Document Type

Article

Publication Date

2-2026

Abstract

With about 182 million infections worldwide at the time, the potential value of a cure for the hepatitis C virus (HCV) was staggering.2 The company behind this drug, Pharmasset Inc., was a startup in Princeton, New Jersey, with 42 researchers and $127 million in the bank, churning through $66 million per year with no commercialized products and no codevelopment or commercialization partners. The “Pharmasset combo” was an extremely effective nucleotide analog that could treat HCV-infected individuals across genotypes, known as PSI-7977 (later renamed GS-7977), also called sofosbuvir, the active pharmaceutical ingredient (API) found in multiple current drugs used to treat or cure HCV. Within months of this announcement, Gilead Sciences Inc. (Gilead, or Gilead US) initiated discussions to acquire Pharmasset, culminating in an $11 billion acquisition in January 2012 by two newly incorporated Delaware entities, Merger Sub and Merger Sub II, funded mostly by debt issued by Gilead US.

This report finds that Gilead’s transfer pricing results appear to violate the arm’s-length standard and the section 482 statute’s second sentence, known as the commensurate with income rule, via a substantial undetected violation of the section 1.482-7(i)(6) cost-sharing periodic adjustment regulation that implements that rule. Violations on the scale indicated here often also violate other U.S. tax statutes, regulations, and judicial doctrines, particularly the section 864(c) effectively connected income rules, which are discussed later. Whether Gilead has violated judicial doctrines (such as the substance-over-form, assignment of income, or sham transaction doctrines, including the potential application of the section 7701(o) codified economic substance doctrine) is beyond the scope of this report.

Comments

Reprinted with the permission of Tax Analysts.

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