Pfizer (NasdaqGS: PFE) called off the deal with Allergan (NasdaqGS: AGN) on Wednesday, but there was a silver lining. Exchange traded funds that track the biotechnology sector surged as traders speculated that the two companies could court other merger targets.

Biotechnology sector-related ETFs led gains on Wednesday. The BioShares Biotechnology Clinical Trials Fund (NasdaqGM: BBC), which tracks potential up-and-coming biotechnology companies that are in the clinical trials stage, jumped 6.0%. The Loncar Cancer Immunotheraphy ETF (NasdaqGM: CNCR), which tracks companies that are developing new classes of therapies, gained 5.9%. The ALPS Medical Breakthroughs ETF (NYSEArca: SBIO), which focuses on small- and mid-cap companies that have one or more drugs in either Phase II or Phase III U.S. FDA clinical trials, increased 5.6%. The broader SPDR S&P Biotech ETF (NYSEArca: XBI), which tracks an equal-weight index of biotechnology companies, rose 5.7%. These four ETFs all track relatively smaller names in the biotechnology sector, which also include more attractive acquisition targets for larger companies.

Meanwhile, the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), the largest biotech exchange traded fund by assets, was up 5.3% on Wednesday. Additionally, the broad Health Care Select Sector SPDR (NYSEArca: XLV), which includes 38.1% pharmaceuticals and 22.7% biotechnology weights, advanced 2.4% and was testing its long-term, 200-day simple moving average.

The failed merger between Pfizer and Allergan could be good news for mergers and acquisitions activity in the biotech space. Allergan is headed by Brent Saunders, one of the pharmaceutical industry’s most prolific deal makers, reports Adam Feuerstein for TheStreet. Allergan is waiting on its $40 billion sale of generics to Teva (NasdaqGS: TEVA) to go through, which could open up a hefty chunk of change to spend on more deals.

“We strongly believe in innovation and R&D and we have invested in innovation and R&D … When we have done acquisitions, which is probably the thing that we have most in common with Valeant, we have exclusively focused on growth assets, not mature assets,” Saunders previously said.

During a conference call Wednesday morning, Saunders reaffirmed the company’s commitment to being “growth pharma,” or a pharmaceuticals company with double-digit growth, adding that the firm will invest in outside growth assets through acquisitions or partnerships to meet this target.

Citibank also recently stated that the potential for biotech sector M&A activity could experience a revival over the next one to three quarters as the sell-off opened up more attractive valuations and companies are sitting on a ton of cash, writes Joe Kunkle for See It Market.

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