Pfizer and Allergan will mutually terminate their merger early Wednesday morning ET, sources told CNBC, after changes in US tax regulations dealt a death blow to the US$160 billion (S$216.6 billiom) deal.
Pfizer will pay Allergan a US$400 million break fee as per the merger agreement, the sources said.
New regulations issued Monday by the US Treasury will prevent so-called inversion deals - under which a US company moves its base to a country with a more favourable taxation environment - removing the tax benefits New York-based Pfizer had hoped to gain from the deal with Ireland's Allergan.
Pfizer had reportedly stood to cut its costs by more than US$1 billion a year by changing its domicile.
Sources told CNBC that while both companies believed the Treasury had overstepped the bounds of its regulatory authority with a crackdown on inversions, neither wanted to risk launching litigation against the US government.
Pfizer announced in November that it would buy Botox-maker Allergan for US$363.63 a share, in what would have been the largest-ever heath sector deal. It also said it would likely move its global headquarters from New York to Ireland.
Analysts said at the time that the proposed tax benefits helped justify the hefty price Pfizer had offered for Allergan.
The move came despite then-pressure from the White House on Congress to take legislative action to prevent inversion deals.
This pressure was ramped up on Tuesday, when President Barack Obama praised the Treasury's new rules and again urged Congress to take action to stop US companies from doing inversion deals.
"While the Treasury Department's actions will make it more difficult... to exploit this particular corporate inversions loophole, only Congress can close it for good," Obama said.
US presidential candidates Republican Donald Trump and Democrats Hillary Clinton and Bernie Sanders have also criticised inversion deals during their campaigns.
Pfizer stock closed up just over 2 per cent at US$31.36, reportedly on hopes that the company would dump the merger or renegotiate more favourable terms, and gained a further 0.45 per cent in afterhours trade.
Allergan shares fell 14.7 per cent on Tuesday to US$236.55 each, and gained 0.46 per cent afterhours.
- Fred Imbert contributed to this report.