Welcome to 2005! Today’s investing environment is significantly tamer and much more cautious. There’s more in-depth due diligence on investments and technologies. ROI is an even larger issue than ever before. Fewer investors are willing to wait 10 or 15 years for a new drug to move through the pipeline — and, odds are, not get approval in the end.

So what is going on? I asked four leaders in the emerging technology world of investments and research to describe where they see biotech going and growing. I also asked a special situations analyst about the hot areas for individual investors. Here’s what they have to say:

Biotech goes in cycles and always has. You’ll typically see nine months of IPO activity; then you’ll see four years of a plateau or

trough period. There are very few biotech IPOs getting done now. There was a little up-tick starting in the fall of ’03 and lasting till summer of ’04, and now things have quieted down a little.

There’s more VC money now, but it’s harder for earlier-stage companies to get money. The valuations

aren’t as good, and the VCs are favoring later-stage companies for investing.

What is a start-up to do? Great ideas and great start-up companies are still going to get funded more easily than others. But companies still have to look for funding.

Funding depends on the company, the nature of its products and management, the marketplace for its products, etc. That has always been the case. The market always rewards these assets.

The general funding framework for biotech companies is a spectrum that has shifted from left to right—left representing lower valuations and more difficulty, and right representing higher valuations and more ease in obtaining financing. In good times the lesser companies have also shifted to the right. In times like today, when the whole frame shifts to the left, some earlier-stage companies shift so far to the left that they can’t get funding at all.

Right now, angel investors are the place for really early start-ups to look for their first couple of million dollars. We started with angel investors at Acorda. What you are finding now is that companies that 3-4 years ago might have jumped directly into a

VC round are forced to go for angel investing. It’s that whole frame shift.

The current fashion is for product companies. People funding biotech are looking for products that are in late-stage clinical trials—that direction. If you’ve got a product in phase II or III clinical trials, you’re in much better shape than most companies right now.

CDH is a desperately needed alternative to rising healthcare costs. CareGain and other emerging young companies enable insurers like Cigna to offer corporations these tax-advantaged solutions.

Eyetech (NASDAQ: EYET) has alerted physicians, patients, and investors that back-of-the-eye diseases are addressable despite their inaccessibility. Gene therapy and RNAi approaches represent exciting new ways to address the loss of vision or blindness we all must face as a consequence of aging.

Venture investors today are seeking healthcare opportunities in greater numbers, in part because the telecommunications industry has been depressed. Both the life sciences and telecommunications industries, however, can be capital intensive, with burdensome regulatory demands. Deals in these industries with neither characteristic are appealing, assuming all else equal.

The National Institutes of Health (NIH), a component of the Department of Health and Human Services, funds a range of projects whose goals are to solve important bio­medical problems through application of nanotechnology tools and concepts. NIH research also informs nanotechnology

research by providing deep understanding of biological processes—evolved over eons—that occur at the nanoscale.

The themes of projects funded range from using nanotools to study basic biomolecular function, to re-engineering of naturally occurring molecules to serve other purposes, to development of novel sensors, to development of imaging agents that report back specific biochemical or molecular information, to the development of therapeutics including novel ways to modify the surfaces of implants or to deliver drugs. Among these projects:

Atomic force microscopy as a tool to study basic biochemical mechanisms of DNA molecules

Using extremely bright fluorescent quantum dot probes to study cohorts of individual receptor molecules that are important in signaling and interaction with the environment

Reverse-engineering a naturally occurring transport system, the nuclear pore complex, with the goal of using that information to fabricate a protein purification device

Engineering pores in biological membranes, to use them to sense the presence and concentration of biologically relevant molecules in diagnostic assays or possibly in vivo

New surface treatments for implants to improve their interactions with bone and surrounding tissue, resulting in better biocompatibility and biointegration

A novel drug delivery system in which particles would be present in the patient’s circulation and the drug would be delivered only when needed, upon an external signal delivered by a magnetic field

Nanoparticles to deliver imaging agents and therapeutics specifically via the blood vessels of tumors.

Additional examples of biomedically relevant nanotechnology projects are available in a slide show posted at http://www.becon.nih.gov/nan­otech_support.pdf. That file also summarizes

several different funding opportunities, each of which includes a description of research goals.

Several new programs have recently been launched to advance the application of nanotechnology to biomedicine. These include a program for nanotechnology centers relevant to heart, lung, blood, and sleep; a comprehensive program for cancer nanotechnology; toxicology studies on nanoparticles; and an NIH Roadmap Initiative on Nanomedicine. Descriptions are accessible from links at http://www.becon.nih.gov/nano.htm.

We just invested

with Accel Partners in Qliktech, a Swedish company whose technology allows people to

upload onto PCs the company analytics and run queries without having to go to the data warehouse, which could take days. These flexible systems are easy and fast to install compared with legacy systems.

Another example of types of companies we are funding are companies creating the right kind of dashboards (they look like a dashboard in a car or plane, and the user can customize the dials). While dashboards are currently used on the operations side of companies, their primary applications will be for compliance and key performance indicators. The market is directed at business leaders and CXOs who want to be able

to compare multiple values, charts, indices, etc., at the same time.

Cyberark represents a security investment we have made. The company’s product is called Vault, and it essentially protects specific data sources instead of protecting the entire perimeter of an enterprise, which, once hacked into at any point, allows the hacker access to the entire enterprise. This software protects anything, such as passwords in large banks. The program doesn’t care if data is in or out of the firewall.

Another area that’s very hot right now is entertainment technology. One of our investments is Forterra, which developed a multi-player type of game called a massively multiplayer persistence game (MMP). The game doesn’t begin or end; it constantly plays. Forterra understood how to apply this technology for homeland security, healthcare and military purposes and now counts the U.S. army among its customers.

On the hardware side, our investments are focused on in a number of companies that provide chip sets for new consumer applications. We’ve invested in Tak Imaging. They have a very high performance chip set for consumer printers so that, for example, you can print pictures directly off camera phones in a matter of seconds, not minutes.

Lab To Wall St r e    e   t

Gateway Reports is particularly excited about the small cap universe as a whole. The small cap Russell 2000 index has out-performed the Dow Jones Industrial Average and the S&P 500 for the last six years. We believe investors will again see strong absolute

performance from the small cap universe this year. Specifically, small cap medical technology and biotechnology stocks are likely to outperform their large cap big brothers in the pharmaceutical and hospital supply sectors.

An era of consolidation in the healthcare industry has created a ceiling that inhibits revenue growth for large cap equities and has priced large cap healthcare stocks to perfection. Consolidation has also raised the bar of success for new products to untenable levels. Moreover, the tendency of traditional Wall Street research institutions to cover only large cap equities has created unusual opportunities in the small cap sector. We believe there are significant opportunities in the medical device and hospital management space. In this space, savvy investors can find companies that are profitable and are experi­encing double and even triple digit revenue growth. In particular companies that provide hospital management solutions like ECLP, surgical solutions like ISRG and imaging 3-d technology like MRCY may offer compelling investment opportunities when a disciplined investor initiates a position at a good price.