Merck & Co. on Tuesday disclosed that liabilities from four tax disputes in the U.S. and Canada could total $5.58 billion, as the drug maker faces tens of thousands of lawsuits over its withdrawn painkiller Vioxx.
Merck said it is fighting the assessments, which were detailed in a quarterly filing with the Securities and Exchange Commission.
"While the resolution of these issues may result in tax liabilities which are significantly higher or lower than the reserves established for this matter, management currently believes that the resolution will not have a material adverse effect on the company's financial position or liquidity," Whitehouse Station-based Merck said.
The company, however, cautioned that an unfavorable resolution could affect results in a quarter in which it is recorded.
Merck isn't the only drugmaker hit with steep tax bills. In September, GlaxoSmithKline PLC agreed to pay the U.S. government $3.4 billion to settle a dispute over how to tax deals between the London-based company and its American subsidiary.
As of Sept. 30, Merck had $15.22 billion in current assets, including $6.22 billion in cash. At least one of the transactions in dispute also includes an income statement benefit, which could potentially be reversed depending on the outcome. In the third quarter, Merck earned $940.6 million on $5.41 billion in sales.
Merck already is facing liabilities that could reach tens of billions of dollars related to Vioxx, the painkiller it withdrew from the market in September 2004 after evidence that it increased the risk of heart attacks and strokes. Merck has been fighting the cases one by one. It has won five cases and lost four.
In a recent interview, Merck Chief Executive Officer Richard Clark said the company was "very conservative" in its tax practices, The Wall Street Journal reported on its Web site Tuesday. He also said the potential liabilities weren't a concern, given Merck's finances. "I don't lose any sleep over that," he said.
A Merck spokesman said the company believed the transactions are in "full compliance with IRS rules" and that it plans to contest the matter, the Journal said.
According to Merck's SEC filing, the Canada Revenue Agency issued the company a notice on Oct. 10 for $1.76 billion in back taxes and interest "related to certain intercompany pricing matters."
The dispute involves revenue Merck had in 1998 to 2004 on its asthma and allergy drug Singulair, the Journal said, citing an unnamed person familiar with the matter. Singulair was originally developed by Merck's Canadian subsidiary in Montreal, entitling the Canadian government to tax revenue on the drug, the person said.
U.S. Patent & Trademark Office records show that, in December 1998, Merck transferred patents associated with Singulair to a Barbados subsidiary called Tradewinds Manufacturing SRL. At the time, Barbados was considered a tax haven because of a variety of favorable tax provisions it offered.
In its SEC filing, Merck said it disagrees with Canadian tax authorities, but said it could be "required to post a deposit of up to one-half the tax and interest assessed which could have a material adverse effect on the Company's cash flows in the quarter in which the deposit is made."
GlaxoSmithKline's settlement with the IRS came after the agency alleged Glaxo's American unit overpaid its British parent for drugs, largely for antiulcer drug Zantac. Those overpayments reduced the company's U.S. profit, and its U.S. tax bill. The IRS said the settlement was the largest ever.
Software maker Symantec Corp. and telecom equipment manufacturer Motorola Inc. have also disclosed sizable transfer pricing disputes with the IRS. Symantec and Motorola disagree with the IRS's position. Symantec is suing the IRS over the proposed adjustments and Motorola says it is planning to dispute the finding.
Of the $5.58 billion in potential liabilities disclosed Tuesday, Merck had previously disclosed $2.3 billion related to a partnership deal dating back to 1993, the Journal said. The newspaper reported in September on how the transaction allowed Merck to shift taxable income to a subsidiary of a United Kingdom bank, Abbey National PLC, but avoid the financial loss of shifting comparable book income. The disputed $2.3 billion in taxes cover the years 1993 to 2001. The liability could be higher if the IRS assesses additional penalties.
Merck said the two other disputes, which are with the IRS, stem from "minority equity financing" deals.
Dow Chemical Co. is in a similar dispute with the IRS and Justice Department. Dow has called that deal a "minority equity financing" as well. Dow is suing the government over the IRS's proposed adjustments.