The largest pharmaceuticals merger in history, between Pfizer and Allergan, could be abandoned after the US government took fresh steps to clamp down on tax avoidance deals.
The $160bn deal, announced in November, was thrown into doubt following the move by the US Treasury on Monday to make so-called tax inversion deals, by which corporations relocate their headquarters to countries with a lower tax rate, less financially appealing.
Reuters reported that Pfizer – best known for Viagra and its cholesterol pill Lipitor – may abandon its $160bn agreement to buy Allergan, quoting an unidentified source.
Shares in Botox producer Allergan had already crashed 15% on Tuesday, following speculation that the deal would be affected by the US government move. Analysts at Jefferies said: “the Treasury action is expected to have a significant impact on the merger, potentially derailing it.”
Barack Obama called on Congress to close “one of the most insidious tax loopholes out there”, saying it shortchanges the country. The president said less tax revenue meant less spending on schools, transportation networks and other investments. He said the practice also hurts middle-class Americans because “that lost revenue has to be made up somewhere”.
“When companies exploit loopholes like this it makes it harder to invest in the things that are going to keep America’s economy going strong for future generations,” Obama said at the White House.
Under the deal Pfizer intends to re-domicile from its headquarters in New York to Ireland. Allergan moved its head office to Dublin after a reverse merger with the Irish drugmaker Actavis a year ago.
The companies said in a joint statement late on Monday that they were reviewing the new Treasury rules. Their immediate reaction to the Reuters report on Tuesday was to decline to comment.
The US tax inversion rules also scuppered US drugs group AbbVie’s $54bn takeover of Britain’s Shire in 2014. AbbVie pulled out of the agreed deal after a detailed examination of the rules, and concluded they made Shire less valuable to AbbVie.
John Colley, a professor at Warwick Business School, said: “the stock market thinks that the US government is likely to be successful with this move. Several pharmaceutical deals are based on similar tax benefits.
“Indeed this move may well prevent recent tax inversion deals altogether. If so, US businesses will have to rely on more conventional benefits to justify their overseas merger plans. Pfizer may terminate the deal or alternatively renegotiate a lower price. Certainly their shareholders will not now be happy with the terms of the original deal.”
Pfizer chief executive Ian Read has made no secret of his desire to split the company into two parts, one comprising patented-protected innovative drugs and the other with older products that have come off patent or are close to it.
The two drugmakers agreed either party may terminate the deal if a change in US law would cause the combined company to be treated as a domestic corporation for federal income tax purposes.
However, terminating party would have to pay the other company up to $400m for its expenses, according to the merger agreement.
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