Can Innovation Save the Economy?

For all the discussions of "green shoots" in housing or consumer spending over the past few months, too little attention has been paid to a classic American economic advantage: innovation. If cash flow is the blood of the global economy and spending and investment are its main arteries, then innovation is the heart that does the pumping.

Over the long term, innovation is what drives cost reduction, higher employment, spending, health care, investment and ultimately, better living standards. Many business owners see it as their No. 1 priority. When consulting group McKinsey asked executives in February where the government should direct the majority of its stimulus spending, 59 percent of respondents said on "fostering innovation and potential new industries," putting it in the top spot, even before potential solutions such as "helping workers who have been laid off" or "helping existing companies."

So here's some good news: Right now, the economy is abundant with innovation -- so much so that it might end up saving the day or, at least, making the way for future prosperity. In some sectors, there are signs that it is already. After years of intensive research and development, a band of small biotechnology companies is teaming up with larger drug producers to rush out what many scientists consider to be an effective replacement for chemotherapy, a painful and traumatizing stopgap to cancer. Immunotherapy drugs aim to stimulate the body's natural immune system so that it can attack or destroy tumors on its own, without the need for invasive radioactive treatments.

So far, the drugs, many of which are undergoing Phase 3 trials by the Food and Drug Administration, seem to be working pretty well. Dendreon, which manufactures Provenge, a prostate-cancer drug, said in April that its drug had proven to be safe in the Phase 3 stages of its FDA trial and had extended the life span of patients by an average of four months, compared with 2 1/2 months from Sanofi-Aventis' conventional Taxotere vaccine. As a result, the share price of the $2.6 billion biotech has risen about 800 percent this year. Antigenics, a drug developer for small-cell cancer, has also entered its flagship product, Oncophage, into Phase 3 trials. In June, GlaxoSmithKline launched a Phase 3 study for a new malaria vaccine, which includes an adjuvant provided by Antigenics. Shares in Antigenics have soared more than 300 percent this year.

All the excitement over revolutionary cancer medicine has led to the creation of an index designed just to track the leading developers' shares. Mentor Capital's Cancer Immunotherapy Index, which tracks 10 cancer immunotherapy drugmakers, has risen nearly 30 percent since it was created July 10.

There are signs of innovation in other corners of the economy, too. The urgency for the development of cleaner and cheaper fuels has notched up a gear as oil prices have been on the rebound this year. In August, Rentech, a synthetic fuel maker, signed a contract with eight airlines, including Delta, United and Continental, to provide fuel for their ground service operations at Los Angeles International Airport. That led to an upgrade of its shares by Raymond James & Associates analyst Pavel Molchanov to "Market Perform," and a subsequent doubling of the firm's stock price. Other fuel producers, such as Synthesis Energy Systems and Syntroleum, have fared similarly.

For these small companies, excitement generated by exterior circumstances over their products is not just a short-term trading advantage: It represents an opportunity to raise much-needed capital to keep surviving, growing and, ultimately, innovating. "Quite simply, higher oil prices draw more investors to Rentech's stock," Molchanov said in an interview. "Higher oil prices also support the company's underlying business model."

This year's concentrated rally in the share prices of the small biotechs and synthetic fuel producers has made for exactly that. It could possibly end up reducing costs and creating jobs in the near future, too. For example, Rentech raised $15 million from investors at the end of August and a further $20 million at the end of last month.

Others are aiming to combine industries to propel growth in different ways. Philadelphia-based e3Bank is what founding Chairman Sandy Wiggins describes as "a green triple-bottom line financial institution." The bank seeks to be just like any other commercial bank that makes loans and receives deposits guaranteed by the Federal Deposit Insurance Corp., except that it will give incentives in the form of reduced interest rates to corporate and retail customers who build more environmentally-friendly buildings and act in a greener way.

Such innovative-industry hybrids now dominate the IPO market. In the past two months, 20 hybrid companies have filed for a public listing out of a total of 31 this year. Of the companies that are looking to raise money, the majority are health-care and education providers that use technology to differentiate their products or services and real estate investment trusts, which are taking advantage of the recent downturn in house prices, according to Bill Buhr, an IPO strategist at Morningstar. "There is a lot coming out of these industries, and we will continue to see a lot coming out of these industries," Buhr said in an interview. "What you're seeing now is a lot of high-quality companies coming to market, whereas four or five years ago everyone and their brother came to market."

Daniel M. Harrison is a business journalist who lives in New York and Marbella, Spain.