US tax inversion clampdown claims a scalp

Salix Pharmaceuticals has pulled out of its plan to merge with Italy's Cosmo Pharmaceuticals, implying changes to US rules on tax inversion led to the decision.

The US drugmaker announced its intention to undertake a $2.7bn merger with Cosmo's Irish subsidiary - Cosmo Technologies Ltd - back in July, saying that it would boost profitability as well as add to its product portfolio in gastroenterology medicines.

Now, according to Salix chief executive Carolyn Logan, the "changed political environment" has created "more uncertainty regarding the potential benefits we expected to achieve." The decision to terminate the deal will result in a $25m payment to the Italian company.

The decision to backtrack on the merger comes shortly after the US Treasury Department introduced new rules on tax inversion deals, in which US companies buy firms in other countries to benefit from lower corporate tax rates.

The updated rules include a number of measures designed to prevent companies from getting access to offshore funds without paying US tax on them and apply to deals closed from 22 September onwards.

There has already been speculation that the changes could have a bearing on Shire's acquisition by by AbbVie in a $54bn deal, Mylan's plan to buy Abbott's EU generics assets and Medtronic's $43bn bid for medical device firm Covidien. AbbVie however insisted this week the deal would go ahead regardless.

Meanwhile, it has also been suggested by some analysts the new measures could discourage Pfizer from returning to the table with a bid for AstraZeneca after being rebuffed earlier this year, although others have questioned their legal basis and openness to challenge in the courts.

For Salix, the upshot of its aborted deal with Cosmo is that it may put itself up for sale, and rumours are already emerging of negotiations with Dublin-based Actavis - itself the product of a tax-inversion merger - which has just completed its $25bn takeover of Forest Laboratories and had a bid for Allergan rejected in August.

Complicating the picture, Allergan has also been linked to a potential acquisition of Salix as it tries to fend off an unwelcome takeover by Valeant, with the latter firm threatening legal action if Allergan does so without shareholder approval.