Wolfe's "New" Nanotech

04/16/2004 12:00 am EST

Focus:

Josh Wolfe

Editor, Forbes/Wolfe Emerging Tech Report

Over a year ago, we featured Josh Wolfe’s recommendation for Pharmacopeia, when he called the firm's molecular modeling unit a "hidden gem." That unit is now being spun off, and his recommendation is up 180%. Here's his update on the "new" company.

"Pharmacopeia has changed its name to Accelrys (ACCL NASDAQ) in advance of its plans to separate its Pharmacopeia Drug Discovery unit from its Accelrys molecular software modeling businesses into two publicly traded firms (expected by the end of April). Subject to final approval, the drug business will trade under the symbol PCOP upon completion of the spin-off, while the software unit will trade as ACCL. A fter the spin-off, Accelrys is expected to have $100 million in cash and no debt. Despite the fact that Accelrys’ revenue dropped from $95.1 million in 2002 to $85.6 million in 2003, SG Cowen analyst Phil Nadeau reassures investors that the software business alone is worth roughly $18 per share. The opportunity for Accelrys is significant. The ability to control and design new materials at the molecular level is one of the hallmarks of nanotechnology, enabling new properties that did not before exist.

"Leading chemicals and pharmaceutical corporations are already the biggest users of molecular modeling software and sophisticated high-throughput systems—allowing for screening for novel materials and molecular simulation on computers rather than in chemistry experiments. Accelrys is one of the firms at the leading edge of this trend. Accelrys’ largest customers are in the pharma, biotech, and chemicals industries, followed by academia and government. Materials science is the fastest growing part of the business so there’s little surprise that its hottest new product is Materials Studio 3.0, a high end specialty software program has been purchased by chemical companies including DuPont and 3M.

"We also note that Pharmacopeia announced a 34% decline in revenues for its first quarter ended March 31. As we expected, ACCL warned of a significant decline in future revenue bookings due to its decision to switch to subscription accounting. While revenue figures are affected by the accounting change, cash flows are not. But the 22% year-over-year decrease in orders had not been anticipated and was blamed on customer confusion with the new subscription-licensing model. While the switch to subscription accounting may not be a seamless transition in the near term, the long-term benefits (including smoother and more predictable revenue streams) are extremely attractive. The glaring headline number resulted in a plunge in the shares. We think the sell-off is an overreaction and short-sighted and we reiterate our Buy rating for long-term nanotech investors and would be buyers on weakness."

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