What: Shares of Irish-based pharmaceutical giant Allergan (AGN), which is perhaps best known for its dermatology and aesthetic product line -- which includes Botox -- shed 19% of their value in April, according to data from S&P Global Market Intelligence. The reason behind the decline can be found in a bevy of new U.S. Treasury Department rules released early in the month which eventually killed Allergan's pending merger with Pfizer (PFE -0.23%).
So what: In an effort to get a stranglehold on an uptick in tax inversions, the U.S. Treasury released new regulations concerning what would be allowed in order for a U.S. company to redomicile overseas. If you recall, Allergan was, in effect, "buying" Pfizer in order to allow Pfizer to relocate to Ireland, a country with a substantially lower corporate income tax rate. Moving overseas could have saved Pfizer in excess of $1 billion annually.
The new regulations had two particularly damning aspects. First, the deal targeted so-called "serial inverters," which includes Allergan. In order for Pfizer to move overseas, the deal needed to be conducted in stock (11.3 Pfizer shares for each share of Allergan), and Allergan shareholders would need to own between 40% and 60% of the new company. Under the terms of the deal, Allergan shareholders were on pace to hold 44% of the company. However, the new inversion rules essentially threw out any acquisitions within the past three years for serial inverters when taking market value into context. This meant Allergan's merger with Actavis and its buyouts of Warner-Chilcott and Forest Laboratories weren't going to be factored into its total merger value. This erased $54 billion from Allergan's deal value, crushing Pfizer's hopes of redomiciling to Ireland.
Secondly, the Treasury tightened regulations concerning earnings stripping, which is the practice of lending money to a U.S. subsidiary and using the deductible interest to lower the company's effective U.S. income tax rate.
Now what: Although the U.S. Treasury has been adamant that it didn't issue these new rules in response to the Pfizer-Allergan merger, I'd have to say that it if walks and talks like a duck, it's probably a duck, if you catch my drift.
But even without Pfizer, Allergan looks as if it'll be just fine -- and I'm not just talking about the $150 million break-up fee it received from Pfizer. Allergan has a growing pipeline of dermatological and aesthetic medicines, as well as a burgeoning product portfolio targeting chronic conditions, including irritable bowel syndrome, Alzheimer's disease, and cystic fibrosis. Allergan's top-line is expected to grow by a double-digit clip throughout the remainder of the decade -- not to mention Allergan also has the luxury of paying a reduced corporate income tax rate in Ireland.
Looking at Allergan, it's only trading at 13 times forward EPS, and it's expected to deliver $22+ in full-year EPS by 2019. Even if Allergan's growth slows, it has an opportunity to boost its dividend or buybacks to improve shareholder value. Long story short, this dip in Allergan's share price could be just what growth stock investors ordered!