Taking Stock / When It's All or Nothing, It's Usually Nothing

A billion shekels were wiped out Tuesday.

Rumors began seeping in at 10 A.M. Tel Aviv time. By 1 P.M., investors grasped that something was amiss. At 2 P.M., the official announcement was released. By the time trading opened in New York, investors saw the share price of Pharmos plummet 70 percent. The stock opened the day with a $350 million market cap and ended it worth $110 million.

A myriad of investors had acquired Pharmos shares over the past few years - but the most prolific group were the Israeli "experts" - hundreds or thousands of private investors who picked up a hot tip on a biotech company developing a revolutionary drug for sufferers of brain injuries with a billion dollar market.

The community of experts rapidly expanded in recent years - doctors, professionals, brokers, friends of brokers and thrill seekers, who surf the Internet all night for message boards and forums where they can gossip and exchange stock ideas.

As street experts are wont to do, they amass a ton of information on the company, its drugs and the industry. They search the Internet, they read articles, they have friends on the inside of the company or friends in other companies. They feel they have "insider information," that they are the ones who know what's going down. The more they know, the cockier they get, increasing the risk of losing their home, their savings or their shirt.

What usually escapes these experts are the drier and more pertinent data: statistics on the number of failures and successes of these drugs and the odds of a company with a short track record developing a groundbreaking drug.

Pharmos was an all-or-nothing deal. Either the trial would succeed, and the company would embark on its long journey to U.S. Food and Drug Administration approval and the drug market, or the trial would fail, leaving Pharmos with little else to offer. However, the chance of ending up with nothing is much greater. That's statistics. That's probability. That's life.

Prof. Haim Aviv, the founder, knew this. Thus, he spared no opportunity to sell off shares over the past five years, a perfectly rational act for one understanding that it was all one big gamble. He said Tuesday that he was "not rich, but neither do I lack for bread." You can buy a lot of loaves with $3.5 million - the amount of Pharmos options he realized.

Traditional investors who bought into Pharmos' offerings know the statistics. Most of them have stocks of its ilk - one winner and 10 losers. In contrast, investors of the past year buying up Pharmos are not interested in statistics. They see the payoff and they convince themselves that they've got "insider information."

Haim Aviv did not have to deceive investors. He only had to know how to speak to them, always using grandiose, nationalist terms - hundreds of millions of dollars, untethered optimism - yet never forgetting to drop that little disclaimer in the small print about the risks. He knows exactly how to do it, because he's been succeeding at it for 20 years with a long list of biotech initiatives.

Now there's someone talking about Pharmos' total trial failure and the collapse of its shares in national terms - a blow to the biotech industry, an immense loss to science and various other declarations. It is a macroeconomic event that requires national introspection.

It reminds one a bit of the eulogies when Scitex shares crashed and burned: thousands of words that tried to transform one company's business failure into a watershed for the industry or the state.

The implosion of Scitex did not herald, as expected, anything for the high-tech industry. It merely reminded investors that it's a risky business when a stock's price can plummet 60 percent overnight. Dozens of more successful companies, large and small, flowered after the Scitex disaster, thank you very much.

Likewise, the fall of Pharmos foreshadows nothing. It's no Teva, no company with a long track record of earnings and accomplishments. It was a one-trick pony making one giant gamble, an all-or-nothing entity that disappointed, whose speculation-driven shares fell with it, and nothing more.