Remember the senseless nattering of two years ago, when the specter of "Frankenfood" was foremost in Europeans' minds and many biotechnology companies (St. Louis-based Monsanto (NYSE: MON) in particular) were thought to be putting Earth as we know it in peril? Perhaps after a rash of mad cow and hoof-and-mouth disease, a little modified grain doesn't sound so bad. In any case, rather than conjuring up a rash of dying monarch butterflies, the term "biotechnology" now more often turns people's thoughts to the eradication of disease through gene and protein research.

A welcome change, no doubt, and until recently, biotech's focus on genomics and proteomics has meant a boon for biotech stocks worldwide. But so far this year, a cross-section of European biotech stocks followed by SG Cowen analyst Ravi Mehrotra has fallen 30 percent. And the stocks never reached the same heights that their American counterparts did. By contrast, the Amex Biotech Index, which reflects the industry's biggest companies, is down 19 percent for the year, while the broader Nasdaq Biotech Index has fallen 24.8 percent.

That's not to say biotechs have hit bottom, though, as most analysts say there's room for downside. After all, the European biotechnology sector is similar to its American counterpart. That is, many of the companies are unprofitable and use capital raised through private or public financing to fund research and development, as opposed to a pharmaceutical company that uses the sales of its own drugs to fund R&D.

But the European biotech sector is some five years behind that of the United States in terms of maturity and size. For instance, while the U.S. boasts nine profitable drug development biopharmaceutical companies, Europe has only two -- Geneva, Switzerland's Serono (NYSE: SRA) and London's Celltech Group (NYSE: CLL). Plus, Europe has just 72 biotech companies with a combined market capitalization of some $45 billion, which is where the United States was in 1997, according to Robertson Stephens analyst Sam Williams. Currently, the U.S. has 278 companies with a market capitalization of around $300 billion.

INVEST EARLY AND OFTEN That lag, however, gives investors an edge, allowing them to get in before these companies' potential gets priced into their share prices. For instance, Mr. Williams says both Celltech and Switzerland's Actelion (SWX: ATLN), are Genentechs in the making. Both have products with large market opportunities. Celltech, with ten products in clinical trials, has one of the deepest pipelines in the biotech sector, while Actelion focuses on developing compounds for the treatment of heart failure. Also, both companies have forged marketing relationships with blue-chip partners, are three years away from rapid earnings growth, and are adequately financed. Celltech is cash-flow positive from its Medeva pharmaceuticals business, and Actelion has $127 million in the bank, enough to last the company until 2005, when it is expected to become profitable, Mr. Williams says.

Novuspharma (Italy: NOV) is Italy's first biotech company to focus on developing novel anti-cancer agents. The company also won't see profitability until 2005, according to Mr. Mehrotra. But Novuspharma has $160 million in cash and three companies in Phase II trials. That's particularly appealing since cancer drugs can be approved after even only moderately successful Phase II trials. Plus, since cancer drugs are often used for types of cancer for which they are not approved, Novuspharma's return on investment will be larger than similar companies'.

THE BEST IS YET TO COME The European biotechnology sector lags the American one in terms of maturity and size only, not in terms of technology, says Jean-Fran‡ois Formela of Atlas Venture Fund. "There's no culture of entrepreneurship in Europe, so in the 1980s there was virtually no biotech market," he says. So in an effort to jump-start its local biotech market, the German government has begun implementing incentives for startup biotech firms. The government will issue grants to companies that meet certain criteria. Aside from regulatory approval, one of the most significant criteria is that the company must be backed by venture capitalists. "That's exactly the right way to do it," Mr. Formela says. "Let the market make the asset allocation decisions, and the government will follow the private sector."

The government's fostering of the biotech sector has been extremely successful, and Germany has a wealth of biotech companies that derive revenue internationally. Qiagen (Nasdaq: QGENF), for one, has established itself as the market leader in supplying tools used in purifying genes, an essential step in all molecular biology and genomics research. Qiagen's sales in this area topped $180 million in 2000 (the company had total sales of $204 million), while all of its competitors combined had sales of less than $25 million. Plus, the company is expanding into genetic screening tools, which will be a part of drug prescribing and disease prognosis.

Evotec OAI (Neuer Markt: EVTG) has developed a unique series of drug screening technologies that radically speed up and lower the cost of drug discovery. Evotec's September 2000 merger with Oxford Asymmetry International (OAI), a leading provider of chemistry services, has created a group that offers pharmaceutical/biotechnology clients a "one-stop-shop for drug discovery expertise," Mr. Mehrotra says. In addition, the company, with $49.4 million in sales, can leverage its merger to cross-sell to each other's existing customer base, which include the likes of Amgen (Nasdaq: AMGN), Biogen (Nasdaq: BGEN), Immunex (Nasdaq: IMNX), and GlaxoSmithKline (NYSE: GSK). The company will likely become profitable in 2002.

By all accounts, the European biotechnology sector will offer good growth with no more risk than is inherent in American biotech stocks. And if other governments follow Germany's lead, as they have begun to do, we'll likely see a rash of biotech IPOs before the decade is out. Then again, changing a culture to encourage a sector takes time, hard work, and political savvy. The French government, for instance, has implemented a plan similar to Germany's, but it is far less stringent and consequently has had less of an effect. "In France, anyone walking through the door who fills out the paper, even a dog, will get the grant," Mr. Formela says, punctuating his comments with stereotypical French exasperation. "That's the French market; what can I say?"