'2007 should be a corker of a year' was the bold claim of the 2007 BioIndustry Review, published early last year by Australian corporate advisory firm Innovation Dynamics.

One of the authors of that review, the company's managing director, Dr Lyndal Thorburn, has a laugh about it now but it was not as if she was alone in her predictions.

'Biotech looks set for a boomer' was this reporter's headline in the corresponding issue last year, but that booming corker seems to have turned into a bit of a fizzer.

Australian biotech companies are doing it tough in two respects: share prices have plunged and investors are still nervous about what is widely considered a high-risk sector, particularly when they are still getting good returns from the resources sector. The good news, according to the analysts, is strong fundamentals and the long-awaited maturing of the market.

Innovation Dynamics' Thorburn, and the company's executive chairman Dr Kelvin Hopper, are reasonably upbeat about prospects, particularly as a number of companies are moving into late-stage trials and should soon have product on the market. The global credit crunch and looming recession should keep the market depressed for the rest of this year but they believe there will be some surprises.

"With the resources boom, everyone thought that the money from that would flow into the economy and then into the [biotech] industry, but it didn't happen," Hopper says. "People with money in resources are sitting on it and keeping it in mining, and it's not going into high-risk ventures like this. The indices for biotech have gone down for the whole year - from the start to the finish - and now we are facing more hiccups going forward.

"The lesson from [the 2008 BioIndustry Review, released in February] is that despite all that, these companies are forging ahead with clinical trials and developing product, so I think there will be some surprises coming up but they will probably be below the radar.

"We have been monitoring the industry for many years and we believe it is poised for real growth as the top companies start to earn revenues for the first time."

It is an analysis that life sciences analysts from PricewaterhouseCoopers agree with. PwC partner Craig Lawn, in a commentary on the biotech indices in the second quarter of financial year 2008, with extra data from January this year, said while a significant hit from the credit crunch saw a major plunge in biotech shares, the sector still had strong fundamentals and will ride out the storm.

"Smaller companies are definitely feeling the force of the market downturn more than their larger counterparts and the flight to quality away from perceived risk will continue," Lawn says.

"Despite the outward volatility of the market, the fundamentals of the sector are still strong. There are opportunities for intelligent investors to make gains if they look at investments on a long-term basis and focus on companies with solid performance, good track records and strong stories."

Small cap stocks are definitely feeling the pinch but are pretty much used to the peaks and troughs of capital investment. Dr Jackie Fairley, CEO of Melbourne-based Starpharma, says her company, like all stocks in the market, has suffered.

"Small cap companies have suffered more than the large ASX200 stocks and Starpharma was off a high level," she says. "Relative to some of the falls that others have had we haven't been as hard hit, but we certainly don't believe that our shares are trading at fair value at the moment."

Fairley says she believes it fair to say that with mining and resources having such a good run in 2006 and 2007, the demand that would otherwise have been applied to some of the other small cap companies has been soaked up. "But we are starting to see the signs of increasing interest in the biotech sector in Australia and certainly talking to investors in the US, that is the case. There are some pretty good buys out there, including Starpharma."

The good news

The good news lurking underneath all of the drama is that more Australian companies are in clinical trials than ever before and some are in late-stage trials, with product on the verge of being marketed. According to Innovation Dynamics' figures, nine Australian companies are in Phase III trials and the focus of the stronger performers is now firmly set on international alliances.

Innovation Dynamics' yearly reports have proved hugely valuable as they contain data from both listed and unlisted companies. The financial performance of listed companies is there for everyone to see but the private sector is known to hold its cards very close to its chest. Lyndal Thorburn, who manages the unlisted sector information gathering for the company, has an old-fashioned way of getting information out of private companies, however - she rings them up and asks them.