Investors in the nation's biotechnology sector are riding a roller coaster this summer, seeing indexes that track these companies reach their highest levels in years -- then retreat amid doubts about whether the rally can be sustained.

The bumpy ride is a reminder that biotech investing is not for the timid. The industry is a source of continual fascination for investors who believe modern science can deliver cures, and make a lot of money in the process. But it also can be hazardous to people's financial health, so much so that many analysts warn small investors to approach the sector with caution, if at all.

Biotechnology companies consume investors' cash voraciously to develop new products. The industry has never been profitable overall -- U.S. companies lost $6.4 billion in 2004, according to a report by Ernst & Young, a consultancy.

But the investment is slowly paying off: The industry has delivered a slew of new products in recent years, and its revenue is growing rapidly, hitting $46 billion in the United States in 2004, up 17 percent in one year. The industry could reach profitability as early as 2008, Ernst & Young predicted.

The world's biggest and most visible biotech companies, Amgen Inc. and Genentech Inc., both of California, are profitable. And they have turned in sterling performances this year, particularly on sales of drugs used in cancer treatment.

"The earnings tell you this isn't just an industry that's built on promise any more," said John T. McCamant, editor of the Medical Technology Stock Letter in Berkeley, Calif. "The companies are showing: We can deliver the numbers."

The Amgen and Genentech performances exceeded Wall Street's expectations and helped fuel a midsummer rally in the shares of smaller companies, analysts said.

"You have had some very good performance by the two marquee names in the sector," said Alexander A. Hittle, a stock analyst at A.G. Edwards & Sons Inc. of St. Louis. His company earns fees from biotech companies for investment-banking work. "When investors see the success of the bellwethers, they imagine that all their smaller hopes-and-dreams stocks will one day rise to similar greatness."

Also fueling investor interest have been recent buyouts of a handful of smaller biotech companies. Such acquisitions can put a premium in the pockets of investors regardless of whether a company has reached profitability, so they tend to spark hope of more buyouts.

Buoyed by those factors, the Amex Biotechnology Index, which tracks the performance of 17 larger biotech companies, jumped nearly 20 percent from early June to early August, hitting a four-year high on Aug. 3. The Nasdaq Biotechnology Index, which tracks the shares of 157 companies -- mostly smaller, more speculative ones -- rose 21 percent in the same period to hit a 15-month high on Aug. 3.

Share prices of biotech companies often diverge from the broader market, particularly on important news, good or bad, about drug approvals by the Food and Drug Administration. But sometimes, in the absence of news directly affecting the sector, the shares track the broad market, as both biotech indexes have been doing since hitting their highs early this month. The indexes have bounced around, mostly drifting downward, amid widespread investor worries about the price of energy, the risk of inflation and other economic fundamentals.

Overall, the Amex index is still up 11 percent for 2005, reflecting Wall Street's enthusiasm for bigger biotech companies with profit to report, but the Nasdaq index has given up all its midsummer gains and is down 2 percent for the year.

The biotechnology industry is similar in some ways to its older cousin, the pharmaceutical industry -- both try to earn big profit with treatments developed by investing in complex medical research over many years.

But the pharmaceutical industry, based mostly in New Jersey, is a conservative business that has traditionally used chemistry to create treatments people can take orally -- pills, that is. For decades, its treatments were developed through a process of trial and error that sometimes involved knowing little about the underlying causes of disease.

The biotech industry, by contrast, is an entrepreneurial business born in California in the 1970s. It is based on detailed medical knowledge, and its treatments are created by slicing and dicing genetic material. The treatments are often not pills, but injectable proteins.

Pharmaceutical companies have been profitable for decades, so their shares usually trade on the basis of actual financial results. Because most biotech companies don't have products on the market, their stocks rise and fall on investor sentiment about particular drugs undergoing tests.

Much of the action these days is in cancer. Big pharmaceutical companies sell useful but highly toxic chemotherapy drugs that are the mainstay of cancer treatment. Biotech companies are gradually augmenting that approach with less toxic injections that use genetic strategies to target tumors.

Success with cancer treatment has fueled the earnings of Genentech in particular. Rituxan, a drug that it co-developed with Biogen Idec Inc. of Cambridge, Mass., has become one of the world's biggest cancer treatments, and a Genentech drug called Avastin that reduces blood flow to tumors is gaining rapidly.

Genentech, based in South San Francisco, Calif., was the first biotech company, founded in 1976. California is still the leading biotech state, with Massachusetts at No. 2. Maryland runs neck-and-neck with North Carolina for the No. 3 position, with scores of biotech companies clustering along the Interstate 270 corridor in Montgomery County.

The Maryland companies tend to be smaller than the California leaders, but many of them also are targeting cancer as their most important commercial opportunity. A good example is GenVec Inc. of Gaithersburg, which is working on a treatment that uses a type of gene therapy to shrink tumors. The company is in the midst of expensive clinical tests of the drug, known as TNFerade.

GenVec's shares plunged 47 percent in a day last fall when the FDA suspended the company's tests in three types of cancer. The agency was concerned TNFerade might cause blood clots, which are potentially fatal. But after the company allayed the agency's concerns, the FDA allowed tests to resume, and GenVec's shares closed yesterday at $2.26, up 88 percent from their Oct. 7 low.

McCamant, the Berkeley newsletter editor, is recommending GenVec shares, one of his few positive recommendations in years on a Washington area biotech company. He said the treatment seems to shrink some inoperable tumors enough that surgeons can remove them, which might help cancer patients live longer.

If the approach holds up in further tests, TNFerade could easily become a standard cancer treatment and a gold mine for investors. GenVec management's "ability to work smoothly with the FDA and get TNFerade out of 'clinical hold' status bodes well for future interactions with the agency," McCamant wrote in his newsletter.

Conversely, history suggests that more blood clots -- or suspension of the company's tests for any reason, however temporary -- would send GenVec's shares tumbling again.

Ranti Ogunsola, left, and Justine Niamke work on producing TNFerade, a potential cancer treatment, at the laboratories of GenVec Inc. in Gaithersburg.

Wall Street has rewarded industry pioneer Genetech's performance in developing cancer drugs by nearly doubling its stock price in a year.

Industry giant Amgen is profitable, fueling analysts' hopes that smaller companies such as those in Maryland will begin to pay off for investors.