Cramer Diagnoses Big Pharma Strategy for 2008

It’s Friday on "Mad Money" and that means we get to speculate. Cramer likes to give you Home Gamers the weekend to think on things before you make your trades on Monday. Think of it as the Brady bill for stocks.

First off is medical diagnostics company Biosite . If the Dems take over the White House in 2008, this sector is where you’ll want to be. That’s because a Bolshevik – er, Democratic – president will mean no more buddy-buddy relationship between the government and Big Pharma. So pharmaceutical companies will start acquiring small diagnostic plays as a new path to profit.

Biosite makes its money by selling rapid-results diagnostics tests for drug screening, heart attacks, and even some bacterial and parasitic infections. The heart tests are 80% of sales, and drug testing is 18% of sales. The San Diego, Calif., company uses about 17% of the money made from these products and reinvests it in research and development. And that’s why this stock really has legs – it’s pipeline. Right now, Biosite is sitting on top of a brand new product cycle.

What’s great for potential investors is that nobody’s paying attention right now. Only four analysts cover Biosite. But there is a caveat for buyers: Over a quarter of the float, the shares that can be traded, has been sold short. A lot of people don’t think much of Biosite, and the shorts tend to be smart – but not when there’s this many of them.

It would take the shorts about 12.7 days to cover all their positions without really moving the stock. That, to Cramer, is a recipe for a short squeeze. Especially when you consider all of the insider and institutional buying. Back in October the company doubled the size of its buyback program and sped it up – last year the company bought back a whopping 12% of its shares outstanding. That’s a buyback that really means something. And Fidelity, which had a 12% stake in Biosite in November, decided to up its stake to 15% about a week and a half ago.

Bottom line: Diagnostics are the future of pharma. Biosite has the product cycle, it’s got the backing of its own management and the smart money, and who knows, when they start launching the new products we could see a nice short squeeze that gives you a big spike.

Questions? Comments?