Kristine Harjes: Todd, I don't know about you, but I have been racking my brain all
morning for breakup songs. Todd Campbell: I think this is the biggest
breakup since Bennifer. Harjes: This might be the biggest healthcare
news we've had all year so far. Campbell: Pfizer likes to make the big news,
don't they? They did it last fall by announcing the deal, now they're doing it this spring,
by exiting it. Harjes: For sure, and we have got all the
details for you, coming up on this episode. First, a quick shout out to the brainstorming
help that I got this morning on Twitter, which, by the way, you ought to know our handle,
which is, @MFIndustryFocus. Let's get this thing rolling. Todd, what's the quick and
dirty? Campbell: First, did you have a favorite song,
or are you going to keep us in suspense? Harjes: Do I have a favorite? You're going
to hear my favorite at the very end of this episode.
Campbell: Okay, that's fine. Harjes: I will leave you in suspense for a
little bit. Campbell: Excellent, excellent. Wow. Yeah,
big news. I guess not unexpected. I mean, it's the biggest breakup since AbbVie exited
its planned tax inversion deal with Shire, back in '14. They had hoped, obviously, to
combine the two companies. I love how you called it, "PfizerGan." That's great.
Harjes: Which is, of course, Pfizer and Allergan. Campbell: Yep, yeah. PfizerGan would have
been huge! There's $160 billion deal that would have created a company with $65 billion
in sales, and would have moved, at least for tax purposes, Pfizer's headquarters overseas
to Dublin, Ireland. Harjes: Yeah, and that's really where the
crux of this issue is. There's always been some speculation that the government, the
US government, might block this deal over anti-trust concerns or over the fact that,
"Oh hey, maybe we don't want to lose all of our tax revenue from Pfizer." I would say
that Allergan investors ... I don't know, there is some implication that the market
might have been under-pricing Allergan a little bit, compared to where Pfizer had put them
at with this deal, which would have-- Campbell: Yeah, the arbitrage there was huge,
right, Kristine? Harjes: Yeah. Yeah, exactly. That implied
that there was a little bit of doubt that this was going through, but the executives
of both companies were very confident in their words about how they absolutely expected this
to go through. I don't think it was until overnight on Monday, when investors truly
heard it through the grapevine that the new U.S. Treasury regulations were going to come
out, and pretty much put the kibosh on this deal.
Campbell: Wait, wait, Kristine, did you just say that management was overly optimistic?
Harjes: I don't want to say "overly." I was as optimistic as them, so maybe I was overly
optimistic, too. Really, given the guidelines that had existed, you would have thought that
this deal was going through, but they completely re-wrote the terms; changed the rules of the
game. Campbell: The goalposts got moved. Absolutely.
Washington doesn't want to lose their tax revenue. I can't say that I blame them. Last
fall, you saw the Treasury Department issue a bunch of new rules trying to thwart planned
tax inversions. On Monday, they did it again. Only this time, they designed it specifically
to kill this deal. Sure enough, they succeeded. They dealt a death-blow with a stroke of a
pen. Harjes: Yeah, and of course, they said that
this wasn't specifically for this deal, but ...
Campbell: Right! Harjes: The press release itself says that
they're not focused on a specific transaction, but rather a loophole within the industry.
This is a loophole that's been used quite a bit, where you get these foreign companies
"buying-up" U.S. companies so that they can use the tax percentages of the foreign countries.
That's actually kind of an interesting detail here, where Allergan, the smaller company,
was technically buying Pfizer. Campbell: I know, crazy, right? Here's Allergan
with $15 billion in trailing 12 month sales. You've got Pfizer doing $50 billion, and Pfizer
obviously being a lot larger in terms of market cap company than Allergan. The reason that
they did that was because, at the time, they were trying to skirt the rules that the Treasury
had put in place that would restrict their ability to move their tax domicile from the
U.S. to Ireland. It's a really kind of a wonky set of rules, but we should probably get into
that for our listeners. Harjes: I'm going to have you lay that out.
There's a lot of numbers in there. Campbell: Yeah. Okay, well you know what?
Let's try to make it really, really simple. In order for you to successfully invert to
another country for tax purposes, the U.S. company shareholders can't own more than 80%
of the combined entity, once the deal is done. If you own between 60% and 80%, you get hit
with some tax penalties, so ideally, you want to structure the deal so that the U.S. owners
of Pfizer shareholders wouldn't own more than 60% of the combined PfizerGan. The way that
they did the deal was they structured it so that Pfizer shareholders would own 56% of
the combined entity, thereby putting them below that 60% threshold and nicely below
the 80%. Harjes: Yeah, nice buffer zone, too; a whole
4%. Campbell: Right, keeping it right in the skin
of their teeth. Unfortunately, one of the thing that they didn't count on was Jacob
Lew at the Treasury Department. Harjes: Yeah, so really the game-changer here,
was the fact that now with these new rules, essentially the last three years of Allergan's
inversion-type actions, are being discounted. This is a company that has grown by acquisition.
It used to be known as Actavis. When it was Actavis in October, 2013, they took over Warner
Chilcott. That was an $8.5 billion transaction, which moved their tax home to Ireland to begin
with. Then a couple years later, July, 2015, they acquired Forest Laboratories for $28
billion. Finally, they took over Allergan itself, for $70.5 billion, and that's where
you get the name change over to Allergan, as we know it today. With these new rules,
they're essentially discounting the value of those acquisitions from the value of Allergan.
Campbell: Right. Basically they're telling Pfizer, that, "Hey, when you do that calculation,
guess what? You know how big Allergan is? Well, you know how big it got over the last
three years because of its acquisitions? Those acquisitions don't exist. So do your math
again." Sure enough, I'm sure that Pfizer crunched those numbers every way they possibly
could, and weren't able to get it below that 60% threshold.