NEW YORK & DUBLIN—When last we talked about Pfizer Inc. and Allergan plc merging in a $160-billion inversion deal that would, in part, have allowed U.S.-based Pfizer to reduce its tax burden by re-domiciling in Ireland (in the December 2015 article “Two bigs make a giant“), there was some worry that new rules by the U.S Treasury Department to discourage such deals might pose a problem.
But, by and large, the market-watchers seemed to think that the deal would go through as structured. And, they might have been right at the time, given that Pfizer and Allergan both seemed intent on sealing the deal and keen to continue despite the new Treasury rules inspired by their inversion deal and the many that had preceded it.
However, as some analysts had cautioned might happen, the Treasury Department played an additional card in its hand to dissuade inversion deals even further. On April 4, the Treasury Department and the U.S. Internal Revenue Service issued temporary and proposed regulations to further reduce the benefits of and limit the number of corporate tax inversions, including by addressing earnings stripping.
Allergan and Pfizer issued a joint statement that same day that they would be reviewing the new rules and then, on April 6, Pfizer announced that the merger agreement between Pfizer and Allergan had been terminated by mutual agreement of the companies, noting: “The decision was driven by the actions announced by the U.S. Department of Treasury on April 4, 2016, which the companies concluded qualified as an ‘adverse tax law change’ under the merger agreement.”
“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” stated Ian Read, chairman and CEO of Pfizer. “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. We also maintain the financial strength and flexibility to pursue attractive business development and other shareholder friendly capital allocation opportunities.”
“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,” continued Read. “As always, we remain committed to enhancing shareholder value.”
In connection with the termination of the merger agreement, Pfizer has agreed to pay Allergan $150 million for reimbursement of expenses associated with the transaction.
For its part, Allergan noted the deal termination on its own website as well, and the reimbursement amount, going on to reiterate its “compelling standalone growth profile and strategy” in the wake of the deal collapse, adding: “Allergan is positioned to drive strong, sustainable growth powered by leading franchises, new potential blockbuster product launches and unmatched pipeline.”
“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. Our pipeline is one of the strongest in the industry, loaded with 70 mid-to-late stage programs, including 14 expected approvals and 16 regulatory submissions in 2016 alone,” said Brent Saunders, CEO and president of Allergan. “Allergan is focused on delivering growth from an efficient operating structure while also being committed to investing in R&D through our ‘Open Science’ model. The company is also poised to deliver additional growth opportunities from its attractive financial profile and balance sheet, propelled by approximately $40.5 billion pre-tax from the sale of our Actavis Generics business to Teva, expected to close in June 2016.”
As for the agency that brought down the deal, U.S. Treasury Secretary Jacob J. Lew said in the April 4 news release about the newest anti-inversion rules: “Treasury has taken action twice to make it harder for companies to invert. These actions took away some of the economic benefits of inverting and helped slow the pace of these transactions, but we know companies will continue to seek new and creative ways to relocate their tax residence to avoid paying taxes here at home.
“Today, we are announcing additional actions to further rein in inversions and reduce the ability of companies to avoid taxes through earnings stripping. This will have an important effect, but we cannot stop these transactions without new legislation. I urge Congress to move forward with anti-inversion legislation this year. Ultimately, the best way to address inversions is to reform our business tax system, which is why Treasury is releasing an updated framework on business tax reform, outlining the administration’s proposals to date as a guide for future reform. While that work goes on, Congress should not wait to act as inversions continue to erode our tax base.”
For more about the unmaking of the Pfizer-Allergan deal and analyst and other opinions about what it means to future deals, to the future of the two companies and to the markets, see our May 2016 issue of DDNews.