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Tuesday, May 17, 2022

Amgen’s Tall Tax Liability

PHARMA: IRS demands $10.7 billion in payments, penalties.

The share price of Amgen Inc. has steadily declined in the days since the biopharmaceutical developer reported that the Internal Revenue Service had notified the company it will have to pay federal back taxes of $5.1 billion, plus interest. 

“In addition, the notice proposes penalties of approximately $2 billion,” according to a release from the Thousand Oaks company. 

According to the IRS, the company owes a total of about $10.7 billion in taxes, interest and penalties for the years 2010 through 2015. 

“Amgen will vigorously contest the adjustments and penalties proposed by the Internal Revenue Service for the 2010-2015 period,” the company said in a statement. “Amgen is confident in its position in the dispute, and in the level of reserves the company has established.”

Since April 27, when the stock price reached $248.79, it lost about 7 percent of its value in the following days through May 2, when shares closed at $230.92. On May 4, shares closed at $236.10. 

The tax issue weighed heavily on analysts who follow the company, according to research reports put out after the April 27 release of first-quarter earnings and the announcement of the taxes and penalties owed by Amgen.

Evan David Seigerman, an analyst with BMO Capital Markets Corp., who rated Amgen’s stock as “market perform” or “hold,” said in his report that the dramatic tax liability soured the tone of the conference call. 

“While the company may have significant offsets ($3.1 billion of previously accrued repatriation tax, $1.1 billion in advanced deposits), in addition to $2 billion potential additional adjustments, the headline risk and overhang are likely to remain for several years as this is litigated (and potentially settled),” Seigerman said in his note. 

Slow resolution

Jay Olson, an analyst with Oppenheimer & Co. Inc., said in his report that the tax controversy could drag on for years before being resolved in Amgen’s favor. 

He simplified the resolution to the tax issues in two potential ways – the first being an 8 percent upside to the stock based on Amgen paying only $2.7 billion in back taxes, interest and penalties; and the second scenario being an 8 percent downside to the stock.

“Our -8% downside estimate is driven by assuming that (Amgen) pays the full $10.7 billion disputed amount to the IRS,” Olson wrote in his note. 

Olson concluded in his report that the tax issue was an “exaggerated overhang” on Amgen shares and that investors should not be concerned with a resolution, given the firm’s belief that it will end in Amgen’s favor. 

“It also seems likely for the resolution to be years away considering the lengthy process involved,” Olson said in his report. 

And Michael Yee, an equity analyst with Jefferies Financial Group Inc., said in his report that with the IRS auditing Amgen from the 2016 to 2018 tax years, it could add more to what the company owes.

“The tax penalties could ultimately be reduced through various strategies but bottom line, this adds more noise to the stock with very limited visibility on achieving a successful outcome,” Yee wrote. “The market may not ultimately care however, as generalists may buy the pullback, but it’s worth following.”  

Both Olson and Yee rated Amgen’s stock as a “buy.”

In the conference call with analysts to discuss first-quarter earnings, there was a lot of discussion about the tax controversy, primarily from Peter Griffith, Amgen’s chief financial officer.

The company believes, for example, that the adjustments for the 2010 to 2015 period are overstated by $2 billion due to the federal tax agency’s failure to account for certain income and expenses, Griffith said during the call. 

“Amgen has reported its income and expenses in a consistent manner for many years, and the IRS has appropriately accounted for the company’s income and expenses in all prior audits,” Griffith added. 

With the IRS currently auditing the 2016 to 2018 period, it is expected that audit will take several years to complete, and it is possible that the 2010 to 2015 dispute will be resolved before that newest audit and any administrative appeals process is finished, Griffith continued in the call. 

“Any transfer pricing adjustments the IRS may propose for this period will be lessened by the change in tax rates resulting from the 2017 tax reform law, which reduced the difference between the tax rates applicable in the U.S. and Puerto Rico by approximately two thirds beginning in 2018,” Griffith said. 

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.

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