Salix Pharmaceuticals and Cosmo Pharmaceuticals of Italy have called off their proposed merger, as changes in the USA aimed at curbing tax inversions take effect.

Salix planned to merge with Cosmo's Irish subsidiary and create a new company headquartered abroad, therefore avoiding higher US taxes. However the companies have mutually agreed to terminate the transaction.

Salix chief executive Carolyn Logan explained that “the changed political environment has created more uncertainty regarding the potential benefits we expected to achieve”. Under the terms of the termination, Cosmo will bank a $25 million break-up payment.

The news comes as Salix shareholders are reportedly pushing for a sale of their own company and Allergan, which itself is being pursued aggressively by Valeant, had been mentioned as a potential buyer. However, Actavis has now emerged as a more likely acquirer of Salix.