Health stocks were stagnant at the start of the week as investors digested a regulatory letter affecting one stock and an upcoming advisory panel that will affect another.

The Nasdaq and Amex biotechnology indices were down less than half a percentage point Monday, while the Amex Pharmaceutical index lagged 0.7%, at 304.67.

Big Pharma stocks and components of the Amex index, GlaxoSmithKline ( GSK), Eli Lilly ( LLY) and Wyeth ( WYE), were all down more than 1%.

On the advancing side, Discovery Labs ( DSCO) shares gained 31.7% to $1.91 Monday, recovering some of the ground lost Friday when news of regulatory delays hit the stock hard. The company said Monday it believes it will not need more clinical trials to gain Food and Drug Administration approval for its thrice-brushed off infant lung drug Surfaxin.

Meanwhile, investors weighed sentiment on Cephalon ( CEPH), a day before an FDA advisory panel is set to meet to discuss expanded use of the company's pain drug Fentora. Lehman Brothers analyst Jim Birchenough lowered his price target for the stock to $88 from $93, ahead of the panel meeting.

Overall, Wall Street analysts were mixed about the mood and likely outcome of the panel, which will discuss ramifications of expanded approval of the pain drug, including a potential increase in its abuse. Shares edged down 46 cents, or 0.8%, to $60.12 Monday

In earnings, Albany Molecular ( AMRI) said first-quarter revenue increased 11% to $53.6 million. The research services firm reported adjusted profit of $4.7 million, or 15 cents a share, up from $3.1 million, or 10 cents a share, a year ago.

Analysts surveyed by Thomson Financial were looking for earnings of 3 cents a share on revenue of $47.6 million. Shares added $1.83, or 16%, to $13.30.

In analyst action, Jesup & Lamont downgraded PharmaNet ( PDGI) to sell from neutral. The stock, which suffered an earnings miss last week, was off 92 cents, or 5.9%, at $14.81 Monday.

Also, Susquehanna Financial downgraded ArthroCare ( ARTC) to negative from neutral. Shares were down $1.71, or 3.8%, at $42.88.

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