In the current economic atmosphere, the biotechnology industry and related exchange traded funds (ETFs) are feeling stressed as investment pullbacks have impeded the sector.

Ernst & Young posted their annual report, which stated that the recession could force companies to consolidate as sources of public funding are diminishing even though the industry was profitable in 2008, reports Rick Mullin for C&EN. The report shows that 20% to 25% of public biotech firms have less than a year’s worth of capital left. Others think the number has risen to as high as 50%.

Revenue of publicly traded biotech companies grew 12% to $90 billion in 2008, and the global industry’s net loss dropped to $1.4 from $3 billion. Capital raised dropped 46% to $16 billion for U.S. and European firms in 2008. IPO funding plummeted 95% to $116 million. Venture capital funding only fell 19% from 2007’s high of $6 billion.

Many companies will need to find new sources of capital, according to the Associated Press. They will need to either develop partnerships or seek buyouts from other companies. Lack of funding would eventually halt the long and expensive process of research and testing. In the U.S., the new administration has embraced biotechs and has pledged its support for the industry.

Soon, the market will see more personalized medicines and generic drugs that could increase competition, which should put a premium on biotechs that keep up with innovative breakthroughs. The continuing globalization of the sector is also seen as a sustainable way to finance further drug developments.

iShares Nasdaq Biotechnology (IBB): down 6.9% year-to-date

ETF IBB

HOLDRS Biotech (BBH): down 1% year-to-date

ETF BBH

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.