There’s much speculation, especially after the $15.2 billion AstraZeneca will pay for MedImmune. So Morningstar has a few ideas, although the firm screens out biotechs with market caps of less than $250 million (firms that tend to be extremely volatile and speculative) and greater than $15 billion (firms that are difficult for even big pharma to afford).

Here’s the Top 5:

Amylin: One could argue that Lilly would still stand to gain by taking out its 50/50 partner for the Byetta diabetes drug, which leads to a rare combination of diabetes control and weight loss, and a once-weekly version could reach the market within two years. Add in an ambitious obesity development pipeline, and the firm’s growth potential increases further.

BioMarin: BioMarin’s rare disease expertise has earned it a narrow economic moat, and strong prospects for current products and its late-stage pipeline could make it a desirable target for partner Genzyme or other firms looking to gain exposure to this niche. We still think its lead pipeline candidate, Phenoptin, has excellent prospects to treat phenylketonuria, and it could be on the market by the end of the year.

Lexicon: Of all of the companies on our list, Lexicon has the earliest-stage pipeline - which makes it a more speculative investment than many other biotechs. However, a productive collaboration with Genentech is starting to yield new pipeline candidates, and Lexicon’s comprehensive research platform has provided a wealth of informative from knockout mice.

MannKind: Given the problems with Exubera, prospects for MannKind’s own inhaled insulin have come into question. The firm’s only pipeline candidate, Technosphere insulin, is still in Phase III trials, and the firm has not yet formed the marketing partnership it would need to bring the product to the market - all of which contributes to a speculative risk rating. However, we’re bullish on the prospects for Technosphere insulin, which could actually work better than injected insulin, and without the side effects of Exubera.

Vertex: Despite a history of successful HIV therapeutics, all eyes are focused on the potential of telaprevir (VX-950) to treat hepatitis C patients. The drug candidate has shown impressive efficacy to date, and while shares fallen from their peaks due to concerns over side effects, we think its efficacy and market position outweigh any safety problems that have arisen to date.

Source: Morningstar report[tags]Amylin, Lexicon BioMarin, MannKind, Vertex[/tags]