The termination of the $160 billion merger between Pfizer Inc. (PFE) and Allergan Plc (AGN) has been confirmed.
The driving factor behind this decision stems from the rules issued by the United States Treasury Department which are focused on making tax inversion deals less profitable.
Moving Addresses, Not Assets
President Obama said the rules are meant to limit one of the most indirect tax loopholes available and prevent companies from decreasing their tax liability.
The reason why this deal came under such scrutiny is not only due to the size of the deal, but also its structure.
Earlier this morning, PFE confirmed the termination of the merger which move the company’s address but not its headquarters or operations. If the merger was completed, Pfizer’s address would change to Ireland which has a lower corporate tax rate.
Wiped out Hundreds of Millions in Potential Savings
If the deal was completed, Pfizer would have been able to save hundreds of millions of dollars in taxes annually by doing the inversion.
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 to that country.
Third Time is Not the Charm
This was Pfizer’s third attempt at an inversion deal with the last attempt being in 2014 when PFE tried to acquire Britain’s AstraZeneca Plc.
Pfizer’s management team has come under pressure from investors and analysts and the company has been desperately trying to increase the company’s value and stock price.
Many market participants want to see PFE break up so growth and profits could accelerate. We believe that the termination of this deal puts a break up back on the table and PFE is trading high this morning.
Two Biotech Favorites
Biogen, Inc. (BIIB) has fallen more than 13% during 2016 and we think shares are set up for a significant rally once fundamentals matter again. BIIB is financially flexible and is one of the best at allocating capital in an accretive manner.
Although many investors expect to see BIIB announce a dividend, we do not expect that to happen. Instead of issuing a dividend, we expect to see BIIB acquire several companies that are currently trading at a discount. This would be a more appropriate move for this growth-oriented biotech company.
GW Pharmaceuticals (GWPH) remains a favorite of ours following the release of positive Stage 3 Clinical trial data for its Epidiolex product. GWPH is the only cannabis company traded on the NASDAQ which provides visibility, liquidity, and financial transparency.