Given the frequency with which the biotech industry comes up with bad clinical news, it's not surprising that investors might choose to put their money elsewhere.

In a gross sense, it can be argued that the market is very good at valuing technologies and companies, and if stocks are low-valued, it is rightly so. But there are exceptions to every rule, and given how seriously the sector is lagging the rest of the market, there must be some value being created that is not being recognized by investors.

Over the past year, one of the key problems for the sector has been making investors care when they had so many easier places to make money. At Aug. 21, before the market crash - but even after it had receded from its 1998 high - the S&P 500 was up 11.42 percent on the year at 1081.24; it rose 31 percent in 1997. The Dow Jones Industrial average was up 7.91 percent at 8533.65; it rose 22.6 percent in 1997. The NASDAQ Composite was up 14.47 percent at 1797.61; it was up 21.6 percent last year.

Biotech, in contrast was down 19.37 percent based on the BioCentury 100 index, and lost 3 percent last year.

The Bear case

The bear case against biotech has been that if investors can make 30-40 percent in blue chip stocks, the incentive they need to invest in biotech is greater than ever. Retail investor sentiment can be seen in the assets put into Fidelity's Select Biotechnology fund, which has run as high as $1.1 billion or so when the sector is popular, and is now at $510 million.

In addition, the bear case goes, investors continue to sell biotech stocks on good news. Finally, the lower tier companies, which appeared to be well-financed with three years or more of cash in the booming equity market of 1996, are now edging down towards two years of cash, with the danger zone of one-and-a-half years of cash visible on the horizon.

Thus while the broad group appeared to be in good financial shape six months ago, the picture has changed: the equity markets are providing ample funds for selected late-stage companies at or near market, but are being stingy with earlier stage companies or those that are out of favor.