Recent headlines would have us believe that the biotech bubble has burst, at least on this side of the Atlantic anyway. In May 2004, the UK, seen as Europe's guiding light in terms of biotech potential, saw its biggest biotech company Celltech gobbled up by relatively unknown Belgian company UCB, which has a predominantly chemicals-based background.

The £1.5 billion deal means that drug delivery specialist SkyePharma has been cast into the limelight as Britain's biggest biotech player - although with a value of little more than £385 million the chances of a British Amgen materialising seem as remote as ever.

The catalogue of difficulties that exist for biotechs is well documented - an almost impossible to live up to tag as 'darling of the stock market' and heavy reliance on tiny portfolios and (initially at least) a reputation in the market for scientific rather than commercial acumen.

But what still lies at the very heart of the sector's woes is the age-old problem of where the money is going to come from.

In short, the coffers are drying up. Venture capitalists, citing too many disappointments, have tightened the purse strings almost to closing point, leaving biotech's big brother, the pharma industry, as the most likely cash source.

But recent signs suggest that the pharma sector holds too many, if not all of the cards. Celltech's sale was pre-empted to a large extent by Pfizer's decision last November to terminate its partnership deal for promising rheumatoid arthritis treatment CDP 870. Analysts were suddenly wondering whether the product, once touted as UK biotech's first £1 billion drug, would even make it to market.

Pharma adopting more selective approach

Then of course there is the story of Cambridge Antibody Technology (CAT) falling out with US marketing partner Abbott over royalties for arthritis drug Humira. The result of the London High Court hearing scheduled for November will be crucial to CAT's share price and ultimately its existence.

The case also begs the question of whether pharma's apparently much more selective (and some would say cautious) approach to biotech deals is exerting too much pressure on the biotech industry.

According to Terry Hisey, head of Capgemini's life sciences practice, there has been a maturing in the nature of the relationship between the two sectors.

"I think pharmaceutical companies are trying to be a bit more measured in their response [to potential biotech deals] and also in the way they approach projects," he says. "They're still seeing the value in biotech relationships and recognise the role these have in helping them to solve some of the market problems they have."

He adds that biotech is also an important component in dealing with the question of health outcomes: "It gives you the ability to be more targeted - some of the targeting that you can do from a treatment and cure standpoint with biological products is far greater than you could hope to accomplish from chemistry.

Biotech no longer seen as 'get rich quick' vehicle

Much of course has been made of biotech's allure to pharma companies. The distorted perception of biotech as an easy 'get rich quick' pipeline bolster has long gone, replaced by the knowledge that biotech can still provide innovative compounds to supplement pharma's own in-house research and drug discovery operations.

In spite of the publicised failures of the so-called one-product companies that swallowed cash faster than they could jump clinical phases, biotech still holds distinct advantages - it has the potential to provide the niche products that are becoming more difficult to source, as ever more questions beset the blockbuster model.

There's no doubting that pharma still sees a huge amount of value in biotech - it's just a case of how much and in what way it is willing to pay for it.

Alliances between the two were never going to be easy. A marriage of fledgling biotech companies thin on commercial experience with pharma companies traditionally vertically oriented and without well-honed partnering capabilities takes time to develop. Recent events would suggest that pharma is cautiously learning from its past mistakes.

"These days big pharma is having to strike a balance between research and development and being equally competent at what I would term 'search and development',"explains Mr Hisey.

"For effective search and development, you need to have a systematic way by which you go out and look at various candidates, build up the core competencies in your organisation to be able to strike the right kind of deal, manage the relationship and understand how you're going to bring it to market.

Pharma spreading its long-term bets more thinly

Pharma's current stance is proving a headache for European biotech companies looking for a long stretch of financial stability to establish themselves on a secure footing. Long gone are the days of massive cash injections triggered immediately after the signing of a partnership. At present, pharma companies are much more likely to part with a lower financial stake at the discovery/phase I stage and buy in only at the end of phase III when prospects are brighter.

In a nutshell, pharma companies have learnt to utilise better risk assessment and are spreading their bets much more thinly over a longer period of time.

Therefore pharma/biotech licensing deals of the early 21st century invariably take on a much more complex nature; pharma companies are able to secure the rights to products with much smaller advance payments, increasing momentum on royalties as products go through the clinical phases.

Does pharma really hold all the cards?

This all adds up to a tougher environment for biotech companies, trying to consolidate their long-term positions. Mr Hisey believes that pharma's newfound reticence to be as speculative as it once was is causing biotechs to partner sooner in the product lifecycle.

"By partnering sooner, when the molecule has not progressed to the point where the commercial opportunity is clearly evident, biotechs are finding themselves at a disadvantage from a negotiating standpoint with a prospective partner," he says.

Stephen Oxley, head of KPMG Pharma firmly believes that despite big pharma appearing to hold all the cards, appearances can be deceptive.

"It depends a lot on the types of drugs that are being negotiated," he suggests.

"If you start with the premise that pharma wants to continue to source blockbuster compounds, then pharma does indeed hold all the cards. The products are merely an evolution of current treatments, and pharma is looking at drugs that will give it the next 20% on the existing compounds already in the market. In this way, they would be able to dominate the therapeutic areas."

But, despite Pfizer's rejection of the Celltech treatment, Mr Oxley believes that biotech can capture the specialist niche areas where big pharma is finding it difficult to excel.

"I think we could see more collaborations between biotechs, device companies and small pharma as opposed to the outlicensing of something fairly early on to the Pfizers of this world, in the hope it will be a $3-5 billion drug," he says. "The market's still there, and pharma feels the need to splash out cash to provide alternatives."

The success stories within the biotech sector can provide hope for those minnows desperately looking around for the partnership that could secure their future. The US biotech big boys such as Amgen, Genentech and Biogen are all comfortably profitable and to all intents and purposes are increasingly taking on the guise of traditional pharma companies.

Partnerships needed to avoid 'one-product' tag

Pharmaceutical analyst Koen Van de Steene at Fortis Bank says the sales growth and patterns of these companies have started to decline and (with the exception of Amgen) they are having to look at acquisitions to avoid the tag of 'one-product' companies.

"The bigger biotechs will naturally be looking to make some interesting acquisitions in the shape of smaller biotech companies to broaden their portfolios," he says.

Despite the allegedly rough treatment of companies like Celltech and CAT, biotech can still look back and see how much it has progressed. Mr Hisey notes that biotechs are continuing to display an increasing level of business sophistication, most of them in the steadfast knowledge that at some point or another they will have to seriously consider making that crucial leap into a partnership.

"When biotechs think about maximising the lifetime value of their large molecule, they are going to need to look for a friend and in these times, that friend is going to come in the form of a relationship or licensing deal with a major pharma company," he says.

"Pharma companies can give them the resources to commercialise the drug in question and reach their full potential, not only in terms of specialty salesforces but access to large-scale general physician salesforces."

The question remains of what can be done to avoid any more nasty spats in the future. Australian biotech firm Biota must have thought its partnership with the then-Glaxo Wellcome in the 1990s for flu treatment Relenza was manna from heaven. However, after two years of fruitless negotiations, Biota has gone to the courtroom, claiming damages for lost royalties after what its chief executive Peter Molloy described as "abandonment at birth" by the British firm.

Biota claims that Glaxo breached an agreement to use its "best endeavours" to market the drug by effectively withdrawing its post-approval clinical studies as well as its promotional support.

Obviously, the wording of contracts is crucial. Is it really a case of biotechs brushing up on their due diligence and hiring a crack team of lawyers to draft the contract? Mr Hisey says that for pharma/biotech partnerships to function in the future, both sides need to be very clear on what their contractual obligations are.

"But more than that, you need to determine what is the overall intent of the relationship. It's also important to recognise what are the motivating factors for each party and not allow yourself to confuse a common goal for common motivation.

Market pressures forces rethink

While biotech looks to partnerships or even consolidation to secure its future, any chances of the European biotechnology sector giving birth to an Amgen appear to be remote.

Mr Van de Steene concedes that most of the few thousand biotech companies that have sprung up on European shores are still way too small to be considered in the same light as Europe's biggest biotech Serono. What is more, he notes, despite interest from bigger pharma companies looking to consolidate, market pressures are forcing them to reassess whether to make the plunge into a partnership.

"There's a lot of talk from big pharma about exploring possible alliances with biotech but it all comes down to money," he says. "When it all comes down to it, the companies repeat the same message: 'We want to invest in biotech, but the money currently being asked doesn't justify the investment.'"

UK biotech on its last legs?

Although many commentators voiced the opinion that the Celltech's sale effectively sounded the death knell for UK biotech, others believe that looking at the bigger picture, it represents a positive step.

As a competitor to the US, the European biotech sector has looked pretty feeble of late. According to an Ernst & Young study earlier this year, although global biotech revenues rose 17% to E46.6 billion in 2003, the majority of this was spurred by US companies. Conversely, their European counterparts saw turnover fall 12% to E11.3 billion in the same year. The report cited "challenging funding conditions and a lack of investor confidence" as reasons for cost cutting across the continent.

Parochial views limit European success

After announcing his company's latest coup, UCB chief executive Roch Dolveux suggested Europe's struggles had been exacerbated by "parochial views".

"Bavarians wanted to create Bavarian biotech companies, and the South of France and Barcelona wanted their own biotech companies," he told the Wall Street Journal at the time. "If we want to compete with the US, we really have to take advantage of the strengths we can bring throughout Europe, independent of where they're located."

Going forward into what Mr Van de Steene describes as a new cycle of product approvals geared more towards the back-end of the decade, it is still difficult to envisage a second European biotech boom. Much depends on how pharma perceives its own identity in a developing market, and whether it sees biotech alliances as a healthy and relatively risk-free route to growth.

"What I do see is a greater degree of realism attaching to the pharma/biotech relationship and I think there are important messages there for both sides, both in terms of how pharma interacts with the biotechs and vice versa. That counts for both parties at the time of doing the deal and then more importantly the ongoing relationship thereafter," concludes Mr Oxley.