Allergan Falls After Treasury Rules Announced; Pfizer Gains

  • Pfizer, Allergan say they're reviewing Treasury rules
  • Action follows outcry from Congress over corporate deals

Pfizer-Allergan and the New U.S. Tax Inversion Rule

Allergan Plc shares plummeted 21 percent in late trading Monday after the U.S. Treasury Department released rules that would limit the ability of U.S. companies to avoid paying taxes by issuing debt to their foreign parents.

Allergan, which is run from New Jersey but has a legal domicile in Dublin, last year agreed to merge with Pfizer Inc. in a $160 billion deal that would give New York-based Pfizer a foreign address and a lower tax rate. Allergan’s shares fell 21 percent $217.99 at 6:39 p.m. in New York, after the market closed. Pfizer shares rose 2.3 percent to $31.42.

QuickTake Tax Inversion

While not technically a so-called tax inversion, the deal between the drugmakers was criticized as the latest in a series of transactions that saw U.S.-based companies moving their legal addresses overseas to take advantage of lower tax rates. The new company formed by the deal between Pfizer and Allergan would be able to take advantage of Ireland’s 12.5 percent corporate tax rate, compared to a U.S. rate of 35 percent.

The agency’s plans may not hold up in court, said Corey Davis, an analyst at Canaccord Genuity Inc. in New York. Even then, it’s unlikely to affect the shuffling of assets that is now under way among Allergan, Pfizer and Teva Pharmaceutical Industries Ltd., which is buying Allergan’s generic drugs business, he said.  

‘Little Chance’

“There’s little chance this will affect Pfizer’s proposed acquisition of Allergan, since the tax consequences were never the main thrust of the acquisition,” Davis said. He also said that Allergan’s deal to sell its generics business to Teva should go through, giving the company cash and ensuring there will be little change to the company’s ongoing business.

The Treasury’s proposals were likely already part of Pfizer’s calculus when considering the deal, said Mark Schoenebaum, an analyst at Evercore ISI in New York. How any change affects the deal won’t be clear until the company comments on the tax changes, he said.

The companies appear to have anticipated the possibility in their merger agreement. The terms, outlined in a regulatory filing, lay out a $400 million breakup fee in the event of an “adverse tax law change” -- a far smaller amount than for other circumstances if the deal were to fall apart.

Pfizer, the maker of Viagra, and Allergan unveiled the deal in November, the largest ever in the pharmaceutical world. The combination helped make 2015 the biggest ever in health-care mergers with more than $600 billion worth of acquisitions announced. Members of Congress decried the deal, with some saying that it called for restrictions on the practice and tax reform.

“We are conducting a review of the U.S. Department of Treasury’s actions announced today,” Pfizer and Allergan said in a joint e-mailed statement. “Prior to completing the review, we won’t speculate on any potential impact.”

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