Allergan Drops as Treasury Plans to Deter Inversion Deals

Can U.S. Treasury Stop the Pfizer-Allergan Deal?
  • Ireland-based drugmaker in talks for deal with NY-based Pfizer
  • Lew says Treasury to reduce economic benefits of transactions

Allergan Plc, the Ireland-based drugmaker in talks to be taken over by Pfizer Inc., dropped in late trading on plans by the U.S. Treasury Department to deter companies from doing deals to move their headquarters abroad for tax purposes.

Shares of Allergan slid 4.4 percent to $297 in extended trading. The company’s potential deal with New York-based Pfizer is predicated, in part, on giving the larger drugmaker a way to reduce its tax rate by becoming nominally Irish. Allergan’s principal executive offices are in New Jersey.

The Treasury Department is reviewing ways to address these overseas acquisitions and plans to issue guidance later this week to reduce the economic benefits of such deals, known as tax inversions, Secretary Jack Lew said in a letter to Senator Ron Wyden, the Oregon Democrat who’s the ranking member on the Finance Committee.

Pfizer shares were little changed at $33.20. The largest U.S. drugmaker said last month it was in “preliminary friendly discussions” about combining with Allergan, which in addition to its desirable tax address also has valuable drugs like the Botox anti-wrinkle treatment. The companies’ talks were expected to result in a deal as soon as the end of November, people familiar with the matter said earlier this month.

Allergan spokesman Mark Marmur couldn’t be reached for comment. Pfizer spokeswoman Joan Campion declined to comment.

At an appearance last month, Pfizer Chief Executive Officer Ian Read said the company is at a competitive disadvantage by having its tax domicile in America. Foreign-domiciled companies with lower tax rates can invest more in research, he said.

Previous Attempt

The Treasury Department has attempted to deal with inversions before, issuing a notice in September 2014 to make it harder for U.S. companies to borrow against their foreign cash to finance inversions. It also tightened the calculations for when a deal triggers anti-inversion restrictions in the tax code and changed how passive assets would be counted in those tallies. And it limited maneuvers by companies to shrink themselves by paying extraordinary dividends before a deal so they would escape the arithmetic tests in the anti-inversion law.

The Treasury proposal last year impacted a handful of pending deals, but not all of them. By September 2014, Burger King Worldwide Inc., Medtronic Inc. and Mylan Inc. were all in the process of inverting -- and all eventually completed those deals. Others fell apart -- AbbVie Inc. dropped a $52 billion purchase of Shire Plc, in what would have been the largest tax inversion to date, blaming the proposed Treasury rules.

Allergan, then known as Actavis Plc, moved its tax address abroad in 2013, with its $5 billion purchase of Warner Chilcott Plc. And some tax inversions have moved forward in the past year, despite the Treasury rules. CF Industries Holdings Inc. plans to get a legal address in the U.K. after a deal with OCI NV. Terex Corp., which makes cranes and construction equipment, will end up with an address in Finland.

Companies that leave get a lower rate. Mylan has said its tax rate this year will be about 20 percent, while Allergan projects about 15 percent. Pfizer estimates it will pay 25 percent.

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