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 But a non-pharmaceutical offering – refined coal – has quietly
generated hundreds of millions of dollars of tax credits for the
company over the last six years that have boosted its bottom line,
according to a Reuters review of company filings.
Since 2011, Mylan has bought 99 percent stakes in five companies
across the U.S. that own plants which process coal to reduce
smog-causing emissions. It then sells the coal at a loss to power
plants to generate the real benefit for the drug company: credits
that allow Mylan to lower its own tax bill.
For a graphic, click http://tmsnrt.rs/2sQaEQL
These refined coal credits were approved by Congress in 2004 in
order to incentivize companies to fund production of cleaner coal.
They are available to any company that is willing to invest the
capital, and are set to expire after 2021.
Mylan is one of only a few public companies, and the only
publicly-traded pharmaceutical maker, that uses these tax credits, a
Reuters review of a comprehensive database of filings with the U.S.
Securities and Exchange Commission found. It is possible other
companies receive an immaterial amount of the tax credits and
decline to disclose them.
Future tax credits could prove valuable to Mylan, which has seen
sales of its flagship EpiPen allergy treatment sag after consumer
outrage over the allergy treatment's $600 list price. The pricing
issue, which has drawn scrutiny from members of Congress and the
U.S. Department of Justice, and Chairman Robert Coury's nearly $100
million pay package last year have caused a group of investors to
launch an effort to vote down the company’s board at its annual
meeting on Thursday.
Mylan already carries a low tax rate after moving its headquarters
overseas in 2015. The coal credits helped the company lower its
effective tax rate further, to just over four percent in 2014 and
7.4 percent in 2015. Last year, the company actually had a tax
benefit of $358 million, giving it an effective tax rate of negative
294 percent.
Mylan confirmed Reuters’ calculations based on figures in the tax
footnotes in the company’s annual reports. According to these
calculations, Mylan used more than $100 million of “clean energy and
research” tax credits in both 2016 and 2015, and around $95 million
in 2014.
A person familiar with the matter told Reuters these coal operations
have increased Mylan’s net earnings by around $40 million to $50
million in each of the past two years. That accounts for around 9
percent of the company’s earnings last year and more than 5 percent
of its 2015 earnings.
Mylan has disclosed very little about the tax credit strategy or its
coal refining operations. It did not announce the coal deals when
they occurred or disclose how much they cost. Mylan has not
discussed them on its earnings conference calls and does not
disclose exactly how much in tax credits they generate or what
effect they are having on its bottom line.
Wells Fargo analyst David Maris, who has a market perform rating on
the company, said he believes that, from an investor standpoint, the
coal transactions adds unnecessary complexity.
“The average investor looking at their financial statements or their
press releases, would have no idea what this is or how it flows
through to their profit and loss statement,” he said.
"BEING MINDFUL OF TAX PLANNING"
Mylan refers to losses and interest expense generated by its “clean
energy investments,” as well as the fact that they qualify for tax
credits, in tables and footnotes at the bottom of its earnings
releases. In filings with regulators, it discloses some risks around
the investments, their carrying value, and liabilities related to
the investments.
“It does sound like they are being mindful of tax planning,” said
Lisa De Simone, professor of accounting at Stanford Graduate School
of Business. “From the perspective of shareholder value, companies
have all of the incentive in the world to try to reduce their tax
payments, to increase net income and increase distributions to
shareholders.”
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Mylan spokeswoman Nina Devlin said in an emailed statement that the
tax credits are available to any interested company, and often “made
outside of a company’s ordinary course of business, and companies
involved in such projects range across a variety of non-energy
related sectors.”
Other companies Reuters found that take the credits include
insurance brokerage and risk management services firm Arthur J
Gallagher, Waste Management Inc and industrial supply company WW
Grainger. The companies vary in their level of disclosure of the
investments, but some disclose the number of tax credits they
receive from the facilities.
Devlin added that the health company recognizes that the production
at the refined coal facilities will no longer be eligible for a tax
credit beginning in 2022. “Nonetheless, on an ongoing basis, we
consider appropriate opportunities for tax planning with respect to
our global operations,” she added.
New York City Comptroller Scott Stringer spoke out against the tax
strategy when informed about it by Reuters. Stringer, who is leading
the effort to vote down Mylan’s current board, oversees New York
City pensions that together own more than 1.1 million shares of
Mylan stock.
“From the EpiPen pricing debacle to embracing complex tax avoidance
strategies, Mylan’s board appears more focused on financial
engineering than on the company’s core business,” he said.
COAL INTEREST DATES TO 2011
Mylan made the first investment in the coal producing plants in
2011, and expanded its total holdings to 5 plants by 2014.
Mylan Chief Executive Heather Bresch, who has led the company since
2012, has coal country roots: she is the daughter of U.S. Senator
Joe Manchin of West Virginia, the second largest coal-producing
state in the country. The company declined to discuss the origin of
why it adopted the tax strategy.
Mylan says in its last two annual reports that its holdings are
equity method investments in five limited liability corporations
that own refined coal production plants, but does not name them.
Reuters was able to identify these operations by reviewing lists of
the company’s subsidiaries included with its annual reports. Mylan
has 99 percent stakes in 5 LLCs that own refined coal plants: Canton
Fuels Company in Illinois, Chouteau Fuels Company in Oklahoma,
Deogun Manufacturing Company in Utah, Marquis Industrial Company in
Indiana and Powder Street LLC in West Virginia.
Mylan is booking losses from the plants, which is not unusual for
these facilities. The companies often pay a middleman who manages
the coal production facilities as well as other costs.
Mylan recorded pre-tax losses of $92.3 million in 2016, $93.2
million in 2015 and $78.9 million in 2014 from the operations. The
loss generated by the coal plants, as well as depreciation, is tax
deductible, according to tax experts.
But the tax credits generated by the facilities are extremely
valuable. Last year, companies received $6.81 in tax credits for
every ton of refined coal produced. Mylan produced around 16 million
tons of refined coal last year, according to a person familiar with
the matter.
According to the same person, expenses – including costs paid for
the assets and adjusted for tax deductions – equate to around 60
percent of the gross credits earned.
(Editing by Caroline Humer and Edward Tobin)
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