All in all, the biotech sector could be looking worse.

A big earnings warning from

Biogen

(BGEN)

earlier today, media reports of more alleged insider trading at

ImClone Systems

(IMCL)

,

Pfizer's

(PFE) - Get Report

rejection of Pagoclone, added to Thursday night's

Intel

(INTC) - Get Report

warning, had health care fund managers bracing for a truly wretched day in the already decimated biotech sector.

But while the Amex Biotechnology Index opened Friday down 5% -- adding to Thursday's 5% loss -- the index has moved higher throughout the day. At 3 p.m. EDT, the index was at 360, down 1.5% for the day.

"We're definitely seeing the start of some bargain hunting, as well as short-covering," said one institutional Wall Street trader.

Of course, all this must be put into a rather bleak perspective. The Amex Biotech Index is now down "just" 37% for the year, and off 10% since last Friday's close. By comparison, the Comp was down 20% headed into Friday. In fact, the Amex Biotech Index hasn't visited the 360 range since December 1999.

Biotech pundits have tried to call a bottom in the sector at various times over the past two months, with little success, so there's no sense in predicting one now. But there does seem to be a feeling on Wall Street that biotech stocks have become somewhat disconnected from fundamentals that indicate prices should be higher, which opens up opportunities for value players to begin nibbling.

"There is nothing out there now that I'd call overvalued," says Carl Gordon, a partner at New York-based health care fund Orbimed Advisors. "It's frustrating. Smaller-cap stocks are trading at cash, as if investors think these companies should be shut down."

There were 40 biotech companies trading at 1.5 times cash or below in mid-May, according to research compiled by Robertson Stephens. The list -- likely larger now with the additional sector selloff since then -- includes some significant names, including

CV Therapeutics

(CVTX)

,

Human Genome Sciences

(HGSI)

and

Cell Genesys

(CEGE)

.

SG Cowen biotech analyst Eric Schmidt believes value investors are starting to get interested in the sector again, but a lack of confidence in the big-cap names is still a hindrance. Profitable companies like

Amgen

(AMGN) - Get Report

, Biogen, and

Genentech

(DNA)

must rally first, historically, before the stronger mid-cap and small-cap stocks get any attention.

"I just don't see any clean stories out there" among the big-cap names, says Schmidt. "There is a lack of confidence, a fear, that expected growth rates aren't real in the face of continuing bad news."

That view was bolstered Friday by Biogen, which

snipped a nice chunk of change off second-quarter and full-year 2002 earnings forecasts. Looking ahead, some Wall Street biotech traders fear second quarter consensus estimates for

Idec Pharmaceuticals

(IDPH)

are in jeopardy because the sales ramp of its new cancer drug, Zevalin, is slower than anticipated.

Need more uncertainty?

Immunex

(IMNX)

continues to have supply problems with its rheumatoid arthritis drug Enbrel, which puts current year and 2003 sales estimates at risk. And if Enbrel's sales numbers are shaky, that hurts Amgen because the biotech giant is counting on Enbrel to accelerate its earnings growth once the merger is completed.

Lastly,

MedImmune

(MEDI)

is anxiously awaiting a decision this summer on its flu vaccine, FluMist, by the Food and Drug Administration. If regulators delay the drug, MedImmune earnings forecasts will also need to be reworked.

Big-cap names have been so bloodied this year that they must seem cheap to investors, but that's not entirely true. These profitable biotech stocks are now trading around 26 times 2003 earnings, compared to a historical average of around 35 times forward earnings.

But growth rates today are lower than they've been in recent years. One biotech fund manager, hunched over his spreadsheets yesterday, used a 23% average growth rate -- down from 26% in year's past -- to figure that big-cap biotech stocks now sport a PEG ratio of 1.1. By historical standards, that means these stocks are fairly valued right now.

So he's buying, right? Not so fast. "If you can't trust earnings and you can't trust growth rates, then the confidence level is just not there yet."

But heck, it's Friday and the week's been dank for biotech investors. If the Amex Biotech Index closes flat for the day, let's just call it a victory and take the weekend to rest.