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Tuesday, March 22, 2005

Accelrys: A Solid Nanotech Investment

Last week, I advised my readers to stay away from two nanotechnology stocks that I consider wildly overvalued—Altair and Biophan. This week, I would like to highlight one that I consider undervalued and worthy of an investment—Accelrys (ACCL), which is trading at $5.12 a share. (Full disclosure: I own stock in Accelrys).

Accelrys develops and licenses molecular modeling and simulation software to the chemical and life sciences industries. Its software is used by biologists, chemists and material scientists for product design, as well as for drug discovery and development. In 2004, the company spun-off from Pharmacopeia in order to focus exclusively on this area.

I am bullish on the company for the following reasons:

 Accelrys currently counts some of the world’s leading chemical and pharmaceutical firms among its customers, including: DuPont, Dow Chemical, BP, Eli Lilly, Pfizer, Amgen, and Genencor.

 It has started two strategic partnerships. One is with IBM to develop modeling and simulation tools for the Linux operating systems and is expected to provide pharmaceutical companies more flexibility and increased capabilities; the second is with Sigma-Aldrich to integrate its chemical compound catalogs into Accelrys’ database. The latter agreement will save chemists a great deal of time by freeing them from having to search multiple suppliers’ catalogs for the right compounds.

 The company has excellent working relationships with academic institutions, including the University of Cambridge and Harvard; as well as the top nanotechnology government research laboratories such as Argonne, Brookhaven and Los Alamos.

 Recently, it has initiated the Accelrys Nanotechnology Consortium—a program designed to accelerate the development of software tools that enable the design of nanomaterials and nanodevices. Current members include Corning, Fujitsu, e2v Technologies, Imperial College, Uppsala University (Sweden), Franhofer and the Japan Advanced Institute of Science and Technology.

 It currently has over $50 million in cash (meaning that almost 35% of its market capitalization is comprised of cash) and little debt.

Although I’m personally bullish there are, as always, reasons to be bearish. These include:

 In 2004, the company reported a loss of $29 million on revenues of just over $84 million.

 An accounting change (the company went from booking the majority of sales up front to spread those sales out over 12 months) initiated in mid-2004 has made quarter-to-quarter comparisons. (Although this problem should soon resolve itself).

 It faces strong competition in the pharmaceutical arena from Tripos (TRPS), whose customers include, AstraZenaca, Pfizer, Bayer, Hewlett-Packard and IBM Life Sciences; and from NanoTitan, a small nanotech software modeling firm located in Mclean, Virginia.

From my perspective, software tools are going to be essential for nanotechnology research—be it at the academic or corporate level—and the need to view, characterize and understand materials at the nanoscale will only increase in the future as the need to perform calculations increases from hundreds to thousands and, ultimately, millions and billions of atoms. Provided Accelrys stays at the cutting edge of these advances, the company should be well positioned for future growth.

Moving forward, investors should watch for Accelrys to line up additional large corporate customers. If it does, it’ll obviously be a bullish sign. If, however, leading life sciences firms begin switching to the software of Tripos or a private start-up such as Apex Nanotechnologies or NanoTitan, it would be wise to review holdings in Accelrys.

Jack Uldrich

Related Links:
Biophan: Less Talk, More Action
Is Altair All Hot Air?