By Randall Osborne


Just when it seemed safe (relatively) for biotech investors to go back in the water, stocks in the sector got yanked under two Fridays ago by the same monster that sank its teeth into the so-called "new economy" shares and others across the board.

Even in the grim times lately, biotech had managed to keep more convincingly afloat than other technology stocks.

One Friday, April 14, changed all that.

Analysts use varying barometers to gauge the industry's progress or setbacks, and most of them empirically are saying the same thing: The rally that began last fall is history.

Peter Drake, managing director and senior biotech analyst with Prudential Vector Healthcare in Deerfield, Ill., said the story is told by the amount of money flowing into dedicated healthcare mutual funds, which are heavily biotech weighted.

"Generally, when [the flow] starts positive in the year, it stays positive," Drake said. Before this year, "the last time we had sustainable up-trends was in 1998," he said. "The numbers were either neutral or negative in 1999."

In January, flow into the mutual funds was positive. The week of Jan. 12, it was in the black zone by $260 million. The next week, $363 million. Then, $763 million. Then, $1.3 billion.

On March 15, the flow was negative by $564 million, and it stayed that way until the week of April 12, when it was positive again by $130 million.

"The sell signal is three consecutive, negative flow of funds weeks, with a lot of deals in the market," Drake said.

Curtis Hogue, senior biotech analyst with Volpe, Brown, Whelan & Co. in San Francisco, said mutual fund information is "usually a week or two late, but it's a pretty decent measure of how the stocks are doing."

This is true, he said, despite the fact that the correlation is imperfect, failing to reflect the full activity of momentum investors who have boosted biotech so fervently with cash in recent months.

Keeping an eye on such indicators may be more of the same game played recently by momentum investors themselves, who can lose as big as they win. "It's hard to feel sorry for those people," Hogue said.

Another indicator of market hardiness relates to follow-on offerings and initial public offerings.

Even before the Wall Street sell-a-thon, companies were backing away from planned financings. Among those to change their minds about going public: Adolor Corp., Drug Abuse Sciences Inc. and Rigel Pharmaceuticals Inc. Retreating from their planned follow-ons ahead of the Friday crisis were Genome Therapeutics Corp., Symyx Technologies Inc., Aurora Biosciences Corp., Lynx Therapeutics Inc., LJL BioSystems Inc. and EntreMed Inc.

Avigen Inc. went ahead with its offering, but raised only $26 million, after disclosing a goal of $293 million.

Was that Friday's avalanche a matter of investors further losing interest in biotech (among other sectors), thereby putting biotech stocks often grossly overvalued back in their proper places? Or was it simply a case of faltering "dot-com" stocks driving the market down and dragging biotech with them, creating a prime opportunity for investors to grab the suddenly undervalued biotech stocks?

The more intelligent approach for long-haul investors might be to fly through the current blinding storm using a reliable instrument panel hewing to the basics while others try to sniff the wind and outguess trends.

Friday's events caused biotech to decline "in direct correlation with the tech sector overall," Hogue said. "The charts pretty much coincided. Hopefully, the people who've been in the sector for a long period of time got in early, and they're looking at it from a longer-term perspective."

Although the first several days of last week provided cause for optimism in some quarters, Hogue said Wednesday "was the end of this rally, and we're going south from here. The question is how long and how far."

Like a swimmer whose toes almost touch the floor of the pool, biotech "may have bottomed out, unless something positive and fundamental happens," Hogue said. "To be sure, we need to go a little bit lower and see those levels hold up." Another week should tell the story, he added.

Biotech stocks are "on their way to coming back down to earth," Hogue said. "Compared to a month ago, there are a number of stocks that are reasonably priced, a good 40 percent to 50 percent."

Some remain undervalued and some overvalued, and judicious selection is, as much as ever, the order of the day.

Genomics stocks such as Human Genome Sciences Inc. and Millennium Pharmaceuticals Inc. "are always good buys," high-priced or not, because they will increase in value over time, Hogue said. Beyond this, not much is certain.

"I wouldn't rush back into the sector wholesale," he said.

Drake said Thursday it will take much longer than one week to determine whether the market truly has bottomed.

"We have to see a few more positive weeks," when money is flowing into the mutual funds, he said. The biotech group "usually tests the bottom once or twice," he added. "Clearly, we saw re-testing of the bottom today."

On Thursday, the Nasdaq Biotech Index closed at $886, down $38.09, or 4.12 percent. The American Stock Exchange Biotech Index ended the day at $428.31, down $19.67, or 4.39 percent.

Withdrawal of financings is a bad sign, Drake conceded, but "some deals are going to get done. To build a sustainable move up from here, you'll want [the market] to tread sideways for a couple of months and build a base," rather than spike only to fall.

"The conundrum is that large-cap stocks, by and large, don't look all that attractive, from a valuation standpoint," Drake said. "We have only two strong buys now, MedImmune Inc. and Sepracor Inc. Notwithstanding those, we think the value lies in later-stage development names," such as Celgene Corp., InterMune Pharmaceuticals Inc., SuperGen Inc., Corixa Corp. and Collateral Therapeutics Inc., he said.

Drake said the "sentiment is still pretty negative," and continued positive flow in the mutual funds will show whether that's really turning around.

"You need to stop the bleeding of money out of those funds, and [this means] more than putting your finger in a few holes in the dike," he said. *