Nanotechnology Report: Part II

By Rick Currin

Just How Small is That?

I had a few comments on the first report that lead me to illustrate just how small a nanometer is.

A nanometer is only about 1/50,000th the width of a human hair.  That’s pretty small.  Another appreciation of scale can be found by relating a nanometer to a meter.  A nanometer is to a meter as an inch is to roughly 15,800 miles.  I nanometer is to a meter as a foot is to the distance from the earth to the moon.  The speed of light is 190,000 miles per second but its only 1 foot per nanosecond.

A nanometer is one billionth of a meter.  A DNA molecule is only 2.5 nanometers wide. Working in the nanometer scale takes special tools.  Materials at this incredibly small scale behave in non obvious ways and can be made to interact with the fundamental building blocks of matter and life.  Advancements in technology have made nanotechnology the “next big thing”.  Sorry for the pun but I’ve read it over 100 times in preparing for these reports.

More Than a Little Hype

The growing wave of interest in nanotechnology is already resulting in some speculative valuation in certain nanotech stocks.  If you are a long term investor you should be wary of this.  Unless you are a stock trader, I’d stay away from investing in the mass speculation and excess volatility in certain areas of nanotechnology.

There is one complete segment in nanotechnology that is entirely premature as far as practical investing is concerned.  Thankfully that area is still in the research labs and universities.  That area is nanoassembly or building things atom by atom.  Some “nanotech” companies may be more suitably classified as simply “specialty chemical companies” and are best judged in comparison to valuations of that group.

Still another area of nanotechnology may be classified as futuristic science fiction with the thought that one day we will be able to assemble a car atom by atom for about ten bucks.  Don’t laugh the theory is molecules can be engineered to be little nanoassembly production robots transforming raw materials into products like magic.  I put that one in the “way out there” category.  This area of nanotechnology has attracted a fearful set of anti-science groups ringing the alarm bells of nanoassembly gone wild turning the earth into glob of “grey goo.”  My interest in Marvel certainly had me take a look at the movies Spiderman and the Hulk.  The villain in Spiderman was a nanotechnology expert. The Hulk was the victim of a nanotech mishap and Spiderman was the victim of a DNA gene-spliced spider bite.  Funny I remembered both as pure atomic radiation issues before.   

Anything Nano

Be on the lookout for companies that will insert “nano” into their names or products simply to attract nanotechnology investment interest.  Some areas are simply speculative in terms of investing, though you might see some market gains for anything “nano” from time to time.

A valuation bubble can result in nanotechnology similar to the premature valuation based on the early euphoria in biotechnology or the “human genome”.  Making outrageous and futuristic predictions is fine for science magazines and Spiderman II, but that will do little to help you make money through investing.  Recall that the outrageous euphoria in the flimsy and sometimes downright lousy business models of some internet companies and investors should quickly be reminded to heed the mantra of “buyer beware”. The same caveat emptor is certainly applicable to such a techno-wonder word like nanotechnology despite its legitimate technical and commercial potential long term.

But do not mistake the potential valuation issues of bad and speculative “investments” with the viable commercialization of many areas in nanotechnology in the near term.  Profitable companies and stocks will emerge as superb long term investments.  With that in mind I’ll briefly outline a large array of the nanotechnology landscape as it relates to public companies to potentially invest in.

The Small Part of Huge Companies

You may be surprised how many large companies already have a stake in nanotechnology research.  They simply cannot afford not to participate.  Because nanotechnology has the ability to herald in unprecedented changes in material and product performance, the potential commercial impact is unknown but acknowledged as substantial.  The obvious possibilities are hard to discount and the immediate applications are already producing breakthroughs and profits.  In a real sense nanotechnology is a technology threat to any tech company that does not participate in research and development in nanotechnology.

As far as investments go, in the near to intermediate term, the potential positive impact of nanotechnology on a very large company is in most cases not reason enough to invest in the company.  If the main business is not one I would invest in, I’m staying away.  HP is perhaps a good example. While HP has a strong patent portfolio in nanotechnology and is even advertising nano in television ads, what happens to an investment in HP has more to do with printers, PC’s, servers, and DELL than it does with a nanotechnology patent.

IBM is a similarly situated.  Big Blue possesses a wealth of nanotechnology patents, is actually a leader in nanoscale semiconductor research, and has demonstrated impressive nanotechnology prototypes.  IBM has already prototyped terabit (about 20 times current hard drive capability) memory.  The prototype utilized read/write heads of a mere 20 nanometers.  IBM (in conjunction with Sony and Toshiba) is also aggressively developing a “CELL” processor using 65 nm technology.  As impressive as these developments are, IBM’s core business is much more heavily impacted by factors other than these promising technology advancements.  At least for the near and intermediate term anyway.

Despite these caveats on HP and IBM, they are indeed strong nanotech players.  But until their nanotechnology developments are in full commercial swing, I view the nanotech impact on either one incapable of affording these huge companies the status of nanotech investments.  Their nanotech patents however compel them to be listed in any look at the nanotechnology landscape.

All the Semiconductors Companies Have to Participate

Nanometer scale designs are already in semiconductors.  Tools to enable 90nm and 65 nm designs are already required. In one regard, providing tools for enabling these nanoscale designs are not really necessarily nanotechnology.  However, increasingly the nanoscale designs will require not only tools, but material changes, dielectric improvements and production methods delivered from nanotechnology.  The distinction between the nanotechnology required by semiconductor companies and “which semiconductor companies” will be successful in exploiting nanotechnology is significant.  All semiconductor companies will be designing in the nanoscale range but that does not make them nanotechnology companies.

What is apparent is that all this shrinking of components and getting information on and off chip in such close proximity to other circuits is a complex technical area never before encountered in digital designs.  As one of my professors once noted, “Digital design is slow enough to ignore a lot of analog issues but as digital speeds increase we will wake up to an analog engineer shortage”.   Increasingly analog design concepts are governing design flow.  Arguably choosing the right forward path for the coming nanoscale designs have even impacted spending while methods required to successfully produce nanoscale semiconductors are being ensured at the expense and likely benefit of the cash capable front runners like Intel, IBM and others committed to R&D throughout the downturn.

Since so many large semiconductor companies will participate, one of the keys for smaller players to ensure not being made moot by the nanotechnology developments occurring within the R&D efforts of large semiconductor players will be the possession of enabling patents.

Nanotubes Are Already Gaining A Following

In semiconductors, carbon nanotubes are already being considered for use in logic and processor chips.  That’s because despite being an exciting innovation with excellent properties, carbon nanotubes or “nanotube transistors” can be utilized within the existing system design, circuit and architecture landscape of semiconductor design.  Considering all the inter-related infrastructure in semiconductor manufacturing, this cannot be underestimated as a driver to adoption.  By contrast if a nanoscale solution requires all radical new equipment, methods, architectures and infrastructure, adoption would certainly be slowed by capital constraints, resistance to change, and protection of turf.

Pharmaceuticals Also Must Participate

Similar to semiconductors, the pharmaceutical industry will participate in nanotechnology in a broad way.  Novel drug coatings that improve delivery and effectiveness will be widely deployed.  Again being a large pharma player does not mean you are a nanotechnology company.  However, since so many large pharma companies will participate, one of the keys for smaller players to ensure not being made moot by the nanotechnology developments occurring within the R&D efforts at the large pharma players will be the possession of enabling patents.

Dividing the Landscape: The 80/20 Rule

In looking at the vast landscape of nanotechnology it makes sense to apply the 80/20 rule.  One way of thinking of this is that 80 percent of the profitable commercial applications of nanotechnology will come from 20 percent of the affected marketplace.  It is anticipated that the largest commercial impacts will occur in these areas:

Automobiles and passenger car bodies

Semiconductors and related devices

Petroleum refining

Electronic Components

Plastics and plastic materials

Pharmaceuticals and biotechnology

Commercial Printing and Publishing

Chemicals

(Source In Realis)

That is a pretty diverse list even using an 80/20 principle.

Finding investments focused on nanotechnology applications in these areas is a good idea.

The Nanotechnology Companies

When looking at companies that actually begin with nano in their name I found over 120! Now almost all of these are private companies but the sheer number is incredible.  That tells me a couple of things.  Nano has the potential to go public as a prefix like ".com" went public as a suffix.  Some of the same investor mistakes are possible with this kind of buzzword mentality.  Don’t make the same mistakes.  None of the stocks I have in the Currin Research portfolios have nano in their name.  Personally I feel better already just knowing that.

The following is a brief roundup of public companies that can be classified as leveraged to nanotechnology commercialization.  The list does not include all the semiconductor, pharmaceutical companies or even chemical companies that will participate.  Also I’ve pared the list somewhat for convenience and to avoid a few sub micro cap companies.

Agilent (A)

A diversified technology company highly leveraged to test and measurement.  Provides test and measurement devices to all the areas in the 80/20 nanotechnology field.

Altair Nanotechnologies (ALTI)

I would classify this as a specialty basic materials/metallurgical/mining company.  Though ALTI is increasingly focusing on utilizing nanomaterials.

American Pharmaceutical Partners (APP)

APP is pursuing nanoscale encapsulation for water insoluble drugs especially for cancer related applications.  Benefits of this are reduced toxicity and improved deliverability of the drug.

Ansys (ANSS)

Ansys is an engineering simulation software provider.  Ansys is a leader in the MEMS (Micro electro-mechanical systems) space.  MEMS, already a market for micro scale machines, will mature as nanotechnology progresses.  An example of a MEMS device is Texas Instruments DLP technology which uses over a million movable micro scale mirrors in the size of a postage stamp to deliver incredible video in HDTV and projection applications.  If NEMS (Nano electro-mechanical systems) are ever to occur, logically MEMS will be fully realized first.

Applied Molecular Evolution (AMEV)

AME utilizes a patented gene synthesis process to increase throughput in discovering altered genes.  The goal is to rapidly raise the development rate of producing proteins from these discoveries.

BASF (BF)

BASF already has an impressive array of nanoscale particles used.  The “we make products…better” slogan will be put to the test in the myriad commercial applications already being pursued using nanoparticles.

Canon (CAJ)

Canon is investing in nanotechnology in areas of advanced displays, semiconductors and optical printing.

Cepheid (CPHD)

Cepheid is active in application of nanosensors for detection of biological agents. The stock was speculatively traded in the Anthrax episode.  That was likely a too much too soon situation but don’t judge the long range potential of this one by the speculative whipsaw that occurred post 9/11.

CTI Molecular Imaging (CTMI)

CTI is a provider of positron emission tomography (PET) equipment, molecular probes and services. PET technology is used in the detection and treatment of cancer, cardiac disease and neurological disorders.

Dow Chemical (DOW)

This mega chemical company was one of only two companies to receive the highest possible score in CRC’s nanotech scorecard released in June 2003.

FEI (FEIC)

FEI provides nanotechnology instrumentation.  Their expertise is focused ion and electron beam microscopes.  Veeco another nanotechnology instrument company was in talks to acquire FEI but that deal has been shelved for now.

Flamel (FLML)

Flamel is a biopharmaceutical company specializing in polymer-based drug delivery.  Flamel shares recently sky rocketed on an announced deal with Bristol-Myers for Basulin, a controlled-release form of insulin.

General Electric (GE)

Conglomerate GE scored second highest on the nanotechnology scorecard.  As a conglomerate representing a diverse cross section of industries, GE has a lot at stake just to secure its turf from potential nanotechnology threats.  GE also has diverse opportunities to successfully implement nanotechnology in its own right in plastics and electrical products among other things. I wouldn’t really call it a nanotechnology company because it’s too diverse, but GE is a nanotechnology player.

Gilead Sciences (GILD)

Gilead produces nanoscale liposomes for drug delivery.  Liposome drug delivery is anticipated to greatly enhance drugs required for gene therapies.

Harris & Harris Group (TINY)

TINY is a venture capital investment company focused on nanotechnology companies.  My first reaction is the Internet Capital Group which once traded for over $150 and is still in operation, trading at $0.47.  That’s cents. My view is to pick up the available public offerings based on sound research and stay away from this stock.

Hewlett Packard (HPQ)

HP is very active in nanotechnology patenting, research and development including molecular transistors. 

IBM (IBM)

IBM is pushing advancements in nanotube transistors and nanoscale storage media.  IBM also has a strong nanotech patent portfolio.

JMAR Technologies (JMAR)

JMAR develops advanced lasers and x-ray lithography steppers for semiconductor fabrication.  JMAR’s next generation fabrication offerings will be utilized in the sub 100 nm design range.  Classifying JMAR as a nanotech semiconductor tool provider is appropriate.

Motorola (MOT)

Motorola is actively developing nanotechnology dubbed “nano emissive displays” for use in enabling lower cost plasma and LCD “big screen” displays.  Motorola is also active in developments in MRAM. (See NVE Corporation)

Nanophase Technologies (NANX)

Manufacturers and engineers nanocrystalline materials.  This sub $100 million market cap is a pure nanotech material company with lots of patents and insider buying to make one take a look.  BASF is Nanophase’s biggest customer.

NVE Corporation (NVEC)

NVE develops sells and licenses spintronics.  Spintronics is a technology utilizing electronic spin instead of electronic charge for data storage.  NVE is expected to ultimately benefit from the commercial development of MRAM (magnetoresistive random access memory) as a nonvolatile memory.  The bar is being set pretty high based on the current valuation but the market cap on this one is still small to support speculative investors who have taken to trading this issue on "nanonews" mentions of MRAM.

MRAM is an intriguing technology but it may be a bit early for NVEC.  Flash memory, perhaps its most immediate nonvolatile memory target, continues to raise densities and thus the bar for MRAM.  Conventional PC DRAM (which is not nonvolatile) is also a fiercely competitive and will be difficult to displace with the cut throat pricing that occurs in that supra competitive market.  The DRAM market would be a tough nut to crack but NVE is enjoying a speculative rise on the future hopes of MRAM grabbing a significant share of the memory market.

Symyx (SMMX)

Symyx is engaged in high throughput chemical discovery.  The company utilizes a significant amount of nanoscale elements for developing candidates for commercial exploitation of rapidly accelerated testing and verification of materials and catalysts for a diverse set of customers in the chemical, pharmaceutical and electronics industries.

Veeco (VECO)

Veeco is the leader in atomic force microscopes (AFM).  AFM’s are the tool of choice for nanoscale measurement.  Veeco also has exposure to instruments provided to the semiconductor and hard drive memory fabrication market.

______________________________________________________________________

Startups to Keep Track Of

Nanosys

Nanosys boasts a strong patent portfolio and already has attention because of their work in “nanowires”.  I’m keeping my eye on this one.

Angstrovision

Angstro is involved in 3D modeling and simulation at the nanoscale.  Software tools will be needed but right now I’d say commercialization will drive the investment potential versus research efforts driving advanced specialty software.  As the field continues to develop, 3D modeling software will find broad use in R&D targeted for commercialization.

_______________________________________________________________________

You’ll recognize the select stocks chosen for the “nanotechnology explosion” portion of the portfolio.  Note that as of this report, as a group they are up on average more than 30% in less than two months.

Next week I’ll introduce a nanotech index based on some but not all the stocks highlighted in this report.  I’ll be using special weighted criteria to balance the significant intellectual property and research influence of large companies with the return potential of some of the selected smaller ones.  This index should be useful for gauging the overall market performance of the nanotech investing arena and is a tool for keeping track of nanotech investments I want to follow and you may want to discuss.  Feel free to ask me about specific issues in this report or in the coming index.  The more interest in a particular company the more likely I’ll discuss it in a future report.