Despite the downturn in stock price valuations since the spring of 2000, the outlook for the future of biotech is more hopeful than gloomy. According to an experienced venture capitalist, "Long term, the biotech industry is a growth industry and great to get into, since it is still relatively early in its evolution." But the industry is being impacted by several broad structural changes, technological transformation, demographic shifts and the emergence of new tools.

Perhaps the most significant change lies in the evolution of new business models for biotech entities. Although venture capital funding in 2002 was above that in 2001, the post-crash slump has forced a re-examination of how biotech companies are being kept alive as economic entities. From a focus on discovery research with decade-long horizons to bringing products to market and an emphasis on upstream technologies that will help identify targets from which drugs are synthesized, biotech industry business models have been evolving to product-centered strategies with shorter periods to return on invested capital. "We're seeing a shift from technology-based to product-based companies. Specifically, we're seeing a shift toward drugs as the driver of value, i.e., clinical compounds as opposed to technologies (genomics, high-throughput screening technology, etc.), which focused on the upstream processes of drug discovery. The time from the use of these technologies to getting a drug on the market is so long and that protracted time frame -- 10+ years -- limits what pharmaceutical companies and investors are willing to pay for them," a senior-level VC points out. "The focus instead is on nearer term profits. Money invested in technologies has slowed down." This more pragmatic model is being implemented largely by creating a network of alliances between specialty biotech companies and larger pharmaceutical companies with established sales and marketing infrastructures.

A senior scientific recruiter corroborates this perspective by saying, "In today's tough environment, VCs are looking to invest in more mature companies. They like companies that have already completed lead optimization and are now quickly moving in to process optimization. This means that they can, therefore, move into clinical trials fairly quickly, and as a result, the return on investment (ROI) will come faster."

The main effect of this shift is to create an environment where more companies become profitable. According to a senior director at a venture capital firm, "40 biotech and specialty pharma companies have reached profitability through 2002 . . . [and] 30+ additional biotechs by 2006 will ignite investor enthusiasm" again. Furthermore, "an additional 96 companies have a scenario for profitability by 2006." Still, many other companies will continue to struggle and eventually be subsumed under the stronger firms. So despite some bright signs on the horizon, "as an industry, biotech will not become profitable for the foreseeable future. In the near term, it is unclear if that's going to change," according to a senior-level VC.

Structural changes are also having an impact. The number of publicly traded companies has declined through mergers and acquisitions, as the industry consolidates both within itself and across to pharmaceutical companies. In 2001, there were some 631 public biotech companies; in 2002 that number shifted downward to 613 public companies. The most significant mergers occurred within the industry: Amgen, Inc. acquired Immunex Corp., makers of Enbrel?? for rheumatoid arthritis, for approximately $17.8 billion; MedImmune, Inc. bought Aviron in January 2002, makers of FluMist?? influenza vaccine, for $1.6 billion; and in February 2002, Millennium Pharmaceuticals Inc. completed purchase of COR Therapeutics Inc., makers of Integrilin?? for acute coronary syndromes and patients undergoing percutaneous coronary intervention, for $1.8 billion. Analysts believe that this trend is likely to continue, as companies merge, restructure, or simply go out of business.

The trend toward consolidation is also coupled with continued globalization of the industry, as companies seek out the best alliance partners from both domestic and foreign pharmaceutical companies, and as the latter gobble up biotech companies to expand their product portfolios. Increasingly, companies are listed on U.S. and foreign exchanges to expand investor bases. The explosion of Internet-based communication has facilitated scientific collaboration around the world. Finally, governments across the United Kingdom, European Union, Scandinavia and Asia are increasingly cognizant of the need to invest in early-stage biotechnology companies as part of their economic development strategy. In the U.S. alone, funding for basic research for the National Institutes of Health has doubled to $23 billion over the last five years.

The trend toward globalization has created a need to harmonize the global regulatory environment, as lack of consistency in patent and intellectual property protection has hampered the entry of Western companies and kept valuable biopharmaceuticals from reaching needed markets.

International investment in biotech has been and is expected to increase sharply throughout the decade, according to an industry report by Ernst & Young. In the next five years, biotech investments in India are expected to generate $5 billion in revenues and create 1 million jobs. Biotech employment in Japan is expected to grow from 70,000 today to approximately 1 million by the end of the decade. Biotech investment in China is expected to triple in the next several years to reach about $600 million relative to the 1996 to 2002 investment of $180 million. And in Singapore, the biomedical manufacturing industry is expected to reach $7 billion by 2005.

The United States leads the industry, generating some 70 percent of revenues and accounting for 70 percent of research and development (R&D) spending. The European industry accounts for 20 percent of revenues and 25 percent of R&D. This means that the most attractive R&D jobs will likely continue to be here in the US.

Within the context of these global trends, several additional forces are shaping the industry. The biotech industry is expected to grow at a rate in the high teens for the remainder of the decade, according to the Standard & Poor Industry Surveys. This anticipated growth is great news for young people considering a career in biotech or for more experienced professionals, who will find more opportunities. Growth will likely come from the major, more established biotech companies, since they have product sales, full pipelines, and stable fundamentals. In contrast, the smaller, emerging companies are likely to continue to struggle. S&P has identified several broad industry trends, which are fueling this expected growth in revenues, including:

• Development of new biologic therapies
• Favorable demographics
• Analytical tools companies struggling
• Emerging integration tool in bioinformatics

Development of new biologic therapies, particularly for the treatment of cancer, is likely to fuel the most significant growth in the coming years. With some 500 biotechnology-related drugs in clinical trials as of 2002 and some 400 agents targeted for cancer treatment alone, biotechnology is set to make a major mark in oncology. In 2001, Procrit??, Epogen??, Intron?? A, Neupogen??, and Humulin?? reached $1 billion each in revenues and in 2002, Rituxan??, Enbrel??, and Remicade?? achieved the same benchmark.

In addition to cancer, the industry has ongoing research in many disease conditions exacerbated by aging, including autoimmune disorders, cardiovascular diseases, genetic defects, infectious diseases, nephrology, neurological disorders, lysosomal storage disorders, multiple sclerosis, psoriasis, and rheumatoid arthritis. The search for new biopharmaceuticals plays is important in finding cost efficiencies in the US healthcare system, since biopharmaceutical drug therapy is less costly and less invasive than surgical alternatives and can be self-administered by the patient. As a result, the burden on the healthcare system is reduced via shorter stays in acute care facilities, such as hospitals, fewer doctor visits and less convalescent time in nursing homes.

From a demographic perspective, of the 281 million people in the US population today, approximately 62 million constitute the 45-to-64 year old age group - the Baby Boom generation. While the U.S. population is expected to increase 8 percent between 2001 and 2010, this cohort will expand by 26 percent over the same period and is by far the fastest growing segment of the overall population. In addition, with life expectancy in 1999 at 76.7 years and showing a steady positive trend, aging Baby Boomers are creating a rapidly growing market for aging related disease treatments based on biotechnology.

Furthermore, according to the Census Bureau, the over-65 year old population is expected to more than double between 2001 and 2030, which will represent 13 percent to over 21 percent of the overall population. Since senior citizens now account for approximately 33 percent of pharmaceutical consumption, their growing numbers can only bode well for the prospective demand for the industry's products.

Thus, by focusing its research on the four leading causes of death in the US -- heart disease, cancer, cerebrovascular disease, and chronic lower respiratory disease - the biotech industry is set to bring to market biopharmaceuticals for which there is an expanding base of demand.

A new field, bioinformatics, stands out as particularly promising in managing and interpreting the masses of data generated by genomic and proteomic research. Bioinformatics refers to the use of advanced databases and computer analysis tools to perform queries and simulations, cross-reference and compare data, archive test results, and collaborate. This new field has spawned academic programs and is one of the promising new career paths created by the industry.