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By Salvatore Salamone

April 7, 2002 | Fresh from their pounding by poor investments, investors and venture capitalists are eyeing the life sciences and opening their wallets.

But beware. Although biotech and genomics research companies are today’s darlings, the VC community’s funds could go elsewhere if financial returns are not realized quickly.

Last year, the investment industry, like most, took a mid-year dive because of poor economic conditions. However, 2001 was still a strong year overall in that about $12.9 billion was invested in the biotech sector, according to Burrill & Company, a San Francisco life sciences merchant bank.

Most importantly, there was a pickup in investments at the end of the year. In fact, the fourth quarter saw investors pumping $4.6 billion into biotech companies, more than double the $2.2 billion third quarter investments, according to Burrill. Additionally, investors returned to biotech stocks in the last quarter. The cumulative market cap for the industry reached $366 billion by year’s end, up 20 percent from the $305 billion at the end of September.

“The venture capital community has again developed an appetite for life sciences deals,” says G. Steven Burrill, CEO of Burrill & Company. He notes that there are “billions earmarked by VCs” for biotech this year.

The kinds of companies that are getting funding are all over the map, however.

Within the biotechnology market, certain segments seem to be stronger than others. Several financial analyst firms expect strong interest in companies that improve and speed the drug discovery process, but not as much interest in straight bioinformatics companies or pure research companies.

At Applied Genomic Technology Capital Funds (AGTCF), for example, 58 percent of the company plans it reviewed in the past two years were focused on enabling technologies such as microarrays and sequencing tools, 28 percent were for target and drug discovery, and 14 percent were for information products. AGTCF expects to review a similar mix this year.

Other observers say funding information management firms will be a high priority. For instance, Decision Resources Inc. predicts there will be a big need for IT to store, sort, and analyze all of the data from drug discovery and other forms of research. This growing demand for IT seems substantiated by life-science equipment spending forecasts from market research firm International Data Corp.

IDC predicts life science companies will increase spending on storage systems from $2.9 billion in 2001 to $11.8 billion in 2006, a compounded annual growth rate of 32 percent. And similarly, life science spending on software to help analyze the large volumes of data collected will grow from $2.7 billion in 2001 to $6.7 billion in 2006 (a 20 percent compounded annual growth rate).

Others concur with these trends. “The market for life sciences software will accelerate at a dramatic pace in the next few years,” says Judith Hurwitz, principal at the biotech consultancy CycleBridge Technologies.

She says there will be strong demand for software that automates the ability to model and screen data garnered from experiments during the drug discovery process. A second important area is software aimed at the business side -- software that helps manage clinical trials and the FDA reporting processes.

For many pharmaceutical companies, this latter area is a mess right now. “The situation is ridiculous. We’ve got large numbers of people working on many different devices all trying to get at data stored in all sorts of formats,” says Robert Evans, a research manager from company not wishing to be identified.

Evans says that collaboration tools are highly sought after today. Hurwitz agrees and predicts that knowledge management products that meld the discovery process and business operations will represent the third major software area for life sciences.

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