BIOTECH STOCKS RISE 68.4% TO END 3-YEAR SLUMP\Approvals, successful drug trials fueling industry growth, analysts\say.

Byline: Lawrence M. Fisher The New York Times

In August 1994, Dan Case, president of Hambrecht & Quist, wrote a memo urging the firm's clients to invest in biotechnology. He was a bit ahead of himself: The stocks hit a new bottom four months later.

But investors who stuck with him have reason to thank Case. According to industry indexes maintained by his investment firm, the biotechnology industry closed 1995 up 68.4 percent, higher even than the high-technology sector, which managed a not-too-paltry 50.5 percent.

The record guarantees that the 14th annual Hambrecht & Quist Life Sciences Conference, which will open in New York on Monday and is the biggest gathering in the industry, will evince a euphoria unknown since 1991.

But Case and others have taken pains to explain that 1995 was not a replay of 1991. For while investors sported wide smiles over this risky area five years ago, they quickly faded.

In 1992, election-year concerns about health care reform weighed heavily on the stocks. Then came the failures of a few high-profile biotechnology drugs. The setbacks sent the stocks into a three-year slump.

However, industry bulls say that in 1991 the market was driven largely by the blockbuster success of just two drugs that came from just one company, Amgen.

Nearly every company with a product close to market that year was touted by some analyst as "the next Amgen." While the 1995 recovery was ushered in by a single event - the good clinical trial results for Cephalon Inc.'s drug for Lou Gehrig's disease - that event was followed by a string of product approvals and other positive news.

Moreover, even though 1996 is another presidential election year, no one is expecting health care reform to dominate the political discussion.

But with biotechnology already up so much, is it too late to make money? No, say many analysts. The reasons are the industry's structure and the biotechnology indexes, including Hambrecht & Quist's, are usually weighted to reflect market capitalization.

The industry has a few large companies, like Amgen, Biogen and Chiron, and many smaller ones. Thus, the weighted industry indexes are disproportionately affected by movements in the big outfits. That means the stocks of many of the small companies did not rise as loftily in 1995 as the index suggests.

Moreover, the value of small companies can grow greatly if they succeed. Dennis Purcell, Hambrecht & Quist's managing director for life sciences, said biotechnology companies occupy three tiers.

First come companies with products already on the market; their market caps range from $2 billion to $4 billion. Second are companies that have products in the late stages of human clinical trials, or which await Food and Drug Administration approval. Their market caps are about $500 million. Third are earlier-stage companies, valued about $100 million.

This structure suggests that, as companies move from tier to tier, their value can increase three to four times, said Purcell. "You can really see the argument that there is room for growth," he said.

But which companies will grow? A. Rachel Leheny, Hambrecht & Quist's biotechnology analyst, recommends Alpha-Beta Technology, which has a novel carbohydrate polymer that modifies the immune system; Incyte Pharmaceuticals, which sells genetic data and gene sequencing to larger companies; Sangstat Medical, which is developing drugs and instruments for organ transplants, and Sequana, which is trying to identify genes responsible for diabetes, asthma, osteoporosis and schizophrenia.

But a caveat is in order. Biotechnology has few sources of independent opinion for the curious investor. Most of these recommended companies are clients of Hambrecht & Quist.

The fact is, outside of a company's underwriters, there are almost no Wall Street analysts familiar with biotechnology stocks other than the big ones that ran up so much last year.

"A lot of the biotech stocks are underfollowed on Wall Street," said James McCamant, editor of the Medical Technology Stock Letter. Wall Street has ignored biotechnology since 1991, and firms will need time to acquire expertise.

And many independent research firms, like Mehta & Isaly in New York and Vector Research in Chicago, are for large institutions and beyond most individuals' means.

One practical source of independent research is investment newsletters, like McCamant's (510-843-1857), Sturza's Medical Investment Letter (212-873-7200) and the California Technology Stock Letter (415-726-8495).

Although some of the editors of these publications also manage funds, and are thus invested in stocks they recommend, they do not have direct financial relationships with the companies covered.

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