Cash Flows Into Biotech

By Unmesh Kher

Venture capitalists, burned in the collapse of digital tech companies over the past year, say the only areas in which they are increasing their investments are security and biotech. That was the conclusion of a recent survey by consultants Deloitte & Touche. Biotech pulled in some $3 billion in VC funding over the first three quarters of this year--a third more than it did in the same period last year, according to the Silicon Valley consultancy Recombinant Capital. A San Diego-based company, Syrrx, even found itself turning investors away early this year after it had raised $55 million in its second round of funding.

Venture firm MPM Capital, of South San Francisco, Calif., raised $600 million for a biotech fund last year and expects to raise another $750 million within the next couple of months. It recently recruited two industry insiders as well as four M.D.s and Ph.D.s, and has 18 other experts focused on biotechnology. Says fund manager Kurt von Emster: "It's one of the few sustainable business models that looks like it's still growing rapidly."

Drug companies Novartis and Johnson & Johnson have set up venture funds to ensure access to the latest technologies. This fall Eli Lilly joined their ranks with a $75 million biotech fund. And IT firms such as IBM and Compaq are getting involved. IBM works in partnership with investment banks like Boston's Oxford Bioscience Partners to provide funds for promising start-ups. Says Carol Kovac, general manager of IBM's life-sciences program: "We see this as the next major scientific revolution for the decade."

Instead of investing in almost anything with "genome" in its name, as VCs seemed to do last year, they are focusing more on established firms. While new technologies and strong patent portfolios are attractive, it's more important for start-ups to show that they can quickly sell a drug or other product--say, a genetically engineered plant.

Individual investors who want to bet on biotech should check with fund expert Morningstar, which ranks SunAmerica Biotech/Health 30 A (YTD: -6.92%) and Orbitex Health & Biotechnology A (-9.7%) as top performing sector mutual funds.

--U.K.