WSJ: Pfizer caught pants down - TRANSFER PRICING FRAUD

The Wall Street Journal publishes a newspaper in India in association with India's HT Media Ltd.

Here is an amazing article from today's Wall Street Journal/LiveMint.com about how Pfizer cheated share holders and the Pakistani government, using inflated transfer prices to make the local unit appear unprofitable. Of course, if you have read my article How Multinationals Avoid Paying Taxes, you already know who this works . . .

Transfer pricing at heart of Pfizer case

Shareholder allege that Pfizer has deliberately contributed to poor results at its Pakistani operations, thus diluting the value of the minority stakeholders' shares

Leela Ann Parker
Wall Street Journal/LiveMint.com
Posted: Thu, Jul 26 2007.

Drug giant Pfizer Inc. says it will appeal a court ruling in Pakistan that has called its behaviour “oppressive” and sided with a small group of investors who had alleged that the multinational systematically drained the coffers of its local operations through artificially high prices for drug ingredients.

See: The 21 May court ruling

The eight investors—two others died waiting for the verdict—are part of a dwindling group of shareholders who now own less than 0.5% in Pfizer Laboratories Ltd (PLL), which is the current version of Pfizer’s operations in Pakistan that has origins in a manufacturing facility opened in 1961. Some of the shareholders who have been fighting Pfizer in court maintain that their original holdings are investments that their parents made in a company called Dumex, acquired by Pfizer in 1959.

At its core, the legal battle is fairly simple. The shareholders allege that Pfizer has deliberately contributed to poor results at its Pakistan operations, thus continuously diluting the value of the minority stakeholders’ shares in an attempt to get 100% control of the business for a lot less than what it is worth.

Interwoven into this saga is a larger issue of “transfer pricing,” a common system under which related but separate companies assign prices for goods or services transferred from one company to the other. Because these are negotiated prices, there can be a potential for one company, especially the parent or majority shareholder, to take advantage of a unit.

Governments and regulators in the developing world, including India and Pakistan, have been particularly wary of opaque transfer pricing mechanisms as they fear that a foreign parent company could use such transactions to drain resources away from the local unit to a foreign parent. That is precisely what happened with PLL, say these minority shareholders who allege that Pfizer sold raw materials at huge markups. They say because Pfizer took equity in return for the cash it pumped into the struggling operation, the drug giant ended up with a growing share of PLL at the cost of minority investors whose equity only fell over time.

According to a court ordered examination of PLL’s practices done by Ernst & Young, Pfizer exported drug raw materials to the Pakistani unit at prices that were, in some cases, up to 70 times those charged by alternative providers. For example, the court papers show, amlodepine besylate, the active ingredient in high-blood pressure medicine Norvasc, was sold at $30,000 per kg while alternative sources could have provided it for as little as $500 per kg. Another example was of piroxicam, used in arthritis drug Feldene, which was allegedly imported by PLL at $8,750 per kg, compared with $125 per kg in the market. Another ingredient, doxycycline, found in antibiotic Vibramycin, was imported by PLL at $700 per kg though it could have been purchased for $60 per kg.

Hat tip Pharmalot.