PFE Stock: Why the Pfizer Inc.-Allergan Plc Mega-Merger Got Murked (AGN)

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Well, the Pfizer Inc. (PFE) – Allergan Plc (AGN) mega-merger is officially dead in the water … much to the chagrin of AGN stock owners.

PFE Stock: Why the Pfizer Inc.-Allergan Plc Mega-Merger Got Murked (AGN)

Due to newly proposed rule changes by the U.S. Treasury Department targeting corporate tax inversion deals, Pfizer’s board of directors voted on Tuesday to nix the $160 billion deal, which was the single largest merger agreement of 2015.

PFE stock ticked up 2% yesterday on the news and is trading higher yet again today.

AGN stock? Not so lucky. It cratered 15% yesterday, plunging more than 40 points, from $277 to $236 per share. As I write this, shares are recovering slightly, but at $245, it’s still miles away from where it was on Monday.

Why the PFE – AGN Deal Got Killed

It’s pretty simple really: The Treasury Department’s new rules would prevent Pfizer from acquiring Allergan, so PFE just decided to front-run the failure and move on with its life. But why is the President Barack Obama’s administration targeting inversion deals to begin with?

To the misfortune of AGN stock owners especially, corporate inversion deals are incredibly politically unpopular. In fact, they are one of few issues on which there is some bipartisan accord, with both Donald Trump and Bernie Sanders having criticized such deals.

In inversions, U.S. companies acquire foreign counterparts specifically to dodge U.S. taxes. They instead pay lower rates in the country where the acquired company is based. In the case of the Pfizer-Allergan merger, Pfizer was trying to pay taxes in Ireland at a 17% to 18% rate vs. a 25% rate in the States, saving about $1 billion annually. The long-term benefits to PFE stock are relatively straightforward.

Understandably, the Obama White House isn’t a fan of this, since it shrinks the U.S. tax base and “sticks the rest of us with the bill,” as the president has said.

PFE Stock: Still Attractive

While the New York-based Pfizer will, for the time being, be forced to pay taxes in the U.S. like the rest of us, by no stretch of the imagination does that make PFE stock less attractive. Yes, the Wall Street Journal is reporting that Pfizer will pay Allergan a $150 million breakup fee, but that’s peanuts in the grand scheme of things.

Plus, PFE actually has some things going for it right now anyways, with or without AGN. While Pfizer — and Big Pharma in general — has struggled to grow in recent years as blockbuster drugs go off patent, its pipeline is looking pretty fresh. From cholesterol drugs to late-stage biosimilars that mimic hot-selling drugs like Humira and Remicade, PFE will be fine without Allergan.

And let’s not forget that PFE stock can now use that incomprehensible pile of capital to make other acquisitions now … acquisitions that could bolster its pipeline or add already-successful drugs to its vast portfolio.

From a valuation and income perspective, PFE stock remains top notch. It trades at 13 times forward earnings and pays a 4% dividend. Not too shabby.

Bottom Line for AGN, PFE Stock

The breakup of this deal doesn’t change the fact that Pfizer is a pharmaceutical heavyweight that should hold global sway for decades to come. As for Allergan, it’ll have to rely on organic growth of its own instead of a buyout for the stock to pop again, but as Baby Boomers age and enter retirement, maybe its Botox treatment will start flying off the shelves like never before.

So while the PFE – AGN mega-merger is no more, both stocks remain strong investments in their own right, and Pfizer especially now has some optionality going forward, which is always a good thing.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/pfe-stock-why-pfizer-allergan-merger-died-agn-stock/.

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