Wall Street analyst Tim Anderson is known for asking tough questions during pharma companies’ earnings calls, so it may not have seemed surprising when he brought up Bristol Myers Squibb’s massive drop in its tax bill for 2012.
After all, the company paid an effective tax rate of negative 6.9% that year. Its tax rate the year before had been about 25%.
Anderson said during BMS’ fourth-quarter earnings conference call in January 2013 that he recognized that all companies “optimize legal entities” to lower their tax rates. “Yet your rate is markedly lower than any other companies that I cover at least. And so I’m wondering why your tax rate might be unique in that regard,” asked Anderson, who was then an analyst at Sanford C. Bernstein and has since moved to Wolfe Research.
BMS’ executives didn’t give Anderson a straight answer, nor did they elaborate on their tax strategy when four other analysts pressed them on the topic during that same earnings call. But the Internal Revenue Service caught on and is now alleging the company owes up to $1.38 billion in unpaid taxes, according to documents obtained by the New York Times.
A spokesperson for BMS said in a statement emailed to Fierce Pharma that the company “is in compliance with all applicable tax rules and regulations. We work with leading experts in this area and will continue to work cooperatively with the IRS to resolve this matter.”
The IRS alleges that BMS created an offshore subsidiary in Ireland and used it to lower its tax bill through an amortization plan developed by accounting consultancy PwC and law firm White & Case.
The plan involved moving patent rights held by U.S. and Ireland-based subsidiaries of BMS into a new company. When BMS brought in revenues from the patents held in the U.S., it allegedly offset its U.S. tax bill with amortization deductions in Ireland, according to the Times.
A spokeswoman for PwC declined to comment. White & Case did not immediately respond to a request for comment from Fierce Pharma.
The IRS briefly posted a 20-page analysis of BMS’ offshore setup last April online, which was obtained by the Times. The report noted that the company’s actions violated provisions in the tax law against “abusive” profit-shifting practices.
It isn’t yet clear what the consequences will be for BMS, or what the timing for resolving the dispute with the IRS will be. But it’s likely to add to a list of legal and regulatory hassles that have been piling up for the drugmaker.
In February, BMS was slapped with a $417 million fine after a judge in Hawaii ruled that it and Sanofi failed to disclose the risks of their blood thinner Plavix to some patients. BMS and Sanofi, which was fined the same amount, are appealing the decision.
And last month, the Federal Trade Commission said it was launching a massive review of biopharma megamergers to determine whether they have resulted in anticompetitive behavior that’s related to skyrocketing drug prices. When FTC acting chair Kelly Slaughter announced the review, she cited BMS’ $74 billion purchase of Celgene as an example.
The IRS dispute may be settled for much less than the $1.38 billion the IRS cites, tax experts told the Times. Still, it is curious that it took so long for the agency to catch on to BMS’ efforts to reduce its corporate tax bill, given the concerns Wall Street analysts expressed after the earnings announcement eight years ago.
During that conference call, analysts from ISI and Morgan Stanley pushed executives for details on how sustainable the sudden tax reduction would be. And a Bank of America analyst noted that the company’s tax changes were “massive relative to what we [and] I think the market [were] expecting going forward.”
Charles Bancroft, BMS’ CFO at the time, referred back to his opening remarks, during which he said the tax rate the company reported that year could be partially credited to “our tax planning initiatives.”