By Karen Bernstein

A year ago the biotech sector appeared to be headed for blockbuster product successes and the kinds of returns investors dream of. But an unbroken string of product failures and the specter of drug price controls have shaken investor confidence and prompted several Wall Street analysts to reexamine the underlying assumptions that once had made them bullish on the industry.

But perhaps more telling for the long-term prospects than Wall Street - which in a sense is the end of the capital pipeline - is the view from the venture community. As the ones who start and fund new companies, VCs' actions today will shape the face of the industry through the end of the decade.

Changing with the times

Despite the uncertainty over the ultimate shape of health care reform and capital gains and related issues, all of which will affect returns on investment, BioCentury's survey of the venture capital community revealed a reassuring degree of optimism about biotech combined with an acute awareness of the need to change with the times and take advantage of new opportunities.

None of the 10 VCs contacted by BioCentury said that the prospect of price restraints on drugs had prompted them to slow their biomedical investing, and several pointed out that change creates opportunity. "Whatever the situation you're handed, you have to figure out how to take advantage of it," said Charles Hartman of CW Group.

All the investors have been carefully considering for some time how to respond to the changing structure of the industry, particularly the proliferation of companies with never-ending cash demands and the looming prospect of consolidation.

"Our horizon is sufficiently long that the short-term issues are not a factor," said Jesse Treu of Domain Associates. "Even before this, we were re-examining the strategic role of venture capital in these companies, taking account of the number of companies working in the same disease targets and the capital crunch coming in the next few years. We're trying to help drive the consolidation and seeking to be increasingly selective about starting new companies."