As biotech booms, high drug costs cause worry

“The whole industry is in a great place,” said George Scangos, chief executive of Biogen Idec.JESSICA RINALDI/GLOBE STAFF

SAN FRANCISCO — These are boom times for biotechnology.

Forty-one new drugs were approved for US sale in 2014, the biggest number in 18 years. A record 63 biotech startups went public, breaking the 1999 record of 52 initial public offerings. The value of biopharma merger deals nearly tripled to $223 billion from a year earlier.

“The whole industry is in a great place,” said George Scangos, chief executive of Biogen Idec Inc., the Cambridge biotech that last year won the Food and Drug Administration’s permission to sell new treatments for multiple sclerosis and hemophilia. “We’re increasing our understanding of diseases. The science is working and new drugs are coming forward,” Scangos said.

The latest industry deals came on Sunday, as Shire PLC, which has its US headquarters in Lexington, agreed to buy NPS Pharmaceuticals in Bedminster, N.J., for $5.2 billion to add treatments for rare diseases to its portfolio; the Swiss drug giant Roche AG planned to spend more than $1 billion to buy a majority stake in Cambridge’s Foundation Medicine Inc.; and Biogen Idec agreed to pay up to $675 million to buy a British biotech working on drugs to treat chronic pain.

But as thousands of biotech entrepreneurs, investors, and dealmakers congregate for the 33d annual J.P. Morgan Healthcare Conference, which opens Monday in San Francisco, the question is whether the expansion can continue in the face of emerging headwinds.

The backlash from health insurers on high-priced prescription drugs — triggered by Gilead Sciences Inc.’s wildly popular $1,000-a-pill hepatitis C treatment — will be an unavoidable topic at hundreds of company presentations scheduled this week at the Westin St. Francis Hotel. Executives are also wary about the consolidation of hospitals, competition from generic drugs called biosimilars, and a feared retreat by the financial markets.

“I think we’ll see a slowdown,” said G. Steven Burrill, chief executive of the San Francisco health care financial firm Burrill & Co. “The capital markets were on fire last year, but you may be seeing fewer deals. Pricing pressures are very real. Our health care delivery system can’t afford to spend hundreds of millions of dollars to extend life for a few weeks or a few months.”

The challenge for drug makers, which have long operated on the assumption they could charge whatever the market would bear, will be to produce cures and breakthroughs in medicine that can save money for insurers and government payers by keeping patients healthy.

“What we have to do is to get the focus on the value of our drugs for patients rather than the cost,” said Vincent J. Milano, the new chief executive of Cambridge-based Idera Pharmaceuticals Inc., a biotech that’s developing treatments for cancers and rare diseases.

As in the past, Massachusetts companies will be well represented at the J.P. Morgan conference, the premier investor meeting for the biopharmaceutical and life sciences industries. More than 100 companies with headquarters or large operations in the state will outline their plans, ranging from homegrown players like Boston’s Vertex Pharmaceuticals Inc. and Marlborough’s Boston Scientific Corp. to fast-growing startups such as Agios Pharmaceuticals Inc. in Cambridge and athenahealth Inc., of Watertown, to pharma giants with Kendall Square research centers like Pfizer Inc. and Novartis AG.

The presentations will include not only scientific overviews of drug and medical device pipelines but, tellingly, road maps for winning regulatory approvals and convincing insurers in the United States and abroad to reimburse them for their products. With the FDA opening the door to cheaper copies of pricey brand-name drugs and larger health care providers gaining more clout in negotiations — trends that could drive down prices — investors will be paying attention.

“More and more, companies are factoring in the economics of a therapy,” said Terry McGuire, founding partner of Polaris Partners, a Boston venture capital firm that bankrolls startups. “Just a few years ago there was a feeling that if we produced a medicine, people would pay for it. Now we have to figure out the likely reimbursement and build a strategy around it.”

Many drug makers are refocusing their efforts from “me-too” treatments that marginally improve patients’ conditions to disease-fighting approaches — such as gene editing, cancer immunotherapy, and RNA interference — that have the potential to generate multiple drugs. Others are divesting drug categories in which they are less competitive and bulking up in areas where they can sell a bundle of products, giving them more leverage with insurance companies.

Novartis, with its global research headquarters in Cambridge, last year agreed to sell its animal health business to Eli Lilly & Co. and its vaccines business to GlaxoSmithKline PLC. Bayer AG bought the consumer care business of Merck & Co., which quickly moved to strengthen its antibiotics business by snapping up Lexington-based Cubist Pharmaceuticals Inc.

“Companies are picking their battleground, looking for where they’ll have a lot of depth,” said Glen Giovannetti, global life sciences sector leader for the consulting firm Ernst & Young.

The buying and selling frenzy last year boosted the value of biopharma mergers and acquisitions to more than $220 billion, the highest level since before the recession that began in 2008, Ernst & Young data show. Activity was also brisk on the fund-raising front, with public and private financing of life sciences businesses topping $104 billion, according to Burrill & Co.

Biotech stocks climbed an average of nearly 27 percent in 2014, more than double the gain of the Standard & Poor’s 500 index and triple that of the Dow Jones industrial average.

Whether they can continue to outpace the broader financial markets — at a time those markets are grappling with everything from plunging oil prices to instability in Europe — remains to be seen.

But biotech executives say they are keeping their focus on drug discovery.

“The financing and the Wall Street aspect of it is entirely secondary to the job of creating a drug,” said Richard Pops, the Waltham-based chief executive of Alkermes PLC, which is developing treatments for schizophrenia, addiction, and depression.

“The stocks are just a reflection of what’s happening in the science. The reason why you’re seeing this [financial] activity is because new medicines are emerging and advancing in development.”