SAN FRANCISCO Talk about a hard act to follow.

After 2000's boom, which brought about a nearly hysterical financial ride for the industry, almost anything would have looked worse. Investors sniffing big profits down the road had jumped aboard the human genome-mapping bandwagon in 2000 with dot-commish glee, which sent valuations rocketing to heights that caused seasoned observers to shake their heads.

By the first part of this year, the plainest evidence of misplaced (and waning) enthusiasm had begun to appear. And, by the time 2001 got under way in "earnest," that turned out to be just the right word for it.

"I think it was a bit of sobering up, after the party of 2000," said Joseph Dougherty, senior analyst with Lehman Brothers Inc.

This week, though, when industry members gather for the annual JP Morgan H&Q Healthcare Conference here, the mood is likely to be typically merry, and Dougherty acknowledged that his "sobering up" analogy is not perfect.

"The hangover was not so bad, because a lot of these companies had cash in the bank," he said. "Almost everyone saw their shares suffer, but a lot of folks had raised money."

Still, he noted, "a lot of people who had great performances in 2000 had a tough year [in 2001]. The first quarter or two were very difficult. People were hanging on in tough times, going into the end of the year."

One standout trend: favoritism that has begun to surface for biotechnology stocks.

"For a lot of investors, biotech has almost been a defensive sector, which is a scary thought," Dougherty said. "The technology stocks' performance had been bad, and recurrent, financially driven blowups had scarred many investors. The prospect of earnings growth in profitable biotechs was much better."

All other things being equal, the debate over embryonic stem cells and cloning would have taken center stage in the year's industry-related news. President Bush stepped into the fray which included abortion foes, religious leaders, ethicists and scientists with a vow of federal support for a limited number of cell lines.

Then, along came Advanced Cell Technology Inc., declaring in the Journal of Regenerative Medicine that it had created the world's first human embryos through therapeutic cloning, or somatic cell nuclear transfer.

Sen. Sam Brownback (R-Kan.) introduced an amendment to place a moratorium on human and therapeutic cloning for six months. The amendment fell to the wayside, but the House gave its nod to a bill from Rep. Dave Weldon (R-Fla.) outlawing therapeutic and reproductive cloning.

Carl Feldbaum, president of the Biotechnology Industry Organization, said the House decision was "in some ways, a freak vote. The House knew the Senate would never take it up, much less pass it. They needed to go home and say they'd done something about stem cell research."

Stay tuned.

"We'll get some signals [about cloning] later this month, with the president's State of the Union address," Feldbaum told BioWorld Financial Watch, adding that BIO sent a letter to Bush, "some of which may find its way into his speech."

The year was about much more than stem cells and cloning, of course. To talk about 2001 without talking about the September 11 terrorist attacks is hardly possible, whether the subject is biotechnology or world affairs.

"You can make an apt comparison [between 2000 and 2001] pre-September 11, but post-September 11, we're living in a different world," Feldbaum said.

Dougherty noted that, after the attacks, "there was a huge liquidity preference and the smaller companies had a harder time. [Investors learned] we can be caught by events that are not stock specific."

The game was no longer just about clinical trial failures and regulatory risks, but "the exposure of the whole sector to things coming out of the blue" such as jetliners taken over by madmen.

Only a few winners emerged from the hard-hit stock market after September 11, such as Cepheid Inc., the maker of biological agent detection systems, whose stock rose 89.5 percent on the first day of trading after the terrorist strike, closing at $2.90, and had risen to about $4.35 last week.

"There will be a lot of money flowing into infectious disease and vaccine companies, and certainly a lot of early stage research funding in the area, but those are not long-term drivers for most companies in the sector," Dougherty said.

What will be the picture long term?

"I think people are going to reevaluate things early this year, in a different light than they did late last year," Dougherty told BioWorld Financial Watch. "They're not going to ignore circumstances in the world around them, but they're going to take a new look at valuations. Smaller-cap companies may get more attention in 2002."

The valuation matter will figure here, too.

"If you were going to make your hopes for return out of [Amgen Inc.], you wouldn't look at smaller names," Dougherty said. "But when Amgen gets expensive, people look for better ideas."

Whether such interest will translate into more initial public offerings is hard to say, he added.

"We haven't had an IPO market in a year or so, and that means there are more mature companies in later-stage, private positions," Dougherty said. "There are quite a few of those folks running around New York interviewing bankers these days, but we need to see a little more stability and directionality in the market."

The window, such as it is, may have to be forced open by "special cases. Those companies are going to have to go out and do well before the more typical early stage biotech IPOs," he said.

One of the few to stick its head up lately is ZymoGenetics Inc., established in 1981, which became a wholly owned subsidiary of Denmark-based Novo Nordisk A/S, in 1988, for which ZymoGenetics operated as a protein discovery arm in North America before it was spun back out through a private placement of $150 million. Somewhat ironically, ZymoGenetics filed for an IPO (with Lehman as one of the book-running managers) the day before the terrorist attacks.

As a result of that trauma and other factors, Dougherty said, 2002 won't pick up where 2001 left off.

"Not quite," he said. "People are more inclined now to put money away for a rainy day, and hold more liquid stocks. That's what makes it strange to call the sector 'defensive.' If there's any long-term worry, it would eventually be price pressure on innovative biotech products. It's mostly a question in Washington. Is Medicare going to drive down pricing for drugs?"

That won't be much of a concern in 2002, he said.

"Profit margins on marketed drugs have not gone unnoticed in Washington, and they're always a potentially political target, but that area is reasonably well defended now," Dougherty said. "This administration and this Congress are likely to look elsewhere for money."

Feldbaum said much depends on "what part of the [congressional] agenda will be absorbed" by war and terrorist concerns.

"I don't see [debate over drug pricing] coming back in the full-fledged way we thought it would, before September 11, but we're anticipating battles in a number of states, smaller fires that are in some ways more difficult to put out," he said.

Finding a leader for the bogged-down FDA is critical, Feldbaum added.

"Do not discount a new form of pressure on the FDA from the national security sector," he said, noting that a recent Department of Defense report went so far as to identify the FDA as a "barrier" to introducing new drugs.

"No one knows [when the head of the FDA will be appointed] and I wouldn't dare make a prediction," Feldbaum said. "We're pushing every button to make sure they realize how important this is."

Meanwhile, in 2002, the industry will be propelled by "the usual sorts of near-term events" drug approvals, mainly, Dougherty said. Transkaryotic Therapies Inc. and Genzyme General have competing treatment candidates for Fabry's disease awaiting FDA action. IDEC Pharmaceuticals Inc. and Schering AG have Zevalin, the radioimmunotherapy for non-Hodgkin's lymphoma, in front of the agency.

Not all candidates are for serious conditions, but for lucrative common ailments. Among other firms expecting FDA news are Biogen Inc., with Amevive for psoriasis; ICOS Corp., with Cialis for erectile dysfunction, developed through a joint venture with Eli Lilly and Co.; and ViroPharma Inc., with PicoVir for the common cold.

Dougherty pointed to three major acquisitions in December 2001 as proof of what has been a constant principle in biotechnology, which is that products rule the game. MedImmune Inc. bought Aviron Inc. for $1.5 billion, Millennium Pharmaceuticals Inc. acquired COR Therapeutics Inc. for $2 billion, and Amgen Inc. acquired Immunex Corp. for $16 billion in stock and cash.

"If there's any lesson to be taken [from these mergers], it's the huge value of marketed drugs," Dougherty said. "The basic biotech investment thesis remains intact."