Two things were obvious to anyone paying attention at this year's Chase H&Q Healthcare Conference in San Francisco: the sector is hotter than it has ever been, and there is an emerging group of public companies - generally dismissed a couple of years ago as too early or with pipelines that were too thin - that are suddenly looking pretty respectable. They have compounds nearing commercialization and they have pipelines with enough products to withstand some failures.

Solving the money mystery

While it is sometimes hard to tell exactly who is investing in biotech at any given moment, dedicated biotech investors and companies have been more than usually unsure of exactly where much of the hot money flooding genomics companies and other high-flyers is coming from.

Typical was the comment by David Goeddel, CEO at Tularik Inc. (TLRK, South San Francisco, Calif.). "Stocks are moving a lot on small volume, but I don't know if it's retail or institutions," he said.

Mitch Silber of The Carson Group sees three drivers of the sector. Most important is the entry of new funds within the large institutions. "We're not seeing that many new fund names, but the dynamic within those institutions is what's fueling much of the rise," he said.

"Usually within investment houses, there's an analyst who specializes in biotech investing for the whole house. Now, the other fund managers are going to the biotech analyst and saying 'I need to put money to work in biotech.' The generalist aggressive growth funds and tech funds are all having to put money to work in the sector," he said.

"So it's the same institutions, but it's more of their funds. And these funds have to invest in size because they're much bigger than biotech funds," he added. "Plus, having gone through the internet experience, they're not as tied to valuation metrics. They're willing to buy at any price because they're being compared to other fund managers."

The second piece of the puzzle is retail, he said. "There is a huge retail component that there has never been before in genomics and biotech in general. This has grown since the summer when retail investors transitioned from internet stocks to biotech."

Number three in terms of importance are index investors, according to Silber. "These investors have to chase the performance of indices such as the Russell 2000, so they reinforce buying by the big fund managers," he said.