April 6, 2016
By Mark Terry, BioSpace.com Breaking News Staff
In light of new U.S. Treasury regulations regarding tax inversions, New York-based Pfizer announced today that it is terminating its acquisition agreement with Dublin-based Allergan .
On April 4, the U.S. Treasury Department released a new set of rules that makes it more difficult for U.S. companies to conduct tax inversions. The rules, which are over 300 pages in length, have two primary components. The first part takes on “serial inverters,” which allows the government to ignore U.S. assets acquired by these companies over the last three years.
The second component involves earnings stripping. The new rules states, “Today’s action makes it more difficult for foreign-parented groups to quickly load up their U.S. subsidiaries with related-party debt following an inversion or foreign takeover, by treating as stock the instruments issued to a related corporation in a dividend or a limited class of economically similar transactions.”
The first part, in particular, imperiled the Pfizer-Allergan deal because Allergan as it exists now is essentially the result of a series of high-profile mergers acquisitions since 2013. It started with the inversion of Actavis in 2013, at that time based in New Jersey, which was acquired by Ireland-based Warner Chilcott PLC. There were more deals, culminating last year in the acquisition of Allergan by Actavis for $66 billion, and changing the company name to Allergan.
“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” said Ian Read, chairman and chief executive officer of Pfizer, in a statement. “We remain focused on continuing to enhance the value of our innovative and established businesses. Our most recent product launches, including Prevnar 13 in Adults, Ibrance, Eliquis and Xeljanz, have been well-received in the market, and we believe our late stage pipeline has several attractive commercial opportunities with high potential across several therapeutic areas.”
Although most earlier reports indicated a breakup fee of anywhere from $400 million to $3.5 billion, Pfizer indicates it will pay Allergan $150 million.
Pfizer was relatively unaffected by the news, up slightly to $31.38 currently.
Allergan dropped about 17 percent at the news and is currently trading at $236.55.
President Obama, in a Tuesday press conference about the new regulations, described inversions as “one of the most insidious tax loopholes out there, fleeing the country just to get out of paying their taxes.”
Brent Saunders, chief executive officer and president of Allergan, said in a statement, “While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth built on a set of powerful attributes. Leading therapeutic franchises with strong brands across seven therapeutic areas provide the foundation for continued strong growth in 2016 and beyond.”
The Pfizer-Allergan deal was expected to decrease Pfizer’s annual tax bill by about $1 billion.
Now that the deal isn’t in the cards, the question is whether both companies will continue on as usual. Most analysts doubt it. There is speculation that Pfizer will consider splitting the company into two parts, one that focuses on research and development and new brands and the other that focuses on older, mature brands and brands coming off patent exclusivity. This was part of the plan after the merger.
Allergan may very well go on a shopping spree, particularly because it will have pulled in $40 billion when the sale of its generic business to Israel-Based Teva closes this year, and the $150 million breakup fee.
