LONDON -- Biotechnology stocks bounced back in Europe on Monday as investors scouted for bargains after last week's rout and a leading investment bank highlighted the sector's substantial cash reserves.

Germany's Neuer Markt biotech index, which has fallen more than 60 percent in the last eight months, recorded its biggest daily advance since early January, adding 11 percent by 1500 GMT.

"I think biotech stocks have got extraordinarily cheap and it has created an unusual buying opportunity," said Anthony Milford, who invests in biotechnology stocks worldwide for London-based fund manager Framlington.

Biotechnology issues have recently been hammered by the same macro-economic concerns that have hit other technology stocks, although the inelastic nature of demand for drugs should make them less vulnerable to economic hiccups.

Furthermore, the industry's perennial problem -- how to fund its cash-burn while waiting for new drugs to reach the market --is less critical now than during earlier downturns, thanks to a record round of fund-raising in 2000.

Steve McGarry of Goldman Sachs estimates cash currently accounts for a hefty 36 percent of European biotech company valuations on average, and the average company has enough money to last 2.9 years.

McGarry believes the risk profile of the sector has never been lower, although given the unprecedented influence of macro trends he is unsure if biotechs have yet found a bottom.

"It is too early to become overtly bullish on the whole sector, but we are certainly significantly more comfortable with fundamentals and valuations than we were even a few short months ago," he said.

PRE-GENOME LEVELS

Certainly a lot of froth has been blown off the biotech market with the Nasdaq biotech index now back down to levels last seen in November 1999, before the stock surge inspired by optimism over the mapping of the human genome.

The risks associated with the sector remain high, as evidenced by Friday's 40 percent slump in the value of U.S. firm Immunex Corp, following disappointing clinical trials on its Enbrel product.

But with no looming cash crunch, fund managers argue the gloom is overdone -- at least for those groups that filled their boots in 2000.

"An enormous amount of money was raised last year, the bulk of it by the larger companies. There were some smaller companies which had hoped to come back to the market and now won't be able to, and life will be difficult for them. But in general the industry has never had so much cash," said Milford.

Kai Bruening, an adviser to ADIG's 150 million euro biotech fund in Frankfurt, said stock selection would be key as investors reposition themselves after the shake-out.

German biotechs flew highest and fell hardest, and the market is unlikely to welcome newcomers to the sector anytime soon, with the market remaining shut to new issues for the foreseeable future.

But Bruening said the country's existing quality issues like Qiagen, GPC Biotech and Lion Bioscience were well-equipped to ride the storm without recourse to secondary offerings.

The volatile German market witnessed the biggest gains on Monday as biotechs that were pole-axed last week recovered sharply, with Lion up 16 percent, Medigene 14 percent, Qiagen 13 percent and Evotec 12 percent.

In the UK, Cambridge Antibody Technology added 14 percent and Celltech six percent, while Switzerland's Serono put on seven percent.

(Additional reporting by Sarah Knight in Frankfurt)