A year ago, in its premier issue, BioCentury asked fund managers what kinds of criteria they used to pick biotechnology stocks. One year, many clinical disasters, a few shining triumphs and a health care plan later, it seems appropriate to ask if and how they have changed.

Summing up the past year, Stephen Lurito, who runs Warburg Pincus Counsellors' Emerging Growth Fund, said "1993 was a humbling year for a lot of us. It was where the dream met the reality. 1994 is the year that I'm going to declare victory on some things and declare defeat on some things and move on. I think a lot of people did it last year and a lot of people are going to do it this year.

"It's hard to declare defeat. You get attached to the managements, you want to believe. But you're in business and you owe the clients a return."

Later rather than sooner

Among the eight fund managers interviewed, only a few had changed their investment behavior in the past year, becoming more conservative, while the rest hadn't changed their styles - largely because they had tight screens to begin with. Still, almost all said that they are looking more at companies in Phase II studies and beyond and less at earlier-stage companies.

"The criteria we apply are pretty stringent," said Garo Armen of Armen Partners. "Often publicly held companies are using less stringent criteria with products in Phase II and Phase III than we use with the private companies in our portfolio."

Jeff Wiggins, an analyst for Rosenberg Capital Management's growth funds, is typical of those who have become more cautious. "When I begin to fall in love with a company, I go and splash cold water on my face. I remember that no matter how much work I do, I can't get rid of that last 30 percent of risk. That's the lesson of 1993."

Others haven't changed. One example is Edward Owens, who picks stocks for Wellington Management Co.'s Vanguard Specialized Healthcare. "I'm a constant rock in a flowing rapids of biotechnology, and I only buy when they're below my valuations," he said. Owens has been buying biotech stocks since before Genentech went public.

More caution doesn't mean there's less interest in the sector, however. Wiggins, for example, is an active buyer right now. What he's done, however, is taken the time-honored path of minimizing risk by diversifying. "Now I spend less time on individual companies. I own many more companies now than I used to - I'm spreading my risk over companies."