SINGAPORE, March 8 (UPI) — As a sign of the concern over biotechnology investments, about $3 billion of worldwide mutual fund investments left the biotech sector last year in favor of other investments.

The industry is expected to face further investor skepticism this year, which may lead to a financing crunch. Manish Jain, a pharmaceutical and biotechnology analyst for Merrill Lynch, estimated that in January alone $250 million exited from the sector.

Biotechnology is based on biology, bringing together many sciences and engineering discipline. Its application range from healthcare (therapeutic drugs and vaccine, regenerative medicine) to agriculture (crop plants production and protection).

This industry has been expanding rapidly growing from a market capitalization of about $45 billion in 1994 to over $200 billion last year. The industry is forecast to be worth $1 trillion by 2020.

But at the same time, volatility in international stock markets, as well as failures of new ‘phase 3’ products (when a full fledge trial on the product is conducted), have put pressures on the sector in the last two years.

In 2001, $500 million of U.S. mutual fund investment flew out of the industry and the trend depended in 2002. “2002 was a very difficult year for the industry. This is clearly evident by the lack of companies that could go public,” notes Ben Iversen, director of equity capital markets at Merrill Lynch.

Alan Mendelson, an adviser at Latham & Watkins, believes this year will prove another difficult one.

“2003 is unlikely to be a boom time for U.S. firms, but 2004 could be more appealing,” he told a small group of reporters at a presentation in Singapore.

The legal firm of Latham & Watkins has been counsel in some of the most significant transactions in the biotechnology industry, including representing Amgen in its $16.9 billion acquisition of Immunex Corporation, the largest biotechnology merger ever.

Merrill estimated that about 60 percent of U.S. companies in the sector had less than two years of cash available in their coffers then their burnt rate is taken into consideration. This means some companies will have to seek financing. It can take up to $500 million to develop a product.

“There is a number of companies posed to go public that are in the ‘phase 2-3; with their products,” Iversen noted. Jain was also “cautiously optimistic” for this year, given that several ‘phase 3’ products are expected to come out.

Mendelson said some venture-capital funds were still willing to spend huge sums in the sector. He pointed to New Enterprise Associate, which has $600 million dedicated to life science.

Iversen argued that the financial markets are cyclical for life sciences meant companies that were considering raising funds needed to be well prepared for the upturn. “Typically rallies are measured in terms of months, and drought is terms of years. There are always a few months of frantic activity in financing, but it never last,” he said.

“Many companies are chasing the same (financing) dream, but there is the law of supply and demand,” added Mendelson.

In a recent report, research firm IDC estimated that $50 billion will be injected into the Asia/Pacific life science markets alone from both public and private sources over the next few years.

South Korea is aiming to join the world’s top seven biotechnology powers by 2010; Taiwan is earmarking 3 percent of gross domestic product for life science development; and Singapore wants 20,000 scientists based there by 2005.

Meanwhile, China is also making a concerted effort to raise the standard and profile of its local biotechnology industry.

Iversen also pointed to India, as a country seeing a lot of activity in that sector.

Copyright 2003 by United Press International. All rights reserved.

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