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Why the Biggest Planned Pharmaceutical Merger in History Just Fell Apart

This post originally appeared on Business Insider.

The merger between Pfizer and Allergan—a deal that would have been worth $160 billion, the largest pharmaceutical merger in history—has officially been called off. In a statement, Pfizer said:

“Pfizer today announced that the merger agreement between Pfizer and Allergan plc (NYSE: AGN) has been terminated by mutual agreement of the companies. The decision was driven by the actions announced by the U.S. Department of Treasury on April 4, 2016, which the companies concluded qualified as an “Adverse Tax Law Change” under the merger agreement.”

The statement added that:

“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” stated Ian Read, Chairman and Chief Executive Officer, Pfizer. “We remain focused on continuing to enhance the value of our innovative and established businesses. 

“We plan to make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016, consistent with our original timeframe for the decision prior to the announcement of the potential Allergan transaction,” continued Read. “As always, we remain committed to enhancing shareholder value.” Pfizer will pay Allergan a $150 million fee as part of their merger agreement to reimburse it for expenses “associated with the transaction” the company added.

Pfizer and Allergan have essentially scrapped the merger after the U.S. government took steps to try and prevent so-called tax inversion deals, which—at their most basic level—allow companies to headquarter themselves in countries with low tax rates. Pfizer planned to move to Ireland, where botox-maker Allergan is based, and as a result, pay just 12.5 percent in corporation tax, far lower than the U.S. rate. 

But the new rules from the U.S. Treasury look to have been designed almost specifically to stop Pfizer benefiting from the merger, the Financial Times reports, and are the driver for the merger’s cancellation.

Essentially, the U.S. Treasury wants to make it less profitable for U.S. companies to invert by making it so that, when calculating the size of the foreign acquirer, any assets bought from a U.S. company within three years of the latest acquisition must be ignored. That makes a tax inversion a whole lot less attractive as a concept.

The Treasury also wants to address the practice of earnings stripping—using interest deductions to foreign headquarters to lower taxes. It is doing so by, amongst other things, giving the IRS greater powers to audit debt instruments, and requiring greater amounts of due diligence.

On Tuesday, U.S. President Barack Obama spoke out against tax inversions, and shares of Allergan dropped by more than 16 percent.

The Treasury Department didn’t specifically refer to Pfizer’s deal in a statement on Tuesday, but U.S. Treasury Secretary Jacob J. Lew said:

Treasury has taken action twice to make it harder for companies to invert. These actions took away some of the economic benefits of inverting and helped slow the pace of these transactions, but we know companies will continue to seek new and creative ways to relocate their tax residence to avoid paying taxes here at home.

Because the move can be seen as fleeing the U.S., tax inversions are not particularly politically popular. When the deal was announced in November, presidential candidates Sen. Bernie Sanders of Vermont and Donald Trump were among many who took a stance against it.

The news has sent European pharma stocks skywards, with investors clearly taking heart from the canceling of a deal that would have created the biggest pharmaceuticals company on earth by sales. On Britain’s FTSE 100, the two biggest pharma firms, AstraZeneca and Shire have both seen big gains, jumping 2.78 percent and 2.54 percent as of 11:55 a.m. GMT (6:55 a.m. ET). Here’s how that looks:

Companies based in mainland Europe have also reacted well, with Novartis, the Swiss giant up by more than 1.2 percent. Roche, also based in Switzerland is up 1.3 percent, while French-based Sanofi has gained 1.3 percent on the day. 

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