SAN FRANCISCO — Almost 40 percent of small and midsize public biotechnology companies in the United States are in danger of running out of cash within a year and government help is needed to encourage investment, industry leaders say.

"We're at the most difficult time in the history of our industry," says James Greenwood, chief executive of the Biotechnology Industry Organization.

More than a quarter of the 370 publicly traded U.S. biotech companies with market values below $1 billion had less than six months of cash on June 30, he says.

Bankruptcies, layoffs and drug-research delays have begun as companies save money, says Eric Schmidt, biotech analyst at Cowen and Co. "We're starting to see the pain. Over the next three to six months, we'll see more."

Smaller public biotech firms, crucial for early-stage and cutting-edge drug research, are especially sensitive to economic slumps. They may need 10 to 15 years to create revenue-generating drugs, requiring them to rely mainly on investors until then.

Investors are tighter with money now and the market for initial public offerings of stocks has turned cold. Venture capital funding for biotech fell 17 percent in the third quarter from the same quarter two years ago, Dow Jones VentureSource says.

Greenwood says BIO hasn't drafted a plea to Congress or the incoming Obama administration. Under consideration are requests for tax breaks to help firms finance research and lifting capital gains taxes for industry investors.

Sir Christopher Evans, chairman of Excalibur, a venture capital group for biotechnology in the United Kingdom, said last month that the UK government should support investment in its biotech industry with "super funds" of public and private money. If not, it may lose its place as the world's No. 2 biotech leader after the U.S., he says.

While some struggling biotechs may die prematurely, funding is generally available for promising companies, says John Chambers, head of healthcare investing for investment banking firm Merriman Curhan Ford & Co. There are also 1,200 privately held firms that may be in better shape, he says, because their venture capital backers will keep them going. While overall venture capital levels for biotech have dropped, three of the 10 biggest venture capital deals in the third quarter went to biotech firms, VentureSource says.

Big biotechs and traditional drugmakers also have cash and needs for promising drugs. That'll drive mergers, says Citigroup biotech analyst Yaron Werber.

Some biotechs are pursuing all options. Citing the "current financial environment," California-based Maxygen said last month it would cut 30 percent of its workers, explore an asset sale and delay work on a key drug program.