Shares in drugmakers AstraZeneca (NYSE:AZN) and Shire (NYSE:SHPG) fell sharply on Tuesday after the U.S. Treasury took steps to curb "inversion" deals that allow companies to escape high U.S. taxes by reincorporating abroad.
The move could jeopardize an agreed deal for AbbVie (NYSE:ABBV) to buy Shire for $55 billion and deter Pfizer (NYSE:PFE) from making another attempt to acquire AstraZeneca, after a $118 billion takeover attempt failed in May.
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The slide in both companies shares wiped out around $8 billion in their combined market value, with AstraZeneca down 5.0 percent and Shire losing 6.1 percent by 1115 GMT (7.15 a.m. EDT). AbbVie lost 4.6 percent in pre-market U.S. dealings.
Smith & Nephew and Swiss biotech group Actelion, two other perennial targets of bid speculation, fell 3.5 percent and 2.2 percent respectively.
Investors had been expecting some action from the Obama administration to clamp down on tax-avoidance inversions but the steps announced on Monday were more far-reaching than anticipated, analysts at Deutsche Bank said.
The new rules, effective immediately, will make new inversions more difficult to do and less potentially rewarding - but whether that will be enough to scupper deals that are pending or under consideration is not clear.
The action follows months of political debate, with Democrats urging prompt legislative action and Republicans pushing to address the problem later, perhaps in 2015, as part of a broader overhaul of the loophole-riddled federal tax code.
"Inversion deals now are clearly going to be very difficult to pull off," Navid Malik, head of life sciences research at Cenkos Securities, said.
That could kill off prospects of Pfizer returning to bid for AstraZeneca at the end of November, when a six-month cooling-off period imposed by British takeover rules comes to an end and the U.S. group can publicly launch a new offer, Malik said.
Other analysts were less certain. Andrew Baum of Citi said the Treasury move would have a limited impact on the economic case for a Pfizer-AstraZeneca deal - though the threat of additional measures could give the U.S. group pause - and he still expects Pfizer to return after the Nov. 26 deadline.
Both Pfizer and AstraZeneca are bound by rules that mean they cannot comment on deal prospects. However, the British firm said previously that the controversial tax issue was a big risk for investors that could cause major delays to any transaction.
The Shire deal may still go ahead, since it is already in train, although AbbVie will likely lose upside from planned tax savings, making the picture uncertain. The transaction is due to be completed in the fourth quarter of 2014.
"Shire has enough momentum in its business and a good enough pipeline that it would be attractive to AbbVie anyway," Malik said. "The tax inversion was the icing on the cake."
Shire and AbbVie officials did not have any immediate comment on the latest developments.
Inversions have surged in the past year, pursued by healthcare companies in particular, although fast-food chain Burger King Worldwide (NYSE:BKW) is also in the midst of inverting to Canada in a deal with Tim Hortons.
Medical technology group Medtronic (NYSE:MDT), meanwhile, is working to close an inversion deal into Ireland with rival Covidien (NYSE:COV), while Mylan (NASDAQ:MYL) plans to buy certain Abbott Laboratories' (NYSE:ABT) drugs in developed markets outside the United States in another tax-cutting transaction.
About 50 such deals have taken place since the early 1980s, but the pace has picked up, with half of those completed since the 2008-2009 credit crisis, according to a Reuters review.
A key target of Treasury's actions is foreign profits held offshore by U.S. multinationals under a U.S. Internal Revenue Service (IRS) rule that defers taxation on such profits unless and until they are brought into the United States.
One new Treasury rule will prevent inverted companies from using "hopscotch" loans that allow them to avoid dividend taxes when tapping such tax-deferred foreign profits. Another rule will bar inverters from gaining access to the same kinds of profits by using "decontrolling" strategies that restructure foreign units so they are no longer U.S.-controlled.
Treasury is also tightening limits on the levels of ownership that the former U.S. owners can have in an inverted company to qualify for foreign tax treatment from the IRS, a move that will make it harder to do these deals.