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Here’s Why Biotech Shares are Climbing

The CEO of Valeant Pharmaceuticals has suggested that Allergan is fat, overstaffed and ripe for bigThe CEO of Valeant Pharmaceuticals has suggested that Allergan is fat, overstaffed and ripe for big
Allergan's headquarters in Irvine, Calif.Photo by Don Bartletti — LA Times via Getty Images

The collapse of one pharmaceutical mega-merger could beget many smaller deals—at least that is the hope of biotech investors.

Shares of the beaten-up biotech sector rallied on Wednesday as U.S. drugmaker Pfizer (PFE) and Ireland-based Allergan (AGN) called off their $160 billion merger after new U.S. Treasury rules aimed at curbing tax-cutting inversion deals.

The Nasdaq Biotechnology index jumped 4.5% by mid-day, while the NYSE Arca Pharmaceutical index gained 2.5%. Healthcare was the top sectoral gainer in European trading, up 2.4%.

With their deal scuttled, Pfizer and Allergan could turn to smaller targets, analysts said.

Pfizer and Allergan “have been serial acquirers in healthcare and both have significant financial firepower,” BTIG analyst Hartaj Singh said. “With biotech valuations down since mid-2015, the sector looks more appealing to acquirers.”

Even with Wednesday’s rally, the Nasdaq biotech index is down about 17% this year and some 30% from last July.

Biotech and pharmaceutical shares have been under pressure from concerns about the focus on drug pricing, and that medicine costs will continue to be a target during the presidential election season.

But investors have been looking for a pickup in deal-making as a sign the sector is ready to rebound.

Investors “want to see larger companies looking at smaller companies and buying them as an indicator that valuations have reached a point that they are very attractive for acquisitions,” said Wedbush Securities analyst Liana Moussatos.