This Nanotech Deserves Respect

Tom Gardner expects his Motley Fool Hidden Gems recommendations to face a bumpy road. They are small and have little analyst coverage. In a word, they are "hidden." But hidden is usually a good thing in investing.

Hidden Gems recommendation Flamel (Nasdaq: FLML  ) hit some potholes this morning when it announced its quarterly revenues increased 80% and its net loss decreased slightly. The stock is off about 6% in afternoon trading.

To be fair, the company did miss the earnings estimates of the three analysts that follow it. One expected a $0.20 per-share profit. The lowest estimate was a $0.06 per-share loss. The actual loss was $0.07 per share. Shucks!

Flamel and its peers in the Merrill Lynch (NYSE: MER  ) Nanotech Index (AMEX: NNZ  ) are the Rodney Dangerfield of stock groups -- they are getting no respect. The index and Flamel are close to 52-week lows. So miss the analyst estimates and you really get no respect.

Flamel uses its polymer chemistry expertise to make new and already-marketed drugs safer and more effective. It is the ability to work with FDA-approved drugs -- which would have greatly reduced development times -- that makes near-term revenue and earnings possible.

Remember the three analysts? They expect the company to earn anywhere from $0.20 to $1.63 per share in 2005. Yes, that is a wide range. But, the growth of revenue and earnings at Flamel could be explosive -- and that is one reason it is a Hidden Gems recommendation.

The company's Medusa nanoparticle technology improves the delivery of native protein drugs through a more evenly controlled release of the drug. The technology also avoids side effects and enables a longer span of time for drug release -- both of which are a significant advantage. Bristol-Myers Squibb (NYSE: BMY  ) has a phase 2 trial using Medusa for a long-acting (24-hour) human insulin.

The company's microparticle Micropump allows small-molecule drugs to have extended delivery times. Generic-drug company Biovail (NYSE: BVF  ) and drug giant GlaxoSmithKline (NYSE: GSK  ) have products set for phase 3 trials.

The company also has a number of undisclosed partnerships, an "undisclosed" Micropump project with Merck (NYSE: MRK  ) , and its own pipeline.

Today's stock action is not indicative of any change of fortune at Flamel. In fact, the company announced the start of construction for a new manufacturing facility. Flamel is clearly getting ready for the future.

The company has a more than respectable $101 million in cash. That's plenty considering the latest quarter's loss was $1.6 million. The stock isn't getting respect in today's trading, but Flamel's long-term future looks like a gem.

Try a free trial to the Motley Fool Hidden Gems newsletter. The trial includes access to a special discussion board for Gems investors. Join in the discussion of Flamel, Nanotechnology, or a thousand other stocks on the Fool discussion boards.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.


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