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Before Internet-Mania There Was Biotech

Biotech funds were great to own in the early 1990s, but they haven't done much since then.

If stratospheric valuations and stomach-turning volatility aren't enough to give you pause about Internet stocks, here are a few more reasons.

The following chart lists returns for some biotechnology mutual funds during the high ride in their underlying stocks from 1989 through 1991 and since then.

As you can see, performance during the past seven years has been less than spectacular. Only one fund --

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Vanguard Health Care -- has beaten the

S&P 500

since 1991.

This chart doesn't show some even more stunning numbers. In 1991 alone,

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Fidelity Select Biotechnology returned 99%. That fund's performance was dwarfed by the 121% return of

Oppenheimer Global Biotech


The chart also doesn't show how the Oppenheimer fund has done since then because the fund has disappeared. After months of sagging returns, it was morphed into the

Oppenheimer Global Emerging Growth

fund in 1994, which itself was merged into the

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Oppenheimer Global fund in 1997. Oppenheimer says it has since gotten out of the sector fund business altogether.

Are Internet stocks headed for a similar stretch of mediocrity? Certainly, there are many parallels between the two crazes. In 1998, the

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Internet fund and

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Munder NetNet produced mind-boggling returns of 196.1% and 97.9%, respectively, reminiscent of the height of the biotech frenzy.

"Biotechs in 1990 and 1991 really saw excessive valuations that were speculative in nature and not based on proper assessment of risk and reward in that business," says Michael Yellen, portfolio manager of the $520 million

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AIM Global Health Care fund. "And I think that's the case in the Internet sector right now."

"I don't think you've seen a group have as tremendous a price run-up in such a short amount of time as you have in the Internet," says John Schroer, portfolio manager of the $1.6 billion


Invesco Health Sciences fund.

Schroer recalls that stocks rose in value at the beginning of the decade merely because they were associated with the term biotech, much like the .com mania surrounding Internet companies now.

"There were companies in biotechnology that ... would make a press release on a monumental discovery, and that discovery was that they had filed with the


that they had a molecule that they were beginning research on," Schroer says. "And the stocks would move."

"You had this rising tide lifting all the stocks, no matter what the quality of the company," says Schroer. "So I think that could be the parallel there, that you have companies moving without the underpinnings, on just news items."

But while the nature of their stock movements may be similar, the fundamentals of the underlying businesses of biotechnology and Internet technology have little in common, these managers say.

The seeds of the biotech craze were planted in the 1970s, when scientists found a way to isolate protein-producing genes within the body, exploit their disease-fighting characteristics and mass produce them for medical use. In 1980, the

Supreme Court

ruled that science could patent new forms of life -- and you thought


was cool -- created by splicing genes with preexisting cells. Hence, the biotech race began.

It wasn't until 1989 that things really caught fire. That was the year


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approval for Epogen, its anti-anemia drug. Suddenly, the once-tiny penny stock from Thousand Oaks, Calif., started to trade like a bona fide winner.

With the growing AIDS epidemic igniting a demand for advanced, disease-fighting drugs, the industry took off. Soon, any lab with a good idea and the potential for a research breakthrough seemed to be going public -- whether it actually had a product to offer or not.

The problem was, many companies underestimated the difficulties and risks -- along with the capital requirements for years of research -- involved in getting FDA approval for their drugs. By 1992, the companies were taking longer to produce these miracle drugs than planned and investors began to lose faith. These companies started slipping into obscurity. So did the biotech craze.

Until it became an analogy for the Internet craze.

Ironically, the biotech managers now say that while Internet valuations are hard to justify, the sector appears to have more staying power than biotech ever did.

The low capitalization requirements for Internet companies make them much more likely than biotech companies to evolve into full-fledged businesses with revenues, they say.

Sustaining a fledging biotech company could take years and a lot of money before it came up with a saleable product.

For every Amgen that navigated its way through the difficult product approval process, there were companies like


of Sunnyvale, Calif., that burst onto the scene in 1992 with the promise of a new wonder drug or technology -- in this case, a way to measure thyroid hormones -- only to disappear when the product failed to materialize or proved unprofitable. BioCircuits ran out of money and ceased operations last May.

For Internet companies, the barrier to surmount is not FDA approval, but consumer mindshare. And while it might not be a walk in the park to create the widespread brand awareness of an

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or a



, neither is it rocket science -- or recombinant DNA, for that matter.

That means success is easier to achieve for an Internet company -- though once achieved, it's less assured. On the Internet, a startup company with talent and a modest amount of funding could come up with a better idea, and that idea could catch fire. That is a scenario that


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Bill Gates says keeps him awake at night.

That was less of a worry for biotech companies. "If you're a little biotech company and you get

your product approved, that's a unique product and no one else has a product like that," says Yellen.

Still, the Internet sector already has passed a key hurdle that took biotech years to surmount -- the actual supply of products to the market place, says Schroer.

"The Internet is much more tangible, believe it or not, than biotech was," he says.

Companies like and

America Online


"have actual revenues. They are valid business models," he says.

At the height of the biotech craze, no biotech company could rival pharmaceutical maker


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in market share, but America Online is already bigger than many well-respected blue chips, points out Schroer.

But that doesn't mean Internet stocks won't come crashing down and drag down the returns of the funds that invest in them. It happened in biotech, and it happened before in gold stocks in 1979 and 1980.

"In the 1970s with gold, hard assets were the only place to be," says Marshall Schield of

Schield Capital Management

in Denver. "The oil shortage was on and the end of the world was coming."

But of course it didn't, and that run-up, like most run-ups, eventually came to an end.

"Like most other tops, it came when you basically ran out of buyers," Schield says. "Everybody that was going to buy had bought, and then it began to drop."

While the biotech and Internet stock run-ups have many parallels, everyone we talked to seemed to have more faith that the Internet actually has some substance behind it.

That could be an ominous sign that history is repeating itself.