In a retreating stock market, biotechnology stocks followed thecrowd on Wednesday.

Fueled by worries about the outlook for Federal Reserve creditpolicy, stock prices fell sharply in afternoon trading onWednesday. The Dow Jones average of 30 industrials was down41.73 points to 3,287.76 as declines led advances by 3-1. TheNASDAQ composite index fell 10.83 to 553.24.

A Federal Reserve status report that cited strengthening in theeconomy cooled hopes for any immediate further moves by theFed to relax its credit policy.

Biotech stocks, which have been falling back gradually for thepast two weeks, sped up the fall on Wednesday. The AMEXBiotechnology Stock Index posted one of its sharpest one-daydrops ever, down 5.89 to 135.79. The index was at 162.57 asrecently as June 3.

The sector's stocks have been edging back for several monthsfrom a phenomenal 1991 performance. The Smith BarneyBiotech Industry index, an unweighted averaging of 60 drug-related biotech stocks, is off about 40 percent from the start ofthe year and about 50 percent since a recent peak in mid-January, said Smith Barney analyst Denise Gilbert in SanFrancisco.

"I think we're well into a down cycle," Gilbert said. "I expectthe group to go sideways through the summer, perhaps the restof the year."

"People aren't as willing to step up and buy today," said JoyceLonergan, an analyst with Cowen & Co. in Boston. Reports ofprogress in clinical tests or other product developments are notas quick to trigger higher valuations for biotechnologycompanies as they were a year ago.

Besides the effects of the larger stock market that were evidentWednesday, Gilbert and other analysts are seeing severalfactors at work that help explain the sector's recent softness.Those include:

-- Adjustment from last year's unprecedented rally inbiotechnology stocks. Many investors are cooling to the entirehealth care industry, prompted by worries over, among otherthings, government cost controls.

-- Major disappointments earlier this year in productdevelopment in a few large biotechnology stocks, whichtranslated into declining stock prices throughout the sector.Regulatory setbacks hurt U.S. Bioscience Inc., Centocor Inc. andXoma Corp., which are ranked among the 15 largestbiotechnology companies in terms of market valuation.

-- A rising tide of institutional ownership of biotechnologystocks, much of it from stock mutual funds that have beenflooded with cash from individuals dissatisfied by therelatively low rates now offered on fixed-rate securities. JimMcCamant, editor of the Medical Technology Stock Letter, saidthe institutions recently held an estimated 81 percent ofSynergen Inc. and Genzyme Corp. stock. Institutional moneytends to move in droves, both into and out of stocks. "I predictyou'll see a substantial decline over the next couple of months,"McCamant said.

-- A shift by investors away from growth stocks and into largercompanies with predictable profits has hurt biotechnology thisyear. "Any movement in the amount of interest has an extremeeffect on price," Gilbert said.

Good news will distinguish the sector's top-performing stocksin coming months, McCamant said. "It'll be a tougher marketthe rest of this year for companies in early stages," he said.

Companies will increasingly chart their own course in the stockmarket. After this market correction, "the group will becomemuch more individual," he said.

Gilbert sees plenty of upbeat news coming next year, whencompanies are expected to file with the FDA about six productlicensing applications (PLAs), with possibly seven more in1994. Even better, the PLAs cover some potential big sellers,products that could produce sales of more than $200,000, shesaid. The most bountiful crop of biotechnology-based PLAs wassix in 1989.

With the recent drop in stock prices, some biotechnology issuesare starting to look low-priced.

For investors looking for near-term results, Gilbertrecommends purchase of Amgen Inc. and Genzyme Corp., twocompanies with established products, whose stock prices havedropped to reasonable multiples of the profits analysts arepredicting for next year.

"I don't have as many hopes for the third tier (of biotechnologystocks) in the near term," Gilbert said. However, selectingcarefully from the group for long-term gains, "you have somephenomenal buys, with many stocks selling a little above theircash value." Among this group, Gilbert likes AgouronPharmaceuticals Inc., Cambridge Neuroscience Inc. and ImCloneSystems Inc. n

-- Ray Potter Senior Editor

(c) 1997 American Health Consultants. All rights reserved.