LONDON


CARL MORTISHED
RTGAM



LONDON - Miracle drugs, rare earth materials and now, graphene. This stuff is bread-and-butter for boiler room investment scams and the U.K.'s Financial Conduct Authority decided Monday to issue a warning to the public to ignore cold-callers offering shares in graphene manufacturers or even the material itself. The FCA is sounding an alarm over hoaxes and hucksters, not listed companies, but it begs the question whether retail investors should ever dip their toes in firms boasting novel technologies but which produce no profit, few revenues or even a commercially viable product.

Graphene is the wonder material of the moment: Super-conductive, super-tough and flexible. Invented by scientists at Manchester University who cleaved graphite using sticky tape to produce sheets of carbon atoms in single layers, its properties are being hailed in a multitude of applications from flexible video screens to aerospace composites and light-weight tennis rackets. As recently described in the Globe, the excitement over graphene is reminiscent of the development of plastics during and after the Second World War. But for a private investor, the question is whether you are really bankrolling the new nylon, or putting your savings in chemistry that just might cure cancer.

To get a feeling for the retail investor excitement, consider Applied Graphene Materials, which floated on Aim, the U.K.'s second tier market in November. Within days of launch, the shares had climbed from 115p ($2.03) to 470p. Yet the company's only significant asset is a proprietary manufacturing process to produce a form of graphene. AGM has produced nil profits and negligible revenues, and the prospectus confirms that the main hurdle facing the company is the creation of a commercial market for its product. There is currently more graphene available than there are buyers for the material because, as AGM's promoters admit, the manufacturers of industrial or consumer products are not yet sure what to do with graphene and how to use it. This is unsurprising for a novel material, but it raises the big question for any technology company: Even if you can turn base metal into gold, can you sell it for a profit? The ghastly truth is that no great invention ever sells itself.

Many companies that launched during the biotechnology frenzy of the 1990s failed even to get the alchemy right. Notorious among these was British Biotech, which floated in 1992 on the back of claims about marimastat, a breast cancer drug in development phase. British Biotech's value peaked in 1996 at more than $2-billion. Subsequently, a whistleblower revealed that British Biotech's bosses had been less than truthful about the wonder drug and the company eventually disappeared into SEC investigations, boardroom mayhem, stock price collapse and an ignominious sale.

Hopefully, graphene will not become a miracle compound that stays hidden in the lab. Yet even if graphene proves to be as wonderful as it says on the tin, the investment question remains unanswered, and it is not clear that start-up enterprises are always the right home for the development of new technology. Nylon and many other successful polymers became ubiquitous because they benefited from the financial, commercial and marketing clout of huge corporate behemoths. It was more than a decade on from 1928, when DuPont's Experimental Station hired Wallace Carothers, that his synthetic silk-like fibre was commercialised into the first nylon stockings in 1940. The new hosiery was then taken on a World War marketing tour, with U.S. soldiers unwittingly volunteering as super-salesmen laden with wonderful gifts from America. Nylon was DuPont's biggest earner for years, until the Arab oil embargos of the 1970s temporarily wrecked the economics of petroleum-based plastics.

DuPont's next big product, Kevlar, took 15 years to develop and an investment of $500-million (U.S.), a sum that is also reckoned to be the typical price tag of a blockbuster drug, from compound through clinical trials. The vast bulk of this investment is not in the whizzy idea, but in the hard slog of creating a product that people will want to buy in vast and ever-growing quantities, and then building the manufacturing and marketing machine to make it happen.

It is not impossible for companies such as AGM to reach such a scale, but it would seem to be a stretch. Even so, it is worth questioning whether the typical stock-picking pension fund manager has the scientific knowledge or even the commercial know-how to assess the investment risks in a novel technology. What is certain is that the retail investor is out of his depth - and should keep his hand on his money.