Pfizer Inc. and Allergan PLC on Wednesday canceled their $160 billion merger in an abrupt end to the largest-ever health care deal after the U.S. government cracked down on corporate tax inversions.
In an inversion, a big company buys a smaller one in another country, usually with a lower tax rate, then moves the combined company's address on paper to that country. Pfizer had intended to buy rival Allergan. The merger would have moved Pfizer's address -- but not its operations or headquarters -- to Ireland, where it would pay far less in corporate taxes.
As analysts and investors had expected, the two companies called off the merger early Wednesday "by mutual agreement." Pfizer cited the U.S. Treasury Department's new regulations, issued late Monday, to make such "tax inversions" less lucrative.
Pfizer, based in New York, will pay Dublin's Allergan $150 million for reimbursement of its deal-related expenses.
The two drugmakers are far from dire straits as they contemplate their next moves. Both are profitable, have multiple lucrative franchises and strong pipelines of experimental drugs, and have enough cash to turn around and do another deal.
Pfizer had $23.3 billion in cash, cash equivalents and short-term investments available at the end of 2015, when it posted a profit of $9.1 billion on revenue of $49.6 billion.
Pfizer said in a statement that it will decide by year's end whether to separate its global established products business, which sells older, mostly off-patent drugs. It accounted for nearly half of Pfizer's sales and profit last year.
"While this was not Plan A, we were prepared for this," Allergan Chief Executive Officer Brent Saunders said in an interview Wednesday on Bloomberg TV. "We're going to go and look to find assets that complement and increase our growth profile."
The decision to abandon the merger could indicate Pfizer has given up on inversions and is "back to usual business once again," Bernstein analyst Dr. Timothy Anderson, who has pushed Pfizer for years to break up, wrote to investors Wednesday. He kept his "Buy" recommendation on Pfizer, adding, "We need a clearer vision of what 'Plan B' might be."
Pfizer has endured years of relentless pressure from analysts and others to break up the company so growth and profits could accelerate. That's easier said than done, given Pfizer's huge scale, increasing pressure from insurers for bigger discounts and a revenue base that's been declining over the past several years as multiple blockbusters such as cholesterol drug Lipitor have lost billions in annual sales to cheaper generics.
"We remain focused on continuing to enhance the value of our innovative and established businesses," Pfizer Chief Executive Officer Ian Read said in a statement.
"We believe our late-stage pipeline [of drugs nearing the end of testing] has several attractive commercial opportunities with high potential across several therapeutic areas," Read added. "We also maintain the financial strength and flexibility to pursue attractive business development and other shareholder-friendly capital allocation opportunities."
Saunders said in a statement that Allergan is "disappointed that the Pfizer transaction" won't happen, adding that "Allergan is poised to deliver strong, sustainable growth."
"Allergan is focused on delivering growth from an efficient operating structure while also being committed to investing in [research and development]," Saunders said.
His company has scheduled a morning conference call to discuss its plans and answer questions.
Meanwhile, Allergan is still selling its generic-drug business for $40 billion to Israel's Teva Pharmacueticals Industries Ltd., the world's top maker of generic drugs. That deal may be delayed because of scrutiny from antitrust regulators in multiple countries.
Shares of both Pfizer and Allergan rose Wednesday morning after the announcement that the deal between them fell through. Pfizer shares rose $1.57, or 5 percent, to close Wednesday at $32.93. Allergan shares rose $8.19, or 3.5 percent, to close at $244.74.
The companies' decision could deter other tax inversions in the works -- exactly the effect President Barack Obama's administration is seeking by having the Treasury Department issue 300-plus pages of new regulations that remove or reduce key financial benefits of a tax inversion. Pfizer had expected to save hundreds of millions of dollars in U.S. taxes annually under its planned deal with Allergan.
Other health care companies recently have done or are planning inversions, including fellow drugmakers Baxalta Inc. of Bannockburn, Ill., and Shire PLC of Ireland, which are planning a $32 billion inversion deal.
Medtronic PLC, which relocated from Minnesota to Dublin in January 2015 after buying fellow medical-device maker Covidien for $42.9 billion, said in a statement that it had done a preliminary review of the new Treasury Department rules and concluded they wouldn't have a material effect on the company.
Read, Pfizer's CEO for five years, has said the deal was needed because U.S.-based drugmakers are at a major disadvantage to their multinational rivals based in Europe and elsewhere, who face lower corporate tax rates. Other U.S. companies likewise have complained about the top U.S. tax rate of 35 percent -- which few ever pay -- and the U.S. taxing them on profits made overseas. As a result, Pfizer and other companies are keeping billions in overseas profits outside the U.S. to avoid a big tax bill if they "repatriate" those profits.
Tax inversions have become a hot issue in the presidential race, with some candidates calling companies considering such deals "unpatriotic." And on the heels of the new Treasury Department rules, Obama held a news conference Tuesday, saying the rules are meant to prevent "one of the most insidious tax loopholes out there" and make wealthy corporations shoulder their tax responsibility like working-class Americans.
"Inversions are dead," said John Schroer, sector head of health care at Allianz Global Investors. Josh Earnest, a White House spokesman, said Tuesday that the administration hoped its new proposals would stop the transactions.
Allergan itself is the result of multiple inversions, and despite its Dublin address is operated from offices in Parsippany, N.J. That's not far from Pfizer's high-rise Manhattan headquarters.
Information for this article was contributed by Linda A. Johnson of The Associated Press and by Kristen Hallam, Cynthia Koons and Zachary Tracer of Bloomberg News.
A Section on 04/07/2016