The future of the $160 billion merger between big pharma Pfizer and Ireland-based Allergan seemed to be unraveling Tuesday after the U.S. Treasury Department proposed new rules to take away the tax benefits of the deal. Late Monday, Treasury announced an action designed to curb tax inversions, deals in which a U.S. company like Pfizer merges with a smaller foreign company like Allergan so it can relocate to the lower-tax foreign domicile. The Pfizer-Allergan agreement, announced in November, was the latest and biggest of a series of such deals over the past few years that have drawn increasing criticism from politicians. At a press briefing Tuesday, President Obama voiced his approval of the new rules. “I’ve been pushing for years to eliminate some of the injustices in our tax system,” Obama said. “So I’m very pleased that the Treasury Department has taken new action to prevent more corporations from taking advantage of one of the most insidious tax loopholes out there, and fleeing the country just to get out of paying their taxes.” Obama also urged Congress to pass legislation to create a more comprehensive solution, including lowering the U.S. corporate tax rate to a level more like other countries’. Many CEOs of inverted companies have also urged this. Allergan stock fell 15%, to 236.55, in the stock market today . Wall Street analysts agreed that the big downside surprise to the Treasury action was the proposed rule regarding ownership. Under current law, if a U.S. company merges with a foreign company and ends up owning more than 80% of the foreign company, it cannot officially relocate to the foreign company’s home country. The way the accounting works now, the Pfizer-Allergan merger would end up with Pfizer owning 56% of the new company, while Allergan would own 44%. Allergan Formerly Actavis … And Warner, Forest Labs Allergan as it is today is a fairly new entity. Back in 2013, the New Jersey drugmaker then known as Actavis acquired Irish counterpart Warner Chilcott, giving it the coveted Dublin address. Since then, it has bought more companies, notably New York-based Forest Laboratories in 2014 and California-based Allergan last year, which led to the name change. The Treasury’s guidelines seem to be aimed squarely at Allergan for this. “For the purposes of computing the ownership percentage when determining if an acquisition is treated as an inversion under current law, today’s action excludes stock of the foreign company attributable to assets acquired from an American company within three years prior to the signing date of the latest acquisition,” says Treasury’s statement. That creates complications. “Here, Allergan (formerly Actavis) is the byproduct of two acquisitions (Forest and legacy Allergan) by Actavis that led to the issuance of an estimated 200 million to 227 million shares of Allergan,” wrote Leerink analysts Jason Gerberry and Seamus Fernandez in a research note. “If you strip those shares from the pro-forma Pfizer-Allergan share count (at 11.3x multiplier), you end up with Pfizer owning close to 80% of the New Co.” The analysts noted that the buyout deal includes a provision for changes in the tax law — without a change, the breakup fee is $3.5 billion, but with adverse changes that drops to only $400 million. This “lowers the probability of the deal closing,” they concluded. Nonetheless, they added that Pfizer’s ownership could come up shy of 80% unless the feds also back out shares related to the Warner-Chilcott deal — “but it’s our view that Warner was the original foreign entity, and it is all subsequent deals that get backed out of the ownership test.” However, an unidentified source told Reuters on Tuesday that Pfizer believes Treasury has painted a target on it, so there will unlikely be any escape routes. “Pfizer is aware that the Treasury will keep ruling against any solution it can come up with,” Reuters quoted its source as saying. By Tuesday afternoon Pfizer had made no formal decision, its only statement being a brief late-Monday press release saying the company is “conducting a review” and would say nothing until it’s completed. Earnings Stripping Another Target Of Treasury Treasury’s proposal also included a provision attacking earnings stripping, in which the foreign parent makes loans to the U.S. subsidiary and deducts the interest payments from earnings. Analysts say this was expected and is not by itself a deal killer. The rules formally took effect April 4, but are not finalized — they first have to go through a public comment period that could take months, according to Evercore ISI policy analyst Terry Haines. However, Treasury might have the edge if the rules aren’t final, Haines says. “Both of these provisions we expect could be subject to litigation from affected companies, but an affected company is not likely to quickly get court relief through a stay of Treasury’s proposal,” Haines wrote. “Treasury is carefully limiting its earning stripping action to a ‘proposed regulation,’ not even a ‘temporary regulation’ like its other actions today on the 2014 and 2015 proposals.” According to Haines, “What Treasury is trying to do is avoid court scrutiny while discouraging inversions at the same time: If a rule is only ‘proposed’ by a regulator, courts reject lawsuits because the government has not taken a final action that definitely harms someone.” On the plus side for Pfizer investors, Evercore drug analyst Mark Schoenebaum said in an email to clients that if the Allergan deal doesn’t go through, this could move up the timeline for Pfizer’s long-expected split into two companies — one devoted to innovative drug development and the other established products. That had been pushed into the future when the Allergan deal was announced in November, but Schoenebaum speculates that a decision on that could be made as early as this year. Pfizer stock rose 2.1% Tuesday. As for Allergan, if it doesn’t merge with Pfizer it will still be affected by the earnings-stripping provision, which Allergan CEO Brenton Saunders has said could shave profit margins by two or three percentage points. Still, analysts calculated that Tuesday’s stock drop brought Allergan well below its stand-alone value. “The updated guidance will put downward pressure on Allergan’s stock price, but we continue to view the company as undervalued at its stand-alone price and think its moat is wide, buoyed by a strong and differentiated portfolio along with a solid pipeline,” wrote Morningstar analyst Damien Conover in a research note.