London-listed pharmas rally as Pfizer-Allergan deal collapses

(ShareCast News) - Shares in pharmaceuticals companies Shire, AstraZeneca and GlaxoSmithKline rallied on Wednesday as investors bet that the termination of Pfizer's agreement to buy Allergan might make the London-listed companies bid targets.US drug maker Pfizer said on Wednesday that its $160bn agreement to buy Allergan has been terminated by mutual agreement, after the US Treasury announced new measures to curb tax inversions."Reports that the Allergan-Pfizer merger has been terminated has counter-intuitively sparked buying in other UK and Irish pharmaceutical groups," said CMC Markets' Jasper Lawler."Speculation that Pfizer will look for another partner in its quest to relocate its headquarters and lower its tax burden has sent the shares of Shire and AstraZeneca flying".Atif Latif, director of trading at Guardian Stockbrokers, said: "With the Pfizer/ Allergan deal not materialising we see scope for the UK listed pharma companies to now come into play."He pointed out talk regarding Hikma and Shire and said both of these are not too large for a M&A deal to be undertaken by one of the majors.Latif argued that Shire still trades at an unwarranted discount to the sector and said this spread should now start to close."Much of the sector weakness of late has been down to concerns re the outlook for big pharma, Valeant and the pipeline mix without a generic stream. Even with no M&A activity the standalone valuation, given the growth outlook coupled with EPS growth near 18-19% represents compelling value on the long side."Meanwhile, Credit Suisse said it was unclear to what extent the new rules would be relevant as far as the Shire's acquisition of Baxalta deal was concerned, with Shire being an Irish-domiciled company.CS noted Shire has publicly stated it expects an ultimate group tax rate for the newco of around 16.5%, some 3.5 percentage points below where the bank sees the blended rate for the two standalone companies."If we assume that profits from sales/costs synergies are taxed at 20%, and that the regular tax shield on additional debt is also at 20%, this implies other tax benefits of up to $260m by 2020 to get to the 16.5% group rate."If we assume that these extra savings are at risk from heightened US tax scrutiny this would reduce our proforma 2020 EPS from $7.05 to $6.76. These assumptions would delay accretion from 2017 to 2019 and move 2020 EPS accretion from 10% to 5%," it said.Nevertheless, Credit Suisse said the possible loss of this level of tax was unlikely to derail management's strong desire to complete the transaction.RBC Capital Markets analyst Douglas Miehm said he was awaiting further comment from Shire but that the earnings stripping or the inversion rules are unlikely to affect the Baxalta acquisition."We anticipate the majority of the debt to be third-party debt (both Dyax and Baxalta related debt) and subsequently, do not anticipate the earnings stripping announcement to impact Shire," he said."We note that the earnings stripping rules are not limited to inverted companies; instead they will affect expanded groups that issue inter-company debt after April 4th, 2016 post a 90-day period once the regulations are published in the Federal Register."At 1050 BST, Shire shares were up 3.2% to 4,179p, AstraZeneca was up 2.8% to 4,059.50p and GSK shares were up 1.6% to 1,441.13p.