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Tuesday, January 24, 2006

Nanotech Investing: A Primer

In the months and years ahead, investors are likely to hear an increasing amount about the emerging field of nanotechnology. Much of the news will be exciting, fascinating and, potentially, quite profitable. Pundits and analysts alike will speak of nanotechnology’s ability to create everything from hundreds of cancer-curing drugs to materials a hundred times stronger than steel.

The press surrounding nanotechnology may, in fact, grow so great that some investors will be tempted to dismiss it as mere hype—akin to the second coming of the Internet boom/bust. That would be a mistake. The science behind nanotechnology is real and talk of it being the “next industrial revolution” is not off the mark.

To begin, however, it is useful to think of nanotechnology not as its own industry or commercial sector. Rather, it should be viewed it as a general purpose technology—like electricity or the Internet—that will change how business is done.

Therefore, investors looking to garner above average returns in the years ahead need to familiarize themselves with nanotechnology because it will impact almost every industrial sector including: chemicals and materials; equipment and instrumentation; electronics and semiconductors; energy, and the life sciences.

The Ultimate in Material Sciences

Nanotechnology is defined as the willful manipulation of atoms and molecules. One way to think of this is to consider a lump of coal and a diamond. Both are made of carbon atoms … but how those atoms are arranged matters greatly. The first is a cheap source of energy, while the other is suitable to be used as a wedding ring.

In the past, mankind simply had to accept materials as Mother Nature saw fit to produce them—be it in the form of bronze, iron, steel or silicon. What makes nanotechnology so unique is that researchers are now figuring out how to shift around atoms and molecules to make better or entirely new materials. Consider this, two private nanotechnology companies—Apollo Diamonds and Gemesis Corporation—are now manipulating carbon atoms to create two-carat diamonds for around $100.

A number of publicly-traded companies including Dow Chemical, Degussa, BASF and DuPont, as well as some small-cap companies, such as Nanophase and Oxonica, are also exploiting nanoscale materials on a more prosaic scale. Among some of the early products nanotechnology is enabling are: self-cleaning windows, stain-resistant pants, and scratch-resistant automobile frames.

These are hardly earth-shattering advances, but they are simply the tip of the proverbial iceberg. Researchers are also working to create shape-shifting materials and even self-healing materials.

From the perspective of the individual investor, it will be important to remember that while many of these nanomaterials are imbued with wonderful characteristics and properties, the benefits will generally accrue to the company incorporating the nanomaterials. Investors are, therefore, encouraged to focus less on who is making and supplying these materials and more of who is using them.

This is not to say that money won’t be made in this field, it is just that the profits are likely to go to those large producers who can achieve economies of scales in the production of these materials.

A few intriguing possibilities do exist but investors may have to wait a few years because some of the more interesting companies are privately-held. Carbon Nanotechnologies Inc. is manufacturing carbon nanotubes which are 100 times the strength of steel, but a fraction of the weight. Due to their extraordinary characteristics, they have a host of promising applications. Similarly, Aspen Aerogels is manufacturing a product called “frozen smoke” which is among the lightest known solids in the world and has magnificent thermal and acoustic properties. If both companies are successful in getting major manufacturers—such as plastic manufacturers or the home construction industry—to incorporate the nanomaterials into their products, the profits could be substantial.

The Early Winners

In 2006, it is estimated that more than $10 billion will be invested in nanotechnology research and development around the world. Much of this money will be spent on the equipment necessary to model, visualize and manipulate materials at the nanoscale.

Among the publicly-traded companies like to profit from this large scale investment are Symyx, Accelrys, FEI and Veeco. Symyx is a leader in the field of high throughput experimentation for the discovery of new materials. Essentially, the company’s technology speeds up the process for creating new materials for the chemical, electronics, and life sciences markets.

Accelrys, which like Symyx has licensing agreements with leading Fortune 100 corporations, is focused on the development of molecular modeling and software simulation. Specifically, its tools facilitate new product design and drug discovery for the life sciences industry.

In addition to creating tools to model the development of new materials, it will also be necessary to visualize and manipulate atoms and molecules. Among the companies making the equipment necessary to do this (i.e. scanning electron microscopes, atomic force microscopes, transmission electron microscopes, etc.), are FEI, Veeco and JEOL.

All of these companies are positioned for long-term growth because two huge industries—semiconductors and life sciences—are both scaling down to the molecular level. The semiconductor industry, which is already making circuits with transistors in the range of 65 nanometers, will continue to make tinier circuits and, as it does, it will be imperative that it has the equipment to operate at these ever-smaller levels.

The life sciences sector is experiencing much the same thing. The workings of the human body have long been known to operate at the nanoscale level (e.g. DNA, viruses, proteins, etc.) and if researchers are to fully understand and, ultimately, fix problems with the body, they will require tools and devices that can see and operate at this level. For instance, FEI’s 3-D electron microscope, because it can characterize and visualize viruses and DNA at the sub-atomic level, will be a useful tool in helping scientists understand the chemical basis for life and uncovering the mechanisms of disease.

A few private nanotechnology equipment companies bear close watching. On the semiconductor side, Molecular Imprints stands out because it has nanolithography technology that can help the semiconductor scale down to the 10 nanometer range. Arryx, a Chicago-based company, is developing something called holographic optical trapping technology that is capable of moving and manipulating cells, organelles, and molecules. And then there is NanoInk, also based in Chicago, which is perfecting a technique called Dip-Pen Nanolithography—a process that uses an atomic force microscope to write nanoscale patterns on substrates using atoms and molecules as the “ink.”

Small and Green: Nanotechnology & the Energy Sector

It has been estimated that within the next two decades the world’s energy needs will nearly triple. This pressure will cause the market to look at a variety of ways to improve existing energy supplies as well as look for new alternative energy sources. Which energy source(s) will win out in the commercial marketplace is difficult to predict. What is not difficult to predict, however, is whether nanotechnology will play a large role.

For example, the role catalysts play in the production of oil and natural gas has long been well understood. Less understood is how new nanoscale materials—because of their large surface-to-area ratio—can make for even more efficient catalysts. ChevronTexaco, ExxonMobil and Headwaters, Inc. are all investing heavily in nanotechnology to increase their yields. Specifically, Headwater is applying new nanocatalysts to the heavy oils in the tar sands of northern Canada in an effort to convert them into higher yield, environmentally-friendly, liquid fuels. Longer-term, one of its subsidiaries, NanoKinetic, is even exploring how nanotechnology can be exploited to liquefy coal.

Different nanomaterials may also be created to enhance the efficiency of fuel cell technology. One company working along these lines is NanoDynamics. The Buffalo, New York company has manufactured a new nanopowder that has been demonstrated to improve the efficiency of a solid oxide fuel cell. The device—about the size of a loaf of bread—can power everything from military gear on a battlefield to outdoor billboards.

It is even feasible that nanotechnology could change the energy equation by creating new nanomaterials manufactured to a standard high enough to safely store radioactive waste—thereby making nuclear power a more attractive option.

A fourth area where nanotechnology will play a large role is the development of solar cell technology. Konarka, a privately-held company located in Lowell, Massachusetts has developed titanium nanoparticles that can efficiently convert natural light and indoor light into electricity. When these nanoparticles are added to a flexible polymer, the possibilities are almost endless. By enabling the creation of thin, flexible solar cells that can be wrapped onto the roofs of homes and businesses all across the country, how America meets a large portion of its energy needs could be transformed. Konarka has publicly stated that it is pursuing this goal—as are two other nanotechnology companies: Nanosys and NanoSolar. The former is already partnering with Matsushita and expects to begin printing flexible solar cells as thin as wallpaper by 2007, while the latter is rapidly making progress with “self-assembling” solar cells. As fantastic as it sounds, these self-assembling nanoparticles might someday be able to be spray-painted directly onto walls.

With less than one percent of the world’s energy need being met by solar cells today, and the overall market for energy increasing, it is clear investors with an understanding of how nanotechnology can help meet this growing need can also profit handsomely in the process.

Keeping Moore’s Law Alive: Nanotechnology to the Rescue

For the past 40 years, the number of transistors crammed onto integrated circuits has doubled roughly every 18 months. In the world of semiconductors, this has come to be known as Moore’s Law—named after Gordon Moore, the founder of Intel, who famously forecast this phenomenon in 1965.

In recent years, a number of people have predicted the demise of the law as silicon—the basic building block of the computer revolution—has begun to run up against its physical limits. (As transistors are etched to ever-finer dimensions, they suffer “leak” as electrons migrate through the thinner material. The circuits, because they are more closely crammed together, also begin to run hotter—so hot, in fact, that they run the risk of eventually melting the silicon.)

It now appears that nanotechnology will keep Moore’s Law sailing along smoothly for at least the next 15 years. The semiconductor industry recently unveiled its updated International Technology Roadmap and announced that nanotechnology would be instrumental in its transition to a post-silicon era. New materials, heat sinks, carbon nanotubes and, eventually, molecular electronics are all likely to be part of the equation.

Initially, the winners are likely to be some pretty familiar names. IBM and Intel have announced startling progress in how new nanoscale materials can be manufactured to improve the flow the electrons in existing circuits. Both have also indicated that progress with carbon nanotubes is progressing to the stage where the one nanometer structures might be utilized as transistors. Perhaps the most exciting work, though, is being done by Hewlett-Packard in the field of molecular electronics. In 2005, the company announced that its researchers had successfully created electronic switches from single molecules—an advance that could lead to radically more powerful computers.

The field of nanoelectronics is host to a number of promising private start-ups, and a few of these are likely to go public within the next year or two. Molecular Imprints, Nanosys, NanoCoolers, and Nantero all bear watching.

What makes the above companies unique is that all are partnering with existing corporations. This is an important consideration because as fabulous as any nanotechnology company’s technology is, to be successful, they will need to partner with a major corporation to get their technology to the commercial marketplace.

To that end, Nanosys and NanoCoolers are partnering with Intel, in the field of nanowires and heat sinks; Molecular Imprints is supplying its equipment to Hewlett-Packard; while Nantero is working with LSI Logic to utilize its carbon nanotubes for a memory based product capable of storing massive amounts of data.

One other private company that bears close watching is Cambrios. This is because it is developing proteins that can bind to wide variety of different electronic, optical and magnetic materials. If successful, semiconductors, nanowires and scores of other small electrical and optical components won’t be manufactured in the traditional sense, they will be grown. The vast upside to such a disruptive technology is that the company won’t have to build a super expensive semiconductor fabrication plant (which today cost $3 billion) to build its product; it will simply grow them inexpensively in labs.

From Treatment to Prevention … to a Cure

As promising as such nanotechnology-enabled advances are, the field where it will ultimately have the greatest impact and the highest potential pay-off for individual investors is in the life sciences sector.

To get an indication of nanotechnology’s promise, consider that earlier this month, the Food and Drug Administration (FDA) fast-tracked for approval VivaGel, a topical microicide gel that can be applied as a preventative treatment against the sexual transmission of HIV. The gel is the first true application of a nanotechnology device in the biopharmaceutical field. Starpharma, the Australian company who is developing the product, is also focused on the development and application of other dendrimer nanotechnologies as drug delivery devices.

What makes dendrimers so unique is that they can be precisely manufactured with a number of different branches—each of which can be tailored to a specific size and be made to perform a different function. For instance, NanoBio, a private company in Ann Arbor, Michigan is working on creating dendrimers that can detect, diagnose and treat individual cancer cells.

While such nanoscale devices are still awaiting final approval, a number of other nanotechnology-enabled products have already reached the market. In January 2005, the FDA approved Abraxane. Made by American Pharmaceutical Products, the proprietary nanoparticle oncology drug binds to naturally occurring proteins and more effectively delivers the drug to its target. Because the nanoparticles are so small, they also have the benefit of being more solvent in the body. This means they require no toxic solvents and this, in turn, lessens the nasty side-effects often associated with cancer drugs.

A variety of other publicly-traded companies including Elan, Flamel, Novavax, Skyepharma, Nucryst and Immunicon are also developing nanoparticles to create new drugs and improve existing ones. With an estimated 60 percent of all blockbuster drugs expected to have their patents expire by the end of the decade, the possibility of employing such nanoparticles to help reformulate these drugs—and extend the patent—is of no small financial consequence.

The number of nanotechnology companies hitting the market is only going to grow in the years ahead. Last year, the U.S. government earmarked $144 million to develop nanotechnology applications to battle cancer. The director of the National Cancer Institute is so optimistic about nanotechnology’s potential that he has publicly stated nanotechnology has the potential to control a variety of cancers within a decade’s time.

By early indications, it appears that he may have been conservative in his projections. Nanosphere, a Chicago-based nanotech start-up, is developing a molecular testing system that is reported to be 1,000 times more sensitive than the systems on the market today. It is also easier to use, has a quicker turn-a-round time, and is capable of testing for more than one marker at a time. If successful, it will enable doctors (and maybe even patients themselves) to detect a variety of medical conditions at a very early stage.

Once detected, nanotechnology-based products and devices will then allow for more effective treatment. There is no shortage of promising nanotechnology-based products and companies. For instance, NanoSpectra Sciences is developing “nanoshell” particles capable of being absorbed by cancer cells. Once absorbed, these nanoparticles can then be treated with infrared light and heated to such a level that they will kill the cancer cell from the inside. Other companies like pSivida and iMedd are perfecting nanoscale devices that can release drug molecules at a slow, steady and sustained rate to targeted areas for extended periods of time.

Be it dendrimers, nanoshells, carbon nanotubes loaded with drug molecules, or some yet-to-be-developed nanotechnology-based treatment, the victory in the “war on cancer” is still a way off, but the road to victory is now becoming increasingly clear thanks to nanotechnology.

What’s an Individual Investor to Do?

The field of nanotechnology is so vast and is growing so quickly that keeping track of its advances—let alone trying to determine who is going to win—is an increasingly difficult endeavor.

The fact that a company has a promising nano-enabled technology or product will not be enough to guarantee success. At the end of the day which companies succeed will boil down to a number of other time-honored considerations like: good management, access to capital, key partnerships, and maybe even a little luck.

Sorting all of this out is a difficult, time-consuming and risky venture. There are three ways to approach this problem. The first is to find a fund dedicated to nanotechnology. As luck would have it, this past October, PowerShare unveiled the first Electronic-Traded Fund (EFT) for nanotechnology. PowerShare tracks an index of companies that are either developing nanotechnology-based solutions or, alternatively, utilize nanotechnology heavily in their end products. The fund is now up 10 percent since its inception but it may leave more aggressive investors searching for something more. That’s because it includes a number of large companies like IBM, Intel and GE—who due to their massive size—are unlikely to achieve extraordinary returns. More troublesome; is the fact that the fund also includes a few nanotechnology companies of questionable worth. They either lack solid management or don’t possess cutting-edge technology.

A second way to play the emerging nanotechnology market is to invest in either Harris & Harris or Arrowhead Research Corporation. Harris & Harris is a publicly-traded venture capital firm specializing in nanotechnology. To date, it has made sizeable investments in a number of nanotechnology’s most exciting private companies. Among the companies i which it has an equity stake include Molecular Imprints, Nanosys, Nantero, NanoMix, NanoOpto, Starfire Systems, Zia Lasers and NeoPhotonics.

Arrowhead Research has a different approach. It invests in promising nanotechnology research and development at university and federal laboratories, and then commercializes the most promising research. While much of this research is further away from the commercial marketplace than Harris & Harris’ investments, it does have the advantage of allowing Arrowhead to claim a larger (and often controlling) interest in the companies it starts.

At the present time, both would appear to be trading near their upper limits and investors are advised to tread carefully until additional news is forthcoming suggesting either company will be bringing products to the commercial marketplace in the near future.

A Final Word

That leaves investors with little option but to invest in individual nanotechnology companies. Luckily, there are literally dozens of well managed, publicly-traded companies working on exciting nanotechnology-based applications. The nanotechnology revolution is coming and the time to become familiar with the field and its leading players is now. Because whether it is the creation of diamond-like or self-healing materials; thin, flexible solar cells; self-assembling computer circuits; or nanoscale cancer-killing treatments, the modern industrial economy is slated for massive change due to nanotechnology and the individual investor with enough foresight to invest in the companies ushering in these advances stands to be well rewarded.

Jack Uldrich is a world renowned speaker on the topic of nanotechnology and the author of the forthcoming book, Investing in Nanotechnology: Think Small, Win Big (Adams Media), which is to be released in March and profiles over 100 leading nanotechnology companies. He is also the author of The Next Big Thing is Really Small: How Nanotechnology Will Change the Future of Your Business. He can be reached at jack@nanoveritas.com.