Converging advances boost technology industries

With the United States seemingly mired in a cycle of steady but slow growth and hundreds of companies struggling to eke out even small profit increases, the technology industry is a standout.

And at the companies that make computers, software and high-tech drugs, rising demand and increasing exports suggest strong growth will continue, largely independent of the overall economy.

The information science industry is currently benefiting from a convergence of technological advances: * The release of Microsoft Corp.'s Windows NT, the operating system awaited by business customers. * Ever more powerful Pentium and Pentium Pro processors from Intel Corp. * The shift to intranets, which model internal computer networks on the technology of the global Internet. * Compelling new software applications that need all that power and connectivity. At the same time, the customer base has become far more global, while the United States has remained the dominant supplier. Even the poorest countries see a need to invest, while stronger economies in Asia and Latin America can help balance swings in demand at home. Medical technology moves at a different pace from information science; product development times and product life cycles are measured in years rather than months. Nevertheless, growth is still driven by product innovation, which continues at a rapid pace. A handful of biotechnology companies became profitable in 1996 as their first drugs gained regulatory approval, and this exclusive club could grow rapidly in 1997, with as many as 30 new drugs nearing the market. Innovative drugs and devices also drive double-digit growth at established companies like Pfizer Inc., Merck & Co. and Johnson & Johnson. These concerns in effect have become large biotech companies, working in partnership with researchers in smaller companies and academia. Since one new drug for a major disease can rapidly generate $1 billion or more in revenue, the growth potential here is enormous. "We really do have a profound change in our economic model, from a mass-produced, consumer-based economy to a global, technology-based economy," said Michael Murphy, publisher of the California Technology Stock Letter. Analysts say that if growth slows in 1997, there would inevitably be some reduction in capital outlays, but history shows that most companies continue to invest in new technology, because it is a strategic asset. Suppliers with hot new products can thus maintain growth even in a recession. "The deployment of information technology infrastructure is a solution to becoming more efficient," said Thomas A. Thornhill, director of technology research at Montgomery Securities. "Not doing it becomes a competitive issue; companies that fail to invest through the down cycle will emerge in a relatively weaker position on the other side." A new breed of corporate software applications that can help increase sales has proved especially compelling, according to Thornhill. These applications in turn have driven sales of larger computers as well as new operating system software and networking equipment. These programs, like a sales management application from Siebel Systems Inc. called Sales Enterprise, do more than just reduce costs. "Because it's a revenue-generating product, there's a substantial willingness to pay for it," Thornhill said. In addition to product cycles, economic, political and demographic shifts are driving growth for technology companies. The transition to an economy based on information and communications from one based on manufacturing means even small companies can address a global market. Meanwhile, the fall of communism has opened new countries to U.S. goods. Roger McNamee, a principal in Integral Capital Partners, said the United States now faced an opportunity unmatched since 1946, when its powerful manufacturing base supplied the rebuilding of Western Europe. "For a long time, the politics prevented you from selling to a lot of countries, even if they wanted to buy," McNamee said. "Now every country is on a market economy, and they need infrastructure to attract capital. You find third world countries putting in wireless telecom systems often before they put in running water and roads. "We've gone from being able to sell to one-third of the world to selling to everybody." McNamee said, adding, "I believe technology will rise to about 15 percent of gross national product from about 8 or 9 percent now." Young customers just entering the marketplace will also lift technology sales, according to McNamee. "Everyone in college today was born after the Apple II shipped; they don't know a world without computers," he said. At the same time, their aging baby-boomer parents are ever more voracious consumers of health care. But with the continuing drive to push health care costs lower, the products that create sales growth must meet previously unmet needs, improve outcomes and lower costs -- and possibly produce phenomenal growth. "When you have a breakthrough therapeutic agent in an underserved disease, most of the time people underestimate the impact," said Viren Mehta, an analyst with Mehta & Isaly. He notes that before the introduction of SmithKline Beecham PLC's Tagamet, the first modern ulcer drug, in 1979, the worldwide market for the previous therapy, mostly antacids, was just $150 million. Today, the market for Tagamet and other drugs like it is about $9 billion, with an additional $9 billion worldwide for a later generation of ulcer medications. "New classes of drugs quickly transform the way things are done," he said. Mehta said Warner-Lambert Co.'s new drug for diabetes, Rezulin, could rapidly become a multibillion-dollar product, and he pointed to as many as 30 new drugs in the late stages of clinical trials that could enter the market in 1997. These include cancer therapies from British Biotech PLC, Idec Pharmaceuticals Corp. and Biocryst Pharmaceuticals Inc.; a platelet- cell generating drug from Genetics Institute Inc.; a new drug for CMV retinitis in AIDS patients from Isis Pharmaceuticals Inc., and a new drug for Lou Gehrig's disease developed jointly by Chiron Corp. and Cephalon Inc. "Compared to 16 companies that were cash-flow positive in 1995, we expect 50 in 2000," Mehta said.

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