The industry pipeline
Box: Recapitulating Back to Basics
The Phase III pipeline
The venture pipeline
On a roll
A Mid-Cap scorecard
Sidebar: Back-to-School: Don't forget serendipity

Last year BioCentury's annual "Back-to-School" report, entitled Back to Basics, described the requirements for building a sustainable company. This year we propose to start a discussion about the structure of the biotech industry going forward into 2000.

This may seem an odd question to ask, given that the group is going through what is thus far its second best stock runup since BioCentury started keeping score in late 1992. The BioCentury 100 climbed 135 percent in the 17 months between December 1994 and May 1996, and has gained 102 percent in the past year. However, the overall performance of biotech stocks shouldn't be allowed to mask some of the continuing issues in sub-sectors of the group, which have long-term implications for the industry as a whole.

According to the conventional wisdom, there are still too many companies, they are too narrowly focused, the financing window is closed, there are fewer good start-up ideas, and big pharma is learning the biology-based discovery game.

But some of these issues may be more perceived than real. Indeed, it is possible to paint a much more positive view about the current structure of the industry, and in this context, identify some of the factors in technology, finance and project selection that could strongly influence the health of bioindustry as a whole.

To do so, we first look at three drivers of industry structure: science, corporate need and finance and ask how these might change the face of the industry.

Second, we look at a pipeline model of the industry and review what the actual rate of corporate formation and consolidation might imply for the group moving forward.

Drivers of industry structure

If biotech is all about scientific discovery, it is logical to ask whether advancements in science will help define the structure of the industry; and whether these advances will improve project selection as well as improve the success rate of the industry.

At the same time, sources of finance will continue to search for improved ways to make investments. Thus it is also important to consider how the industry's structure will be influenced by these ongoing efforts to manage risk, gain scale and achieve strategic as well as financial objectives.

Finally, science doesn't get done in a vacuum, and there is a constant process of picking and choosing what become the winning technologies. Here it is important to ask how corporate need plays a significant and possibly dominant role in structuring the industry.


At least intuitively, one might expect the science to help define what kinds of companies can be successful, their chances of success, how rapidly they can lower their risk profiles, and how much money it will take to reach the goal line. That, in turn, should affect the size and makeup of the pool of young companies that forms the feeder system for the industry as a whole.

In biotech, most of the advances in technology over the past decade have focused on the research end of the spectrum: the human genome project, functional genomics, combinatorial chemistry, high throughput screening, arrays, pharmacogenomics and a host of information management technologies.

Thus most of the new technologies are affecting the drug development process at its earliest stages, leaving - at least for the moment - the clinical, regulatory, manufacturing and marketing pieces of the puzzle unchanged.

It also remains to be seen just how much impact these new technologies will have, and how much lasting effect they will have on corporate formation and development.

As noted by Sandra Panem, a longtime institutional investor at the Vector Later-Stage Equity Fund and the Oppenheimer Global BioTech Fund, "there is a way to increase efficiency in different steps of the process, but that doesn't tell you if you've increased overall efficiency."

For example, Panem said, "receptor design strategies have increased the number of lead compounds one can take forward. But you don't know if it leads to more drugs. So you can improve lots of different points, but you don't know how much improvement in different areas you need before you see overall improvement. As far as I know, there are no statistics to show that the number of compounds that get presented for preclinical development versus the number that get on the market has changed in 20 or 30 years."

For the optimists, it is only a matter of time before the new technologies improve the process of picking good targets and designing compounds with a higher chance of success than in the past - even if the fruits of those efforts are not yet visible.

George Rathmann, chairman of Icos Corp. (ICOS, Bothell, Wash.) and co-founder of Amgen Inc. (AMGN, Thousand Oaks, Calif.), falls into this group. "If science doesn't set the agenda, what the hell is going to do it?" he said. "Advances in science are what keep biotech rolling ahead."

Thus if the current set of new technologies haven't yet proven their importance, Rathmann expects this to happen further down the road, based on his experience with older technologies.

He noted that the first gene therapy experiments were done in 1980, that monoclonal antibodies came on the scene in 1976 and are only now bearing fruit, while molecular genetics led to erythropoietin and G-CSF. "Everybody said these are all going to change the world. Science will do it, but it never happens quite as fast, and just when people are giving up is when they work," said Rathmann.

"Similarly," he said, "the genomics era will have its effect. Genes are all-powerful - they're the perfect entity when it comes to medical advances - not only the human genome, but bacterial and viral genomes. It will be more revolutionary but also take longer than most people thought."

Philippe Cramer, director of life sciences at Close Brothers, the French investment bankers, agreed. "My impression is that progress in science impacts on industry a long time after the first discoveries are made," he said. "We can see this with monoclonal antibody companies such as Abgenix Inc. (ABGX, Fremont, Calif.) that are now having a lot of success with a technology that was invented a long time ago."

In the view of Jeremy Levin of Perseus Capital, the venture fund that co-invests in the life sciences with the George Soros funds, the single most important advance will be teasing out the function of genes, which will define the structure of the industry in two ways.

"First, it will stimulate the reagent business," he said. "We will see a resurgence of proprietary reagents, simply to understand the basic science of the gene. So sectors that have been under-looked at will suddenly become important again, and that will be sustainable."

Levin believes that suppliers such as Qiagen N.V. (NMarkt:QIA; QGENF, Venlo, the Netherlands) and Invitrogen Corp. (IVGN, San Diego, Calif.) will benefit from this trend. "If you look at pharmaceutical R&D spending over the last year, of the $9 billion on the R side, 25-30 percent was for reagents," he said.

Second, according to Levin, the focus on gene function will give an important advantage to those companies that have the power to determine what targets are useful. "Then you need to ask if the only survivors will be the companies with the scale of Millennium Pharmaceuticals," he said. Levin argued that those companies win because they can leverage their capabilities across multiple genes.

These changes, he said, will drive companies such as QIA and PE Corp. (Norwalk, Conn.), systems integrators such as NetGenics Inc. (Cleveland, Ohio) and chip companies such as Affymetrix Inc. (AFFX, Santa Clara, Calif.).

Levin is less convinced that pharmacogenomics is yet driving a new agenda for the industry. "Pharmacogenomics has yet to be proven as a useful tool in drug discovery, drug delivery and marketing, except for one area: I think it plays a critical role in drug toxicology and making clinical trials more efficient," he said.

Cramer also thinks pharmacogenomics is a good example of the lag between discovery and impact, noting that when Genset S.A. (NM:Genset; GENXY) and Abbott signed a deal in 1997 to analyze genetic variations affecting drug response, "people thought that it would have a rapid impact on industry. Yet two years later Genset announced that it had discovered four or five genes responsible for one-third of the side effects associated with the Abbott drug. That means there could be 12 to 25 genes associated with liver toxicity," he said.

"With the science we have now it will be difficult to build nice kits to analyze those mutations," Cramer said. "Until we have all those genes and until the microchips are ready to be used on a mass scale, I do not see pharmacogenomics being really efficient. Maybe in two or three years things will change."

Panem doesn't see developments such as the human genome project or pharmacogenomics as altering the industry's structure. What they do change, she said, is the information base that can be used.

Indeed, William Haseltine, chairman and CEO of Human Genome Sciences Inc. (HGSI, Rockville, Md.), already has dismissed the human genome project as "an irrelevant footnote to the genomic revolution in drug discovery." On the other hand, he predicts that gene-based development will yet have a profound impact on the industry.

Haseltine argued that the next few years should see an emerging focus on genes, proteins and antibodies as drugs. "They address a fundamental class of disease - degenerative diseases associated with aging - and they're very well suited to address repair and restoration," he said. "So there's a very good demographic and economic reason to develop these drugs."

Possibly even more important from an industry point of view, these compounds have favorable development profiles. Haseltine argued that the time from discovery to approval can be five or six years - half the time, with less expense and fewer failures than small molecule drugs.

Haseltine sees this potential shift as more important than the discovery tools. "Even with substantial help from genomics, combinatorial chemistry, rational drug design and pharmacogenomics, there has not been a substantial increase in IND filings by large companies or biotech companies. But there has been a dramatic increase in the rate of antibody drugs on the market and in clinical trials," he said. "So if you're looking for a new hope for the biotech industry, that's where it is."

On the other hand, said Haseltine, there is very little hope in small molecule drug discovery. "The future for the next 10 years in that area has already been written because we know what's in the pipeline and we know how long it takes and we know the failure rate," he said.

Indeed, Haseltine noted, "we have provided our partners with hundreds of validated targets. "But neither they nor other companies have yet used one of these targets to support an IND filing. That is my biggest disappointment. They find a lead, but fail to find a drug with the right absorption, metabolism, specificity and elimination profile."

Thus, he said, there's a great deal of work going into a low-yield area, whereas "a great opportunity is not being used to full capacity. We've got 14,000 secretory genes - these are the antibody targets, receptors, hormones, one half of the small molecule targets. The opportunity is enormous."

Mike Powell of venture capital firm Sofinnova, who was previously group leader of pharma R&D at Genentech Inc. (DNA, South San Francisco, Calif.), thinks that Haseltine is at least half right.

"If you get a small molecule hit, they're very cheap to make, and you make so much more money versus the cost of making an antibody," he said. "But that said, the dropout ratios are different for small molecules versus proteins. A couple of years ago, if you started preclinical studies with a lead compound, the odds of getting a small molecule into Phase I were about 1 in 6, while the odds of getting a protein into Phase I were greater than 50 percent. The odds of getting out of Phase I and into Phase II were 1 in 6 or 1 in 8 for a small molecule, but again for a protein were greater than 50 percent."

Thus, Powell concluded, "if you're willing to live with the stability issues, production costs and QC issues, the odds of success with a protein are greater, but you won't make as much money. And if a small molecule comes along, you'll get hammered."

Mark Levin, chairman and CEO at Millennium (MLNM, Cambridge, Mass.), agreed that the protein and antibody areas are quicker to the clinic and the marketplace, and thus for many biotech companies are a better idea than small molecules.

However, he noted that historically the market size for most drugs given intravenously or intramuscularly is fairly small relative to the numbers big pharma needs. "So small molecules will continue to dominate because of the great need to have multi-billion dollar drugs," he said. "They are the big home runs."


If the jury is still out on the technology revolution, then the financing picture will remain challenging as investors must weigh not only this technology risk but also consider other opportunities across the whole economic spectrum.

As Perseus' Levin noted, institutional investors are faced with complex asset allocation decisions. "The pools of money to invest today are driven by dynamics which have nothing to do with the industry," he said, noting the recent breakup and remarriage of the venture firms Institutional Venture Partners and Brentwood Capital into separate high tech and biotech groups because of the very different funding needs and timelines of each. "Even more important, it's occurring at the level of the public equity funds. The science cannot address that," he said.

"What this is likely to do is lead to new funds such as ours which look at these as private equity plays," said Levin, "a whole new generation of funds that are geared to fill an empty niche."

At the same time, financiers will continue to search for improved ways to make investments, which should directly affect the kinds and shape of companies that are funded.

Sofinnova's Powell noted that early stage investors are trying to lower their risk, and hence lower the odds of failure. "VCs are trying to select things that are further along in development, with more clinical data," he said. "People doing series A investments are going back to the professors and saying those preclinical data look nice - now go get me clinical data, even if it's only in five or six people."

Francesco De Rubertis, a partner at Index Securities S.A. in Geneva, has a similar view. "Preliminary Phase II data will soon become de rigueur for companies seeking equity capital from the larger venture capitalists," he said. "The consequence of this shift in emphasis will mean that platform technology companies such as genomics companies will have to consider merging with companies that have late-stage compounds."

Thus, from an industry structure point of view, the financial imperative may be to begin the company formation process with greater scale than in the past.

Sofinnova, for example, is looking for technologies that other companies have put $50-$60 million into before deciding that the work wasn't in their area of focus. Seattle Genetics, for example, was a spinout of Bristol-Myers Squibb. "They have four or five platforms, with the main one being monoclonals for cancer," said Powell. "BMS decided it didn't want to be in the protein space, and in any case they wanted all their activities on the East Coast. But they had put in about $100 million. Other companies we're talking to have put $20 or $30 million in. We think that's a good model."

Similarly, Stan Fleming of Forward Ventures argued that VCs can achieve returns in three to five years if they are willing to shepherd companies further along in development, up to the $500 million market cap stage if necessary.

These models point to designing startups from inception to be folded into existing companies early on. Under this scenario, small companies would never do IPOs, being sold once they had demonstrated that their product or technology works. Or if they did go public, it would be with a clear trade sale exit.

In the meantime, companies with clear long term, large cap potential would be supported longer by private equity investors before going to the public equity markets.

"What you are not going to see is money going into private companies that plan to go public before they have achieved substantial revenues," said Index Securities partner David Rimer. "The time for biotech companies to go public will be when they are more mature than they have been in the past. They will graduate from being small private companies into public mid-cap."

Finally, Panem notes a change in who is doing the financing. "Sustainable finance speaks to the question of who is providing capital," she said. "Insofar as the large pharma industry is not going away, is avaricious for new products, and wants to stretch its R&D dollar, I think you'll see more business development guys sitting on company boards. That's a commitment to the industry and to innovation that's more long term than any financial pool of capital. That will change the dynamics of the industry, because an increasing proportion of the capital will be from strategic rather than financial sources."

To monitor whether such a shift in financing is real, she advised looking at two metrics: first the proportion of money going into health care private equity funds that is from corporate treasuries; and second looking at the percentage of direct funding that is from corporate rather than financial sources.

Corporate need

The prospect of strategic investment provides a reminder that, in the end, the structure of the industry will be set by the winners, and the winners will pick the winning technologies. This is simply because the best choices can't be made at the early end because the technologies are too new. Instead, the best choices are made later by people who know exactly what they need.

According to MLNM's Levin, "the bigger companies are the ultimate arbiters of what becomes successful. We're doing dozens of alliances with tool companies. We do a bottleneck analysis on gene to patient - the steps that are blocking productivity. Big pharma is thinking the same exact way. The tools that they choose will really determine the future successful Tier 1 and Tier 2 toolkit companies. If they've got a great idea, in short order they will have a lot of alliances. If in two years there are no customers, there's no company."

He added that changes in big pharma will be a key determinant of the industry's appearance in five years.

"Pharma is headed to outsourcing marketing, clinical trials, pharmacology, chemistry, tools," he said. "It's as if big pharma sits on top of this bank and outsources a lot of these things. And by outsourcing, they're taking a much larger role in financing biotech companies. A lot of pharma companies are making a lot of their decisions based on EVA - economic value added - and that's driving a lot of company startups in chemistry, software, bioinformatics."

Changes at Pharmacia & Upjohn illustrate the point. Of the company's $1 billion budget for pharmaceutical R&D, about $150 million a year is spent on partnered projects, including around $60 million from P&U's $300 million early discovery budget.

"We used to spend about 4 percent of our discovery budget on outside research projects three to four years ago - now that figure has moved to 20 percent and it may move higher," said CEO Fred Hassan. He added that while most of the rest of the pharma industry spends less than 20 percent of its discovery budget externally, the upward trend is typical of where the industry is going.

The pipeline model

The obvious question, then, is where do the winning technologies reside? Looking at the actual rate of corporate formation and consolidation, one can argue that the win-lose decision is made when a company enters the mid-cap group.

Arrival in the mid-cap group, typically through the completion of late-stage clinical trials, in large part culminates the efforts of a smaller cap company to validate its technology, and provides the visibility that investors need to leverage their bets.

One also can argue that the mid-cap stage clearly is no more than a way station. Companies either grow through it rapidly, are acquired/merged, or stall and fall back to earth.

Since 1995, the group of small cap public companies (under $300 million) has actually grown by 60 percent from 186 companies to 297, although it peaked in 1997 at 322 and has shrunk 8 percent since then (see The Industry Pipeline, A1).

The mid-cap group ($300-$800 million) has gone through a similar cycle, starting at 29 companies in 1995, peaking at 53 in 1997 and numbering 37 today.

In contrast, the group of large companies (above $800 million) has grown steadily from 17 in 1995 to 29 this year (71 percent), although Alza Corp. and Centocor Inc. are poised to exit via acquisition, following on the heels of Agouron Pharmaceuticals Inc. and DeKalb Genetics Corp.

The question is what will happen to these groups over the next few years.

Last year, "Back to Basics" argued that to be sustainable, companies must have longitudinally complete pipelines, with multiple products at various stages of development from Phase III back to preclinical, and with a sufficient number of programs to accommodate the inviolate rate of product failures.

Much the same can be said for the industry as a whole. Some significant percentage of companies will fail or be acquired at every stage of development. In particular, there is broad agreement that a high number of public companies currently in the small cap group will disappear over the next few years.

If the industry is not to shrink substantially, this small cap pool will have to be replenished by up-and-comers from the private companies. And even if the small cap group shrinks permanently, there will remain the need to replenish the mid-cap pool, perhaps as more robustly funded private companies leapfrog the public small-cap stage and head straight to mid-cap status.

In any case, any gaps in this feeder system will have implications for the growth of the top tier group, and the biotech sector's ability to replace its large cap winners if they are acquired by big pharma.

The flow of companies in and out of the mid-cap group provides a good illustration.

Of 93 companies that had market caps of $300-$800 million at some point in the 1995-99 period, 20 percent (19 companies) joined the top tier by increasing their market cap, and a further 3 companies - all with already-approved products - exited via acquisition (see A Midcap Scorecard, A9)

But 34 companies were demoted to small cap status, and the mid-cap group has contracted since 1997, begging the question of whether the rate of entry into the top tier will subside until the feeder system restores the mid-cap population.

One way of assessing the prospects for continued tier jumping is to consider company product pipelines. There are at least 157 products in Phase III or II/III trials by public companies (see Phase III Pipeline, above). Of these, 92 are being developed by 80 companies with market caps under $300 million. If half were to succeed, 40 companies would be candidates to move into the mid-cap group. And 20 companies still could move up if the success rate were only 25 percent.

Moreover, this doesn't include the 22 private companies with 23 products in Phase III or II/III.

In addition, 17 of these late-stage products are being developed by 15 companies in the mid-cap group. Again, if half were to succeed - and here the odds might be made more confidently on the grounds that the mid-cap companies have more experience - another 8 companies could have the opportunity to move into the large cap group.

A second way to consider the industry pipeline is to look at venture funding. While the opinion is widespread that funding for private companies is shrinking, the actual numbers tell the opposite story (see Venture Pipeline, adjacent). The size of the average venture round actually has increased by 16 percent from 1994 to the present, from $8.6 million to $10 million, while the total annual venture funding has risen dramatically from $437.8 million to almost $1.1 billion so far this year (144 percent).

Sofinnova's Powell noted that for the private companies, "if the price is right, there's enough private money out there that they should be able to go along until they're self-sustaining," he said.

Thus by several metrics, the pipeline looks healthier than industry watchers usually give it credit for.

It is true that 118 of the 203 companies with market caps under $100 million also have less than $10 million in cash. But weeding out this group might serve a positive purpose by strengthening as well as diminishing the size of the small cap group. Investors then might find it easier to supply sufficient capital to companies as they pass through the small cap stage.

As noted by Jeremy Curnock Cook, chief executive at Merlin Ventures and formerly head of the Rothschild Bioscience Unit, "I suspect the first thing that has to happen is to tidy up what we have already. That will revitalize the interest of the investment community at all levels."

Similarly, Forward Ventures' Fleming believes that while the number of mid-cap companies may be an indicator of sector sustainability, the strength of those companies may be more important in attracting investment into the group. "To have a viable and sustainable bioventure community, you don't need hundreds of companies in that mid-tier range," he said. "You need quality companies that are creating value for their shareholders that their shareholders can take to the bank."

Fleming noted that the number of biotech companies tends to outrun the sophisticated investors, so financiers (and cash) are spread too thinly across the mid-tier companies. "The key is to grow the number of potential investors, so fewer companies in that space is a potentially positive development," Fleming said.

Getting to mid-cap

Although any discussion of new technology tends to dwell on discovery tools, MLNM's Mark Levin thinks that having products is one of the keys to moving from the small cap group to the mid-caps and beyond.

"We've approached the issue of growing up and out of the mid-cap group by putting in place a very broad platform on the technology side and the capability of working on multiple diseases with multiple products," he said. "When we started in 1993 we focused on genes and targets. In 1995 we added chemistry with our acquisition of ChemGenics. Then we added biotherapeutics and predictive medicine, then plants, then therapeutics. This year or early next year we'll move into the clinic, and next year we will move into products on the predictive medicine side. You don't bet the company on a single product."

Elizabeth Greetham, CFO of DrugAbuse Sciences Inc. (Menlo Park, Calif.) and for many years a buyside fund manager at Weiss, Peck & Greer, sees sustainability coming from a fairly straightforward formula. "When you look to a $300 to $800 million company, you have to look at revenues. But you've also got to have a visible pipeline," she said. "You have to have enough visibility and breadth in Phase I and Phase II to know that of every four products only one will make it. That's what we haven't funded."

Extrapolating to the big picture, she sees sector sustainability coming from consolidation, most importantly to allow risk reduction by elimination of projects that are less likely to lead to products.

Nevertheless, Rathmann doesn't see an overall change in the aggregate number of companies. "You might have merged 400 companies, but you might have formed 400," he said. "So it will be steady-state by the numbers - but that doesn't mean you haven't had a lot of change."

Mark Levin, for example, thinks that many of the public companies with market caps under $300 million will disappear.

"A lot of these companies have been around five or 10 or 15 years and in general are not up-and-coming stars. In general they have less than one or one-and-a-half years of cash," he said. "The smaller funds that used to invest in them have gone away, or are tired. So we'll see a higher mortality rate or acquisition rate over the next couple of years than we've ever seen before, and they will be replaced by up-and-coming companies in tune with what pharma is looking for based on its restructuring."

Levin thus foresees that since big pharma will continue to outsource more money, this will stabilize a group of service companies. "They may not become big companies, but they will be stable, viable businesses," he said. "So biotech will have a new group of more stable small cap companies that the investment community will like a lot more because they are stable and they will be EPS-driven much earlier."

In this group, as well as among the private companies, Perseus's Jeremy Levin thinks that in five years "all companies will be generating revenues, whether from products or reagents. The question is whether they will be profitable enough to sustain their own R&D."

In fact, many private companies with no visible source of funding other than OPM (other people's money) will not survive. According to Sofinnova's Powell, "The private companies without products, i.e., the toolkit companies, will get bought for very cheap prices. Those that have real products - the lucky toolkit companies or the product companies - some of those will be mid-cap companies."

Cramer notes that the small cap dilemma will be especially acute in Europe. "Unfortunately, companies are still being formed using the old model," he said. "In Germany, because money is not an issue, companies are being formed around narrow platforms or single project ideas. And with European unemployment levels still causing concern, governments will be looking at ways for creating jobs and may wish to emulate what Germany has achieved through its BioRegio program. I expect France, Italy and Spain to look at taking similar initiatives. Consequently, Europe will retain a high number of small cap private companies."

Moving up the food chain, most observers expect the mid-cap and large cap groups to grow, based on the entry of companies with a strong product focus. But unlike in the past, Mark Levin said, "they won't be basing the company on a single product, but will bring multiple products forward, and as they get their hits they will become big cap companies."

At that point, according to BancBoston Robertson, Stephens banker Mark Simon, a sustainable group of large cap companies may serve to consolidate both science and business in the sector. "You have to remember that the whole biotech industry has a market cap of around $150 billion total - that's still less than Merck," he said. "And the biotech industry has more than 350 products in the clinic. It's tough to talk about biotech as an industry since it's so fragmented."

Simon also sees continued consolidation as more or less inevitable in big pharma. He noted that the top five companies (Novartis, Merck, Glaxo, Pfizer and Bristol-Myers) total only 20 percent of the global market, while the top 10 total only 36 percent. Thus he predicted increasing partnerships wherein biotech companies take products as far as possible and then partner with a larger infrastructure.

In five years, Simon said, he expects three to four pharma companies each to have 10 percent of the global market.

But beyond market consolidation, Sean Lance, chairman and CEO of Chiron Corp. (CHIR, Emeryville, Calif.) and formerly COO of Glaxo Wellcome, suggested that the mergers of the future will combine discovery and development companies. "The way forward might depend on mergers, but not in the same way as before with similarly structured companies," he said.

"Big pharma's answer to the economic challenge has been merging, which satisfies short-term objectives - you can save $10 billion easily. But that's a three- to four-year thing. There's no doubt that mega-mergers have not shown a strategic advantage - the companies that surged ahead were companies that didn't merge," Lance said.

"I think the ability to innovate gets suppressed by these large mega-mergers," he added. "Maybe that's why biotech has a right to exist economically - because of the innovative, entrepreneurial flair that's needed."

According to De Rubertis at Index Securities, the data support Lance's theme. "The proportion of new chemical entities launched in the past five years coming from biotechs has increased from 11 percent in 1994 to 35 percent in 1998," he said. "Going forward pharma companies' reliance on biotech products will continue to grow as the biotech sector generates more compounds based on its understanding of cellular processes."

The aging process

Blending the data and prognostications, one can argue that maturation, rather than sea change, will shape the face of the biotech industry over the next few years:

There will be a healthier group of more substantial private companies in the U.S., although the European group still will be working its way through the formation of too many narrowly based companies.

The existing group of small cap public companies will have contracted, and more companies will populate the mid-cap and large cap spheres.

But while many of the names will change, the aggregate number of public and private companies is unlikely to shrink much, as new names replace those that disappear.

In this setting, startups will benefit as financiers develop a more precise understanding of the investment resources required to reach an early trade sale, enabling investors to balance portfolio risk with multiple exit strategies.

Meanwhile, both managers and investors will be reaching a consensus on the key success factors for driving companies into the mid-cap group and subsequently up into the top tier. Companies will miss these benchmarks at their own peril.

At the same time, the top tier and mid-cap companies will remain under pressure to achieve the financial leverage required to accumulate winning technologies. Indeed, the ultimate complexion of the industry's top tier will be determined by the ability of biotech's leading names to manage earnings and build scale simultaneously.

Finally, the fundamental need to take risk in exchange for big rewards will remain - even if it is somewhat mitigated by greater knowledge of genetics and biology.

On this score, long-time investors such as Curnock Cook don't even want to see too much change.

"Do I think we will see a different industry? In many respects I hope not," he said. "It is essential that any new model for the biotech industry does not remove one of the key components that has driven the sector, and that is the element of risk taking. By taking risk there is a chance of generating a ten times return. The absence of risk will result in boring companies that might not attract investment in the first place."