It's been fascinating to watch nanotechnology slowly advance from theory to reality. For investors, however, only one journey really matters: The step from the research laboratory to commercial product.
As investors, we keep the majority of our powder dry, firmly believing that many of the best Rule Breaking nano investments are yet to come. We do note, however, that some opportunities already exist. One of these opportunities is in the incubators of budding nano companies, called technology transfer companies. A technology transfer company is an organization designed to take the research efforts of universities (or sometimes private corporations that do not wish to develop new ideas internally) and bridge the gap between concept and commerce.
There are three publicly traded incubators in the nano universe (that we know of). They possess a high-risk profile but of course stand to reap all the rewards of a successful investment. The three incubators are Arrowhead Research
Arrowhead Research used to be known as Interactive Inc., but through a reverse acquisition by Arrowhead founder Bruce Stewart, it was renamed in January 2004. Its primary focus is to develop and commercialize the nano research and proprietary products being developed at the California University of Technology. Arrowhead has already established three majority-owned subsidiaries, each focused on a particular sector of nano development.
Aonex Technologies was formed to commercialize a proprietary process for fabricating semiconductor nanomaterials to help device manufacturers reduce costs and improve performance. In the near term, Aonex is focused on applying its technology to next-generation solar cells.
Another subsidiary, Insert Therapeutics, received $5 million of funding from Arrowhead in 2004 in return for 62% of the company. Insert is developing advanced drug delivery technologies with a proprietary polymer delivery system trademarked as Cyclosert. This last round of funding was primarily raised to finance preclinical and phase 1 trials for their lead product, Cyclosert-camptothecin. Camptothecin is an anti-cancer agent that has been around for more than 40 years but has yet to be commercialized in its pure form because of toxicity issues related in part to its poor solubility. The company is hoping to demonstrate that its technology overcomes those problems and that the product will be superior to camptothecin derivatives such as Camptosar, which is made by Pfizer
The final subsidiary, Nanotechnica Inc., was funded with $4 million by Arrowhead in return for 74% of the company and is developing nanoscale devices and systems.
All of these subsidiaries are a long way from actual revenues. Arrowhead's role is to ensure that they have sufficient financial and material backing to allow them the time to develop a commercial product and attract partners and customers. According to its latest 10-Q, Arrowhead's only revenue source thus far is $129,000 in grant revenue brought in by Insert. With less than $7 million in cash and burning nearly $2 million a quarter, Arrowhead was in desperate need of a cash infusion. This week it announced the exercise of warrants raising $21 million, which puts it in a much healthier position to continue the efforts of its subsidiaries, as well as to continue sponsoring further nano research by Caltech.
Competitive Technologies was established in 1971 and has been acting as the bridge for more than 500 separate licensing agreements between universities and industries. It has licensed developments across a variety of sectors, including electronics, biotechnology, and, lately, nanotechnology. It is working with the University of South Carolina in developing a nano-derived bone biomaterial that is reportedly superior to existing bone cement products.
Competitive's share price rose more than 345% in 2004, but a peek under the covers indicates that this growth isn't sustainable without further developments. The rise was primarily a result of two separate one-time payments that boosted revenue growth. The first payment was a portion of a $50 million settlement from Wyeth, which had infringed upon a University of Colorado patent. Although Competitive Technologies was not a direct litigant, it received about $5 million of the payment because of its contract with the university. The second windfall was a $5 million up-front license fee paid by Abbott Laboratories for a hymocysteine assay patent. That patent expires in 2007, leaving Competitive little time to accrue much more than $1 million to $2 million in further royalties. If we back out those fortuitous one-off payments, the company is not much different from what it was a year ago, when it was under review for delisting by AMEX. The share price was $4 then; it is now more than $10.
Within the space of nine months, the newest of the technology transfer companies, Advance Nanotech, has gone from nonexistence to sitting at some impressive dining tables.
In July 2004, Advance Nanotech made a $2 million investment in a fellow British company, Owlstone Ltd., in exchange for 60% of the company. Owlstone was spun out of Cambridge University and is developing nanosensors for detection of chemicals and explosives, with markets in homeland security and personal safety. In October 2004, Advance Nanotech backed itself into the existing U.S. public listing of Artwork & Beyond. Advance paid off Artwork & Beyond's directors and established a new name, new ticker, and new directors.
Since becoming publicly listed in the U.S. market, Advance Nanotech has established 18 nano subsidiaries and is in the process of breathing life into each one. To do so, it raised $20 million in a share offering in February 2005 that included several VC companies and a polyglot of ex-chairmen and CEOs, including Michael Jordan, chairman and CEO of EDS and former CEO of Westinghouse and CBS; Jonathan Segal, founder of WorldPay; Larry D. Bouts, former chairman and CEO of Six Flags Theme Parks and former CEO of Toys "R" Us International; Greg Osborn, co-founder and partner of IndiGo Securities and former senior vice president at Smith Barney; and Timothy Lane, former chairman and CEO of Holiday Inn Worldwide and former president of Frito-Lay International.
Advance Nanotech is among the lead partners in the financing of Cambridge University's new Center for Advanced Photonics and Electronics, a facility designed to bring together the disparate nano research groups in Cambridge under one roof. Cambridge University is the preeminent university in the U.K. (arguably in all of Europe), and it has educated more than 60 Nobel Prize winners. This new center of excellence is positioned to become one of the leading nano research institutions in the world, and Advance Nanotech is a lead partner in the venture. Other partners include Marconi
Advance Nanotech has also opened offices in the United States and one in the Far East, with a $3.5 million budget to invest in emerging nanotechnology research. Its original investment in Owlstone could bear fruit as soon as the end of this year, since Owlstone promises a commercial launch of its button-sized sensors by then. The nano component is in fabrication and promises to be 1,000 times cheaper than existing chemical sensors.
Ordinarily, a bulletin board stock that comes out of nowhere touting the latest hot technology and promising the world would raise a huge red flag. In this case, however, we're taking a closer look.
When looking for potential Rule Breakers, we scout companies that take our breath away. Advance Nanotech has certainly done that with the pace of their development. Although it is burning through a lot of cash, will it fly too close to the sun and fall back down to earth? Only time will tell. We advise you to take your time and thoroughly research this company.
As you can see, these are all highly speculative stocks. Investors with a risk-averse disposition should look elsewhere. Those with a penchant for risk (and reward) might want to take the view that Caltech and Cambridge University are likely to produce pioneering developments in nanotechnology -- developments that can make it to a commercial market. If so, then the work being done now by Arrowhead Research and Advance Nanotech could reap investment benefits for the long term. Competitive Technologies is less focused on nanotechnology and currently looks overpriced, but it does have more history on its side.
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