Bio Brouhaha

With the decline in the fortunes of the Internet and much of the rest of the tech sector, and with the coinciding advances in biological research and development, many people are investing their funds and their faith in the biosciences. The danger is a repeat of the hype that surrounded Internet companies, which may result in similar overvaluations and careless investments as that which ultimately caused the Internet bubble to burst. Informed realism should be a guiding principle in this new cycle.

Indeed, the popularity of the biosciences sector operates independently from the rest of the tech sector. For much of the mid to late 90's, when tech stocks surged, bioscience stocks (and startup activity) achieved only modest growth and, for the most part, failed to gain the public eye. Now that tech investments are volatile at best and much below their recent highs, bioscience investing has become a fashionable venture capital investment. Southern California venture capital investments in the biosciences reached $280 million in 2000, an improvement over the $250 million invested in 1998, and the $190 million invested in 1999. The Medical Products Index (made up of Medical Supplies and Advanced Medical Devices) is up 170% over its valuation five years ago. The Pharmaceuticals and Biotechnology Index is up 120% from its position five years ago. The two indices experienced their five-year highs in December of 2000, when they were up 210% and 125% respectively. To be sure, the Human Genome Project, begun in the early 1990s and gaining public recognition throughout the decade, was a major force in encouraging investment in the biosciences. The far frontiers of bioscience suddenly seemed more accessible; the possibilities of finding specific pathways to certain diseases now seemed more assured. The development of computing (with its power, speed, and adaptability) has, ironically, catalyzed the speed of change and development in the life sciences world.

The biosciences, although more accessible to the public than ever before, are a far more research-intensive and specialized field than many investors and neophytes realize. One should not assume that the sector will follow the trajectory of the rest of the tech industry of the 90's. And even if the sector does achieve even moderate success, there may be much disappointment associated with that success, just as there was with other technology investments.

For one thing, the sector is multidimensional. Within the biosciences are a vast number of highly-specialized sub-fields, such as biotechnology, medical devices, medical supplies, pharmaceuticals, and bioinformatics. Biotechnology, for example, is a very specific term describing processes that identify, alter, or transfer genetic materials that control fundamental characteristics of organisms. Yet many use the term "biotechnology" as a catch-all for everything in the biosciences. This loose language creates an uncertain popular understanding of the general and specific developments within each of the sub-sectors in the field and leads to a blurring of investment priorities and strategies.

Second, the life sciences inherently carry ethical dilemmas and concerns, and regulation is both necessary and continuing (despite accelerated approvals of some drugs and devices). Indeed, the furor over cloning technologies (and increasing scrutiny by ordinary consumers of bioengineering techniques and applications) makes the future direction of regulation in this field hard to predict or control. Unlike the headlong rush to market that was experienced during the years of the Internet craze, strict FDA regulations, uncertainty, and long research cycles naturally lead to a more tenuous and unpredictable march to market.

Third, despite the continued growth of the bioscience industry and the technological developments that are advancing the field's growth, the biosciences remain a very specialized field, one that requires much longer-term perspectives and strong relationships with the research community that take a lifetime of cultivation. Time frames may shorten, but the biosciences will never be on "Internet time." Unfortunately, old habits die hard, and the popular expectation of huge valuations and huge returns is based, in part, on the expectation of quick market entry and penetration (or the appearance of quickness).

Ultimately, the lesson looming on the bioscience horizon is that cautious, steady growth and careful investment can realize great potential within the industry. For example, in the medical device sector, a variety of conditions (from blocked artery to sputtering pancreas) are being cured by innovative and novel devices from a variety of companies all over the country. From January 2000 through April 2001, Southern California received more pre-market approvals for medical devices than the Bay Area and the San Diego region combined. In Southern California, there has long been an active cluster of companies creating everything from blood packs to catheters, from instrumentation to software. In fact, in 1999, Southern California boasted 64,700 bioscience employees and 2,090 bioscience establishments. This compares to only 64,200 employees in the Bay Area and 23,000 in San Diego. Amgen, in Thousand Oaks, has long been the world's largest biotechnology company, and has grown its own oasis; some positive ripple effects are starting to be felt throughout the region now. San Diego has mushroomed as a focal point for biotechnology and pharmaceuticals, both at the research and the development levels. The Bay Area boasts the largest concentration of biotechnology companies in the country, estimated at over 200 by Ernst & Young. The Bay Area witnessed 96 mergers and acquisitions in the biosciences in the year 2000, compared to 68 in Southern California and 64 in San Diego. If companies in the region are truly able to capitalize upon the scientists, facilities, networks, and the smart investment dollars available to them, they will help push forward the bioscience industry towards a successful future.

These ideas, and an examination and analysis of the industry and its presence in Southern California, are the subject of larta's upcoming report, Heart of Gold: The Bioscience Industry in Southern California, and the subject of this week's LA VOX. Enjoy!

by Rohit K. Shukla CEO, larta K. Lynn Farris, larta research associate, and Victor Hwang, larta COO.