Bloomberg yesterday started the rumor-mill going that Sanofi-Aventis is on the prowl for a large biotech company, sending many biotech stocks higher on Friday (on a day in which the market is down).

The rumors make sense, as big pharma is constantly on the prowl for solid biotech companies. Let's take a look at the dynamics and which companies would be most attractive from a valuation standpoint. The three companies mentioned cited by Bloomberg as targets include Allergan (AGN), Biogen-Idec (BIIB), and Genzyme (GENZ).

The Wall Street Journal, trying to catch up with Bloomberg, has tossed in Amgen (AMGN), Gilead (GILD), and Celgene (CELG).

Let's take a closer look at all of these stocks to try to see who is the best bet. Biogen jumps out to me the most. Including the most recent quarterly results, Biogen is trading at a forward P/E of 10. It has an operating margin of 30%, return on equity of 16%, and has been growing at a 7% clip. The market cap is $13B.

Here's the whole list, taking into account forward P/E in relation to return on equity (ROE), one of my favored measures of valuation (ideally, the P/E will be lower in relation to a higher ROE).

1) Gilead (GILD): Forward P/E 9; ROE 50%; Market Cap. $31B

2) Amgen (AMGN): Forward P/E 9.5; ROE 22.5%; Market Cap. $50B

3) Biogen-Idec (BIIB): Forward P/E. 10; ROE 16%; Market Cap. $13B

4) Allergan (AGN): Forward P/E 17; ROE 16%; Market Cap. $19B

5) Celgene (CELG): Forward P/E 15; ROE 20%; Market Cap. $23B

6) Genzyme (GENZ): Forward P/E 14; ROE 2%; Market Cap. $14B

To me, Gilead clearly has the best numbers, and it also has a reputation for being a very well-run company. Genzyme doesn't look very attractive at all.

I doubt that Amgen is in play, it is very large (Bid would require $50B+) and the stock action today is pretty flat.

The market is voting for BIIB, and here is how these stocks are performing today:

Symbol	Last Trade		Change		Volume	Intraday	Related Info
GILD	1:31PM EDT	34.73	0.59	1.73%	5,307,023		Basic Chart, Message Boards, Key Statistics, more...
AMGN	1:31PM EDT	51.50	0.52	1.00%	2,905,368		Basic Chart, Message Boards, Key Statistics, more...
BIIB	1:31PM EDT	49.09	2.36	5.05%	6,376,347		Basic Chart, Message Boards, Key Statistics, more...
AGN	1:31PM EDT	61.64	3.54	6.09%	8,683,448		Basic Chart, Message Boards, Key Statistics, more...
CELG	1:31PM EDT	50.50	0.88	1.77%	2,835,820		Basic Chart, Message Boards, Key Statistics, more...
GENZ	1:31PM EDT	52.43	2.57	5.15%	4,948,441		Basic Chart, Message Boards, Key Statistics, more...

 Source: Yahoo Finance

Clearly the market doesn't think Amgen is in the mix, and it's voting heavily that BIIG or AGN are the targets.

After combing through this list it is clear to me that many of these stocks are undervalued and could indeed be taken out in the near-term. My best bets are Gilead and Biogen.

Big pharma buying biotech is one of the strongest ongoing trends. This is because large pharma companies have become less successful in developing new products with in-house R&D, and are increasingly turning to biotech companies to acquire new products.