SAN FRANCISCO — Biotechnology executives, researchers, and investors gathering here this week for the industry's premier conference are as bullish as ever about the cutting-edge science that's transforming everything from cancer research to treating diseases by fixing defective genes.
But even after a year that brought the most new US drug approvals in two decades, there are unmistakable cracks in biotech's financial foundation. Over the past six months, stock prices have tumbled and initial public offerings have stalled. High-priced prescription medicines, a driver of profit growth, are coming under intense scrutiny and criticism.
"There are challenges, there are headwinds," said Alexis Borisy, a partner at the Boston venture capital firm Third Rock Ventures, a leading backer of biotech startups. "We've just been through a couple of halcyon years in our industry. So it's a fair thing to say that activity may slow."
Many industry players still think biopharma will remain a growth business, continuing to outpace other economic sectors. But the bull market that propelled the Nasdaq Biotechnology index to a gain of nearly 150 percent over the past three years may be nearing an end.
The strength of financial markets will be closely watched at the 34th annual J.P. Morgan Healthcare Conference, which opens Monday, because the ability to raise capital enables biopharma companies to fund research, shepherd drug candidates through clinical trials, and win regulatory approvals. If investors fear they won't be able to cash out of their holdings through acquisitions or stock offerings, it will become tougher for startups to advance and for established companies to expand their drug portfolios.
Leora Schiff, principal at Altius Strategy Consulting in Somerville, which advises life sciences companies, cited market volatility and unpredictable factors such as US interest rate hikes and the rocky Chinese economy for the turn in investor sentiment. "You have a lot of things unrelated to the industry that might cause investors to be more conservative this year," she said.
A small number of biotechs have registered to go public early this year, seeking to end the IPO drought and test the resolve of life sciences investors. Among them are Editas Medicine Inc. and Visterra Inc., a pair of Cambridge startups backed by Microsoft Corp. cofounder Bill Gates. But even with the promise of new fields such as gene editing, in which Editas is a pioneer, there is a nagging sense that the sector may have gotten overvalued.
"There's a resetting of expectations that's going on," said Mitch Bloom, head of the Boston health care practice at the law firm Goodwin Procter, who works with companies on IPOs. "The deal activity I'm seeing now is a little lower compared to what it was last year."
Among the concerns hanging over this year's conference is the rising clamor over drug prices. Some criticism has come from presidential candidates and other politicians. But health insurers and consumers have also raised their voices about high-profile cases of price gouging and a pipeline of specialty therapeutics carrying price tags that critics say are unsustainable.
Companies have countered that they must maximize pricing to fund research and earn a return on their investments, but executives don't see the issue going away.
"It's going to stay front and center," said Peter Hecht, chief executive of Ironwood Pharmaceuticals Inc. in Cambridge. "This is one of the biggest issues facing our industry, and it's gone from a simmer to a boil. We have to better communicate the value of our new medicines and think creatively about ways to better connect the price and the value."
Many executives here brand as outliers figures such as Martin Shkreli, the Turing Pharmaceuticals chief who last year acquired a generic medicine to fight infections and increased its price to $750 from $13.59. But they also acknowledge the new spotlight on prices has hurt market values and put pressure on companies to develop lifesaving or life-prolonging treatments that can justify their cost.
"There are always actions on the fringe that are inappropriate," said David Schenkein, chief executive of Agios Pharmaceuticals Inc. in Cambridge. "It just puts more focus, appropriately, on making sure that we're providing medicines that are truly breakthrough."
No one doubts the industry's ability to generate new therapies and launch innovative startups that are attractive takeover candidates for big pharmaceutical companies.
Last week, in a key sign of progress on the clinical front, the Food and Drug Administration reported 45 new drug approvals in 2015, up from 41 the prior year and the most since 1996. And the value of biopharma mergers and acquisitions climbed from $220 billion in 2014 to a record $329 billion last year, according to the consulting firm Ernst & Young, though the gain was largely due to the $160 billion tie-up of drug giants Pfizer Inc. and Allergan PLC.
Other measures were more sobering. The number of biotech IPOs dropped to 44 last year from 63 in 2014, reported Greenwich, Conn., research firm Renaissance Capital, with activity slowing in the second half of the year, when many startups sold shares below their target range.
Ernst & Young's annual industry outlook, set to be released here Monday, shows Big Pharma revenue declining for the third straight year, even as more entrepreneurial biotech companies continued to grow.
Overall, the life sciences industry's merger and acquisitions markets is likely to settle back to the level of 2014 before the Pfizer-Allergan megadeal, predicted Jeffrey Greene, global life sciences transaction leader at Ernst & Young.
Many companies are expanding with capital already raised from IPOs and private financing rounds during the past few years. Agios, a cancer drug maker, doubled its staff to more than 200 last year and moved to a new headquarters and research center a block and a half from its old offices on Sidney Street near the Massachusetts Institute of Technology.
"I'm going into the year as optimistic as I've ever been, and that's because the science is so strong," said Schenkein, its CEO.