A merger agreement between Salix Pharmaceuticals Ltd. (NASDAQ: SLXP) and Cosmo Pharmaceutical Spa of Italy valued at $2.7 billion was scrapped recently. The American company blamed stringent rules as the reason for ending the plan to relocate overseas for the benefit of lower taxes.

Salix will offer a payment of up to $25 million to Lainate headquartered Cosmo. The American company is headquartered in Raleigh, in North Carolina. Salix is presently in the middle of discussion to sell itself. The buyer, according to unnamed sources, will be Actavis Plc (NYSE: ACT).

Anti-tax inversions measure working

The canceled deal is the first evidence of rules enforced in September by US Treasury Department succeeding in inhibiting tax lessening and cross-border deals called tax inversions. Such tax inversions have previously helped to make a record figure in industry mergers.

According to Carolyn Logan, the Chief Executive Officer of Salix, the change in the political environment has led to the creation of increased uncertainty, as far as probable benefits are concerned. The above points were made during the issuance of statement on Cosmo deal.

Cosmo increased 7 percent and touched 153 Swiss Francs, raising the market value of the company to a 2.29 billion francs or $2.37 billion US dollars. The stock bled 8.3 percent post CNBC reporting that the agreement would be terminated by Salix. The latter rose to $154.57 – a gain of 2.3 percent in New York.

No disappointment from Cosmo’s part

Mauro Ajani, the founder of Cosmo, who is also the controlling shareholder and chairman, said that he had no plans to sell his company and was not disappointed when the plan was scuttled.

In a phone interview, he said that with the change in the political environment, there is a probability that shareholders pushed the management to sell off the company, which is understandable in the current context.

An estimate, made by Joint Committee on Taxation, calculates that about $20 billion will be collected over next 10 years if a bill to inhibit inversions is passed. Though there is no immediate chance of an agreement between Actavis and Salix, the possibility of it happening has brightened in the first week of October.

Allergan Inc. (NYSE: AGN), a manufacturer of Botox, has tried to acquire Salix. However, the initiative has stopped recently due to the concern about valuation. The best-selling drug of Salix is Xifaxan, which treats diarrhea in travelers.