Perrigo Company (PRGO) Risk Factors

We market certain products that are subject to the EU's Medical Device Directive ("MDD") and will be subject to the EU's Medical Device Regulation ("MDR"), both of which require that products be certified by designated assessment entities ("Notified Bodies") prior to sale. The date of application of the MDR, and as a result the date of repeal of the MDD, has been deferred by 12 months to May 26, 2021 due to the pandemic. In connection with this extension, Notified Bodies designated under the prior MDD regime were allowed to continue their related governance of medical devices for one additional year, until May 25, 2021, subject to them having a designation under MDD in place throughout this time. During this time, the MDD designation of a Notified Body that certifies certain products in our portfolio has expired. The current regulations are not clear on the treatment of the existing certificates granted by such a Notified Body during this period, and we have engaged in detailed discussions with the relevant authorities to enable continuity of supply. While we do not expect a material impact on our business, there can be no assurances that our ability to sell these products in the EU will not be interrupted, slowed or otherwise adversely affected.

We may become involved in lawsuits arising from a wide variety of commercial, manufacturing, development, marketing, sales and other business-related matters, including, but not limited to, competitive issues, pricing, contract issues, intellectual property matters, false advertising, unfair competition, taxation matters, workers' compensation, product quality/recall, environmental remediation, securities law, disclosure, and regulatory issues. Litigation is unpredictable and can be costly. We intend to vigorously defend against any lawsuits, however, we cannot predict how the cases will be resolved. Adverse results in the cases could result in substantial monetary judgments. No assurance can be made that litigation will not have a material adverse effect on our financial position or results of operations in the future (refer to Item 8. Note 17). - We may be subject to liability if our products violate applicable laws or regulations in the jurisdictions where our products are distributed. The successful assertion of product liability or other product-related claims against us could result in potentially significant monetary damages, and we could incur substantial legal expenses. Even if a product liability or consumer fraud claim is unsuccessful, not merited, or not fully pursued, we may still incur substantial legal expenses defending against such a claim, and our reputation may suffer. - We may face environmental exposures including, for example, those relating to discharges from and materials handled as part of our operations, the remediation of soil and groundwater contaminated by hazardous substances or wastes, and the health and safety of our employees. We may in the future face liability for the costs of investigation, removal or remediation of certain hazardous substances or petroleum products on, under or in our currently or formerly owned property, or from a third-party disposal facility that we may have used, without regard to whether we knew of, or caused, the presence of the contaminants. The actual or alleged presence of these substances, or the failure to remediate them, could have adverse effects, including, for example, substantial investigative or remedial obligations and limitations on our ability to sell or rent affected property or to borrow funds using affected property as collateral. There can be no assurance that environmental liabilities and costs will not have a material adverse effect on us. See Item 1. Business - Information Applicable to All Reportable Segments - Environmental for more information. - Our CSCI and CSCA segments regularly make advertising claims regarding the effectiveness of their products, which we are responsible for defending. An unsuccessful defense of a product-related claim could result in potentially significant monetary damages and substantial legal expenses. Even if a claim is unsuccessful, not merited, or not fully pursued, we may still incur substantial legal expenses defending against such a claim, and our reputation could suffer. - Additionally, we are the target of claims asserting violations of securities fraud and derivative actions, or other litigation proceedings, and may be in the future.

Although we believe that our tax estimates are reasonable and that our tax filings are prepared in accordance with all applicable tax laws, the final determination with respect to any tax audit or any related litigation could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results or cash flows in the periods for which that determination is made and in future periods after the determination. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties or interest assessments. We are currently involved in several audits and adjustment-related disputes, including related litigation. This includes litigation in the United States District Court for the Western District of Michigan regarding our fiscal years ended June 27, 2009, June 26, 2010, June 25, 2011, and June 30, 2012. The United States District Court for the Western District of Michigan has scheduled a trial date in late May 2020 in response to our complaint filed on August 15, 2017 to recover $163.6 million of Federal income tax, penalties and interest assessed and collected by the IRS. Additionally, the IRS has proposed adjustments regarding the deductibility of interest for the years ended June 29, 2013, June 28, 2014, and June 27, 2015 and the IRS has proposed adjustments regarding litigation costs and transfer pricing positions for Athena Neuroscience, Inc. ("Athena"), a subsidiary of Elan acquired in 1996, for the years ended December 31, 2011, December 31, 2012 and December 31, 2013. We are also involved in litigation with Irish Revenue for the years ended December 31, 2012 and December 31, 2013. On August 22, 2019, we received a draft NOPA from the IRS with respect to our fiscal tax years ended June 28, 2014 and June 27, 2015, relating to the deductibility of interest on $7.5 billion in debts owed to Perrigo Company plc by Perrigo Company, a Michigan corporation and wholly-owned indirect subsidiary of Perrigo Company plc. The debts were incurred in connection with the Elan merger transaction in 2013. The draft NOPA would cap the interest rate on the debts for U.S. federal tax purposes at 130.0% of the Applicable Federal Rate (a blended rate reduction of 4.0% per annum from the rates agreed to by the parties), on the stated ground that the loans were not negotiated on an arms'-length basis. As a result of the proposed interest rate reduction, the draft NOPA proposes a reduction in gross interest expense of approximately $480.0 million for fiscal years 2014 and 2015. If the IRS were to prevail in its proposed adjustment, we estimate an increase in tax expense for such fiscal years of approximately $170.0 million, excluding interest and penalties. In addition, we would expect the IRS to seek similar adjustments for the period from June 28, 2015 through December 31, 2019. If those further adjustments were sustained, based on our preliminary calculations and subject to further analysis, our current best estimate is that the additional tax expense would not exceed $200.0 million, excluding interest and penalties, for the period June 28, 2015 through December 31, 2019. We do not expect any similar adjustments beyond December 31, 2019 as proposed regulations, issued under section 267A of the Internal Revenue Code, would eliminate the deductibility of interest on this debt. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies. No payment of any amount related to the proposed adjustments is required to be made, if at all, until all applicable proceedings have been completed. Following receipt of the draft NOPA, Perrigo provided the IRS with a detailed written response on September 20, 2019. That submission included an analysis by external advisors that supported the original interest rates as being consistent with arms'-length rates for comparable debt and explained why the exam team's analyses and conclusions were both factually and legally misguided. Based on discussions with the IRS, we had believed that the IRS staff would take our submission into account and meet with us to discuss whether this issue could be resolved at the examination level. However, in the weeks following such discussions, IRS staff advised that they would not respond in detail to our September submission or negotiate the interest rate issue prior to issuing a final NOPA consistent with the draft NOPA. Accordingly, we currently expect that we will receive a final NOPA regarding this matter that proposes substantially the same adjustments described in the draft NOPA. On April 26, 2019, we received a revised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena for the years ended December 31, 2011, 2012 and 2013. The NOPA carries forward the IRS's theory from its 2017 draft NOPA that when Elan took over the future funding of Athena's in-process research and development after acquiring Athena in 1996, Elan should have paid a substantially higher royalty rate for the right to exploit Athena's intellectual property, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The NOPA proposes a payment of $843.0 million, which represents additional tax and a 40.0% penalty. This amount excludes consideration of offsetting tax attributes and potentially material interest. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including potentially those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. No payment of the additional amounts is required until the matter is resolved administratively, judicially, or through treaty negotiation. On October 30, 2018, we received an audit finding letter from the Irish Office of the Revenue Commissioners ("Irish Revenue") for the years ended December 31, 2012 and December 31, 2013. The audit finding letter relates to the tax treatment of the 2013 sale of the Tysabri intellectual property and other assets related to Tysabri to Biogen Idec from Elan Pharma. The consideration paid by Biogen to Elan Pharma took the form of an upfront payment and future contingent royalty payments. Irish Revenue issued a Notice of Amended Assessment ("NoA") on November 29, 2018, which assesses an Irish corporation tax liability against Elan Pharma in the amount of €1,636 million, not including interest or any applicable penalties. We disagree with this assessment and believe that the NoA is without merit and incorrect as a matter of law. We filed an appeal of the NoA on December 27, 2018 and will pursue all available administrative and judicial avenues as may be necessary or appropriate. In connection with that, Elan Pharma was granted leave by the Irish High Court on February 25, 2019 to seek judicial review of the issuance of the NoA by Irish Revenue. The judicial review filing is based on our belief that Elan Pharma's legitimate expectations as a taxpayer have been breached, not on the merits of the NoA itself. The High Court has scheduled a hearing in this judicial review proceeding in April 2020, and we would expect a decision in this matter in the second half of 2020. If we are ultimately successful in the judicial review proceedings, the NoA will be invalidated and Irish Revenue will not be able to re-issue the NoA. The proceedings before the Tax Appeals Commission have been stayed until a decision on the judicial review application has been made. If for any reason the judicial review proceedings are ultimately unsuccessful in establishing that Irish Revenue's issuance of the NoA breaches our legitimate expectations, Elan Pharma will reactivate its appeal to challenge the merits of the NoA before the Tax Appeals Commission. We regularly assess the likelihood of adverse outcomes resulting from tax examinations to determine the adequacy of our tax reserves. We believe that, based on a review of the relevant facts and circumstances, this matter will not result in a material impact on our consolidated financial position, results of operations or cash flows. However, while we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is ultimately resolved unfavorably it would have a material adverse impact on us, including on liquidity and capital resources. We will consider the financial statement impact of any additional facts as they become available. In addition, going forward, uncertainty regarding the future outcome of tax disputes such as the NoA or draft or final NOPA may have an adverse impact on our strategy and the results of such tax disputes may have an adverse impact on our financial condition and liquidity. At this time, we cannot predict the outcome of any audit or related litigation. Unfavorable developments in or resolutions of matters such as those discussed above could, individually or in the aggregate, have a material impact on our Consolidated Financial Statements in future periods (refer to Item 8, Note 15 for further information related to uncertain tax positions and ongoing tax audits and Item 8. Note 17 for further information related to legal proceedings). In addition, an adverse result with respect to any of these matters could ultimately require the use of corporate assets to pay assessments and related interest, penalties or other amounts, and any such use of corporate assets would limit the assets available for other corporate purposes.

During the year ended December 31, 2017, we divested the Tysabri financial asset to Royalty Pharma for $2.2 billion in upfront cash and up to $250.0 million and $400.0 million in milestone payments. We received the $250.0 million royalty payment on February 22, 2019. In order for us to receive the milestone payment related to 2020 of $400.0 million, the payments received by Royalty Pharma from Biogen for Tysabri sales in 2020 must exceed $351.0 million. The 2018 Royalty Pharma payments from Biogen for Tysabri were $337.5 million. We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017. Upon Tysabri meeting the 2018 global net sales threshold we recorded a $170.1 million gain in Change in financial assets. The fair value of the milestone payment related to 2020 is $95.3 million as of December 31, 2019. Our receipt of the milestone payment related to 2020 may be negatively impacted if the royalty stream decreases and is insufficient to meet the specified thresholds. Given the fact that the milestone payment related to 2020 is recorded at fair value, if it is determined that Tysabri global sales levels do not meet specific thresholds, we would recognize a material charge in the Consolidated Statement of Operations. Factors that may have an adverse effect on the Tysabri royalty stream include: - Companies working to develop new therapies or alternative formulations of products for multiple sclerosis that, if successfully developed, would compete with, or could gain greater acceptance than, Tysabri and damage its market share. For example, in February 2016, a competitor's pipeline product, Ocrevus, received breakthrough therapy designation from the FDA, and this product was launched in 2017. The product competes with Tysabri and could have a significant negative impact on the Tysabri royalty stream;- Biogen is the owner of the patents on Tysabri. The loss of protection of these patents, such as a patent invalidation, could adversely affect the royalty stream from Tysabri. In addition, once the Tysabri patents expire, other generic companies may introduce products similar to Tysabri that could adversely affect the royalty stream;- Foreign currency movement, which could have a negative impact on Royalty Pharma's Tysabri sales, thereby reducing the royalties;- Any negative developments relating to Tysabri, such as safety, efficacy, or reimbursement issues, could reduce demand for Tysabri; and - Adverse regulatory or legislative developments could limit or prohibit the sale of Tysabri, such as restrictions on the use of Tysabri or safety-related label changes, including enhanced risk management programs, which may significantly reduce expected royalty revenue and require significant expense and management time to address the associated legal and regulatory issues. Additionally, Tysabri sales growth cannot be assured given the significant restrictions on its use and the significant safety warnings on the label, including the risk of developing Progressive Multifocal Leukoencephalopathy ("PML"), a serious brain infection. The risk of developing PML may increase with prior immunosuppressant use, longer treatment duration, or the presence of certain antibodies. Increased incidence of PML could limit sales growth, prompt regulatory review, require significant changes to the label, or result in market withdrawal. In addition, the result of ongoing or future clinical trials involving Tysabri or other adverse events reported in association with the use of Tysabri may have an adverse impact on prescribing behavior and reduce sales of Tysabri. Furthermore, there can be no assurance that Royalty Pharma will pay the 2020 milestone payment even if the specified thresholds are met.

To protect the Company against various potential liabilities, we maintain a variety of insurance programs, including property, general, product, and directors' and officers' liability. We may reevaluate and change the types and levels of insurance coverage that we purchase. We are self-insured when insurance is not available or not available at reasonable premiums. Risks associated with insurance plans include: - Insurance costs could increase significantly, or the availability of insurance may decrease, either of which could adversely impact our financial condition;- Deductible or retention amounts could increase, or our coverage could be reduced in the future and to the extent losses occur, there could be an adverse effect on our financial results depending on the nature of the loss and the level of insurance coverage we maintained;- Insurance may not be available to us at an economically reasonable cost or our insurance may not adequately cover our liability in connection with claims brought against us; and - As our business inherently exposes us to claims, we may become subject to claims for which we are not adequately insured. Unanticipated payment of a large claim may have a material adverse effect on our business.

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic, as the new coronavirus, unknown to health officials just three months earlier, spread rapidly from Asia to the Middle East, Europe, and the United States. As the pandemic continues, many actions taken to reduce the spread of the coronavirus remain in effect, including quarantines, government restrictions on movement, business closures and suspensions, canceled events and activities, self-isolation, and other voluntary and/or mandated changes in behavior. Both the outbreak of the disease and the actions to slow its spread have had an adverse impact on our operations by, among other things, increasing absenteeism, affecting the supply of raw materials and third party supplied finished goods, and preventing many of our employees from coming to work. The Company has responded to such impacts by, among other things, implementing protocols to protect the health of factory workers, adjusting production schedules, and seeking alternate suppliers where available, and so far, most of our facilities have continued to produce at high levels despite these challenges. However, a number of jurisdictions that relaxed such restrictions, or have experienced limited public adherence with suggested safety measures, have experienced new surges in COVID-19 cases. Many of these jurisdictions are now contemplating or implementing new or renewed restrictions. Going forward, the continued spread of the disease and the actions to slow it could have an adverse impact on our financial condition, our supply chains and other operations, our results of our operations, consumer demand for our products and our ability to access capital. The magnitude of any such adverse impacts cannot currently be determined, but such adverse impacts could be material, depending on: the duration, intensity, and continued spread of the disease; the duration of business closure and similar government orders; the process by which government authorities permit businesses to reopen and employees to return to work and the publics willingness to adhere to suggested safety measures; the scale and timing of any additional waves of the outbreak as restrictions on community movement are relaxed; the severity of any economic downturn resulting from the pandemic; the effectiveness of the Company's efforts at mitigation; and other factors, both known and unknown, many of which are likely to be outside our control. In addition, to the extent that any increased sales of our products during the initial stages of the outbreak may reflect "pantry stocking", consumer demand for such products in future periods may be correspondingly reduced. Further, lower consumer demand for certain other self-care products in our CSCI segment may continue and volume of U.S. prescriptions could decrease in our RX segment in future periods depending on the course of the pandemic and related responses to combat the virus. It is also possible that a change in the course of the pandemic may affect consumer demand for products in future periods in ways we do not currently anticipate.

Consumer preferences related to health and nutritional concerns may change, which could negatively impact demand for our CSCA and CSCI products or cause us to incur additional costs to change our products or product packaging. - The future growth and stability of U.S. store brand market share can be impacted, in part, by general economic conditions, which can influence consumers to switch to and from store brand products. Our CSCA segment sales could be negatively affected if economic conditions improve and consumers return to purchasing higher-priced brand-name products. Conversely, while store brand products present an alternative to higher-priced branded products, if economic conditions deteriorate, our CSCA segment sales could be negatively impacted if consumers forgo obtaining healthcare or reduce their healthcare spending. - Our CSCI segment's success is dependent on the continued growth in demand for its healthy lifestyle products, which includes products for weight management and well-being and smoking cessation. If demand for products in this category decreases, our CSCI segment's results of operations would be negatively impacted. - Our CSCA customers may request changes in packaging to meet consumer demands, which could cause us to incur inventory obsolescence charges and redesign costs, which in turn would negatively impact our CSCA segment's results of operations. - Our nutritional product category within our CSCA segment is subject to changing consumer preferences and health and nutrition-related concerns. Our business depends, in part, on consumer preferences and choices, including the number of mothers who choose to use infant formula products rather than breastfeed their babies. To the extent that private, public, and government sources may promote the benefits of breastfeeding over the use of infant formula, there could be a reduced demand for infant formula products. We could also be adversely impacted by an increase in the number of families that are provided with infant formula by the U.S. federal government through the Women, Infants and Children program, as we do not participate in this program.