Biotechs in region lead US in red ink

New England's vaunted biotechnology industry leads the nation in just one thing: losing money.

The region's publicly traded biotechnology companies lost nearly $1.2 billion in 2005, more than those in any other part of the country, according to a national report released today by accounting giant Ernst & Young.

With Massachusetts banking on biotechnology to drive its economy in the next decade, the sobering fact raises an important question: Who in their right mind would invest in an industry with such a track record?

The answer, apparently: plenty of people.

''The money keeps coming in -- there's no question about it," said Thomas M. Finneran, president of the Massachusetts Biotechnology Council.

Though biotechnology's insatiable appetite for cash evokes memories of the dot-com era, when companies burned through funding without finding a way to make money, analysts widely see the industry as fundamentally different. More of the world's new drugs are now produced by biotech firms than traditional pharmaceutical companies, and the steady rise in healthcare spending guarantees a long-term stream of income.

''Biotechnology is the major engine for the new scientific discoveries that are being brought to the market today," said Donn Szaro, director of Ernst & Young's global health-sciences practice, who oversees its annual report on the industry.

With about 300 local companies and more than 30,000 jobs, the biotech industry is a thriving, if still modest, component of the Massachusetts economy. But in the past several years it has drawn increasing attention from state leaders, who see it as a way to keep the economy humming through a highly trained, high-wage workforce.

The Massachusetts House and Senate are debating millions of dollars in incentives and tax breaks to lure and retain biotech companies. Mayor Thomas M. Menino and Governor Mitt Romney are flying to Chicago next week for the industry's annual convention, which Boston will host next year.

Behind biotech, though, is one of the most demanding financing models in the business world. Most companies spend years doing research on potential new drugs, spending millions of dollars before either folding or going public. Some are bought out. Few survive to turn a profit.

''We kind of debate why people are so enthusiastic about investing in biotech," said industry analyst Phil Nadeau of SG Cowen & Co.

Nadeau keeps a list of the nation's largest public biotech companies; only about a dozen are profitable.

''There are phenomenal returns to be made if you're in on the winners, and there's enough people who think they can pick the winners that you continue to see investment," he said.

Though New England's 2005 performance sounds alarming, it was actually an improvement over 2004, when the region's biotech companies posted a cumulative loss of more than $1.7 billion, according to Ernst & Young's figures.

That number represents the total loss of the region's 59 publicly traded biotech companies. With 67 public companies, the San Francisco Bay Area is the country's only larger biotech cluster, but it posted a much smaller loss overall, at $246 million. In San Diego, 37 companies lost $718 million, the second-biggest loss.

In an industry with numerous small companies, those figures are strongly influenced by the handful of firms at the top of the pyramid. In the Bay Area, for example, Genentech Inc. -- widely considered the first biotechnology company when it was founded in 1976 -- single-handedly contributes a profit of nearly $1.3 billion on its lineup of growth hormones, cancer drugs, and other treatments.

By contrast, the top biotech companies in Massachusetts, Genzyme Corp. and Biogen Idec Inc., made a modest $441 million and $542 million last year, respectively. Genzyme's most important drugs treat rare enzyme deficiencies; Biogen's prime product is a multiple sclerosis treatment.

The next tier of local biotechs has yet to make any money.

Vertex Pharmaceuticals Inc. of Cambridge has recorded a loss every year since it was founded in 1989. Millennium Pharmaceuticals Inc., also of Cambridge, lost $198 million last year and has lost a whopping $2.5 billion in its 13-year history.

''My investors want a loss," said Joshua Boger, chief executive of Vertex, which has lost nearly $1 billion in its history, ''because they believe the things they're investing money in will yield a return."

Thanks to promising trial results for its hepatitis C drug, Vertex is on a roll with investors: Its stock price has more that tripled since last May. It has more than 800 employees and is trying to fill 80 new jobs. Last year the company lost $203 million.

''It may sound a bit perverse, but when the losses are high and you're still in business, it means you're very far along in development," said Una Ryan, chief executive of Avant Immunotherapeutics Inc. and chairwoman of the Massachusetts Biotechnology Council.

As companies get closer to developing a useful drug, she said, they need more money to run larger trials and increase production.

''It isn't that you can lose money forever," said biotech investor Terry McGuire of Polaris Venture Partners, ''but biotech is famous for this decade-long period of investing before the products come to market."

For McGuire, who has backed high-profile companies such as Momenta Pharmaceuticals Inc., Microbia Inc., and Sirtris Pharmaceuticals Inc. that are years from profits, New England's consistent biotech losses can be seen as a vote of confidence in the region's intense concentration of investment capital, university-bred science talent, and medical centers.

''An interpretation of that [statistic] is that we have the most in-depth, robust environment for the most interesting technology," he said.

Szaro, of Ernst & Young, agrees. He says biotech's losses nationally are actually narrowing as the industry matures, and New England is following the trend.

Szaro also offers a personal endorsement: he is moving from his Florida home to Boston.

''Biotech is reinventing the healthcare delivery system, and I think it's going to happen in Boston, and I want to be there," he said.

Stephen Heuser can be reached at sheuser@globe.com.