To survive in tough economic times, a biotech company often needs two things: cash and the ability to reach money and markets overseas.

The industry is growing dramatically outside of the U.S., predominantly in Europe and Asia. And with the frail public markets, biotech officials would be wise to set their sights on other parts of the world where foreign venture capitalists invest large sums and where regulatory approvals are not such a challenge to attain.

"Clearly, biotech has come of age and it's a global industry," said Mike Hildreth, biotechnology sector leader for Ernst & Young in Palo Alto, Calif. "You've got well over 4,000 companies around the world."

Ernst & Young recently put a global biotechnology report titled Beyond Borders. The report found that venture capital financing, in the U.S. and abroad, helped to stimulate the growth of the global biotech industry in 2001. The venture capitalists filled the gap left by a closed public market window.

But aside from venture capitalists, domestic biotech companies have looked toward mergers and acquisitions, as well as partnerships, with budding and established European and Asian biotech companies in order to take advantage of global markets.

The best science and talent, as well as large sums of money, are everywhere around the world, and many domestic biotech companies are taking advantage of the opportunities.

Growth in overseas nations can be attributed to a variety of things, including a competitive, free-market economy, and a system of strong protection for intellectual property. If a nation has academic and governmental support, as well as a public regulatory system that fosters confidence in the safety and efficacy of new products, it helps to fuel the industry's growth.

There were more than 480 collaborations between biotech and pharmaceutical companies in 2001. As for collaborations between biotech companies, there were 550. The trend is allowing biotech companies to reach critical mass and to remain independent with cross-border alliances and mergers and acquisitions, as well as spin-offs.

Beyond-border mergers and acquisitions in 2001 included Sequenom Inc.'s merger with the UK's Gemini Genomics plc, as well as Germany-based LION bioscience AG's acquisition of Trega Biosciences Inc. This independence has allowed biotech companies to negotiate better deals with pharmaceutical companies, many of which have limited pipelines and blockbuster drugs that are coming off patent, the report says.

In the U.S., biotech companies currently have more than 300 products in Phase III trials.

But despite the positive outlook for some potential products, certain challenges with drug pricing, global patent protection and public policy on stem cell research and cloning hinder industry growth. So does the slowdown in product approvals in 2001, due partly to a lack of an FDA commissioner, a job recently given to Mark McClellan.

"McClellan should reverse the trends of slowdown for biotech product approvals," Hildreth told BioWorld Financial Watch, adding that there will be a "pretty rosy future in the medium to longer term for the industry."

It's the next year or two that will be a challenge, especially for companies that are in the middle of their development cycle, he said. Investors seem to be looking at early stage and late-stage companies to fund, Hildreth said.

U.S. venture capitalists poured almost $2.4 billion into privately held biotech companies in 2001, with most of that - 72 percent - being invested in late financing rounds.

For 2003 and later, Ernst & Young predicts there will be larger investments, as well as increased global competition. "Given the amount of money the funds have raised, it's likely that those funds will look to make larger investments," Hildreth said.

Unavoidably, some companies will be squeezed out of business, he added. For example, about 1,775 biotech companies in Europe will at some point be seeking additional funding in the coming years. "It's unlikely that the public and private markets combined with strategic alliances are going to be able to fund all 1,775 companies," Hildreth said. "So you'll see some companies merge and others that will sell the assets they can and move on."

Hildreth said biotech industry officials will begin looking at more creative financing ideas, such as collaborations and mergers, rather than just venture capitalists to fund their research and development in the coming years.

Ernst & Young's report says that the next five years will be challenging for biotech companies until the public begins to see the fruits of recent advances. Company officials will need to tighten spending and prepare for the possibility they may not be able to raise more money for awhile, or they will need to speed up development in order to hit milestones and maintain the interest of investors.

"Ten years ago we were saying the exact same thing. Then the public markets recovered and everyone went public," Hildreth said. "If I had the crystal ball I wouldn't be doing this. I'd be investing in these companies.

"What's concerning me a little bit is, at least in the U.S., it would appear that venture capital funding has slowed down dramatically in the recently completed third quarter of this year," Hildreth said.

The funding dropped to below $500 million, but Hildreth said he has to wait and see if it's a trend or not.

The report also predicts that by 2005 the European biotech market could double from current valuations to more than $100 billion.

"With the efforts of the European evaluation agency, for companies anywhere in the world, they can access markets that are almost as big as U.S. markets in an efficient manner," Hildreth said.

Global agricultural biotech also seems to be a fast-growing segment of the industry. There were more than 50 million hectares of transgenic crops in 2001 compared to zero in 1995.

The global biotech industry has 4,284 companies in 25 nations. The industry is emerging quickly in the Asia/Pacific region, especially in Australia, China, India and Singapore. The region is home to more than 500 biotech companies.

The U.S. retained its leadership position in 2001 with 55 percent of the world's publicly traded biotech companies and 72 percent of global revenues. Europe, however, holds the lead for the number of privately held companies with 48 percent.

Within the U.S., New England and the San Francisco Bay area continue to be the two top hot spots for the biotech industry, but other areas - particularly those with academic research facilities and top colleges and universities that offer biotech degrees - are gaining ground. The Pennsylvania/Delaware Valley region saw the greatest influx of new biotech companies in 2001, rising to 71 companies compared to 50 the year before. New England is home to 252 biotech companies, and San Francisco has 226.

In Europe, Germany and the UK are the top two for housing biotech companies. Australia and Korea have the most biotech companies in the Asia/Pacific region.