WASHINGTON - As biotech emerges from the wreckage of what G. Steven Burrill calls the "Sam and Martha sideshow," and as uncertainties over war in Iraq, the new requirements of financial reporting and devalued market capitalizations continue to plaque the industry, there is only one direction left for the industry to go: up.

"The returns for us are in the future, not in the past," said a very positive Burrill, the CEO of San Francisco-based Burrill & Co.

Burrill presented findings from his most recent annual biotechnology industry report and offered his predictions for the future at a couple different workshop sessions last week at the Biotechnology Industry Organization's annual convention held at the Washington Convention Center.

Alongside him, analysts and another venture capitalist also shared their views of how the industry will reinvent itself in the wake of corporate scandals and the resulting Sarbanes-Oxley legislation, which requires new rules for financial reporting to the SEC.

First, Burrill reviewed the positive things that happened in 2002. The top 10 biotech companies, for instance, had revenue growth of 28 percent. A total of 26 new biotech drugs were approved, and Mark McClellan was appointed as the new FDA commissioner. McClellan spoke at the convention's plenary luncheon Monday, following President Bush, and promised to reduce FDA review times by 10 percent within a year, reducing costs for individual companies by $12 million for each drug.

Other positives for the industry include the $10.4 billion raised in the capital markets in 2002, compared to $11.9 billion raised in 2001. Also, the industry saw $7.5 billion in partnering deals last year, equal to 2001 levels. Then, there's bioterrorism.

"As ugly as that is for society, it's very positive for biotechnology," Burrill said.

President Bush in his speech Monday at BIO 2003 reiterated his proposed Project BioShield in which the government would spend $6 billion over the next 10 years to develop vaccines and treatments against bioterrorism threats such as smallpox and anthrax. Beneficiaries of such a package would be companies like Acambis plc and Baxter BioScience, which have a $428 million contract for smallpox vaccines.

But just as many negative things happened for the industry in 2002, starting with the ImClone Systems Inc. debacle. The company lost 75 percent of its value in one month when its Phase III cancer product failed and company CEO Samuel Waksal was indicted and later convicted and sentenced to jail for insider trading. His friend, television's homemaker Martha Stewart, also was recently indicted for selling her ImClone stock the day before the Erbitux failure was announced. Following the scandal, the company's market cap fell from more than $500 billion to $681 million, and it became responsible for changing the value paradigm, Burrill said.

"The big change today," Burrill said, "is investors aren't listening to Trust me, this stuff is going to be great.' They're going to buy approved drugs once the development and regulatory risk is eliminated. That's the big shift after 30 years.

"What drove the industry for 30 years is we had an investment banking community that was on our side. Those guys are all gone."

Eric Roberts, managing director of Lehman Brothers Inc. in New York, agreed with Burrill that investors will be less risky in their investments.

"It's going to take companies with real clinical data to get investors to take the risk," he said, "because the reward is so high and tangible."

The Enron and WorldCom corporate scandals, and Ireland's Elan Corp. plc losing 69 percent of its value in the first quarter of 2002, certainly didn't help matters for the industry.

Dennis Purcell, senior managing partner at the New York-based Perseus-Soros BioPharmaceutical Fund, said new pricing rules will make sure the big stock price pops of 2000 won't happen again. "We're not going to see a company go out, price a deal at $10, then go to $15," he said. "It will be a more orderly process in terms of after-market performance."

While biotech's market cap declined in 2002, the industry's intrinsic value continued to climb, Burrill said, creating the widest gap in history between the two. Value was up because of the revenue growth among the top 10 biotech companies, the 35 new drug and vaccine approvals for new indications, more mature management teams and a pipeline of 350 potential products in the clinic or awaiting approval. Market caps fell because of the bear market and the recession.

In the first half of 2003, however, the uncertainty over war in Iraq diminished, the biotech industry market cap rose 15 percent and some key products were approved, including Genzyme General's Fabrazyme, Biogen Inc.'s Amevive, Trimeris Inc.'s Fuzeon and Millennium Pharmaceuticals Inc.'s Velcade.

Industry-wide, as of Dec. 31, 2002, biotech had a market cap of $224 billion in the U.S., compared to $25 billion in Europe and $17 billion in Canada.

Notably, Pfizer Inc., after completing its merger with Pharmacia Corp., had a market cap of $254 billion, and Merck & Co. Inc. had a market cap of $132 billion.

Burrill argued that an investor would be better off owning the whole biotech industry than one or two pharmaceutical companies. The biotech industry has 130 drugs on the market and 350 in the clinic or pending approval, while Pfizer and Merck combined have 35 products on the market and 70 in the clinic.

Also in 2002, there were only three biotech initial public offerings - ZymoGenetics Inc., Ribapharm Inc. and DOV Pharmaceutical Inc. Of those genomics and proteomics companies that went public in 2000, their share prices were down by 48 percent since their IPOs and they were down 81 percent from their high.

Purcell said there is only one biotech company that is public today that hasn't traded below its IPO price: Genentech Inc.

As for achieving the same success of that one company, Burrill said, "There is no magic formula. It took the Genentechs six to 10 years to go public, 15 years to become profitable. People forget all that."

At least 25 companies had staff cuts during 2002, cutting anywhere from 15 jobs at Organogenesis Inc. to 539 jobs at Exelixis Inc. and 400 jobs at Applied Biosystems Inc.

Four companies, including the aforementioned Organogenesis, filed for Chapter 11 reorganization, while another six companies filed for Chapter 7 liquidation. And 17 companies, including Advanced Tissue Sciences Inc. and Interleukin Genetics Inc., were delisted from major exchanges in 2002.

Burrill's report also says that 69 percent of public biotech companies in the last year have traded below $5, meaning many brokerages will not provide coverage for them.

For the second half of 2003, however, Burrill remains optimistic, expecting 10 to 12 IPOs, another $15 billion to $20 billion raised and an increase in partnering and consolidations, as well as more FDA approvals.

He also expects personalized medicine to come to the forefront. Asia will become more active in the world's biotech community, and the pressures regarding cloning, stem cells and genetically modified organisms will ease a bit. And, of course, the threat of bioterrorism will bring more money into the industry.