Product-based companies have fallen out of favor over the past few years, as investors tired of the blow-ups in Phase III trials that left them holding worthless stock. They turned instead to platform companies, in part because product development would be left to others, at least for the immediate future.

As providers of technology and services, platform companies have seemed far less risky than product stories. At the same time, platform providers have been actively courted by pharmaceutical companies worried about falling behind in the combinatorial chemistry/screening/genomics/functional genomics/bioinformatics revolutions.

As a result, platform companies have been hot - especially in the venture community, while product companies have felt like orphans.

In 1997, for example, 36 percent of all the venture financings compiled by BioCentury (39 of 107) were for platform companies. Among 1997 IPOs, while product companies still predominate (27 product companies versus 5 platforms), the average market cap at IPO of the platforms was $142 million versus $90 million for the product companies. Among follow-ons, although only three of 40 were by platform companies, the second and third largest deals in terms of money raised were both platform stories.

But this perception of relative risk/safety doesn't tell the whole story. While none of the big stock market losers last year were platforms, they also didn't provide investors with the greatest rewards. Of the 33 top price gainers of 1997 tracked by BioCentury, only three were platform companies, and they ranked 27, 30 and 32 among stocks with the greatest percentage price increases.

These price numbers are a reminder that a blockbuster drug still remains the best way for both companies and shareholders to make dramatic returns, even if most drugs fail. At the same time, the limitations of the platform model have started to appear, including the relatively lower returns of a business model based on royalties, fees and services.

In addition, most platform companies, in the words of one fund manager, have a platform that's really no more than "a 6 by 6 inch perch," and won't be viable in the long term as stand-alone companies.

Making the choice

If these are the realities, the question is for how much longer product stories will be out of favor and for how much longer platform companies will seem like the answer to the shortcomings of the biotech product model. For its sixth annual review of buyside sentiment for the new year, BioCentury asked institutional investors how they think about investing in these two broad groups of stocks.