(Updates performance of stock indexes; adds Valeant context at end)
By Lewis Krauskopf
NEW YORK, April 6 (Reuters) - 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 and Ireland-based Allergan Plc called off their $160 billion merger after new U.S. Treasury rules aimed at curbing tax-cutting inversion deals.
The Nasdaq Biotechnology index closed up 6 percent, its biggest one-day rise since August 2011. The NYSE Arca Pharmaceutical index gained 3 percent.
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 16 percent this year and some 29 percent 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.
Pharmaceutical stocks also may have benefited on Wednesday from Valeant Pharmaceuticals International Inc, whose U.S.-listed shares rose nearly 19 percent after activist investor William Ackman offered a more optimistic outlook for the company.
Valeant's struggles have cast a pall over shares of specialty drugmakers broadly. (Reporting by Lewis Krauskopf; Editing by Nick Zieminski, Bernard Orr)