By Cormac Sheridan

BioWorld International Correspondent

COLOGNE, Germany - The current era could be described as "best of times" for the U.S. biotechnology industry, according to Dennis Purcell, managing director of the life sciences investment banking team at Hambrecht & Quist in San Francisco.

FDA reforms that have led to a major increase in productivity, rising numbers of approvals for biotechnology drugs, and research budget increases at the NIH are among the factors that have contributed to the current positive climate, Purcell told the Bio-Europe '99 conference here Tuesday.

According to Purcell, the sector has evolved through five distinct phases, from its beginnings in the late 1970s and early 1980s, when the first biotechnology companies went public. The early part of the current decade was a period of explosive growth, with a large number of initial public offerings. Health care reform cast a chill over the sector toward the middle of the decade, though. It started to recover during the 1995-'97 period, when there was a concerted focus on business issues. Purcell characterized the current era as one focused on innovation and products. Half of all FDA drug approvals last year were for biotechnology products, he said.

However, investor suspicion that biotechnology cannot become self-sustaining still needs to be allayed, he said. And biotechnology companies face major challenges in breaking through the $250 million market capitalization barrier. At present, just seven percent of the industry accounts for 70 percent of its market capitalization, Purcell said. The bigger companies are increasing their valuations rapidly, while the smaller caps are in decline.

But the pharmaceutical industry needs biotechnology companies more than ever, Purcell said. The big pharmaceutical companies are looking to launch four or five new drugs every year, each with up to $300 million in sales. The sector's R&D spending has risen steadily throughout the decade and will hit $25 billion in the current year. In parallel, the level of R&D outsourcing has climbed from around 20 percent in the early 1990s to 30 percent at present.

Wolf-Dieter Busse, senior vice president for biotechnology at Bayer AG in Leverkusen, Germany, said the company has undergone a major "culture change" as a result of its $465 million drug discovery deal with Millennium Pharmaceuticals Inc., of Cambridge, Mass., last year. Busse said Bayer expects the alliance to deliver 30 candidates into development over the next five years, which is the same amount the company expects to generate from its own resources.

Busse also was upbeat about the prospects for new protein drugs. They have a 50 percent success rate throughout the various clinical stages, he said, in contrast with a success rate of just 20 percent for new chemical entities. Bayer expects to bring two new proteins into development every year up to 2003, he said.