Cramer Games a Potential Takeover Candidate

Cramer likes spotting takeovers before they happen, but how do you tell what makes a good takeover candidate? Think like the potential buyer, not the potential acquisition.

Allergan , for example, recently said it's looking to grow its business. In addition to its vanity-driven segment, the company has some exposure to legitimate medicine, including eye care. If Allergan is looking to deploy cash, it may seek to acquire an eye-care outfit. Like, say, Inspire Pharmaceuticals , a company with which it’s already working. Allergan pays royalties to Inspire for its dry-eye treatment Restasis, so a merger here just makes sense. Not to mention, Allergan, with its $20 billion market cap, could easily absorb the much smaller $560 million Ispire.

Plus, Inspire's CEO Adrian Adams seems to know how to get deals done. Adams previously served as CEO of Sepacor, which was bought by Dainippon Sumitorno Pharmaceuticals in 2009. Before that, he was CEO of Kos Pharmaceuticals, which was acquired Abbott Labs in 2006.

But Cramer wouldn’t recommend a stock merely on its takeover potential. The fundamentals need to be strong as well. And with Inspire, they are. The company focuses on two main areas: ophthalmology and treating pulmonary disease, or the eyes and lungs. In the opthamology biz, which matters most to Allergan, there is the aforementioned Restasis, which is Inspire's largest source of revenue, and Azasite, a pink-eye treatment that is the company’s number-two moneymaker. Azasite could also be used to treat blepharitis, an infection that causes eyelid inflammation in 34 million Americans a year, but it is still in Phase II testing for this indication. Approval from the US Food & Drug Administration, but Cramer thinks it “could be huge.”

In August, Inspire inked a new royalty agreement with Allergan, and its stock has been soaring ever since. Cramer thinks it could go higher and said the deal makes a takeover seem more likely.

What if there’s no takeover? Cramer still likes Inspire, but for its pulmonary franchise. It's working on a drug called denufosol tetrasodium for cystic fibrosis, which affects 30,000 Americans. The drug is in Phase III development and is considered first in its class because it treats the disease in its early stages rather than addressing later complications, as competing drugs do. Cramer thinks it could be a huge catalyst for the stock and ultimately worth up to $500 million a year.

Inspire has plenty of cash on its balance sheet, so Cramer doubts it will go belly up. But because this is a speculative play, the usual rules apple: Wait for a pullback, buy in increments and always, always use limit orders.

Call Cramer: 1-800-743-CNBC

Questions for Cramer?

Questions, comments, suggestions for the Mad Money website?