Lehman Brothers may have cooled on the biotechnology rally, moving to downgrade the entire sector on Monday morning, but analyst Craig Parker sees value in two names:

Genzyme

(GENZ)

and

Chiron

(CHIR) - Get Report

.

In Parker's view, while biotechnology firms have matured a great deal, the sector's growth may not be able to support such lofty valuation, prompting a downgrade to neutral from positive. With competition on the rise, the government re-examining how it reimburses companies and sales expected to plateau in 2005, the industry could be priced to perfection.

In reaction to the news, the Amex Biotech Index was off 0.8%, led lower by

Celgene

(CELG) - Get Report

, off $1.21, or 2.1%, to $57.61;

Invitrogen

(IVGN)

, off $2, or 2.8%, to $70.83; and

Human Genome

(HGSI)

, down 19 cents, or 1.6%, to $11.51.

As Parker points out, the sector has traded at a five-year historical price-to-earnings multiple of 33 times one-year forward earnings, when 2000 and 2001 are factored out of the analysis. The passage of the Medicare Modernization Act of 2003 will also weaken pricing power going forward, the analyst said, and with the sector trading at 31 times forward earnings, upside may be limited in the years to come. (Lehman Brothers does and seeks to do business with the companies covered in its research reports.)

"The increase in intensity of competition in the sector, along with the increased pushback on utilization from third-party payers -- both of which are likely to increase in intensity over the next several years -- suggests biotech P/E multiples could be 10% lower than the five-year historical average," said Parker, in a note.

Ultimately, biotechnology rallies run in boom-bust three-year cycles, with outsized gains in one year offsetting moderate stock performance in following years. In 1995, the American Stock Exchange Biotech Index rose 63%, followed by a gain of 7.9% in 1996 and 12.6% in 1997. With the index gaining 45.7% in 2003, the analyst fears that valuations are getting expensive, given the possibility of a cyclical turn.

While the overall sector may be getting pricey, in Parker's view, not every biotech firm is expensive -- the analyst upgraded Genzyme and Chiron on Monday, citing slumping share prices.

"We are upgrading Genzyme shares from equal-weight to overweight," said Parker. "Genzyme shares are down 15% in the last four months to a level where we feel that the market has overly discounted the dilution from the Ilex acquisition and the likely competition from Renagel."

Despite the upgrade, shares of Genzyme fell along with the rest of the sector, dropping 77 cents, or 1.6%, to $46.95. Chiron shares were unchanged at $43.95.