Arrowhead's Carbon Coup

In the field of nanotechnology, few materials have generated as much excitement as carbon nanotubes. Their high strength-to-weight ratio, small size, and excellent conductivity hold the potential to open up a host of business applications in flat-panel displays, conductive polymers, high-strength materials, solar-energy converters, and electronics.

For years, one of the better-recognized leaders in this field has been Carbon Nanotechnologies, a privately held company based in Houston. Yesterday, the company's status changed, when Unidym, a subsidiary of Arrowhead Research (Nasdaq: ARWR  ) , announced that it has purchased Carbon Nanotechnologies for $5.4 million. As a result of the deal, Arrowhead's stock surged 15%.

On the face of it, there's no question that acquiring Carbon Nanotechnologies' intellectual property alone adds significant value to Arrowhead. The company is one of the world's leading producers of carbon nanotube; it owns 54 patents and has dozens more pending, and it boasts established relationships with DuPont (NYSE: DD  ) , Motorola (NYSE: MOT  ) , and Foster-Miller.

The bigger question for investors is whether Unidym will be able to translate this intellectual property into commercial products that generate revenues and, eventually, profits.

I think it will happen, but not overnight. According to company officials, Unidym will focus first on incorporating carbon nanotubes into electronics products. Specifically, it intends to have a transparent electrode on the market next year. Unidym believes that product will replace tin-oxide electrodes in the touchscreens on cell phones and PDAs. After that, it is looking at developing RFID tags, thin-film transistors for the printable-electronics industry, and possibly even carbon nanotubes as drug-delivery vehicles.

The market for the transparent electrodes is an estimated $1 billion, and if Unidym can capture even a portion of that pie, the value of the stock will rise. But I would caution investors that electronics manufacturers are typically not quick to adopt new technologies. And although tin oxide has its shortcomings, it is not at all clear yet that carbon nanotubes -- for all their amazing properties -- don't also have problems of their own. This is especially true in terms of trying to manufacture each nanotube so that it has the exact desired property.

These reservations aside, the acquisition is a solid, strategic move, and it should bolster Arrowhead's position in the long term. Like Motley Fool Rule Breakers recommendation Harris & Harris (Nasdaq: TINY  ) , the publicly traded venture-capital firm specializing in nanotechnology, it is a more speculative investment. But if carbon nanotubes can begin to deliver on their immense potential, an investment in Arrowhead could pay significant dividends in the years ahead.

Interested in other Foolishness about Arrowhead? Check out these articles:

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Fool contributor Jack Uldrich owns stock in IBM and Harris & Harris. The Fool has a strict disclosure policy.


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