BioWorld International Correspondent

LONDON - European biotechnology saw its share of global revenues slip 5 percent last year to 16 percent, and other key indicators were down as the impoverished funding environment continued to force companies to cut costs, restructure and change business models.

Globally, revenues of quoted biotechnology companies rose by 17 percent, to $46.6 billion, but Europe's share dropped 5 percent to $7.5 billion, according to Refocus: Ernst & Young's 11th Annual European Biotechnology Report, published last week. With Canada and Asia Pacific holding steady at 4 percent and 3 percent, respectively, Europe is falling even further behind the U.S.

While elsewhere there were signs of recovery, in 2003 the European sector "again endured one of its toughest years yet, and many companies are still in critical care," the report said.

"The U.S. has achieved more than expected and Europe has achieved less," William Powlett Smith, leader of Ernst & Young's Health Sciences Group in the UK, told BioWorld International. "At the same time, Asia Pacific is showing signs of rapid development, particularly with investment in manufacturing and growth in labor-intensive areas, such as bioinformatics, and is showing signs of eclipsing Europe."

The effect of the poor funding climate is highlighted by an overall 17 percent fall in research and development expenditure, an increase in the number of companies with less than two years of cash and a 5 percent reduction in employment levels.

Last year also saw a 10 percent fall in the amount of venture capital going into the industry, accompanied by a tendency of venture capital firms to limit losses by drip-feeding funds. The average amount per deal decreased for the third straight year.

"This will change when some good news comes through," Powlett Smith said. "The lifeline will be companies getting floated, or bringing products to market and so helping VCs to understand the risk better."

Although there were no initial public offerings in Europe, follow-on and other offerings by public companies did bounce back from $108 million in 2002 to $1.6 billion in 2003.

Powlett Smith believes the funding climate will continue to be patchy in 2004, but might improve with better news due in 2005.

Companies are best advised to budget based on the probability that the European capital markets will not welcome many biotech IPOs this year. Powlett Smith said that presents a "rolling challenge to keep pruning and deadheading, and to check the value the R&D program is generating against external benchmarks."

However, even when the financial markets improve, Europe will continue to face a less-favorable regulatory regime than the U.S.

"Particular issues are patents and drug pricing, which have held back growth, and we will continue to see the consequences," Powlett Smith said.