Revenue. Now, following an extensive exchange of information, there is an acceptance by the Irish tax authorities that the original bill was way out of kilter – even accepting Revenue’s approach to the transaction.
“The reality has been, through this dialogue, through massive technical exchanges between Revenue and Perrigo, and Perrigo’s accountants and lawyers, that they have acknowledged in writing that, if they had the information back in 2018, the facts that they have today – without conceding any point – under the exact same methodology that they use, the number is at least 40 per cent lower and under €1 billion.
Various factors contributed to inflating the original figure. Revenue had assessed the Tysabri deal on the basis that the agreed earn out payments would materialise: they didn’t, that cut around $400 million from the value of the deal.
Perrigo was also entitled to claim certain expenses against a capital transaction that were not relevant to an IP transaction and had not therefore been included in the original filing.
When all that and other similar issues are taken into account, the relevant figure is now €976 million according to a company filing this week.
Settlement
Kessler had teased the markets with the news at a recent investor presentation but, given all that has happened, he needed the Revenue’s written assurance before making the announcement.
It is clearly still a very significant figure, but it does make a settlement more likely. Given the inflated nature of the original assessment, Perrigo were never going to be in a position to make a settlement offer that was likely to be seen as reasonable. Similarly, Revenue could never have accepted such a settlement because it would have looked as though it had folded its hand.
“I believe there is good faith discussion on both sides at this point but I think there was in the background this €1.6 billion number that was never real that interfered with some of the productivity of the discussion.”
With agreement now on what the figure should look like under Revenue’s own means of assessment, the serious talking begins. Kessler still argues vehemently that Perrigo’s position on the transaction is correct but he is also pragmatic.
“Even though we still believe that Elan filed correctly and that, ultimately, in a long drawn-out battle, we would come out and win, we believe the right thing to do right now with reasonable minds all trying to get to a reasonable solution is for us to settle this case at a reasonable number that makes sense.
"I think it is good for Perrigo, I think it is good for its investors, I think it is good for its employees, I think it is good for our Irish employees to not have to be reading about this all the time. And I think it is good for Ireland.
“I know we have a big date coming up in November. I have also been around for a very long time. If we win outright, it could be appeals on the other side; if they were to win it, it could be appeals that could go on for years and years. I don’t think that is in anyone’s best interest.”
When might a settlement happen? Kessler cannot say although clearly it would suit both sides to have an accord in place before they appear before the tax appeals commissioner.
“If Revenue told me this week ‘let’s get in a room and get this done’, I think we have progressed far enough that we can get it done. I have done a lot of deals in my career and things have to ripen, time has to go by, arguments have to be shown back and forth in legal briefs and then it gets to the time when it is the right time.
“I think there is a meeting of the minds to be working towards a solution,” Kessler says. “I believe [that] between now and November, that is the right time. If it was me, and I am not in the public service sector and sometimes they have to go through more processes, but for me, I’m ready to sit down and talk.”
Uncertainty
For Perrigo, part of the motivation is the ongoing uncertainty an outstanding tax bill of that scale has. Kessler believes it has been a big factor in what he considers the undervaluing of the company in the market.
It is also an elephant in the room when trying to attract key hires or new investors. “When they put that risk out there, they like certainty,” he says.
He argues that it has also held back the company’s plans in Ireland. “It affects how much I can invest. I want to invest more. I have plans to invest more in Ireland. People ask me all the time: ‘Are you pulling out?’. We’re not pulling out, we want to invest more but we have to get it to a friendlier environment.
“If we didn’t have this battle over the last two years, we would be trying to find ways to put more things in Ireland to get more benefit. Because we are not really taking advantage of the structure.
“It’s enough already; it’s been a few years.”
Covid-19
Some things are bigger than business. For Perrigo, Covid has been tremendously disruptive. First, the panic buying at the start of the pandemic last year means the company has had challenging artificially high comparators to measure against in the first half of 2021.
And then there is the collapse of the market for cough and cold remedies last winter and social distancing and lockdowns meant the worst cough/cold market for the industry in memory.
But the company, like make others, has adapted to meet the health challenges of the pandemic.
“In Ireland, you see Perrigo from the tax side of things,” Kessler says. “Perrigo as a company has a huge heart. Last year I could have made a lot more money, I could have sold our most expensive things, I could have raised prices. Instead we prioritised the things the world needed the most whether we made money on it or not.”
One example is acetaminophen – known better here as paracetamol. Perrigo manufactures more than half of the supply for the US market. “That is a lower margin item for us but that is what the world needed to keep fevers down. We stopped making things we make 10 times more money on because that was what the world needed.”
Kessler says the company also started making hand sanitiser – something that doesn’t feature in its normal product range – in both Europe and the US. “We didn’t try to sell them, we just gave them to hospitals.” It also supplied iPads for hospital emergency rooms to help those hospitalised talk to their families.
He’s sanguine about the longer-term impact. “Our business is strong. It’ll bounce back. People will get colds and coughs again. It’ll return to normal.”
And where would resolution of the Irish tax headache leave Kessler? He originally joined Perrigo on a three-year deal. With the unfinished business of the generics business disposal and the Irish tax bill, as well as the disruption from Covid-19, he recently committed to another three.
“I would like this company to have this uncertainty behind it with Ireland and then I would like to invest this cash. And then I think when that all happens and I leave a company that is stronger, back to its core roots of success, that is a cleaner, more investable company that is taking advantage of trends worldwide on self care, that has a good balance sheet that people have a good future in, then I’ll have done my job and I can go back to retirement.”
Name: Murray Kessler
Age: 62
Position: Chief executive, Perrigo
Family: Married to Sarah, he has a daughter, Reed
Interests: Away from the desk, Kessler has had a lifelong interest in equestrian sport and has been a competitive amateur showjumper for decades.
Something that you would expect: He cheers the fact that he's currently nursing a cold after the worst year in memory for cough and cold medications, a staple of Perrigo's portfolio
Something that might surprise: Alongside the full-time role at the listed healthcare group, Kessler is president of the US Equestrian Federation, the national body for the sport in the United States, a voluntary role he has filled since 2017. His daughter was the youngest ever Olympic show-jumper when she represented the US in 2012.
