Updated from 8:58 a.m. EDT
shares fell early Monday after the company late Friday said it "vigorously disagrees" with Internal Revenue Service audits which claim the company could owe more than $2 billion in back taxes and interest.
Although resolving the tax dispute "will not have a material effect" on Merck's "financial condition or liquidity," the company warns that "an unfavorable resolution could have a material effect" on Merck's results of operations or cash flows "in the quarter in which an adjustment is recorded or the tax is due or paid."
Merck revealed the IRS dispute Friday in a filing of its first quarter financial report with the
Securities and Exchange Commission.
The giant drugmaker said that the IRS had served the company with a "preliminary notice of deficiency" on April 28 concerning an unnamed partnership transaction in 1993.
Merck, which provided few details on the dispute, said the IRS seeks to disallow certain royalty and other expenses claimed as deductions on the company's tax returns from 1993 through 1996. Merck said it expects to receive a similar notice for its tax returns covering 1997 through 1999.
"If the IRS ultimately prevails in its positions, the company's income tax due for the years, 1993-1999, would increase by approximately $970 million plus interest to date of approximately $490 million," said Merck's SEC filing.
"The IRS will likely make similar claims for years subsequent to 1999 in future audits with respect to this transaction," the company added. "The potential disallowance for these later years, computed on a similar basis to the 1993-1999 disallowances, would be approximately $540 million plus interest to date of approximately $40 million."
Using that scenario, Merck would owe $2.04 billion excluding any penalties the IRS might impose.
Merck is not the only global drugmaker embroiled in a major tax battle with the IRS.
is currently fighting an IRS claim seeking $5.2 billion in back taxes
Recently, Merck's shares were down $1.30, or 2.7%, to $46.41.