Emerging industry to see explosive growth in variety of fields
Tom Abate / SF Chronicle 30oct00
This state-of-the-industry report, compiled by consulting firm Ernst & Young, will be released at a biotech conference in San Diego. The 86-page document naturally celebrates the meteoric rise of biotech stocks which have made the industry, at least for now, a Wall Street darling.
But E&Y consultant Scott Morrison said the real excitement in the report stems from the growing conviction that biotech has the potential to be the defining industry during the decades ahead, just as technology has been the dominant force of the last quarter century.
``If you look at history, and you see what happened when we made the transition from the agricultural era to the industrial age, and from the industrial age to the information age, this period has all the earmarks of being another big shift,'' Morrison said.
All this big talk is based on something infinitesimal: the molecule, a group of atoms with a specific structure and purpose.
Of course, the molecule of greatest interest to biotech has been DNA, the chemical software that spells the difference between sickness and health. During the past 50 years, as scientists have tried to wrestle the secrets of life out of DNA, they've had to develop instruments and techniques to see and touch objects beneath the grasp of the tiniest tweezers.
And while it's great news for drug development and human health that we're getting a handle on DNA, that's just the beginning.
Industrial leaders are coming to realize that the world is chock-full of money-making molecules. Soaps, solvents, alloys, foods -- they're all molecules at heart. And the same tools used to slice and dice DNA are now being used to give these old-economy products a new-economy face-lift.
Two Bay Area biotech firms exemplify this bio-industrial convergence. Symyx and Maxygen went public less than a year ago and already Wall Street values each of them well north of $1 billion -- because investors believe the same molecular manipulations that drive drug discovery will lead to more- profitable manufacture of other industrial chemicals.
``That's why we had outfits like Chevron Ventures at our venture capital meeting last week, and why the Dow Chemicals and DuPonts of this world are asking for our latest report,'' Morrison said.
Biotech is also shaping up as a template for futuristic fields like nanotechnology, the effort to build machines of sub-microscopic size. Much of the E&Y report is organized as a series of conversations between visionaries including Eric Drexler, a leading proponent of nanotechnology, and Stuart Kauffman, a co-founder of the Santa Fe Institute and a guru of complexity theory.
At one point in the report, Drexler and Kauffman suggest that nanomachines will have to be ``self-organizing systems,'' governed by some inner logic. After all, how does one engineer remote-control into a machine one 10- millionth the thickness of a human hair?
And the best examples of self-organizing nanosystems are plants and animals, which are made up of trillions of cells that somehow coordinate their activity in ways science is only beginning to discern.
Just last week, for instance, Wendell Lim, a professor at the University of California at San Francisco, published a paper in the journal Science that begins to explain how cells take in multiple signals to make decisions.
Humans, it turns out, won't have to reinvent the nano-wheel. They will just have to copy it from nature.
Of course, such pie-in-the-sky stuff always sounds more persuasive coming from an industry that's flush. Folks are paying attention to biotech these days for the simple reason that it has become profitable to do so.
``Reversal of fortunes is the theme of this report,'' said Morrison. He described 1997 through 1999 as ``the long biotech winter,'' when Wall Street virtually ignored the sector.
``It was so bad,'' he said, ``that for the first time we saw at least 25 public companies shut their lights and go out of business.''
Beginning somewhere around last November, and feeding on public excitement over the Human Genome Project, Wall Street suddenly became bullish about biotechnology. And though investors would be wise to wonder how long this infatuation will last (see related story, above), there's no argument the last 12 months have been extraordinary.
``We've never seen anything like this before,'' Morrison said. In the last nine months, biotech firms have raised more than $27 billion through IPOs, venture capital, private placements and debt offerings. The previous record was $8.8 billion in 1992-93, Morrison said.
Even adjusting for inflation, the industry is just shy of tripling its previous money-raising record, with a few weeks of trading still left.
Aside from minting some new bio-millionaires, this capital orgy has sown the seeds of a stronger industry in the years ahead, Morrison maintained.
During the biotech winter, when companies were blinking out, conventional wisdom held that biotech firms were nothing more than early development houses for big pharmaceutical companies. If a biotech player happened to hit on a hot drug, its best hope was for big pharma to come in and buy it out.
Now, however, coffers flush with cash, a new crop of biotech firms aspires to bring drugs all the way through development and manufacturing, and perhaps become one of the brand names that populate medicine cabinets. In this category, Morrison put firms like Human Genome Sciences, Abgenix, Cor Therapeutics and Gilead Sciences.
The newcomers might one day join biotech giant Amgen, which has already achieved a size that would seem to ensure its independence.
This year's capital resurgence could even bail some of the larger biotech firms out of corporate limbo. A large chunk of Genentech and Chiron shares are owned by Swiss drug companies. They are independent, but not completely in charge of their own destinies.
The Seattle biotech firm Immunex used to be in the same fix. It once mortgaged a large stake of its shares to American Home Products, and people assumed AHP would eventually swallow Immunex. Today, however it's AHP that needs a cash infusion. It's selling off its Immunex shares and setting the Seattle biotech firm free.
It would be speculative to say Genentech and Chiron might achieve financial independence the same way. But it is noteworthy that a top Swiss investor recently called upon Roche, which owns a majority of Genentech, to sell off its holding while biotech shares are at record highs.
These are just a few thoughts plucked from a long, chart-laden report. Morrison said the full text should be online tomorrow at www.ey.com/industry/health. Check it out.
BIOTECH IPOs BOOM IN NORTHERN CALIFORNIA Amount raised, in millions of dollars, July 1998 to June 2000
Northern-- California $1.17 billion (x) New-- England $595 million Other $434 million Southern-- California $416 million Midwest $158 million Mid--- Atlantic $109 million North-- Carolina $47 million Pacific-- Northwest $45 million (x) Does not include Genentech's $2.1 billion reoffering. . Sources: BioCentury, BioWorld Financial Watch, Ernst & Young Chronicle Graphic
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