SAN FRANCISCO — As the biotech industry caravan rolls into the City by the Bay for the annual J.P. Morgan Healthcare Conference this week, drug makers and deal makers are basking in the glow of one of their strongest years financially, but warily looking ahead.
Biotechnology stocks outpaced the broader financial markets, which soared to record highs in 2013, with the share prices of 81 biotechnology companies more than doubling. Fifty-two life sciences companies went public on US exchanges last year, including nine from Massachusetts, the largest crop of initial public offerings in over a decade.
And the value of mergers and acquisitions of biotech and medical technology companies climbed more than 20 percent, to $131.8 billion.
The frenzy was driven by several factors, including the increasing preference of large drug makers to buy smaller companies to acquire drugs, rather than develop them in-house, and a perception that regulators are speeding the path of new therapies to the market.
“Big Pharma has clearly concluded that it’s cheaper to buy than to build, so there’s a big appetite for acquiring biotechs, and that’s helped to bring the generalist investors into the biotech market,’’ said G. Steven Burrill, chief executive of the San Francisco health care financial firm Burrill Co.
At the same time, the Food and Drug Administration’s approval of 39 new medicines in the previous year, 2012, a 15-year high that helped ignite the recent IPO market for young biotech firms, suggested regulators were more willing to fast-track experimental drugs for hard-to-treat diseases and accept requests for “breakthrough therapy’’ designation to accelerate the approval process.
“Certainly the fact that the FDA approved a lot of drugs in 2012 was one of the catalysts for the strong IPO market we saw last year,’’ suggested Glen Giovannetti, the global biotechnology leader for accounting and consulting firm Ernst Young. “When you have drugs going after real unmet needs, they’re more willing to strike a balance’’ between trying to extend lives and potential safety risks. “They see that there’s also a risk of doing nothing.’’
But the number of new drug approvals fell back to 27 in 2013, a 30 percent drop that made some industry watchers fret that a cautious new mood by regulators could upend the biotech boom. The fear was also fueled by some high-profile setbacks, such as the FDA’s rejection of a kidney cancer drug by Aveo Pharmaceuticals Inc. of Cambridge, its pressure on Cambridge-based Ariad Pharmaceuticals Inc. to temporarily halt US sales of a leukemia therapy, and its rebuff of a multiple sclerosis treatment from another Cambridge firm, Genzyme.
Calling it “an ominous trend,’’ John Carroll, editor in chief of the industry newsletter FierceBiotech, wrote that last year’s drop in FDA approvals “raises big questions about the productivity and sustainability of the world’s multibillion-dollar R&D business.’’
Others are more sanguine, noting that the number of drug approvals in 2013 reverted to the average of 28 approved in the United States annually during the past five years and was no cause for alarm.
“You have to look at these things over a period of time,’’ Giovannetti said. “The number was down last year but it could go back up in 2014. I’m not reading much into it.’’
Another wild card for the industry is growing reluctance by payers — health insurers, employers, and governments around the world — to reimburse for new treatments that are not clearly superior to those already available. As the push to contain health costs intensifies, drug and medical device companies will have to make a strong argument that their products save money by keeping patients out of hospitals.
“The assumption is still that good products will get approved and will be paid for,’’ Burrill said. “But the willingness to pay for them will be based on value and outcome.’’
Whether the market performance of life sciences firms this year — and the number of IPOs — can replicate the torrid pace of 2013 remains an open question. While many analysts say the industry’s pipeline of much-needed therapeutics and promising startup companies remains strong, they acknowledge that trends in the broader market could come into play.
“If there’s a pullback in the exuberance, it will apply to biotechs,’’ said Jonathan Gertler, senior partner at the Boston consulting firm Back Bay Life Science Advisors. “But I think the general outlook is spectacular. You can point to things that might concern you, like a pullback in federal research funding. But the large drug companies are extremely interested in finding innovation. You’re seeing smaller biotechs with real research and development pipelines. And the venture capitalists and strategic investors are continuing to push innovation in the sector.’’
That robust outlook has drawn thousands of industry executives and investors to the J.P. Morgan conference and the rounds of private meetings that will take place at hotels across the city to explore partnerships, financing deals, and mergers.
One of those attending is Bernard Davitian, a former European biotech entrepreneur who is vice president and managing director of Sanofi Genzyme Bioventures. That Cambridge-based venture capital fund invests in startups that could ultimately fill the pipelines of the French drug giant Sanofi SA and its Genzyme rare diseases therapy division, which it acquired in 2011.
“Certainly the fact that the market has been strong has been positive for everybody,’’ said Davitian, who made investments in four life sciences companies during the past year and will be hunting for others in San Francisco this week. “We hope the trend will continue.’’