Overlooking the shaky conditions of the overall stock markets in the past two weeks, the reality is that the biotech sector has been on a tear. The BioCentury 100 was up 11 out of the 14 weeks in the third quarter. It is up 17 percent on the quarter, 24 percent on the year, and 93 percent since the group started rising at the beginning of September 1998.

But while the biotech equity market has been known to get ahead of itself, this time it looks like the enthusiasm is sustainable, driven by the fundamentals of the mid-tier and top tier companies.

In fact, Jeffrey Casdin of Casdin Capital Partners went so far as to argue that this is the first time that biotech has been a growth stock sector. "It's always had the promise, but it's never been able to follow through and deliver," he said. "In 1985-86 it fizzled when Genentech bombed out, as expectations for Activase tPA were $1 billion and it did a few hundred million. In '91 there was Amgen, and Centocor and Synergen were expected to follow, but they blew up and Neupogen growth flattened in '92. In 1995-96 there was another brief moment, not so much based on any one company but because the group got so cheap - so that was really a normalization of values."

The reason biotech had failed to deliver, he said, was that the technology was never really that powerful. But now the industry looks like it is building a new, higher, sustainable base.

"This rally has been driven mostly by antibodies - finally," Casdin said. "Unlike proteins, which depend on an unbelievable amount of work to purify a protein with therapeutic value, with antibodies there are lots of targets being created. So I have a feeling this product category is sustainable. And coming behind it is genomics-driven proteins, antibodies and small molecules, along with companies making money."

Thus Casdin sees a "small but bigger universe of companies that will bottom on earnings. I see higher highs and higher lows, and the valleys will be shorter in time. In a way I see biotech as just getting off the starting line for the first time."

Sven Borho of OrbiMed Advisors also likes the fact that this rally is underpinned by earnings. "The driver for the sector versus some of the other bull markets before is the earnings of the 21 or so profitable companies. The rally started with this group and that has been the driving force. To that extent, this rally is more sustainable - unlike '95 or '91, which were driven by expectations five years down the road."

Underlying any run up is the question of what is a sustainable base, and that, in turn, depends on whether current prices are justified. There are at least two ways of looking at that issue. First is the question of whether the market caps of companies with earnings are justified by either current sales and future sales trends for existing products, or by the potential of the next products in the pipeline.

Another way to approach the issue is to consider those companies that do not yet have sales and earnings, but have products in Phase II or Phase III trials. Many of these have market caps double those that similarly situated companies had a year ago. For long-term players in the industry, there is some discomfort when companies without approved products get market caps of half a billion dollars or more - and certainly there is an even larger percentage that is discomfitted when market caps of these companies go over $1 billion.

Earnings-driven companies