The IPO window that opened exactly one year ago has given birth to many publicly held companies that are promising to provide value from the genetic code, as well as more traditional product-oriented companies. In the past 12 months, 55 U.S. companies have gone public, raising $5.3 billion, while 24 European companies have raised $1.8 billion in IPOs. This sheer proliferation raises the question of whether the market can continue to feed all of these mouths until they turn the corner on profitability.

But industry players aren't too concerned with oversupply because in their eyes the demand for biotechnology investments - both on the primary and secondary markets - has never been stronger.

Daniel Richner, senior investment officer responsible for Lombard Odier's Immunology Fund, believes the market can sustain the new companies because of the vast amounts of capital looking for emerging sectors. And he rates biotech as the favored son as internet and e-commerce plays lose steam. "Biotech is not just a big bubble into which you invest money," Richner said. "A lot of companies have gone from bench to market and now there are a lot of biotech products and technologies on the market. There is so much money out there, that it has to find its way into emerging sectors like biotech."

In fact, despite the rotation from tech to biotech that began last fall, Richner still calculates that institutional investors are underweighted in biotech, and expects more capital to rotate in from spaces like e-commerce and information technology.

Richner also sees a shift of money and momentum from the old health care economy (pharma) to the new health care economy (biotechnology). "The real innovations are coming from the biotechnology sector. Large pharma has a lot of me-too products and faces generic pressure, and for biotech that's not the case because many of the new products are immune to pricing pressures," he said.

To illustrate his point, Richner noted that biotech is having a great year compared to most of the big cap pharma stocks, which have been flat. Through the end of the third quarter, the BioCentury London index has soared 108 percent, while the BioCentury 100 is up 71 percent and the AMEX Pharmaceutical Index (DRG) is up 18 percent.

Xavier D'Ornellas, fund manager for Mercure Pharmacie and Mercure Biotech, also sees rotation from big pharma into biotech as some old-line companies post disappointing top line growth.

In fact, biotech appears to be one of the few places to make money these days: the NASDAQ Composite, The Dow Jones Industrials, the S&P 500 are all under water this year (see "Index Performance", A1).

Chasing returns

Hoping to capitalize on this performance, new money is coming into the sector through the creation of new funds dedicated to biotech and via the entry of non-core investors.