Bloomberg

Pfizer Inc. (NYSE: PFE) and Allergan plc agreed to terminate their $160 billion merger, an abrupt end to the largest-ever health-care acquisition as officials in Washington crack down on corporate inversions.

The U.S. Treasury Department’s proposed new rules to deter inversions drove the decision, the companies said Wednesday in a statement. New York-based Pfizer will pay Allergan $150 million in reimbursement for expenses associated with the transaction.

Pfizer will decide whether to pursue a potential split of the company by no later than the end of this year. The split would probably involve two parts: one focused on new drug development, the other on selling older medications.

“One of the reasons we held the stock was because there was supposed to be a breakup of the company coming, which obviously would have been delayed with the Allergan deal,” said Dan Mahony, who helps manage including health-care funds at Polar Capital LLP in London, in an interview. “Maybe they’d dust that plan back off again.”

The termination represents a victory for President Barack Obama, whose administration proposed tougher-than-expected new rules aimed at making inversions like the Pfizer-Allergan deal harder to achieve. In an inversion, a U.S. company shifts its tax address overseas, often through a merger.

Allergan, which is run from New Jersey but has a legal domicile in Dublin, last year agreed to merge with Pfizer in a deal that would have given the New York-based company an Irish address and a lower tax rate.

Pfizer rose 1 percent in trading before the opening of U.S. markets, while Allergan declined less than 1 percent.

Pfizer still plans to report first-quarter earnings on May 3.

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