NEW YORK (CNN/Money) - As they head into 2003, biotechnology stocks -- pardon the pun -- are looking a lot healthier.

Biotech is perhaps the riskiest and most difficult to understand industry, famous for its big flame-outs and cash flow hemorrhaging. But the group is maturing, and earnings, once a foreign concept, are beginning to flow for biotech's oldest names.

Last year, 38 of the 224 biotech companies tracked by Baseline were expected to be profitable. In 2003, analysts are predicting that 46 will be in the black.

The fourth-quarter report for one, Genentech (DNA: Research, Estimates), is on tap for Wednesday. Wall Street expects earnings of 24 cents a share, a 20 percent increase from a year ago.

Last year was an abysmal one for the group. The Amex Biotech index, which includes 17 biotech companies, plunged 41.7 percent. Delays in approvals for key drugs and the ImClone insider-trading scandal took their toll.

But there is hope that this year will mark a turnaround as several high-profile drugs -- including MedImmune's FluMist, a nasal spray flu vaccine, and Amevive, a psoriasis drug made by Biogen (BGEN: Research, Estimates) -- may receive approval from the Food and Drug Administration (FDA) and finally hit the market.

Greg Aurand, manager of the Orbitex Health and Biotechnology fund, is optimistic about MedImmune's prospects. He also owns industry leader Amgen, which recently received approval for a manufacturing plant in Rhode Island that will produce more of its blockbuster arthritis drug, Enbrel. Both MedImmune (MEDI: Research, Estimates) and Amgen (AMGN: Research, Estimates) are profitable.

Aurand says that overall, he's encouraged that biotechs don't seem to be getting caught up in a massive wave of hype anymore, as they were in 2000 when genomics plays were all the rage. "There are more realistic sentiments now evaluating these stocks and their possibilities," he says.

A hedge fund manager who invests in the sector says investors should focus on individual stocks instead of making a broad bet on biotech. She also favors many of the larger profitable companies.

The biotech elite These seven large cap biotech companies are profitable and growing. Company  P/E*  Est EPS Growth*  Amgen  29.4  26%  Biogen  24.8  8%  Cephalon  34.6  27%  Genentech  33.9  16%  Genzyme General  23.7  28%  Gilead Sciences  56.2  67%  MedImmune  32.4  142%   * Based on 2003 earnings estimates and prices as of 1/14  Source:  Baseline

"There's no reason to believe that the entire sector is going to zoom ahead indiscriminately. Companies with drug approvals and increased earnings will do well this year," says Libbe Englander, co-manager of the Biotech Opportunities hedge fund. To that end, two of her favorite large-cap biotechs are Cephalon (CEPH: Research, Estimates), which manufactures the cancer pain relief drug Actiq and has a promising narcolepsy drug in its pipeline called Provigil, and Gilead Sciences (GILD: Research, Estimates), which has a portfolio of anti-viral drugs.

Some of the smaller companies that are not expected to be profitable are popping up as potential values as well, mainly because they still have a lot of cash.

"So many companies that were so ridiculously overvalued two years ago are now trading near or below the amount of cash on their balance sheet," says Paul Abel, manager of the Kinetics Medical fund. "I've got my hands full looking at companies that I passed on two years ago."

Abel lists Medarex (MEDX: Research, Estimates) and Ilex Oncology (ILXO: Research, Estimates) as two of his top small-cap biotech picks. Medarex has approximately $370 million in cash but its market value is just $300 million. Ilex Oncology's market value is $216 million but it has $148 million in cash.

Still, the major stocks in the sector are by no means cheap. The companies expected to be profitable this year are trading at an average of 50 times 2003 earnings estimates. Earnings are expected to increase 72 percent for this group, however.

And the entire sector still tends to be extremely volatile. Stocks are subject to large moves when there is news about test results for a drug. Witness what happened Wednesday to a relatively small biotech firm called Transkaryotic Therapies (TKTX: Research, Estimates). An FDA advisory panel voted against recommending the approval of Replagal, a drug developed by Transkaryotic to treat Fabry's disease, a rare genetic disorder. Transkaryotic's stock plunged 25 percent on the news.

However, the FDA panel did recommend approval of another drug for Fabry's disease -- Fabrazyme, which is manufactured by the much larger and profitable biotech Genzyme General (GENZ: Research, Estimates). Genzyme's shares were up 6 percent Wednesday.

The biotech business may be growing up, but it's still not for the faint of heart.