AMSTERDAM, the Netherlands - The European biotechnology sector is poised on the threshold of maturity following rapid evolutionary change in 1999, which brought products closer to market and companies to the brink of profitability.

This change was characterized by a number of investor-friendly mergers and acquisitions and a host of strategic alliances, according to the seventh annual survey of the sector, presented at the European Life Sciences Conference here on Monday.

Glenn Crocker, of the consulting firm Ernst and Young, who is the lead author of the report, told BioWorld International that the key players worked hard in 1999 to transform themselves into sustainable entities worthy of enduring investor attention. "There has been a realization that you have to grow quickly," he said. "Some of the large companies are doing that through merger and acquisition, while there is a move away from basing everything on the science, with companies bringing in hard-headed CEOs with business experience."

Overall, the number of European biotech companies increased by 15 percent to 1,351. Much of the increase was in Germany, where the number of companies has risen by 150 percent in the past three years, demonstrating the success of the German government's initiatives to promote biotech. "Germany can now claim to be Europe's most densely populated biotech kindergarten," the report said.

However, there is a view that the soft money available in Germany has led to the creation of companies that are not sustainable in the long term. "Lots of money has gone into companies that would perhaps otherwise have gone into public sector research," Crocker said. The German industry may be heading for a fallout in a few years as these companies have to stand on their own feet.

Crocker does not believe this structural weakness extends to other parts of Europe. "Although there are initiatives to support biotech elsewhere, no one is going down the route of Germany with so much money. In addition, there are different barriers - for example, legal complexities in France and the Netherlands, which hold back the formation of companies."

Although the whole of Europe has been alive with protests over genetically modified foods, Crocker said regulatory issues are not affecting investors. "Although Axis Genetics [a UK vaccines company] cited the GM food row as a reason it could not get follow-on funding, most European biotechs are in healthcare, and investors recognize the distinction between that and ag-bio."

At the other end of the spectrum, the past year saw the emergence of a new breed of "big cap" company that Europe has not seen before, with Celltech Group joining the ranks of the 100 leading shares on the London Stock Exchange and several other UK companies - including PowderJect Pharmaceuticals plc, Cambridge Antibody Technology Group plc and Oxford GlycoSciences - passing the psychologically important EUR1 billion market capitalization.

One effect of this will be to push back the conceptual boundaries of biotech valuations in Europe. Currently, many are still undervalued compared to U.S. counterparts and the change in values achieved last year should make it easier for quality companies to achieve value and leverage from it.

A number of biotech products are expected to gain approval in the near future, and European biotechs now have 60 compounds in advanced clinical trials. "This demonstrates the industry can deliver on promises and that patience is rewarded," Crocker said. In addition, many companies are about to move into profit, further transforming the way they are viewed by investors.

Another dose of realism came from the recognition of mergers and acquisitions as a driver to create profitable companies. Some mergers were from a position of weakness, such as that between Therapeutic Antibodies and Proteus to create Protherics, or the reverse takeover of Core Group by CeNeS Pharmaceuticals, but some were from a position of strength, such as Celltech and Chiroscience.

Value was further increased by an increase in the number, and a change in the nature, of the deals struck with pharmaceutical companies. There were 241 strategic alliances, up by 75 percent from 1998 and, "Many of the deals in 1999 were true alliances with guaranteed funding. This contrasts with some past deals which were more biased towards achieving certain milestones and on royalties on future products," he said.

Private investors viewed the sector more favorably, with venture funding up by 52 percent from EUR380 million to EUR579 million.

On a down note, the market for new offerings was static. There were no IPOs on the London market. The EUR319 million raised in public offerings on the pan-European EuroNM was an increase of only EUR19 million over 1998.

"Companies are transforming their prospects, but this is not translating into IPOs. At present there is a disconnect between the two," Crocker said. The sector will need more follow-on funding this year, as the report's survival index shows that 20 percent of the quoted companies have less than one year of cash.