By Nathan Bomey
Pharmaceutical firm Pfizer's $160 billion merger with fellow drug giant Allergan is off, just days after the Obama administration revealed new rules designed to undercut this type of tax inversion deal.
The deal's sudden collapse dashes New York-based Pfizer's hopes of dramatically lowering its U.S. tax bill through a merger in which it would have shifted its tax base overseas to Allergan's Irish home.
It also signals that the U.S. Treasury Department's new rules, unveiled Monday, could prove to be a significant obstacle for certain inversion deals that have come under heavy bipartisan criticism in the 2016 presidential campaign.
Both companies confirmed Wednesday that they had mutually agreed to ditch the deal. Pfizer will pay Allergan a so-called breakup fee of $150 million.
The deal's swift demise comes after President Obama and presidential candidates on both sides of the aisle lambasted U.S. tax loopholes allowing inversions in certain instances.
Obama on Tuesday called inversions "one of the most insidious tax loopholes out there," while Democratic presidential contenders Hillary Clinton and Bernie Sanders and Republican candidate Donald Trump have been particularly critical of inversions, albeit for divergent political reasons.
Companies that have pursued inversions have come under fire, such as Milwaukee-based manufacturer Johnson Controls' proposed merger with Ireland-based Tyco International.
On the flip side, corporate leaders have blasted U.S. laws for making it prohibitively expensive to maintain tax headquarters in America — with Pfizer CEO Ian Read among those bemoaning the situation.
Pfizer maintained that it would continue to consider a separation into two separate companies — one that would sell highly profitable, newer drugs and one that would sell established drugs, likely including off-patent therapies that have generic competition.
“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” Read said in a statement. "We remain focused on continuing to enhance the value of our innovative and established businesses."
Pfizer shares rose 1.5% in pre-market trading Wednesday to $31.84 after rising 2.1% on Tuesday in the wake of the Treasury news. Allergan shares fell 1.9% in pre-market trading Wednesday after falling 14.8% Tuesday after the Treasury news.
Allergan will press ahead as planned with a sale of a substantial portion of its generic drug business to Israel-based Teva Pharmaceuticals, which is expected to be completed in June.
"While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth," Allergan CEO Brent Saunders said in a statement.
Pfizer's top revenue-producing drugs include a pneumonia vaccine, pain treatment Lyrica and erectile dysfunction drug Viagra. Allergan's top drugs by revenue are wrinkle treatment Botox and dry-eye treatment Restasis.
Treasury's new rules on inversions exclude the value of the foreign target's last three years of acquisitions when determining the tax benefits of such deals.
That threatened the Pfizer-Allergan accord because Allergan has completed three major deals in the last three years, including its $66 billion merger with Actavis and its the $25 billion acquisition of Forest Laboratories, S&P Global Market Intelligence analyst Jeffrey Loo said Tuesday in a research note.
Without considering those moves, Allergan is too small of an inversion partner for Pfizer to reap any substantive tax benefits, rendering the deal pointless from a tax perspective.
Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.