Financial Instruments and Markets: A Casebook

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ALZA and Bio-Electro Systems (A): Technological and Financial Innovation

In September 1988, Martin Gerstel, co-chairman and chief executive officer of ALZA Corporation, reread the draft prospectus for the rights offering that would create Bio-Electro Systems, Inc. (BES). This new organizational entity and the drug delivery technologies it would develop would play a key role in the future of ALZA. This very uncertain and risky venture resembled ALZA in its early days, when Gerstel joined the firm in 1968 as its chief financial officer with a newly minted MBA degree from Stanford University. In 1968, ALZA had just been founded, had no products, and was years from earning profits. Two decades later, ALZA was a recognized leader in drug delivery technologies. A few of the products it had developed were among the most successful in the industry, and still many others were under development. ALZA held 342 U.S. patents, generated positive profits and operating cash flow, and was regarded by Wall Street analysts as a relatively low-risk yet high-profit player in the growing pharmaceutical segment.

Mr. Gerstel realized that ALZA's success had spurred its rivals to accelerate their drug delivery development efforts, and that new technologies could significantly affect the company's future. ALZA's continued growth, profitability, technical preeminence, and ability to attract and retain its unique staff depended upon advancing these new drug delivery technologies. Mr. Gerstel and the board ...