AMSTERDAM, The Netherlands ¿ Europe¿s biotechnology sector is still growing robustly and now has 1,178 companies employing 45,823 people, according to Ernst and Young¿s sixth annual report on the industry, presented at the European Life Sciences Conference here.

While the global market for initial public offerings (IPOs) was very tight in 1998, European IPOs accounted for more than 60 percent of the Euro596 million (US$635 million) raised. Venture capitalists continued to invest in start-ups, pouring Euro380 million into the sector, a slight fall from Euro385 million in 1997.

However, some believe the current valuations sought by start-ups are too high, and are now looking to put money into different sorts of ventures such as spin-outs from pharmaceutical companies, or companies which are merging. With the IPO exit route cut off, venture capitalists are also looking for more trade sales.

The problems that afflicted the U.K.-quoted companies in 1998 have taken a toll on the sector, according to Tom McKillop, CEO designate of AstraZeneca plc, in the report¿s forward.

¿No longer are venture capitalists prepared to back companies solely on the basis of outstanding science and long term prospects,¿ he said. ¿The focus now is on the business model and its ability to deliver revenues and profitability, well within the time scales associated with the development of a new drug.¿

McKillop also noted that the success of various countries will be measured by the quality, rather than the quantity, of new company formations. The report notes the first signs of consolidation in the European sector with deals such as Quadrant Healthcare plc acquiring Andaris Ltd., Peptide Therapeutics plc acquiring Oravax Inc., and the sale of Hexagen plc to Incyte Pharmaceuticals Inc.

Another sign of maturity of the European sector was said to be the turnover of CEOs, with the realization that changes in management are needed to provide the correct skills for the stage of development of the company.

The convulsions going through the pharmaceutical industry are also affecting the sector. While on one hand deals are being cancelled as a result of restructuring and merger activity, on the other there are new opportunities as pharmaceutical companies seek to bolster their pipelines.

In the past year, there has a been a sea of change with the end of biotech-for-hire¿ and the introduction of more complex arrangements, often involving risk-sharing. With the public markets practically closed, deals became one of the most important sources of capital. In the short term, however, the pharmaceutical industry needs products, not development compounds, to fill portfolios, and few European biotechnology firms have such advanced compounds.

According to the report, as the number and variety of biotechnology companies increases, and the number of deals grows, an extremely complex collaborative environment is being created. ¿Pharma and biotech are increasingly co-existing in an ecosystem¿ in which they are mutually interdependent and in which few, if any, variables can be considered in isolation,¿ the report said. n