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Biotech shares rally as Pfizer-Allergan deal collapses

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 Inc (PFE) and Ireland-based Allergan Plc (AGN) called off their $160 billion merger after new U.S. Treasury rules aimed at curbing tax-cutting inversion deals.

The S&P healthcare index gained 2.7%, while the Nasdaq Biotech Index jumped 6%. Shares of Pfizer rose 5% to $32.93 and gave the biggest boost to the S&P 500, while Allergan was up 3.5% at $244.74.

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

Pfizer and Allergan have been serial acquirers in healthcare and both have significant financial firepower. 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.

I am thinking about buying iShares Nasdaq Biotechnology ETF (IBB). Do you think a recovery in biotech will continue?