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All New Biotech Specs: Part 2

“We never stop looking for opportunities in pharmaceuticals here on ‘Mad Money,’” Cramer said Tuesday, “and right now two of the biggest sources of opportunity out there are takeovers and biotech conferences.”

The “Mad Money” host is dedicating the entire week to a merger of the two. Big pharma over the next couple months will be hawking the latest research from its smaller peers, searching for acquisitions. They’ll look to snatch up a company that has an experimental new treatment for HIV, cancer or, as Cramer mentioned Monday night, rare genetic disorders in order to add a profitable new franchise to their business. In the process, investors have the chance to profit, too.

One disease in particular that Cramer recommended watching was hepatitis C because a successful treatment here could mean big money for its discover. Or the acquirer of that discoverer. Not because no treatment exists, but because the one that does “often feels worse than the actual disease,” Cramer said.

If you’re one of the 170 million people worldwide with hep C, which attacks the liver and is transmitted through blood-to-blood contact, the only cure is an oral antiviral called ribavirin, taken twice a day, and an interferon injection once a week for 48 weeks. The side effects can be “severe,” Cramer said, and even at the end of that 11-month treatment the chances of success are still just 50-50.

That’s why of the 7.4 million people who are infected with hep C in the US and the top five countries in Europe, only 170,000 are treated and just 85,000, or 1.15 percent, are cured in a given year. No one wants to suffer through a yearlong therapy that, in the end, has the same success rate as calling heads or tails on a coin.

Hence the M&A glow emanated by any company that’s closer to offering a better cure for this disease. These winners will fetch a high price, as ZymoGenetics did from Bristol-Myers Squibb: $885 million, or an 84-percent premium, because ZymoGenetics is working on a better interferon with fewer side effects.

But who’s the next possible takeover target? Cramer thinks Vertex and the more speculative Pharmasset may be.

Vertex is developing a third drug for the currect hep C cocktail called Telaprevir, “a potential blockbuster,” Cramer said, because it would cut the treatment timeline down to 24 weeks while bumping the success rate to 75 percent. The company will submit the drug for Food & Drug Administration approval in the fourth quarter, meaning Telaprevir could be on the market some time next year.

“If that happens, it will completely transform the way hep C’s treated,” Cramer said. “It’ll make Vertex the leading player in the space.”

Merck is supposed to roll out a competing therapy at about the same time, pitting this big pharma bellwether against a much smaller competitor. But Cramer thinks Vertex CEO Matthew Emmens is a savvy enough marketer to give Merck a run for its money. Plus, Vertex played it smart and expensed the first several quarters of Telaprevir supply in, thereby keeping the costs of good sold very low. As a result, gross margins from the treatment could be over 90 percent for the first few years after launch.

If Telaprevir is approved, Vertex should earn $6 a share. Give the stock a multiple even lower than the average of large-cap biotechs like Amgen , Biogen Idec , Celgene or Gilead Sciences —which clock in at between 10 and 31 times earnings—and VRTX should still reach $50, or more than $15 from Tuesday’s closing price. Cramer recommended getting in before Vertex submits its FDA application and before it presents at the American Association of the Study of Liver Diseases (AASLD) at the end of October.

Pharmasset, as I mentioned, is much more speculative, as its most advanced product will enter only Phase III trials next year and won’t hit the market until 2014. This treatment will serve patients who don’t respond to the new hep C therapies from Merck and Telaprevir. What Pharmasset does offer that Vertex does not is a seeming built-in acquirer in Roche, which has licensed the drug that Pharmasset is working on. Also, the company has another hep C treatment in Phase IIB trials, with data expected over the next six to 12 months.

VRUS may be just two points off its high, but Cramer thinks it could reach $41, or 28-percent higher than its present price. He suggested buying it ahead of that AASLD meeting if you want to play it.

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