StreetTalk: With Nanotechnology, It's the Little Things that Count

I was playing tennis recently with my friend Ron who, in addition to a wicked backhand, is well-versed in new technologies and gadgets.

Brian O'Connell

Between points he told me about a new technology that could make a tennis ball bounce twice as high and twice as long as today's brands. He said it was the same technology that promises to produce stain-resistant clothes and develop computer storage media with 40 times the capacity of current models.

The technology Ron is talking about is called nanotechnology. Maybe you've heard of it.

So while we're talking small in terms of deployable technologies, the upside of the nanotech industry is huge. The National Science Foundation (NSF) pegs the US market growth for nanotechnology products at about $1 trillion over the next ten years. The NSF also claims that the technology will boost job growth significantly, adding between one to two million new jobs in the US by 2010, and that about half of all new drugs developed in the US will be created using nanotechnology tools.

Another study – "Nanotechnology in Health Care" – from the Cleveland-based Freedonia Group states that key growth areas within the nanotechnology sector include new, improved cancer and central nervous system therapies based on solubilization technologies. In the pharma sector, protein- and peptide-based compounds for cancer, diabetes, infectious diseases, and organ transplant acceptance should fuel nanotechnology growth. Investors, however, shouldn't expect those technologies to materialize overnight. "Diagnostic tests based on nanoarrays and quantum dots, and imaging agents based on superparamagnetic iron oxide nanoparticles will also see strong growth," says the study. "(But) in spite of progress in introducing new products, the vast potential of nanotechnology in the health care field will not be fully realized for at least a decade as stringent regulatory barriers and technical complexities delay its commercialization."

Eager to be the first kids on the block to capitalize on nanotechnology financially, the venture capital industry has poured $700 million into the sector over the past two years.

WHAT IS NANOTECHNOLOGY?

Lux Capital, which recently launched a nanotechnology index on the American Stock Exchange, defines nanotechnology as "the manipulation, precision placement, measurement, modeling, and creation of sub-100 nanometer scale matter." Another financial services firm, ThinkEquity Partners LLC, has published a report entitled "Thinking Big About the Small World: A ThinkPiece on Nanotechnology." Aside from in-depth research reports on over 30 publicly-traded nanotechnology companies, and a useful primer on nanotechnology called "Nano for the Novice," the report has much to say about the impact this technology will have on society.

Their findings are myriad and useful, especially the ones with an investment focus. . .

• Recent applications, such as stain-resistant apparel and nanocomposite tennis racquets, are only suggestions of the type of commercial applications we are likely to see before the end of this decade. (This) includes non-volatile RAM, 15 nm node devices, diagnostics for disease, flexible displays, and biosensors. The most interesting and useful applications will be applied to information technology, communications, and healthcare. Carbon nan-otubes could play critical roles in many of these applications.

• Government funding around the world, totaling over three billion per year, is growing and really unprecedented for the physical sciences arena. The US federal government, through the National Nano-technology Initiative, appropriated close to $1 billion for research in fiscal 2005, but the European and Asian countries are keeping pace.

• The public market for nanotech investment is at best, "under-developed", although some small capitalization companies like Harris and Harris Group, Lumera (LMRA-not rated), Immunicon (IMMC-not rated), and Flamel Technologies (FLML-not rated) are publicly traded. Large firms like Intel, IBM, DuPont, 3M, General Electric, Samsung, and Hitachi are also heavy investors in the nanotechnology sector.

• The societal debate on nano-technology is just starting. Advocates will see it as a solution to many problems, while detractors will view it as an unregulated technology with little under-standing as to its consequences. Expect these two extreme views to be expressed in the media more than those of the vast majority who believe in progress with a steady focus on safety, health and the environment.

BIO-BENEFITS

So how will such products impact the life sciences industry?

Imagine a camera the size of an aspirin that patients can swallow for endoscopic procedures. That beats having a camera hose inserted down your throat.

Imagine nanotechnology-based DNA microarrays that can diagnose and treat genetic diseases. Nanotech devices could ultimately make DNA analysis as easy and safe as blood testing.

Or how about tiny cellular/molecular devices that can pinpoint treatment points for life-threatening diseases? (FDA has already approved Abraxane, from American Pharm-aceuticals, which treats metastable breast cancer.) Or new, cheaper, faster ways to identify and validate target proteins and drugs, and methods to improve visualizations of new drug interactions?

Nanotechnology, through faster microchip arrays, can also speed up biopharm R&D pipelines, a big challenge for the life sciences industry. Studies indicate that daily delays in drug production can cost industry companies between $1 to $3 million in lost revenue.

NANOSCIENCES, BIOSCIENCES, AND THE STOCK MARKET

Nanotech stock performance to date is a mixed bag, with the index, as benchmarked by Punk, Ziegel & Company, flat-lining for the last year. In June 2005, the Punk Ziegel Nanotechnology Index was at 69.40, it's price point at about the same time in 2004. That's also below the high water mark of 120.00, reached by the index in December 2003.

If nanotechnology can deliver on its promise of faster computers and livelier tennis balls (translation: commercial success), then companies developing nanotechnology products will see stock prices rise.

One company that seems to be really taking off in the nanotech sector is FEI Co. (FEIC: Nasdaq). The primary benefit of the company's products (ion- and electron-beam technologies) is to globally provide nanotechnology researchers with the ability to image and manipulate atomic scale materials and devices.

The company's financials are starting to look pretty tempting. Net sales were $121 million for the first quarter ended April 3, 2005, an increase of 15 percent over net sales of $105.1 million in the first quarter of 2004. FEI currently expects net sales for the second quarter to be in the range of $114 to $120 million. Couple that with escalating growth in the nanotechnology sector, and FEI is well positioned to see its stock price climb even higher.

FEI's stock price in mid-June was about $23, about $7 higher than its 52-week lows.

Another intriguing nanotech company is BioSante (BPA: AMEX). The Lincolnshire, Illinois pharma company is heavily involved in nanotechnology, developing a pipeline of hormone therapy products that deliver bioidentical estradiol and testosterone treatments for both sexes. BioSante pegs the current market for estrogen and testosterone products to be around $2.5 billion in the US. The company is also developing its calcium phosphate nanotechnology for novel vaccines, including biodefense vaccines for toxins such as anthrax and ricin, and drug delivery systems.

The company's stock is trading at about $3.50 through mid-June, but I don't think it's indicative of the true potential of the company. BioSante has been generous with its research and development financing this year. That could help explain why the company recorded a net loss of approximately $2.8 million or ($0.14) per share for the quarter ended March 31, 2005, compared to a net loss of $2.4 million or ($0.17) per share for the same period in 2004. The liquidity picture is brighter, with BioSante's cash, cash equivalents, and short-term investments at about $15 million through March 31, 2005, compared to $8.3 million in March 31, 2004. There is one potential red flag to look out for: BioSante's current average cash burn rate of $800,000 per month is expected to remain consistent through 2005. Given its cash position, the company doesn't have much wiggle room to spend much more than that.

A great place to start your search for nanotech stocks is www.pzk.com, the home page of investment firm Punk, Ziegel & Company. It offers the Punk Ziegel Nanotechnology Index I mentioned earlier. It has about 20 good nanotechnology stocks to review.

Happy hunting.

Celebrity author and business/finance commentator for CNN and Fox News, Brian O'Connell has written for The Wall Street Journal and Newsweek, 79 Radcliffe Drive, Doylestown, PA 18901, 267.880.3144, fax 267.880.1939, brian.oco@verizon.net.