Over the past 35 years, the biotechnology industry has produced a number of modern medical miracles and has generated a great deal of hope for more. But it has never turned a profit.

In the past decade, losses have averaged $4 billion to $5 billion a year, peaking in 2006 with a net loss of $7.3 billion. The deficit shrank to $2.7 billion last year, although if one were to remove the few (hugely) profitable companies, such as Genentech and Amgen, the industrywide losses would have been much worse.

Losses are only a symptom of a deeper problem: A shrinking number of new drugs to show for all the investment. The Food and Drug Administration approved only 17 new drug entities last year, compared with two or three times that number 10 years ago. The failure rate in biotech now stands at almost 9 out of 10 drugs that enter human clinical trials.

Despite all this, biotech posted an all-time global high in 2007 of venture-capital investments, $7.5 billion. And the industry is growing: It has more than 4,000 companies in operation running 400 drugs in human trials, according to the Biotechnology Industry Organization.

If this enthusiasm for an unprofitable industry seems misplaced, consider one of the big stories coming out of the Biotechnology Industry Organization’s annual bacchanal last week in San Diego: State governments are racing to invest billions of taxpayer dollars in biotech.

On the first day of the meeting, Governor Deval Patrick of Massachusetts touted his recent signing of a $1 billion biotech bill for his state. Governor Martin O’Malley of Maryland was there, too, talking up the $1.1 billion his state is planning to spend on biotech. A few days later, Maryland added another $500 million to the pot.

Meanwhile, Governor Arnold Schwarzenegger of California talked up his state's $3 billion stem-cell initiative. Passed by voters in 2004 but delayed until last year by legal challenges, the massive public initiative is already pumping hundreds of millions of dollars into biotech and basic science in the Golden State.

This comes on top of $1 billion committed last year in Florida to biotechnology projects, and billions more in other states, not to mentions dozens of nations around the world.

What is the reason for this largess, public and private, for an industry perennially in the red?

For private investors, there is the Hollywood blockbuster mentality: Most movies lose money, but a few make a killing. Likewise, biotech is a high-risk, high-reward venture, and a hit, like Amgen’s Epogen, can rake in billions of dollars a year.

In a report issued at the San Diego conference, the accounting and consulting firm Ernst & Young compared biotech to gambling. “With such steep odds,” it said, "successfully commercializing a product is, in effect, the equivalent of winning the drug-development lottery."

For states, there is the hope of becoming a “biotech cluster,” as San Diego and San Francisco have done. For a lucky few localities, biotech has indeed attracted thousands of highly educated workers with high salaries. Biotech also is innovative and mostly clean, and brings with it something politicians love to bask in: a high-gloss focus on the future.

Never mind that creating a biotech cluster has proven to be extremely tough, requiring a critical mass of world-class research institutions, risk-loving investors, and entrepreneurial moxie that few locales have been able to muster.

If this were any other industry, it’s hard to imagine billions flowing from venture capitalists and states given the risks and perpetual losses, even if there are a few huge hits. But biotech creates products that are designed to treat and cure the sick, a motivation that overrides rational business calculations for some people.

Schwarzenegger made this point during a lunch keynote at the BIO conference when he talked about how Alzheimer’s disease has afflicted his father-in-law, Sergeant Shriver, the close aide and confident of President John F. Kennedy. On bad days now, he can’t remember his daughter and Arnold’s wife, Maria Shriver, or much else that matters.

No cure exists for Alzheimer’s, but more than 40 drugs are currently in human testing. Perhaps it’s the nature of the science that 40 attempts are needed to get one or two successes, though there is no guarantee that any of the 40 will work, though everyone is rooting for success.

Historically, there are periods when investors flee biotech, but for the moment biotech is hot – so was dealmaking, partying, and swag-collecting at BIO. It's all either a testament to human hope, or to our ability to believe that if one rolls the dice enough times they can come up a winner.

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Natural Selection
David Ewing Duncan's biweekly column on the intersection of science and business.