Investors are accustomed to watching biotechnology stocks rise and fall dramatically on news about drug development. But the body blow delivered to Immunex ( IMNX) last week by investors was a stunner, signaling a new era in biotech stock valuations.

Immunex lost half its $10 billion market value March 22 after disclosing that its top-selling arthritis drug Enbrel had failed tests to expand its use to chronic heart-failure patients. Immunex shares have clawed back some since then, but the company is still down almost 40% since the announcement, just above its 52-week low.

By most measures, Immunex is a biotech success story, building Enbrel into a $650 million drug in just two years. The company could still push sales of Enbrel into the $1 billion blockbuster range through new arthritis uses. But as last week's misstep proved, investors have been quick to bring the sky-high valuations of biotech firms quickly down to earth, especially those companies without products on the market or earnings.

The American Stock Exchange Biotechnology Index is down 25% for the year, after posting big gains over the past two years. Genomic stocks have been hit the hardest, with companies like Celera Genomics ( CRA) and Human Genome Sciences ( HGSI) off 88% and 62%, respectively, from their 52-week highs. But the selloff is also affecting the more established (and profitable) biotech drugmakers. Amgen ( AMGN - Get Report) is off 25% from its 52-week high, as is Biogen ( BGEN), down 43%, and MedImmune ( MEDI), off 58%.

Now that the biotech sector's performance is more closely mimicking the broader Nasdaq Composite Index, many analysts are starting to cry foul, believing that the ill winds blowing over technology stocks are unfairly flattening biotech stocks.

"Biotechnology continues to be dragged down by an unwarranted association with its Nasdaq brethren in the technology sector," says Peter Drake of Prudential Vector in a recent report. "We believe this effect may be compounded by a general disdain for any stocks with high multiples, regardless of fundamentals."

Adding to the frustration is the fact that demand for new drugs doesn't abate just because the economy sags.

"As a consumer dealing with a recession, I may not buy a new personal computer these days, but if I get cancer, I'm going to buy drugs," says Mike Becker, analyst with Wayne Hummer Investments. "Biotech companies are growing between 20% and 25% a year, regardless of the economy -- how many sectors can you say that about?"

The fundamentals underlying the biotech sector do look sweet. Biotech raised $22 billion from investors last year, creating an ample war chest from which to fund research and development. And there are 319 drugs in late-stage clinical trials, with another 89 submitted to government regulators for approval.

So, are biotech stocks cheap today? Or does the sector still have further to fall before it reaches a bottom?

It depends on the way you interpret the numbers. The recent selloff has pushed multiples down far enough to appear appetizing. As late as December 2000, big-cap biotech companies were trading at 75 times 2001 earnings, on average. Today, they trade at 50 times 2001 earnings, according to research done by Banc of America Securities.

Those companies were trading at an average of 40 times forward earnings before the big biotech stock boom that began in 1999. So, today's prices are either in the ballpark with historical levels -- which means it could be time to buy -- or prices still have a little further to fall.

Wayne Hummer analyst Becker says investors need to stop buying and selling biotech stocks as a homogenous block. He says genomics firms such as Celera or Millennium Pharmaceuticals ( MLNM) are still risky, even at stock prices fractional to their all-time highs. Without products or earnings, the metrics used to value these companies are still highly speculative.

At the same time, biotech companies with products on the market and strong pipelines of new drugs may be buying opportunities, he says, mentioning specifically big-cap names such as Biogen and Amgen, as well as smaller companies with drugs nearing approval, such as Amylin Pharmaceuticals ( AMLN) and La Jolla Pharmaceutical ( LJPC). (Becker has market outperform ratings on Amgen and Biogen, and his firm doesn't do underwriting.)

"Investors have to realize that there's a difference between a company with drugs on the market and a company whose products are still years away," says Becker. "Investors today have forgotten this, so they've been throwing out the baby with the bath water."

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