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By Tony Strattner

May 15, 2004 | IT entrepreneurs attending the Ernst & Young Venture Summit* got a cold shower of news from Bryan Pearce, leader of the New England Venture Capital Advisory Group at E&Y. Pearce piled on a slew of bleak numbers from industry research that showed a tough 2003: More than 550 IT companies went out of business last year, representing a loss of more than $8 billion in venture capital. Those IT firms lucky enough to survive 2003 by merging or getting bought still failed to provide their initial investors adequate return on capital.

So, not surprisingly, Pearce reported that the number of equity investments in software companies, for example, bottomed out in the third quarter of last year at 128 deals nationwide, representing roughly $700 million invested. Comparing this to a high of 501 deals in the first quarter of 2000, representing more than $5 billion invested, is an indication of how scarce seed money is these days for a software startup.

But entrepreneurs in the biopharma market were treated to much better news: Cumulative venture capital invested in biopharma startups rose by $1.6 billion during 2003, from $11.9 billion to $13.5 billion overall. Of the 487 eligible biopharma companies, Pearce noted that nearly 30 percent were able to raise follow-on financing in 2003. Perhaps unsurprisingly, he cited California and New England as the dominant locations for first-round financing activity, garnering 51 percent of all biopharmas started in the United States last year.

Road Ahead
Jim Golden, vice president of research at Life Science Insights, continued the good-news/bad-news theme for biopharma versus IT. Life Science Insights expects worldwide revenues for biotechnology companies to increase at a compound annual growth rate of nearly 26 percent through 2008. "This isn't surprising," Golden noted, "as many biotech and biopharma companies are just now moving products into the market and generating significant revenue for the first time."

Meanwhile, pharmaceutical industry revenues are expected to increase at a compound annual growth rate of 8.58 percent through 2008. This growth rate is lower than years past for several reasons, according to Golden: Drug companies continue to merge and consolidate and account for capital depreciation from rapid growth; the overall number of blockbuster drugs is declining; and pressure to lower prices is increasing from government buyers and drug importation.

As a result, Life Science Insights forecasts total IT spending by pharma and biotech companies to increase at a compound annual growth rate of only 7 percent in the United States, and 7.5 percent worldwide.

While the life science market opportunity may have shrunk in recent years, Golden was careful to point out that IT and other technology vendors could still compete successfully. "The market is dynamic and highly fragmented," he noted. "The key is for vendors to develop a sophisticated understanding of how their products and services fit into the overall drug-discovery model."

Golden proceeded to segment the life science market by application, and spotlighted particular applications projected to have a "high level of impact" on IT spending inside biotechs and pharmas. High-content screening and clinical trial data management, for example, are two high-impact applications this year because of their requirements for image processing and data storage, respectively.

Systems biology and biomarker discovery/validation are two more areas expected to drive a high level of IT spending, though not until 2005 and 2006, respectively. On the far horizon -- four to seven years out -- are personalized medicine and ultra-high-throughput sequencing.

No 'Killer App'
Indeed, Golden saw personalized medicine as an overarching driver of future IT spending via several enabling sub-applications, including biomarker discovery and validation, pharmacogenomics and toxicogenomics, systems biology, and molecular diagnostics.

"Technology vendors have an opportunity to play a leadership role in creating data standards and methods for data integration," he said. "They can also form important relationships with regulatory agencies to provide knowledge and products that otherwise might be cost-prohibitive."

He cited the example of informatics vendors currently providing free training to the FDA in order to ensure that discoveries made using their technologies could gain regulatory acceptance and that agency reviewers and private researchers would reach similar conclusions when reviewing the data.

Finally, technology vendors should abandon quixotic hopes of creating "the killer app" -- a given technology that will enjoy industrywide implementation. "That definitely does not exist," Golden said, "and probably never will."

*Ernst & Young Venture Summit, Health-IT World Conference + Expo, March 30.


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