Nanotech: Small Scale, Big Potential
08/20/2004 12:00 am EST
The Forbes/Wolfe Nanotech Reportis one of the most exciting additions I have seen in the financial newsletter field in the two decades I have been following this industry. Editor Josh Wolfe offers an overview of some of his favorite opportunities in this emerging market.
"How small is a nanometer? We’re talking about a billionth of a meter. A million nanometers is the size of a pin. If you go a thousand times smaller, we’re at the size of red blood cells that carry oxygen through your body. If we go down yet another thousand times smaller, we’re at the size of DNA, which is about 2-½ nanometers wide. One nanometer is roughly the size of ten hydrogen atoms. In nanotechnology, we’re talking about the ability to control and manipulate matter at an atomic scale— individual atoms.
"The development of plastics in the 1970s and 1980s revolutionized the world because for the first time it allowed us to control the structural properties of matter. You were able to control the shape of objects. Now with nanotechnology, you are able to not only control structural properties, but the optical, the electronic, the magnetic—every property that matter gives off. You can literally tune it. Because of this – fundamentally controlling atoms and molecules—it touches every aspect of every industry you can think of. Everyone thinks of nanotechnology as a niche sector. That may be true in a sense, but it is also false— as it is a cornucopia that touches energy, transportation, materials science, life sciences and pharmaceuticals, computing, optical electronics, super-thin displays that you can roll up, etc.
"The Holy Grail of nanotechnology is bottoms-up manufacturing, the ability to actually grow something from the bottom up, atom by atom. The way that a table is made is by taking a piece of wood from a tree—which nature by the way assembled atom by atom from the bottom up—and carving it away into a shape that we use for some function. With nanotech, we are actually developing what we call self-assembly— where you can get molecules to attract one another and assemble into complex objects. Right now, we can do basic chips and turn silicon wires into small designs. We are nowhere near being able to grow a car or toaster oven. That’s not something you should think about investing in. Nanotech is placing individual atoms where you want them when you want to achieve a certain functionality. It’s precise control over matter at the atomic scale.
"We have already seen some products, such as waterproof khakis, nano-material car bumpers that won’t scratch, cosmetics with nano-particles such as clear sun screen, and nano-composite tennis rackets. These are interesting, but they are not the things that will change the world. Think about our dependence on foreign oil and the ability to go from oil and natural gas to solar cells— flexible solar cells that can go on any surface, even clothing such as uniforms for soldiers. Consider that in computing we first had electro-mechanical systems. This was basically punch cards to represent zeros and ones. People felt it couldn’t get better than this, but then we had vacuum tubes. Then we had the invention of the transistor, and people felt it couldn’t get better. Now we have integrated circuits. And people feel that it can’t get better. But they are wrong. There is a next thing. And our prediction is that this will be molecular computing. Hewlett-Packard, and IBM, and Intel are all working very closely on doing just that. Think about the potential in molecular memory for computer applications. There are more molecules in a single drop of water than there are transistors in the entire world, cumulatively, since the invention of the transistor in 1959.
"Meanwhile, government spending on nanotech has grown from under $200 million in 1997 to a level eight times higher— and it is growing exponentially. A government funding bill for $3.7 billion over five years was signed into law last December. This is also an issue that has complete bipartisan support. Both sides of the aisle recognize that this is critical for economic competitiveness, for job creation, for national security and homeland defense, and for healthcare. Here are some of the headline we have seen internationally: ‘Taiwan Pledges Commitment to Nanotechnology’; ‘Nanotech firm sets up facility in China’; ‘Korea Budgets $1.6 billion for Nano R&D’. Every country around the world is competing very heavily to attract scientists in this area. For example, Singapore does not have restrictions on stem cell research. So you will see US scientists go abroad, unless things change here. There are also huge implications for defense, in developing body armor and the ‘soldier of tomorrow’ with super-lightweight materials.
"In addition to government spending, we now have universities setting up huge nanotech centers. Cornell, my former campus, was one of the first universities to set up a nano-fab facility, where they can fabricate nano-structures. In that facility, they ripped out the entire engineering quad, and built a $60 million building right in the center, interfacing between the physics department, engineering, electrical, computer science, biology, etc. A lot of these people never spoke to each other before. Electrical engineers never usually talked with biologists. They were viewed as two different disciplines. I’d liken this to the story of the tower of Babel, many different people working towards a common goal—in their case, building up towards heaven—but all speaking different languages. That’s what is going on in nanotechnology, with the different languages being the scientific languages. And at every university campus around the country, this phenomenon is taking place, where these disciplines are converging upon each other. It’s a scientific renaissance— and this has only started in the last five years.
"What is the first thing that universities do when they establish nanotech facilities? They buy the equipment that researchers need to actually do this scientific research. And that is the first investment theme—the tools. Look at history—the railroads, the gold rush— the money was made by selling picks and axes. Even in the Internet, the people who made money were the firms that sold routers. In this case, those selling the picks and the axes to the nanotech field will be the first ones to make money. Veeco Instruments (VECO NASDAQ) makes atomic force microscopes, which is the equipment that allows people to work at the nanoscale. Usually when you think of a microscope, you picture one looking into something. But you can’t see atoms, because they are below the wavelength of light. This machine works like a record player— with a stylus and groove. It touches the surface and feels for an atom and it can tell you if it was a carbon atom or a hydrogen atom. This is a long-term buy; we think the stock could be up to $35 to $40 within the next 12 months.
"Along with Veeco, we also like FEI Company (FEIC NASDAQ), which is also in the instrument segment. The company makes ion beams, or scanning electronic microscopes. Both FEI and Veeco traditional sell their products to the capital equipment market, where they are selling to the Intels and AMDs for them to make computer chips. But they have seen a double-digit growing demand—some 50% per annum— for these tools in the research area for nanotech. We're long-term bulls on FEI and expect some exciting announcements in coming months about their direct investments in nanotech. We'd note that FEI was slated to merge with Veeco, and the market punished the stocks over concerns that the Department of Justice would view this as monopolistic.
"We are also seeing more and more scientists doing research using software where they can model chemical reactions and the probable interactions between molecules on a computer. Accelrys (ACCL NASDAQ), which was recently spun off from Pharmacopeia, is in the software side of nanotech. The company has $85 million in cash and they are doing a phenomenal job so far, helping to discover new drugs. The market cap is about $163 million. We like it for the long term in the life science area, we like Flamel (FLML NASDAQ), a French company. They have some big news coming up, as they get closer to fulfilling a $165 million contact with Bristol-Myers Squibb to reformulate drugs into a nanoscale formulations, which could help reduce side-effects from these drugs. We're long-term bulls on Flamel. Immunicon (IMMC NASDAQ) is a nanotech company that went public about two months ago. It is trading below its IPO price. It has been a very volatile stock since it began trading. It has about a $200 million market cap. The company is flush with cash and has a deal with Johnson & Johnson, which will go into effect towards the fourth quarter of this year. They make little nano-particles that are more effective in helping to diagnose and target various types of cancer.
"Finally, we would comment on one company that is still private. Nanosys is one to watch. The stock is not yet public. It was supposed to go public recently, but the company decided to withdraw given the market environment. We are venture capital investors in this company and we are strong believers that this firm will change the world. Consider how we make a semiconductor chip. We start with a top-down approach, where we literally carve away at a silicon surface, using lithography and light. The equipment to do this costs about $40 to $50 million per machine. Contrast that to Nanosys, which can actually grow transistors in their lab using chemistry. So it’s no wonder that Intel made a venture capital investment into Nanosys. They have 250 patents. They own the intellectual property landscape from about 15 universities for inorganic semiconductors and nano-structures. They will probably test the public market again in six months or a year."