For the past two years, investors have made great returns in the top tier biotechs, driving them up 79 percent in 1998 and 53 percent in 1999. Now the rotation into companies with real products, real earnings and significant market capitalization is pretty much complete, as many investors agree that the big cap biotechs are just about fully valued.

Thus while the big cap biotech names remain must-haves in any health care portfolio, investors last year were already starting to look down into the tier two companies valued between $501 million and $1 billion. Those companies were up 102 percent last year, and it looks like investors will spend much of this year looking for their big gains by prospecting among the middle tier of companies that will form the next generation of top tier companies, as well as on down into the lower tiers for potential winners.

This mid-tier theme coincides with a second theme: the coming of age of genomics and antibodies. Antibodies have proven their worth, with some of the biggest products of the last few years, while genomics is catching a second wave of investor fancy. The combination is made more potent by investors' realization that some of the first products coming out of genomics-based discovery will be protein and antibody therapeutics.

Looking down a tier

"Looking at the large cap companies, it's hard to see where to invest to make any money in them given their current valuations," said Anders Hove of BB Biotech, who sees continued rotation into the mid-cap biotechs as everyone tries to spot the next winner. He looks for companies with potential to have a dominant product in a therapeutic category that will command a sustainable pricing premium.