Innovation Dynamics' Drug Pipeline database shows that there are over 450 drugs in development by Australian biotechnology and pharmaceutical companies, with 189 compounds in human clinical trials. 54 per cent of those in trials are in phases II and III.

"Our new data indicates that the biotechnology industry is clearly maturing, with more companies moving forward into phase III trials and looking toward reaching market," she says.

"Our analysis has revealed an eight per cent increase in the number of drugs in development since the same time last year. The most significant increase was in oncology, already the largest therapeutic area, rising 29 per cent in 12 months.

"Neurology and analgaesia also showed a significant increase, rising 16 per cent in the last 12 months."

Thorburn says the majority of these trials are being sponsored by public companies but that 21 private companies carried out clinical trials in 2007. Most of these companies also had a portfolio of drug candidates in preclinical development as well.

The current period of belt-tightening may even be a blessing in disguise. Venture capital funding for high-risk stocks like biotech is always tight, Kelvin Hopper says, and the forecast for the future is going to be very hard. This may put a dampener on start-up companies and spin-outs from universities, which might not be a bad thing.

As Thorburn puts it, venture capitalists have long said there are too many unpromising deals out there. The figure of VCs investing in only one in every hundred start-up ideas is perfectly true, she says. One new VC, Terra Rossa in South Australia, is investing in six in a hundred and "that's incredibly high", she says.

For Hopper, what the current crisis does is, given the amount of small companies formed and the downturn, show the way forward. "There have to be more mergers and acquisitions," he says. "Companies in Australia are working in various areas and they often can't find a matching deal, but where they have done I think it has worked out reasonably well."

The best example is the merger between Peptech and Evogenix into Arana Therapeutics, which has been successful and widely applauded.

"There has been an increase in alliances and that's what I think is a strength of the industry, alliances within but mostly outside of Australia," Hopper says. "And that's what will drive companies into the market."

Secondary financing has been reasonably strong, with PwC tracing a surge in the second quarter, totaling $245 million. However, Craig Lawn says there may very well be a lag effect with initial public offerings drying up and secondary financing tightening.

"Due to market conditions the opportunity for increased mergers and acquisitions activity should arise as life science companies become more affordable and the pressure to amalgamate increases," he says.

"CEOs of life science companies may need to be more pro-active when it comes to M&A activity, especially where reducing cash reserves in a tight share market highlight the risk of being left with insufficient funds for R&D."