Biotechnology funds were still recuperating in the second quarter after suffering a blow in February when a major drug used to treat multiple sclerosis was taken off the market.

The health and biotechnology sector posted a return of 6.67 percent for the second quarter. In the first quarter, it saw negative returns of 6.05 percent.

RCM Biotechnology Fund, which in May had $258 million in assets, posted a 14.33 percent return for the second quarter, earning a ranking from Lipper Inc. of third among similar funds as of June 28. The San Francisco-based fund, which started up in 1997, invests mostly in companies with "products on the market, about to be on the market, or in the very late stage of clinical trials," said fund manager Camilo Martinez.

Stocks suffered a crucial blow in February when Tysabri, a drug used to treat multiple sclerosis, was withdrawn from the market after being linked to brain disease in two patients.

"It was a reminder that you can take a drug all the way to the finish line and still lose," said Alexander Hittle, a biotechnology analyst with A.G. Edwards & Sons.

Immediately after Tysabri's withdrawal, investors became reluctant to invest in biotechnology stocks, and newer companies that did not yet have established drugs took the hardest hit, Hittle said.

He said, "the only right move" in the first quarter was to invest in Genentech Inc., a biotech giant that sustained the Tysabri blow. Investors in other companies were still recovering in the second quarter.

One driving force of that recovery is the prospect of mergers. In June, Pfizer Inc., the world's biggest drugmaker, bought Vicuron Pharmaceuticals Inc., a biopharmaceutical company, for $1.9 billion.

"Basically what you've seen in this quarter is that investors have bought stocks they think are candidates for being bought out," Martinez said.

Investors like seeing mergers in the industry because shareholders in the purchased company usually see premiums on the stock price, analysts said.

-- Anjali Athavaley

Camilo Martinez manages the RCM Biotechnology Fund, ranked third by Lipper.