Rocky Road for Biotech Firms : Price erosion: Market’s recent fall was triggered in part by the astronomic appreciation of the stocks. Most of the companies have not been profitable.

Biotech stocks were sizzling this year, but these days it seems they’re burning investors.

The stock market’s recent nose-dive was triggered in part by a ripple of sudden queasiness over the astronomic appreciation of the stocks of biotechnology companies--the vast majority of which have produced neither profit nor product.

Denise Gilbert, an analyst with Smith Barney, Harris Upham & Co. in San Francisco, said the 45 biotech stocks she tracks were down Friday an average 21% from their peak on Nov. 12, though the index still was up 115% year to date. Some say prices will continue to erode as investors discriminate among solid products, prospects and pipe dreams.

“When you reach the state where you have people buying securities based on cocktail-party-type discussions, you know we’re somewhere in the final phase” of a positive move, said John Wilkerson, head of Wilkerson Group, a biotech consulting firm.

The biotechnology industry has enjoyed three periods of “open windows,” when investors were particularly attracted to biotech issues, allowing companies to raise money with ease. The first window opened in 1981, then again in 1983 and once more in 1986.

This year, after a somewhat tumultuous beginning, the public’s appetite for biotech issues proved ravenous once again. So far this year 32 biotech companies went public, triple the number during the last open window, said Roger Longman, editor of In Vivo, a biotech newsletter based in Norwalk, Conn.

To date, biotech companies have raised an estimated $2 billion through equity and debt offerings.

Experts generally agree that a handful of successes enjoyed by a small, elite group of companies helped renew interest in the entire biotechnology sector.

Less than two years ago industry leader Amgen Inc. of Thousand Oaks introduced the anti-anemia drug Epogen, which has become a blockbuster, with sales expected to top $300 million this year.

Centocor Inc. of Malvern, Pa., is expected to receive government approval by year’s end to market Centoxin, which treats sepsis syndrome. Analysts estimate that first-year sales will range between $200 million and $400 million, a stellar performance for a new drug, even at the lower end of the range.

Still, most companies won’t be in the black for years. Of the 45 biotech companies Smith Barney’s Gilbert follows, only eight are expected to make money by year-end. Another 18 are expected to be profitable by the middle of the decade, and another 19 companies won’t see any black ink until “the end of the decade or beyond,” she said.

Part of the problem in the marketplace is that the second- and third-tier biotech companies have seen their stock prices rise in tandem with the few companies with proven track records.

“The biotech group has not been logical,” Gilbert said. “There has been very little discrimination between companies.”

What is happening now, she said, is a much-needed correction, with the market for the first time choosing among companies where the payoff is imminent and those that don’t hold out even the hope of profitability.

“What seems to have happened is the really dizzying heights some companies have reached caused people to sit back and ask, ‘What do I know about this company? Who are the managers?’ And in fact, a lot of the time they don’t know,” In Vivo editor Longman said.

The prospects for real products coming onto the market are slim indeed. About 10 to 15 biotech drugs are awaiting Food and Drug Administration approval. Biotech companies have 120 drugs in human clinical trials, and about another 500 drugs are in preclinical trials, Wilkerson said.

The payoff is way down the road. “We will have some spectacular product launches in the next three to six years, but the real impact will come in 1997,” he predicted.