The iShares Nasdaq Biotechnology ETF (IBB) surged nearly 9 percent in its best day since Oct. 13, 2008, and topped its 50-day moving average for the first time in more than a month.
Comments from Hillary Clinton and Bernie Sanders on high drug prices have weighed on pharmaceutical stocks.
Despite a nearly 9 percent surge Wednesday, the biotech ETF was still down more than 13 percent over the last 12 months and was trading about 17 percent below its 52-week intraday high, or in correction territory.
"On Prop 61, its defeat means efforts to drug price regulate at the state level become much more difficult," Terry Haines, managing director and head of political analysis at Evercore ISI, said in an email. "In a political context 61's defeat is a black eye for Democratic progressive supporters of this kind of initiative, Senator [Bernie] Sanders in particular."
The passing of Prop 61 would have largely prevented state agencies, which cover about 5 million people, from paying more for prescription drugs than what the federal Veterans Affairs Department pays. The VA often pays the lowest prices for drugs in the nation, often at a steep discount compared to other government agencies and Medicare.
To be sure, President-elect Trump's health-care platform highlights the need to negotiate drug prices. Trump also plans to repeal the Affordable Care Act.
"ACA reform if successful would broadly benefit hospitals, providers and insurers but is probably negative for pharma and bio if successful because some sort of drug pricing action happens on Part D — adding price to the government negotiating criteria in the law along the lines of Mr. Trump's campaign position," Haines said.
— CNBC's Dan Mangan and Meg Tirrell contributed to this report.