Analysts: New inversion rules will kill $160B Pfizer-Allergan deal

Drugmakers Pfizer Inc. (PFE) and Allergan Plc (AGN) are scrambling to determine whether to proceed with their plan to merge and move Pfizer's address - but not its operations or headquarters - to lower-tax Ireland. They are taking another look after the U.S. Treasury Department issued new rules to make such "tax inversion" deals less profitable.

Both companies were mum Tuesday on what they'll do, other than to swat rumors that they're leaning toward dropping the inversion.

But analysts and tax experts are debating whether the new, unexpectedly aggressive tax law changes issued late Monday will kill the deal.

Most are saying the new rules likely will - and that the changes and their timing are squarely aimed at preventing New York-based Pfizer, the biggest drugmaker based in the U.S., from completing its proposed $160 billion Allergan acquisition and inversion in the second half of the year.

"The Obama administration isn't just sending a message to Pfizer, it's sending a message to all U.S. companies contemplating inversions, and that message is 'Don't," said analyst Steve Brozak, president of WBB Securities LLC.

Investors seem to view the deal as dead, and were trading shares in the two companies at a furious pace Tuesday. Allergan's U.S. shares fell $41, or 15 percent, to close at $236.55 Tuesday. Pfizer shares rose 64 cents, or 2.1 percent, to $31.36.

Tax inversions and the need to overhaul the U.S. tax structure have become a hot issue in the presidential campaign, with some candidates calling Pfizer and other companies considering such deals "unpatriotic." President Obama held a news conference Tuesday afternoon, saying the Treasury rules are meant to prevent "one of the most insidious tax loopholes out there" and prevent wealthy corporations from shirking their tax responsibility.

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 - but little else - to that country. Allergan itself is the result of multiple inversions, and despite its Dublin address is operated from offices in Parsippany, New Jersey.

No one expects Pfizer or Allergan to announce what they'll do soon, given the complexity of determining exactly how much of the inversion's expected financial benefit would be wiped out by Treasury's 300-plus pages of new regulations. Pfizer had expected to save hundreds of millions of dollars in U.S. taxes annually by doing the inversion.

Shares also fell Tuesday for other companies that have been planning inversion deals: Milwaukee-based Johnson Controls Inc. and Ireland's Tyco International, makers of heating and other building control systems that announced a $14.6 billion deal in January, and drugmakers Baxalta Inc. of Bannockburn, Illinois, and ShirePLC of Ireland, which are planning a $32 billion inversion deal.

As for Pfizer, experts disagree on what its Plan B will be and on its value and future prospects without the deal.

Cowen and Co. analyst Steve Scala wrote to investors that Pfizer's "innovative engine is starting to deliver, as evidenced by the success" of new breast cancer drug Ibrance, the promise of its immune system-boosting cancer drugs and growing sales of its pneumonia vaccine Prevnar-13 and blood thinner Eliquis.

Scala wrote Tuesday that Pfizer "has one of the industry's most expansive pipelines" and forecast that the standalone company would have earnings-per-share growth of 11 percent from 2016 through 2020, "among the best in the group."

Jeffries International analyst Jeffrey Holford, on the other hand, sees "few other key catalysts for Pfizer in 2016 outside the Allergan merger and potential" separation of its global established products business, which sells older, mostly off-patent drugs, particularly outside the U.S.

Ratings agency Standard and Poor's on Tuesday renewed its "Buy" recommendation on both Pfizer and Allergan shares.

The Allergan deal is Pfizer's third attempt at pulling off an inversion, including its failed hostile attempt to acquire Britain's AstraZeneca PLC in 2014. Pfizer's top management has been desperately seeking a way to quickly boost the company's value and stock price amid years of relentless pressure from analysts and others to break up the company so growth and profits could accelerate. If that happened, Pfizer likely would spin off the established products business.

The company has a history in this century of doing mega-acquisitions that allow it to cut costs and increase sales to boost profits quickly. That has kept Pfizer among the top global drugmakers but hasn't pleased investors enough, which ultimately led to the ouster of CEO Ian Read's predecessor late in 2010.