Nanotech Book-Value Bet

10/23/2002 12:00 am EST

Focus:

Josh Wolfe

Editor, Forbes/Wolfe Emerging Tech Report

Josh Wolfe gave one of the most fascinating seminars at the last Money Show in San Francisco, and I’m truly looking forward to his presentation at The New York Money Show. From his latest Nanotech Report, we offer this sneak peak at one of his favorites.

“I always caution investors that the rewards of nanotech investing will come over the long-term  Nanotech is in its infancy. But I think I have found a value opportunity - Pharmacopoeia (PCOP NASDAQ). Accounting for more than 70% of revenues, its Accelrys software unit sells molecular modeling and simulation software to life sciences, materials, and nanotech researchers. This software allows researchers to model the structure of protein and chemical molecules and simulate interactions at the nanoscale.

“After a 1995 IPO at $16, PCOP rode the genomics and bioinformatics buzz to a high of $104 in March 2000. It now trades for a mere $7.55. But I think investors have oversold this stock without much regard for its tremendous potential in nanomodeling. The company has a solid balance sheet with $1.43 million in cash and equivalents ($6.12 per share), no debt, $122 million in revenues over the past 12 months, and blue-chip customers like DuPont, Pfizer, BASF, Dow, Texas Instruments, Harvard, and Caltech. PCOP trades for less than book value with cash representing more than 80% of its current market capitalization.

“Pharmacopoeia was profitable in 1999 and 2000, but lost $14.2 million over the past 12 months due to a slow down in business tied to the current economic malaise. Street estimates for 20002 EPS range from a loss of 15 cents to a loss of 18 cents. The company suffers from a bloated cost structure built during the go-go years in the late 1990s and was late to respond to the slowdown in business growth. It only recently announced a restructuring. Better late than never.

“In my opinion, the company has reached a crossroads. The bottom line is that value still exists, but it needs to be unlocked by management. I think the stock is worth a lot more than its current share price, and it’s time for management to deliver for its shareholders.”

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