Potential for Deals Drives a Big Surge in the Biotech Sector Among the beneficiaries was Epizyme, a newly public Massachusetts company that some Wall Street analysts predict could also become a takeover target. Shares of Epizyme, which is working on drugs to treat types of leukemia and lymphoma, have risen 20 percent since July 1, and they have more than doubled since the company's initial public offering on May 31. Six other biotechnology companies completed I.P.O."s in June, and five or so are lined up behind them - an incredible run considering the window for biotech offerings had been all but slammed shut since the 2008 financial crisis. The hot streak has been driven largely by the potential for deal-making in the industry, investors and analysts said. The feared "patent cliff" for brand-name drugs has caused billion-dollar blockbusters like Pfizer's cholesterol drug Lipitor and Bristol-Myers Squibb's blood thinner Plavix to lose ground to generic competition, so the pharmaceutical industry has been hunting for innovation among small biotechnology companies, as both takeover targets and licensing partners. There were five acquisitions of venture capital-backed biotech companies in the second quarter alone, according to data from Thomson Reuters and the National Venture Capital Association. "I think the big pharma companies are going to continue to look outside to find the next wave of innovative therapies," said Dennis Purcell, senior managing partner of Aisling Capital, a life sciences venture capital firm based in New York. On June 17, an Aisling portfolio company in San Diego, Aragon Pharmaceuticals, which has a prostate cancer treatment in midstage human trials, was bought by Johnson & Johnson for $650 million up front, plus the potential for an additional $350 million in payments tied to research milestones. Still, biotechnology is more prone to disappointments than perhaps any other industry - a risk that came to light not long before this recent run of I.P.O."s. In May, shares of a former high flyer, Aveo Pharmaceuticals, fell nearly 50 percent when an advisory panel to the Food and Drug Administration urged the agency to reject the company's kidney cancer drug because of questions about its efficacy. That so many investors have been able to overlook such uncertainty and jump into a new class of companies with unproved science shows a new tolerance for risk on the public market, some experts say. The robust deal-making environment helps. "People are hungry for growth," said Erik Gordon, a professor specializing in life sciences entrepreneurship at the University of Michigan's business school. "When you see something like Onyx telling Amgen" its offering price is too low, "you have to ask, what's the downside? The downside is bad news, but if that doesn't happen, the company you've invested in could be taken out at a huge gain. The 16 biotechnology companies that have gone public this year are up 48 percent on average from their offering prices, according to data provided by Nasdaq. As of Tuesday, four of the top 10 performing companies on the Nasdaq year-to-date were biotechs: Stemline Therapeutics, Bluebird Bio, Epizyme and Prosensa Holding. "The fact that these companies can get out reloads the capacity of the venture funders" to turn to the public markets, said Samuel Isaly, managing partner of OrbiMed Advisors, which manages the Eaton Vance Worldwide Health Sciences Fund in addition to private equity and hedge funds. We're back to the good old days of before the financial crash. The biotechnology I.P.O. market is so frothy, in fact, that some companies are not waiting to take advantage of it. Hans Schikan, the chief executive of the Dutch biotech company Prosensa, said he and his management team originally planned their I.P.O. for a week or so after the Fourth of July holiday, but when they saw the positive investor response to Epizyme and others, they rushed out on June 28 instead. "When the window's open, you'd better use it," Mr. Schikan said. Prosensa's shares opened $7 above its $13 offering price and are up 102 percent so far. It closed up 1.1 percent in trading Thursday on the Nasdaq, closing at $26.26. One gateway for acquisitions in the biotech sector is research partnerships, and those are increasing as well. Epizyme did not start human testing of its lead drug until late last year, but it attracted plenty of interest from big pharmaceutical companies long before that. The company formed research partnerships with GlaxoSmithKline, Celgene and Eisai, which together were worth $125 million in nonequity financing. Simos Simeonidis, an analyst at Cowen & Company, predicts that if one of Epizyme's two leading cancer drugs shows even a hint of success in clinical trials, "a lot of big pharmas or big biotechs are going to want to own the platform. The possibility of an acquisition in my mind would be very high," he said. Several other members of this year's biotech I.P.O. class have rich partnerships. Bluebird Bio of Massachusetts signed a three-year oncology research deal with Celgene in March, which included a $75 million upfront payment. Bluebird's I.P.O. was on June 19, and its stock has climbed 78 percent. PTC Therapeutics, a New Jersey company that went public the next day and raised $114 million, has a $30 million deal with Roche to study treatments for spinal muscular atrophy, and an oncology partnership with AstraZeneca that included an undisclosed upfront payment. Both deals included the potential for milestone bonuses. Its shares have risen 9 percent. On Thursday, they rose 3.4 percent to close at $16.34. Robert J. Gould, the chief executive of Epizyme, said he was aware that research partnerships often blossomed into full-blown buyout offers. But "we have no intention of positioning ourselves to be acquired," he said. Bluebird and PTC, both still in post-offering quiet periods, declined to comment. Venture capitalists in life sciences predict that both the pace and the value of licensing deals will accelerate. "Pharma certainly is evaluating every single asset of every single company that's out there and acting on it," said Noubar Afeyan, managing partner and chief executive of Flagship Ventures, an investor in Agios Pharmaceuticals of Massachusetts, which announced its intention on June 10 to raise $86 million in an I.P.O. Agios has a $150 million cancer drug development deal with Celgene. It is not just cancer treatment that is generating excitement among investors. Prosensa is developing drugs to treat Duchenne muscular dystrophy and other muscle disorders. PTC has its own treatment for muscular dystrophy and is also developing drugs to fight cystic fibrosis and infectious disease. The one unifying theme in all the companies that have generated excitement on Wall Street is the rise of personalized medicine, said Christoph Westphal, a longtime biotechnology entrepreneur and a founder and partner of the Longwood Fund. "Many companies that have done well recently have a specific molecular-medicine approach to a serious disorder that has no other therapies," he said. Prosensa's two lead drugs for muscular dystrophy, for example, are being tested in small groups of patients whose disease is caused by specific genetic mutations, which can be detected with diagnostic devices that the company is using with the drugs. Another factor in the biotech industry's favor is that regulators have become more supportive of drugs that address high unmet medical needs. In July 2012, the Food and Drug Administration Safety and Innovation Act established the "breakthrough therapy" designation, which gave the agency the authority to speed its review of drugs to treat life-threatening ailments. "The regulators, notably the F.D.A., have been particularly willing to come up with new strategies to enable the rapid development of drugs for which there is a dramatic effect in a defined patient population," said Robert Tepper, a partner at Third Rock Ventures, an investor in both Bluebird and Agios. If you can stratify the patient population you want to treat through genetic analysis, for example, you can move quite quickly through early-stage trials.