By Nuala Moran

BioWorld International Correspondent

AMSTERDAM, the Netherlands - After two years of decline, the European biotechnology sector saw a growth spurt in 1999, with revenues up by 45 percent at EUR5.4 billion (US$5.2 billion), and spending on R&D up by 36 percent, to EUR3.2 billion.

This cheery news for investors was presented this morning at the European Life Sciences Conference, and comes from the seventh annual survey of the industry by the consultants Ernst and Young. The conference ends Tuesday.

Not that the sector is out of the rough yet. Net losses may have fallen by 44 percent, but they still amounted to EUR1.2 billion.

Glenn Crocker, of Ernst and Young and senior author of the report, told BioWorld Today, "This was the year the industry got realistic. We saw the development of large, sustainable companies, while at the same time a new type of company with hard-headed CEOs, focused business models and a new sense of urgency, began to emerge." Many companies adopted a twin-track strategy, developing technology platforms and products simultaneously, to spread risk and bring in early licensing revenue.

As a result, U.S. investors began to look more to Europe. "The European market was too small before for U.S. institutions to be interested," Crocker said. "In the past six months they have moved into the quoted UK stocks, which were increasingly undervalued in relation to U.S. stocks."

UK biotechnology companies, which represent 60 percent of the value of the European sector, outpaced the Financial Times Stock Exchange (FTSE) Index of the 100 leading shares and the FTSE pharmaceutical and healthcare indices. Their combined market capitalization rose from EUR6.9 billion at the end of 1998 to more than EUR10.6 billion at the end of 1999. In the first quarter of 2000 the UK market grew by a further 70 percent, though it has fallen off since. "The market may be lower than its peak in the first quarter, but it has taken a step up overall," said Crocker.

As a result, several UK companies, including Cambridge Antibody Technology Group plc, PowderJect Pharmaceuticals plc and Oxford GlycoSciences plc, reached the psychologically important market capitalization of EUR1 billion.

Last year also was the one in which European biotechs realized they had to look seriously at mergers and acquisitions as a way to build their companies, and also as a way of providing shareholders with an exit route.

"There were two types of M&A activity," Crocker said. "One was large companies like Celltech and Chiroscience merging from a position of strength; the other involved companies like Therapeutic Antibodies and Proteus forming Protherics, or the reverse takeover of Core Group [by CeNeS Pharmaceuticals], where the merger was needed to survive."

There was a striking change in the nature and number of alliances and deals with big pharma and with larger U.S. biotechs. In all, 241 deals were struck, up by 75 percent over 1998. "Many of these were true alliances with guaranteed funding," Crocker noted. "This contrasts with some past deals, which were more biased toward achieving certain milestones and on royalties on future products."

An example is deals Cambridge Antibody Technology Group plc, of Royston, Cambridgeshire, has with Wyeth-Ayerst and G.D. Searle, both of which are collaborative R&D agreements with guaranteed R&D funding and equal R&D commitment from the partner.

The restructuring of the pharmaceutical industry and the increasing complexity of discovery and development technologies, particularly in the field of genomics, is increasing the reliance of big pharma on biotech innovation.

European biotech also is poised to deliver products. Celltech's Chirocaine, a long-lasting local anaesthetic, received FDA approval in 1999, and the quoted companies in Europe have more than 60 products (45 from the UK) in later-stage clinical trials. "FDA approval is expected on several products this year, marking a watershed in the development of the sector," Crocker said.