Regulatory hurdles have always been a challenge for corporate mergers and acquisitions, but Washington turned the game upside down recently with two sets of rules from the Treasury Department. As with any new and far-reaching regulatory oversight, there will not only be losers affected by the rules, but also winners that are able to take advantage of the new competitive landscape.

The Treasury released two sets of rules on April 4: one that pushes profits to low-tax countries in a technique called ‘earnings stripping’ and another that cracks down on corporate inversions. In an inversion, a U.S. company acquires or merges with a foreign rival and then moves its headquarters overseas to a country with a much lower corporate tax schedule.

#-ad_banner-#The new attack against inversions potentially puts U.S. companies at a disadvantage when bidding on foreign companies because they won’t get the benefit of operating in a lower-tax jurisdiction. That opens the door to foreign rivals that can snap up assets without competition from U.S. firms. 

One best of breed Israeli company is doing just that to secure a huge lead against others in the sector.

This Generic Drug Powerhouse Is About To Get Even Bigger
The new anti-inversion rules by the U.S. Treasury in April brought down the $150 billion proposed merger between Pfizer (NYSE: PFE) and Allergan (NYSE: ACT). The failed merger brings back to the table a $40.5 billion offer by Teva Pharmaceutical Industries (NYSE: TEVA) for Allergan’s Actavis generics portfolio. Teva has said that it is finalizing a $2 billion asset sale to clear the way for regulatory approval of the deal and expects the deal to close in June.

Generic drug makers and specialty pharma have faced a sector wide selloff lately on fears of weakness in pricing and pipeline strength. Shares of Endo International (Nasdaq: ENDP) plunged 40% after management warned that profits would fall far short of estimates. While shares of Teva have been under pressure over the past three months, the pricing fears aren’t affecting it nearly as badly. Shares are down just 10% since mid-February versus a 70%+ loss on Endo International and Valeant Pharmaceuticals (NYSE: VRX).

As the market sells out of all specialty pharma names, investors have a real opportunity to pick up those with size advantages and stronger pipelines. Teva hasn’t been as aggressive with its pricing as other companies, which means its stock wasn’t bid up on expectations, and the Allergan deal could give the company an unrivaled size and scope in the industry. Teva controls nearly 20% of the industry market share and will control an even larger share after the Allergan deal. The combined company will have more than 320 new generics in its pipeline, 123 of which will have first-to-file applications.  

Management said it expects U.S. regulatory approval of the Allergan Actavis deal in June and that it will help the company launch more than 1,000 new products this year. Besides the leading portfolio of drugs, the company expects to cut costs and achieve tax savings of $1.4 billion after the acquisition. After Allergan deal, Teva will have the broadest generics portfolio and pipeline in the industry.

Investors have worried for years about generic competition to the firm’s branded Copaxone, which accounts for 20% of sales, but market fears could be overdone. Novartis AG (NYSE: NVS) launched a competitive drug, Glatopa, last year but Copaxone still managed 9% global sales growth to $1 billion in the first quarter. Any weakness in sales on Copaxone competition should be easily offset by management’s $2 billion savings plan along with a strong pipeline of new products.

Teva shares bounced almost 5% on stronger than expected Q1 earnings, announced before the bell on May 9. The company posted an adjusted $1.36 per share in Q1 earnings on $4.81 billion in sales, both beating estimates for $1.17 per share on $4.77 billion in sales. Shares are still about 30% off their 52-week high and recovering from recent lows.

Shares trade for just 9.7 times trailing earnings against a five-year average multiple of 21.9 times. While earnings are expected 3% lower this year, the Allergan deal could help the company surprise on the upside and earnings are expected to jump 14% next year. My target of $63 per share is built off a conservative 12 times 2016 expected earnings and a 20% upside not including the 2.7% dividend yield.

Risks To Consider: Teva still faces regulatory challenges to the Allergan deal and competition on its Copaxone sales.

Action To Take: Take advantage of the temporary selloff in shares of Teva to position before the Allergan deal.

Editor’s Note: An inside look into Trump’s portfolio revealed that he owns a huge stake in one pharmaceutical stock that tripled his money in the late 90’s. And now he may be looking to replicate that profit with another little-known medical stock that creates a much-needed flu vaccine. Get the scoop on this under-the-radar stock — before it explodes — in this special report.