Perrigo Company PLC (NYSE:PRGO) disclosed a possible $1.9 billion tax liability after Thursday's close, prompting a plunge in share price.

The company plans to appeal Irish tax authorities on behalf of its Elan Pharmaceuticals, whose Tysabri intellectual property and Biogen Idec assets were said to be improperly reported in 2013. Perrigo's management assured no payments are required and liquidity will remain unaffected until a final determination is reached.

Some analysts refuse to give in to despair until then.

What Analysts Say

Given Elan’s filing is historically consistent, Cantor Fitzgerald approaches the ordeal skeptically. “We would not read too much into the headlines because it is unclear that there is much of a case here,” the firm wrote in a note.

However, Wells Fargo suspects the Irish tax authorities have the upperhand in the dispute given that they craft the rules. As such, it models a 50-50 chance of payment.

“If the tax case does go against PRGO, a $1.9 billion tax bill plus penalties and interest would be challenging for a company with only approximately $440 million in cash and approximately $3.0 billion of long-term debt, especially during a time that has seen lower than historical growth for the business,” Wells Fargo wrote.

Morgan Stanley was not only concerned about related overhang, which could take years to resolve, but also about the delay in reporting.

“Might investors potentially question new management transparency considering the Notice of Amended Assessment (NoA) was dated Nov. 29, 2018 and investors were only made aware of this potential tax liability through the 8K published Dec 20?” its analyst wrote.

Wells Fargo expressed similar concerns, particularly as Perrigo’s CEO failed to raise the topic in a meeting last week.

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

Morgan Stanley awaits clarity around implications for the prescription spinoff and bolt-on deal strategy, length of resolution and settlement fee before adjusting its thesis.

The Ratings

Cantor Fitzgerald maintained an Overweight rating on Perrigo with a $107 price target.

Morgan Stanley maintained an Equal-Weight rating with a $67 price target.

Wells Fargo maintained a Market Perform rating but cut its price target from $64 to $46.

At time of publication, Perrigo shares were down 11.4 percent at $46.40.

Related Links:

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Photo courtesy of Perrigo.