Everybody guessed wrong last year, and nobody knows quite what to think this year. If 1995 was the "give up" phase of the bear market in biotech, when investors assumed there would be no near-term rewards for value-adding events at companies, going into 1996 the sector is balanced between overheating and the continued momentum of positive events.

On the plus side, there are a record number of products awaiting FDA approval - Cowen & Co. estimates 21 products are before the FDA, with 15 likely to be approved this year - and enough products in late-stage trials that it's become easy to lose track. Good news on the clinical and regulatory fronts, combined with continued interest in partnering by pharmaceutical companies, will unequivocally justify increasing valuations.

On the negative side, excess buying pressure from momentum players, as well as the potential influx of unsophisticated investors, could drive prices to unrealistic levels. And too many stock offerings - which by definition means more offerings by lower quality companies, or companies too immature to be public - also could sour the atmosphere.

On balance, institutional investors interviewed for BioCentury's fourth annual report on the Buyside View believe that the positives will outweigh the negatives this year, although no one thinks they will make as much money as they did in 1995. And everyone expects there will be corrections along the way.

More upside?

One of the big questions will be how long the hot money sticks with the sector. Much of the group's outperformance in 1995 was a function of the speculative fever spilling over to biotech from high tech, according to Stephen Lurito of Warburg Pincus Counsellors. "I suspect that will continue for awhile," he said, "but managers in this group are fickle." Still, he expects biotech to do well this year. "The environment is pretty good and I wouldn't be surprised if the sector outperforms again - there is enough high profile news coming on approvals or product launches," he said.

Tom Malley of Janus Capital Corp. also predicts the sector will outperform again this year, with the rally continuing at least in the first half, as low interest rates and earnings disappointments in more cyclical sectors keep biotechs attractive. Even if there is a mini-bear market, he thinks the companies with products won't suffer.