First Enron and Andersen. Then Merrill Lynch. Now ImClone.

With news this month that the New York biotech company's former CEO had been arrested on charges of insider trading, analysts and fund marketers said the scandal was yet another reason for investors to worry at a time when the investment industry is trying frantically to keep the trust of its patrons.

"Our shareholders are obviously concerned," said Morgan Mohrman, director of marketing for Boston-based Eaton Vance, which offers the Worldwide Health Sciences Fund, a product that invests partly in biotech firms. "They're shell shocked from a lot of areas. Everywhere you look it's been a pretty tough environment."

Nonetheless, fund executives remain bullish on biotech's future. Some said that even if the biotech sector seems like a minefield for investors, many will likely look at the ImClone debacle as an isolated incident, distinct from the company's peers.

In fact, Eaton Vance expects much of the regulatory turbulence in the sector will blow over by the end of summer and that health stocks will begin to perform well in the third and fourth quarter of this year, Mohrman said.

"A lot of investors are taking a step back, but I don't think they would [expect] the situation at one biotech firm is going to affect the entire sector," said Brian Lewbart, a spokesman for T. Rowe Price of Baltimore, which offers the T. Rowe Price Health Sciences Fund.

The controversy stems from the arrest of Samuel Waksal, the former CEO of ImClone who resigned from the firm on May 22. The Securities and Exchange Commission alleges that Waksal attempted to unload $5 million worth of ImClone stock late last year after learning that the U.S. Food and Drug Administration would decline to review his company's application to market a cancer drug called Erbitux. The SEC also accuses Waksal of notifying family members of the bad news about Erbitux, and says those people were successful in selling off more than $10 million in ImClone stock.

The commission has filed a lawsuit in federal court in Manhattan. It wants Waksal to forfeit several million dollars in losses that his family members managed to dodge. The SEC also wants to keep Waksal from heading public companies.

Analysts said that the ImClone scandal amounted to insult to injury for a biotech sector that, as one put it, "has been taking it on the nose in recent years." Biotech funds are down 23% year-to-date through June 18, according to Lipper of New York. And analysts say a glut of dot-com investors flocked to biotech after the technology sector imploded, rendering the biotech sector oversold.

"Billions of dollars were raised when people got sick of the dot-coms and all the lemmings came running to biotech," said Michael Sterns, an executive VP at BioSpace in San Francisco, which provides investment information for the biotech sector.

In addition, biotech companies are subject to regulatory approval for nearly all of their products. That means stock prices can skyrocket or plummet based on news of FDA drug approvals and rejections.

Indeed, Mississauga, Ontario-based pharmaceutical company Biovail saw its shares shoot up 7% June 17 as it announced that the FDA had issued a preliminary approval of its hypertension drug. After the FDA announced its decision regarding Erbitux, ImClone's stock price dropped 16%, according to the SEC.

"Any time you have a few pieces of less-than-perfect news, you'll see a drop," said Josh Ginsberg, an associate at the Chicago boutique investment bank Vcapital.

To ease investors' anxieties, analysts are encouraging fund complexes to communicate honestly and often with investors about the troubled biotech sector.

"There are huge risks in biotechnology stocks," and investors need to know about them, said Charlie Bevis, a senior analyst at Financial Research Corp. in Boston. Bevis suggested that firms such as Chicago fund researcher Morningstar might help the fund business better educate investors by developing more Web-based tools on risk.

Others suggest that fund companies simply call investors and intermediaries. Some firms are already doing that.

For four months, Eaton Vance has been conducting conference calls with brokers about its health sciences fund, Mohrman said. The calls are hosted by Samuel Isaly, portfolio manager of the Worldwide Health Sciences Fund. Although the calls weren't prompted by the troubles at ImClone, Mohrman said Eaton Vance identified turbulence in the sector and wanted to make sure its brokers were well informed about those issues.

T. Rowe Price, meanwhile, is planning to include an interview with Kris Jenner, who manages the T. Rowe Price Health Sciences Fund, in an upcoming issue of its investor newsletter. The interview addresses why biotech health care stocks have fallen out of favor. It also cites a cautious stance within the FDA when it comes to approving drugs.

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