One of Wall Street's ugly ducklings seems to be transforming itself, ever so fitfully, into a swan.

The U.S. biotechnology industry, long on promise and short on delivery for the entire two decades of its history, is finally selling real medicine to real people for actual money. Profits at the leading firms are rising, and explosive growth is likely for some of them over the next few years.

These things have been true for a while now, but Wall Street's perceptions seem to be catching up with reality. Over the past year, the two leading indexes that track biotech stocks have roughly doubled, far outpacing gains in the broader market. In the past 10 weeks alone, the biotech indexes have jumped more than 30 percent.

"The biotech industry has done a really remarkable and effective and efficient job of developing new products," said Jim McCamant, publisher of the Medical Technology Stock Letter, which tracks the industry. "Many of the stocks are still selling at ridiculous prices relative to the drugs they have in development. I think you're going to see the group work its way higher."

Wall Street's reviving interest in biotechnology seems to be following a classic pattern. When out-of-favor sectors come back into the Street's good graces, the first stocks to move are the premier stocks, those with recognizable names and solid balance sheets. After prices of these first-tier stocks have jumped, the favorable sentiment filters down to second- and third-tier companies. In the case of biotech stocks, these would be companies that have drugs in advanced stages of research but have not yet won approval to market them.

After falling sharply during last year's late-summer market correction, top-drawer biotech companies saw big gains at the end of the year. From Sept. 1 to Dec. 31, Amgen Inc. of Thousand Oaks, Calif., the world's largest biotech firm, jumped 71 percent. Immunex Corp. of Seattle, riding high on the success of a blockbuster treatment for rheumatoid arthritis, jumped 125 percent.

For the first half of this year, top-tier stocks such as these basically treaded water, with the American Stock Exchange biotechnology index and the Nasdaq biotech index bouncing up and down with a relatively narrow range. But since mid-June the sector has been undergoing another rally, this one somewhat broader than the last. Select second- and third-tier companies have seen gains, and--barring a broad turndown in the stock market--analysts such as McCamant are predicting more to come.

The industry reached a milestone on Aug. 2 when the Amex index hit an all-time high of 257.63, surpassing the 256.60 it hit on Jan. 14, 1992, during a previous (and premature) round of enthusiasm for biotech stocks. After hitting its new high, the index dipped below the 1992 peak for a few days but has traded above it since Aug. 13.

The present rally is particularly impressive given that biotech stocks generally weaken in the late summer, when there's a dearth of news from human tests of potential new drugs. The stocks often rally in the fall, when a heavy flow of testing news comes out at big medical conferences. Some analysts are expecting a broad, impressive rally in biotech stocks later this year.

One reason for the strength of biotech stocks may be dimming investor enthusiasm for Internet stocks. The biotech industry, though it displays much the same potential for rapid growth as the information technology business, had been a scruffy also-ran for a couple of years as investors snapped up Internet shares at any price. But with Internet stocks in a swoon for the past month or so, and with a raft of biotech companies suddenly reporting hot product sales and rising profits, a lot of itchy money now seems to be flowing into biotech stocks.

Another reason is a recent surge of mergers and acquisitions targeting biotech companies. Big pharmaceutical companies, with their drug "pipelines" weak and their stocks dead in the water for a year now, have shown themselves willing to pay hundreds of millions or billions for biotech companies with richer pipelines.

Among the prime beneficiaries of Wall Street's bioenthusiasm is MedImmune Inc. of Gaithersburg, the only local biotech company among the world's elite. The company has a wildly successful new product, Synagis, that prevents a common respiratory infection in vulnerable children, and it has an impressive pipeline of new products in development. The stock has jumped 214 percent in a year. An investor who put $10,000 into MedImmune shares five years ago is sitting on a $381,000 gain. Many employees who took the risk of joining MedImmune in exchange for stock options are now wealthy.

"We have a lot of happy shareholders, and quite a few happy employees, these days," said David Mott, MedImmune's vice chairman and chief financial officer. "The parking lot is pretty impressive."

Nothing better illustrates the market's enthusiasm than a recent public offering of shares in Genentech Inc., the South San Francisco company whose launch in 1976 marked the beginning of the industry. F. Hoffmann-La Roche Ltd., the Swiss pharmaceutical giant, had bought out Genentech but decided to sell about 17 percent of it back to the public. The shares leapt 33 percent, to $129, in their first week of trading, a performance that one industry newsletter described as "astounding" for a biotech stock. Genentech closed Friday at $153.75, up 58 percent from the offering price.

The picture is not as rosy for every biotech company. Indeed, the very success of their big brothers is making life harder for some small, early-stage biotech firms. Running such a company is tricky. Even if a drug works, it can take 10 to 15 years and tens of millions of dollars to bring to market. Many drugs don't work, though their failure often doesn't become clear until years of effort and millions of dollars have been wasted.

These smaller companies were once part of an entire industry that was seen as a work in progress. Financing, though never easy, was possible. Now, the small fry find themselves judged against a harsh new standard: big biotech companies that actually make money. If a small company reports even mildly disappointing news, the Street's reaction these days is swift and brutal. Shares of PathoGenesis Corp., a Seattle company, plunged 65 percent after the company said on March 22 that it would lose money for the year, instead of earning the small profit investors had been anticipating.

Analysts expect many small biotech companies to become takeover targets, while some may go under entirely. Still, for the industry as a whole, it's plain that a new day has arrived. The top biotech companies are reaching a size that allows them to draw big institutional investors. And the surfeit of capital is allowing them to plow huge sums into product development that should pay off down the road.

Yet to come, these companies say: important new treatments for the nation's biggest killers, including heart disease and many types of cancer.

"A lot of investors," Mott said, "are concluding that the risks and the wait can sometimes be worth it."

CAPTION: BIO-TAKEOFF (This graphic was not available)