We met with Charles Duncan, biotech analyst for JMP Securities, over cocktails during his firm’s conference this week, and his primer on the sector gave us a slight queasy feeling — on behalf of public investors in biotech companies.

He told us that 320 of the 340 publicly traded biotech companies are losing money. Even the ones that are making money can suffer intense volatility. And we’re not supposed to worry, he and others keep saying, because it takes time for these companies to get their products out, and finally make money. Investing in publicly traded stocks is all about arbitrage, Duncan told us. “You don’t base your investment thesis on profitability,” he kept saying, explaining how money is made by picking stocks of companies for specific periods of time as they develop promising products. So what’s new, Sherlock, you’re asking? Nothing. It’s just the assumption is these companies will indeed one day start making money — and last time we checked, that assumption is open to question. So while we know Duncan was trying to assure us, and that he’ll probably do well and make a lot of money on behalf of his clients, we still left feeling queasy. Check out Sarah Lacy and Dan Primack for other viewpoints on the immediate IPO market.

In any case, private investors continue to increase their bets on biotech start-ups, many of them here in Silicon Valley. Here’s the highlight from the report out today from VentureOne:

Of note are valuations within the health-care category. Led by biopharmaceutical investing, the health-care category posted an overall annual median of $21 million-the highest among the major industry categories. First-round health-care companies were valued at $7 million for 2004-an amount on par with 1999 valuations. This was helped by a surge in the second half of the year when the median valuation for first-round health-care companies surpassed $9 million, higher than any point since the third quarter of 2000.