As a target for investors, biotechnology has always had something of a roller-coaster ride. Unattractive in the mid-1980s, the sector bounced back to become the gold rush of the 1990s, alongside the dotcoms.

The bonanza ceased when high company valuations based on promised breakthroughs in new drugs failed to match expectations.

Since then, finding investment has been far more difficult for the biotech companies, especially those with long-term and riskier projects. Backers want less risk and shorter times to market, creating the funding gap, a dearth of cash made worse by the global recession.

According to the latest annual biotechnology report issued by Oxford-based intellectual property firm Marks & Clerk, the depth and virulence of the financial crisis means the funding model for the biotechnology industry will have to change, leading to a period of increased consolidation.

The study is based on an international survey of 365 executives across the biotechnology and pharmaceutical sectors in the USA, the UK, Europe and Asia.

It also reveals a widespread belief that President Obama’s recently announced initiatives and reforms will strengthen the position of the USA as a centre for the industry, providing a further threat to Europe, and the UK in particular.

The research has found that more than 90 per cent of biotech executives believe conditions have become more challenging over the last year, and that terms for funding have become more onerous.

Typically, investors demand a greater equity stake, or secure investment against the underlying intellectual property rights.

Those same executives quote a lack of appetite for risk among investors as the principal problem they face in the current market. Most believe it is the more speculative, early-stage companies that will bear the brunt of the funding squeeze.

More than half believe the outlook will start to improve within the next year, while almost as many think it will take more than a year for investors to re-appraise the sector.

There is strong opinion that in the current climate, the big pharma companies will use their muscle to form alliances, or acquire the smaller biotech organisations, leading to a shrinking biotech sector before the recession ends.

Opinion is divided on whether such consolidation is a good thing for the industry.

Innovative firms believe the patent system should be more generous to reflect the difficulties of bringing complex products to market.

This follows in the wake of a US bill to promote generics to reduce the cost of healthcare. Generics are drugs whose patents have lapsed, allowing them to be more cheaply produced by other than the original manufacturers.

But what is the overall state of the industry in Oxfordshire?

Lisa Mynheer, director of the DiagnOx Laboratory facility at Cherwell Innovation Centre, said: “Although times are tough, we remain enthusiastic about the prospects for small companies specialising in medical diagnostics and related technologies.

“Several based in our Diagnox Laboratory at Heyford Park are doing well with their research and development programmes, and some have been able to raise investment and form new strategic partnerships within the last year.”

Dr Gordon Sanghera, chief executive of rapidly-expanding Oxford Nanopore Technologies, which recently moved to larger premises on the Oxford Science Park, added: “There is definitely a different appetite for risk than there was a year ago among UK investors, but that can work to some peoples’ advantage.

“We are developing a platform technology rather than a drug, and we are private not public. Both of these factors are working in our favour.

“Interestingly, we are seeing increasing attention from institutions that normally focus on the public sector and may have been challenged by liquidity and volatility problems there.

“We are also in a market segment that is much more active in the USA than in the UK.

“In January, we took a £12m strategic investment from the USA, and we continue to receive a lot of interest from the scientific investment community there.”

Dr Mike Anstey, healthcare investment analyst at Oxford Capital Partners, echoed the overall view.

He also cited Beyond Borders 2009, the annual global biotechnology report by accountants Ernst and Young.

The report says new and more sustainable ways of funding drug development will be led by significant trends such as generic drugs, healthcare reforms, personalised medicine and continued globalisation of the industry.

Dr Anstey said: “Worldwide, the biotech industry is in much better shape than one might expect, with revenues growing 12 per cent in 2008, net loss dropping 53 per cent and USA biotech being profitable for the first time with Europe not far behind.

“Venture financing fell only 19 per cent from 2007’s record of £5bn. But investment is difficult. There have been no company flotations for over a year.

“The economy is driving the funding drought and there is no visibility on when the public markets will open up again.

“The good news is that investment by private venture capital firms has not changed much in the last two years and continues to support strong technologies.”