North Carolina's biotech companies led the nation in revenue increases and landed the nation's richest partnership deal in 2007. Meanwhile, the state continued to play a leading role in the race to develop genetically engineered drugs.

Even as it failed to produce a profit, the nation's biotech industry posted an average revenue increase of 20 percent last year, according to an industry report from Ernst & Young. North Carolina companies generated a 38 percent increase, the best showing among the 15 regions surveyed.

The report showed that money continued to pour into biotech companies, which raised a record $5.5 billion in venture capital last year. About $200 million went to North Carolina companies, up from $130 million in 2006.

Also, the drug development partnership of Targacept of Winston-Salem and GlaxoSmithKline, a British drug maker with a U.S. headquarters in Research Triangle Park, was the nation's biggest biotech alliance of 2007. The deal is worth as much as $1.53 billion.

"North Carolina is holding its ground," said Glen Giovanetti, Ernst & Young's global biotech leader.

A lot is riding on North Carolina's biotech industry, which includes dozens of drug development companies. Most are concentrated in the Triangle, but the industry is expanding to Winston-Salem and the Charlotte area.

Four years ago, Gov. Mike Easley said the state would help the industry with research, manufacturing and promotion. The goal, by 2023, is to replace about 100,000 textile, tobacco and furniture manufacturing jobs that the state has lost. That would be nearly double the existing statewide biotech work force of 54,000.

But competition for investments and jobs is fierce among the top U.S. biotech hubs -- California, Massachusetts, North Carolina and Maryland. And that doesn't include emerging rivals such as India and China, which are drawing companies and investors, as well.

Giovanetti said emerging challenges could make for a more difficult environment for the industry this year.

For one, regulatory approvals of the most innovative new medicines declined to the lowest level in two decades last year as safety concerns increased, according to the report.

And financing is becoming more difficult in the wake of the housing recession and the ensuing credit crunch.

Twenty-two biotech companies completed IPOs in 2007, raising $1.2 billion, according to the report. But by January, the market had cooled, and companies started canceling IPO plans. That included Biolex, a Pittsboro biotech company. The IPO of a second Triangle company, Talecris Biotherapeutics, is in limbo.

"Most market observers believe that little or no IPO activity will occur in the first three quarters of 2008, if not longer," the report said.

Still, Aldagen, a Durham biotech company, took a leap of faith last week and filed plans to sell as much as $80 million in stock to the public.

Despite the challenges, many positives remain, Giovanetti said.

With its large number of biotechnology companies, compared with other states, North Carolina is expected to benefit from large pots of venture capital waiting to be invested, Giovanetti said.

In 2007, venture capital firms collected more than $9 billion from their limited partners, including pension funds and university foundations, according to the report. That money is all earmarked to be invested in biotech companies.