US pharmaceutical company AbbVie has pulled the plug on its plan to buy Shire, recommending shareholders vote against the planned $55 billion takeover following new US tax rules.
Shire stands to be paid a break-up fee of about $1.64 billion if AbbVie's shareholders vote against the deal.
The reversal had been widely expected after Chicago-based AbbVie said it was reconsidering the deal.
The US government's tax proposals are designed to make it harder for American firms to shift their tax bases out of the country and into lower cost jurisdictions in Europe.
"The agreed-upon valuation is no longer supported as a result of the changes to the tax rules and we did not believe it was in the best interests of our stockholders to proceed," AbbVie's chief executive Richard Gonzalez said.
AbbVie's move for Shire, a leader in drugs to treat attention deficit disorder and rare diseases, was announced in July amid a spate of deal-making in the pharmaceutical sector.
Gonzalez said at the time that the deal, involving the creation of a new US-listed holding company with a tax domicile in Britain, was not just about tax.
But the firm said that the changes in the US tax regime "eliminated certain of the financial benefits of the transaction, most notably the ability to access current and future global cash flows in a tax efficient manner as originally contemplated in the transaction.
This fundamentally changed the implied value of Shire to AbbVie in a significant manner."
News yesterday that AbbVie was cooling to the transaction hammered shares in Shire, sending them down 23% to where they were before the deal talks emerged in June and the shares were down a further 11% in early trade today.
AbbVie said the withdrawal of its recommendation alone would not cause a lapse in the offer for Shire and it must convene a shareholder meeting before December 14 to vote on the deal.
A spate of "tax inversion" merger deals, particularly in the healthcare sector, prompted the US move to change its tax regulations, including placing a ban on loans that allow US companies to access foreign cash without paying tax in America.
AbbVie said the breadth and scope of the changes "introduced an unacceptable level of uncertainty to the transaction".
AbbVie's second thoughts on the deal have surprised Shire investors, coming just weeks after Gonzalez, in the wake of the Treasury proposals, told employees of both companies he was "more energised than ever" about the transaction.
Aside from the tax benefits, buying Shire offered AbbVie a way to diversify its business and reduce reliance on arthritis treatment Humira, the world's top selling medicine, whose $13 billion in annual sales accounts for more than 60% of company revenue.