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particularly remarkable, considering all the other garbage
coming out at the time. It was unique, however, in that it
showed that a penny could still buy a lot. The company
proposed to offer units of one share and two warrants for the
modest price of 1¢. Of course, this was 333 times what
insiders had recently paid for their own shares, which wasn’t
unusual either, but when it was discovered that the champ
himself had resisted the temptation to buy any stock in his
namesake company, investors began to take a good look at
where they were. Most did not like what they saw. The
result was a dramatic decline in small-company stocks in
general and in the market prices of initial public offerings in
particular. In the course of a year, many investors lost as
much as 90 percent of their money.
The prospectus cover of Muhammad Ali Arcades
International featured a picture of the former champ standing
over a fallen opponent. In his salad days, Ali used to claim
that he could “float like a butterfly and sting like a bee.” It
turned out that the Ali Arcades offering (as well as the
Androbot offering that was scheduled for July 1983) never
did get floated. But many others did, particularly stocks of
those companies on the bleeding edge of technology. As has
been true time and time again, it was the investors who got
stung.
Concepts Conquer Again: The
Biotechnology Bubble
What electronics was to the 1960s, biotechnology became
to the 1980s. The biotech revolution was likened to that of
the computer, and optimism regarding the promise of gene-
splicing was reflected in the prices of biotech company
stocks.
Genentech, the most substantial company in the industry,
came to market in 1980. During the first twenty minutes of
trading, the stock almost tripled in value. Other new issues of
biotech companies were eagerly gobbled up by hungry
investors who saw a chance to get into a multibillion-dollar
new industry on the ground floor. Interferon, a cancer-fighting
drug, drove the first wave of the biotech frenzy. Analysts
predicted that its sales would exceed $1 billion by 1982. (In
reality, they were barely $200 million in 1989, but there was
no holding back the dreams of castles in the air.) Analysts
continually predicted an explosion of earnings two years out
for the biotech companies and were continually disappointed.
But the technological revolution was real, and even weak
companies benefited under the umbrella of the technology
potential.
Valuation levels of biotechnology stocks reached levels
previously unknown to investors. In the 1960s, speculative
growth stocks might have sold at 50 times earnings. In the
1980s, some biotech stocks sold at 50 times sales. As a
student of valuation techniques, I was fascinated to read how
security analysts rationalized these prices. Because biotech
companies typically had no current earnings (and realistically
no positive earnings expected for several years) and little
sales, new valuation methods had to be devised. My favorite
was the “product asset valuation” method recommended by
one of Wall Street’s leading securities houses. Basically, the
method involved the estimation of the value of all the
products in the “pipeline” of each biotech company. Even if
the planned product involved nothing more than the drawings
of a genetic engineer, a potential sales volume and a profit
margin were estimated. The total value of the “product
pipeline” would then give the analyst a fair idea of the price
at which the company’s stock should sell.
Perhaps U.S. Food and Drug Administration approval
would be delayed. (Interferon was delayed for several years.)
Would the market bear the projected fancy drug price tags?
Would patent protection be possible as virtually every
product was being developed simultaneously by several
companies, or were patent clashes inevitable? Would much of
the potential profit from a successful drug be siphoned off by
the marketing partner of the biotech company, usually one of
the major drug companies? In the mid-1980s, none of these
potential problems seemed real. Indeed, the biotech stocks
were regarded by one analyst as less risky than standard drug
companies because there were “no old products which need
to be offset because of their declining revenues.” We had
come full circle—having positive sales and earnings was
actually considered a drawback because those profits might
decline in the future. But during the late 1980s, most
biotechnology stocks lost three-quarters of their market
value. Even real technology revolutions do not guarantee
benefits for investors.
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