????By David Ewing Duncan

????A recent jostling with thousands of life science bankers, investors, and executives at the packed JP Morgan Healthcare Conference in San Francisco felt like Alice on the other side of the looking glass compared to 2009.

????A year ago at this meeting and others, biotech was being given up for dead in the wake of the late 2008 economic collapse. Analysts and industry representatives -- those who still had jobs -- were predicting that 30% to 40% or more of biotech companies would be out of cash by the end of 2009. Stocks were crashing and delisting notices were in the mail as everyone from CEOs of big pharma companies to the Mad Hatters of venture capital walked around in a daze, looking like the Queen of Hearts had just said: "off with their heads!"

????A year later, the mood at the conference was upbeat.

????"Last year was a body blow to the industry. Biotechs are now rising off the mat, and most people are cautiously optimistic," said Safi Bahcall, the co-founder and CEO of Synta, a medium-sized drug development company based in Lexington, Mass.

????Still, biotech remains an industry that in the nearly forty years of its existence has had only one profitable annum for publicly traded companies -- 2008 -- despite a market cap that currently is over $230 billion. And while dozens of biotech drugs have been developed that have treated millions of patients since the early 1970s, the number of approved compounds produced each year remains small, averaging less than 10 a year.

????The attitude shift at JP Morgan from 2009 to 2010 reminded long-term attendees of 2002, when the industry miraculously bounced back in mood, if not reality, from the 2000-2001 economic meltdown. It also illustrates the volatility of an industry that has swung wildly from heights to depths and back again with dizzying regularity since Cetus, Chiron, Genentech and other pioneering biotech companies were founded a generation ago.

????The optimism comes from the feared bloodbath being less gory than expected, said many attendees. Dozens of companies did fail, however, or were acquired at fire sale prices; and at midyear the biotech index on Nasdaq had plunged over 35% from its high in early 2008. Yet many companies survived by cutting costs and trimming drug discovery and testing programs -- temporary solutions for some that may yet lead to more failures if capital remains tight, particularly for early-stage companies.

????In the second half of the year, the markets began to recoup, with the index ending the year at 850, up from a low of 605 last March. The numbers of deals and financings also accelerated. The year ended with three IPOs and a banner year for partnerships between biotech's and Big Pharma, which totaled $37 billion in financings, compared with $20 billion in 2008.

????Deals and announcements were flying this year at JP Morgan as if 2009 didn't happen. Investors and Big Pharma executives saw a steady stream of companies a day in hotel suites at the St. Francis and surrounding hotels -- speed-dating sessions that slowed to a trickle last year, but returned this year, though buyers and funders said they were being very selective.

????"It's all about market cap and late-stage products," said the CEO of a small start-up, who noted that there were opportunities for raising funds, but it was difficult. "They are scrutinizing clinical trial results very closely," said the CEO.

????Some highlights from this year's conference included an announcement from Silicon Valley-based Complete Genomics that it has sequenced an entire human genome for only $1,500 -- a process that cost $50,000 just a year ago. And Belgium-based Galapagos entered into a $580 million global, multi-year strategic alliance with Roche to develop potential new therapies in chronic obstructive pulmonary disease or COPD.

????Big Pharma was at JP Morgan in greater numbers than in previous years, observed venture capitalist Dennis Purcell, a senior managing partner of Aisling Capital. "I see 50, 75, 100 people per big pharma," he said. "They are desperate to find new drugs from biotech as their patents expire." These are patents on blockbuster drugs such as Pfizer's Lipitor, the top-selling drug in the world at $13 billion a year, which is slated to go off patent next year.

????Merv Turner, chief strategy officer at Merck (MRK, Fortune 500), confirmed that his company was trolling for biotech partnerships in the wake of its merger with Schering-Plough last year. "Merck is twice as big, so we'll be looking at twice the deals," he said. "Venture Capitalists will be focused on acquisitions, but we'll be focusing on licensing."

????Venture capitalists like Purcell were out in force, too, though several insiders predicted that venture money is likely to drop in 2010 and in future years. "I worry that limited partners will not provide more money for biotech funds," said Purcell. "The rate of return is better in other sectors. Drugs cost too much money and time to develop, and usually fail."

????New drugs cost over a billion dollars and 12-15 years to develop, with some Big Pharma companies such as Pfizer (PFE, Fortune 500) currently spending up to four or five billion dollars per drug. "This is a disaster, and can't be sustained," said investor Richard Aldrich, head of RA Capitol. "We have to learn to develop drugs more efficiently. It's going to be a different ballgame this decade than it has been, with fewer players and finance streams, cost cutting, and more partnerships with pharma."

????It's possible that 2010 will bring this industry back to the right side of the looking glass, where products and money are being made, and possibly even profits. More likely, however, it's a year that will resemble the Cheshire Cat: a great big smile with a body that fades between substance and invisibility.