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The plunge in the US stock market may finally knock biotechnology shares out of the doldrums and trigger more investor interest, experts suggest.

At the same time, they warn that the industry may suffer enough in the short term to propel the weakest, particularly new companies, into mergers or out of business.

In the two weeks up to 4 September US investors suffered their worst episode since the ten days before the stock market crashed in 1987. The Dow Jones Industrial Average plunged 512 points on 31 August, and by the end of the week was down 3.4 per cent for the year. The Nasdaq index, which more closely reflects the performance of technology and biotechnology stocks, dropped 73.16 points over the week, 0.2 per cent down for the year. Another measure, the Russell index of small company stocks, rose slightly, but is down 20.6 per cent for the year.

Biotechnology stocks have been weak since last October, when concerns about the crisis in Asia hit investors' nerves, but stock market analysts saw reason for optimism.

The strong performance of the Dow Industrial Average and the S&P 500 had taken awayy the incentive to hold smaller stocks, says Dave Stone, managing director and biotechnology analyst at S. G. Cowen Securities Corp. in Boston. Now investors may be drawn to biotechnology by the industry's improving fundamentals.

“Shaking investors off the bandwagon is probably not a bad thing for the biotech sector,” says Stone.

In fact, a few biotech companies bounced back up later last week. These included industry leader Chiron, based in Emeryville, California; Vertex Pharmaceuticals, a specialist in structure-based drug design for viral diseases, in Cambridge, Massachusetts; and AgriBiotech, a Las Vegas forage and turf seed company. Shares in the San Diego-based agricultural biotechnology company Mycogen rose $5.72 to $27.66 a share. On 1 September, Dow Chemical said it would buy the 32 per cent of Mycogen it did not own for $28 a share, or nearly $325 million.

James McCamant, editor of the Medical Technology Stock Letter, has urged readers to load up immediately on biotech stocks. Biotechnology companies are barely affected by the worldwide economic swings because they serve the burgeoning US medical sector, he wrote. Wall Street has largely ignored strong sales of new products such as Agouron's AIDS drug Viracept, good clinical trial results, broad-based development programmes and smart corporate deals — creating some compelling bargains.

Those bargain prices have made it hard for companies to raise capital for operations, however. Misha Petkevich, managing partner in Petkevich and Partners in San Francisco, predicted increasing difficulty for biotechnology companies not seen as solid in technology and management. Those with a broad technology platform, a product close to market, or involved in a service function such as gene identification may benefit from a period of consolidated investor interest while others fall by the wayside, he said.

Petkevich said the outlook for new biotechnology companies was less encouraging. While venture capitalists have plenty of cash right now, “there's a significant exodus from being involved in start-up biotech companies,” he said. Venture capitalists have been lukewarm towards bioscience for the past year, and the recent stock market volatility has not helped to increase their interest.