Barack Obama’s derailment of Pfizer’s $160bn (£114bn) merger with Allergan sparked immediate speculation on Wednesday that the US drugs company would turn its attention to another big pharmaceutical takeover.
Pfizer, best known for Viagra and its cholesterol pill Lipitor, will pay the Botox producer Allergan $150m for pulling out of what would have been the world’s biggest healthcare deal, first announced in November and now abandoned after the US Treasury Department stunned financial markets with measures to clamp down on tax efficient mergers and takeovers.
Shares in the pharmaceutical companies Shire and AstraZeneca were the biggest gainers on the FTSE 100, each rising by more than 4.5%, on speculation that they could be targets for acquisition-hungry Pfizer, which has now failed to pull off two major deals in two years.
The merger plan had been motivated by the ability to save as much as $1bn in tax annually by shifting Pfizer’s domicile from New York to Ireland, after Allergan moved its base there a year ago in a similar move. Allergan moved its head office to Dublin after a reverse merger with the Irish drugmaker Actavis.
Such deals have been motivated by the US’s relatively high corporation tax rate and its system of taxing profits made overseas as well in the US market.
The US president described global tax avoidance on Tuesday as a huge problem, and after the deal was formally abandoned on Wednesday the presidential candidate Hillary Clinton tweeted: “Glad to hear Pfizer is calling off the merger. We need to close the loopholes that let corporations escape paying their taxes.”
The Treasury Department did not name Pfizer and Allergan when it announced changes to the rules, but Pfizer blamed the breakdown of the deal on the US government’s move. Allergan’s chief executive, Brent Saunders, a veteran deal maker who has embarked on a number of mergers and acquisitions since joining the company two years ago, also made clear that the deal had been scuppered by the changes.
“It really looked like they [the US government] did a very fine job at constructing a temporary rule to stop this deal and obviously it was successful,” he told CNBC television.
Under the changes announced, the merger would not have counted as a so-called tax inversion deal, because the smaller partner, Allergan, could not end up with 40% of the enlarged company because all of its deal-making in the last three years would be excluded from the calculation.
Allergan’s shares, which had plunged 15% in the aftermath of the tax changes, were up 3% and Pfizer’s rose 5% after they called off the deal.
In 2014, Pfizer’s chief executive, Ian Read, failed to clinch a £70bn takeover of AstraZeneca following resistance from the British drugmaker’s shareholders. Now Read’s ambitions have been thwarted a second time following political invention in the US.
Speculation that Scottish-born Reed’s deal with Allergan would fall apart had been mounting since the Treasury Department’s announcement on Monday.
While Saunders held a call with investors and made clear that his dealmaking ambitions had not been thwarted, Read was not immediately as visible. He said in a statement that a possible division of Pfizer into two parts – one focused on patented-protected innovative drugs and the other on older products that have come off patent or are close to it – was still on the table.
“We plan to make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016, consistent with our original timeframe for the decision prior to the announcement of the potential Allergan transaction,” he said.
Even so, there was speculation about his ambitions for future deals. “The possibility now is that Pfizer goes shopping again, and you might be prepared to develop a case that maybe a firm like Shire becomes the bid target,” Chris Beauchamp, a market analyst at IG, told Reuters.
Others were more cautious. “The market has naturally assumed that with the deal off, [Pfizer] is desperate and must be suddenly on the hunt again. This may not necessarily be the case,” said Tim Anderson, a pharmaceuticals analyst at Sanford Bernstein.
He said the fact Pfizer was still talking about a decision by the end of the year about whether to split in two appeared to indicate that the company had “given up on inversion of a larger target” such as AstraZeneca or GlaxoSmithKlein, which would still meet the threshold for full US tax relief.
Read was urged to find other ways to grow. “Pfizer will now need to review its strategy after a lost three years. Other big pharma companies will be following suit,” said John Colley, a professor at Warwick Business School.
“Perhaps now Pfizer and other pharmaceutical businesses can focus on drug development rather than financial engineering. In 2015 around $600bn of acquisition activity occurred in the pharmaceutical industry, a significant proportion was driven by US tax rules and avoiding tax,” Colley said.
Other deals have fallen foul of US rule changes. Shire, which is based in Dublin for tax purposes but managed in Boston, was to have been taken over by the US drugs group AbbVie in 2014 before the latter pulled out of the agreed deal after a detailed examination of the tax inversion rules.
Shire is now itself in the throes of taking over the Illinois-based Baxalta, which develops treatments for rare blood conditions.
Read said Pfizer had approached the deal with Allergan “from a position of strength and viewed the potential combination as an accelerator of existing strategies … We remain focused on continuing to enhance the value of our innovative and established businesses”.
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