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Making M&A Money in Big Pharma

Friday, 23 Jan 2009 | 7:00 PM ET

The Democrats now in power aren’t exactly friendly with Big Pharma, so Cramer doesn’t expect them to stifle the generics competition that eats away at earnings. Drug companies in search of growth then will have to look to mergers and acquisitions to increase profits.

That’s the driver behind Pfizer’s pursuit of Wyeth, Cramer said. Now he’s looking for the next pairing in the sector as a way for investors to make some mad money. One of Cramer’s charitable trust names, Abbott Laboratories , has hinted it might be looking to enter the M&A market. CEO Miles White said on the company’s last conference call that he thinks “it’s a good time to be a buyer, as long as there is a willing seller.” So who’s the likely target?

Abbott Labs
A look at Abbott Labs, with Mad Money host Jim Cramer.

Celera, maker of cardiovascular lab diagnostics who’s also working with Abbott on tests for personalized medicine. The pre-existing relationship seems to put Celera, at least potentially, in the “willing seller” category. And beyond the buyout speculation, Celera’s the underlying business fundamentals that Cramer demands when he recommends a stock.

Personalized medicine uses everything from height and weight to gene and gene-expression information to treat patients. Celera and Abbott are trying to develop molecular diagnostic products to aid in the process. The two firms recently updated their deal, which should lower Celera’s operating expenses and give the company room to launch products outside the joint venture with Abbott. So even if a merger never happens, Celera might stand on its own as a solid investment.

On its own, Celera makes KIF6, a test for genetic risk of cardiovascular disease, and right now it accounts for 10% of sales. Cramer thinks there’s still room for more growth. There’s also a variant of KIF6 called StatinCheck that doctors use through a cheek swab, which also should do well.

Celera has made a few acquisitions of its own, too, buying Berkeley HeartLab and Atria Genetics. Celera’s sales were up 123% in its most recent quarter, largely due, Cramer said, to these two additions.

The price-to-earnings multiple here might scare some investors. Celera trades at 41 times forward earnings. But the company could potentially grow earnings per share by 50%. Plenty of money managers would be willing to pay 80 times earnings for that kind of growth.

Of course, this is just speculation, albeit calculated. But there’s no guarantee an Abbott-Celera deal will happen. So investors are taking a risk if they buy CRA. This is an $8 stock with a market cap of just under $700. Therefore, the usual rules apply: Wait five days to buy, use limit orders when you do and make sure you purchase in small increments.

Oh, and there are a couple of other possibilities for Abbott-takeover speculation. Cramer thinks Martek Biosciences and Sequenom might fit nicely, too, though with the latter up 24% since his Dec. 19 recommendation, investors might want to take profits. But do some homework and decide for yourself. Cramer’s still leaning toward Celera.






Cramer’s charitable trust owns Abbott Labs.

Questions for Cramer? madmoney@cnbc.com

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