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The next big thing is very, very tiny
Nanotechnology one day will rearrange atoms to produce computers, medicine and consumer goods at the molecular level. Here are 7 companies at work on the future.
By Michael Brush
Given the amount of money most of us lost when the tech bubble exploded, the last thing we need now is another next big thing.
But its here. Its called nanotechnology. And writing it off is dangerous. If youve dismissed it so far as just another iteration of the Internet craze, youve already missed out on a possible gain of 200%. That's the return Josh Wolfe, a Lux Capital venture capitalist, has generated in a portfolio of nanotech stocks that he put together in March 2002.
What is nano?
Nanotechnology has many definitions, but all of them start with the notion of smallness. Nano means a billion -- or a billionth of a meter in this case. A hair split 75,000 times would be about a billionth of a meter. That's roughly equivalent to the size of 10 hydrogen atoms sitting side by side.
Now, when you break substances down to around this size, all the old rules about how these substances behave get thrown out the window. For example, if you take a piece of cadmium a few nanos in width and double the size, its takes on a new color. Thats something that doesnt happen if you double a pound of the stuff. Other basic properties like stickiness and conduction change as well.
The point of nanotechnology is to take advantage of these tiny quirks of nature to develop better goodies of many different sorts -- from smaller microprocessors and TV screens, for instance, to more accurate medical tools and cheaper beauty aids.
Since were still in the early days of nanotechnology, lots of the better investment plays are small, private startups. But there are several promising publicly traded nanotech plays too, says Wolfe. These include equipment makers Veeco Instruments (VECO, news, msgs) and FEI (FEIC, news, msgs). There are also several small companies developing ways to apply nanotech in the areas of consumer electronics -- NVE Corp. (NVEC, news, msgs) and Nano-Proprietary (NNPP, news, msgs) -- and medicine -- Nanogen (NGEN, news, msgs), SkyePharma (SKYE, news, msgs) and Flamel Technologies (FLML, news, msgs).
Naturally, big tech giants such as IBM (IBM, news, msgs) and Hewlett-Packard (HPQ, news, msgs) have huge research teams looking for ways to use nanotech to revolutionize the world of micro-processing and storage. But nanotech is more than just a bunch of theory being cooked up in the lab.
There are already lots of products on the market that use it. They include sunscreen, anti-wrinkle cream, tennis rackets, stain-resistant khaki pants, and coatings used to keep ship hulls free of barnacles. The EasyShare LS633 digital camera, made by Eastman Kodak (EK, news, msgs), has a sharper screen because it uses organic light-emitting diodes based on nanotech.
Nanotech eventually will touch many more parts of our lives because its a general-purpose technology, much like electricity, railroads and the Internet, says Michael Mauboussin, chief U.S. investment strategist at Credit Suisse First Boston. In five to 10 years, we may see products such as powerful computers you can fold into your wallet, highly efficient solar panels and powerful drugs and medical diagnostic tools. Here is a closer look at some of the companies that may benefit between now and then.
Companies developing new apps in technology
Giants like IBM and Hewlett Packard, of course, will see big payoffs if nanotech lives up to its promise of revolutionizing the world of storage and microprocessors used inside everything from computers to cell phones. For example, IBM is developing ways to use tiny beams with tips the size of atoms to poke small holes in a surface thousands of times with the aim of creating a tiny storage device.
Small nanotube transistors might eventually take the place of silicon. That would mean much smaller and much cheaper storage devices in computers, cameras and cell phones. The whole thing is about smaller, faster, cheaper, says Tom Theis, director of physical sciences at IBM Research. I see a lot of potential for brand-new memory devices. One outcome could be computers with the processing power needed to move to the next level -- so they can think and anticipate our needs as we use them.
While IBM and Hewlett-Packard have huge research arms developing the technology, there are smaller, purer plays on nanotech in the computing arena, too. NVE, a spin-off from Honeywell (HON, news, msgs), for example, is a fairly focused play on a novel approach to using nanotech to create new kinds of computer memory and storage.
The company holds patents on several aspects of the technology behind spintronics, a system that uses the spin of electrons to store massive amounts of data. People have known for a while that electrons spin up and down, so it is a binary effect obviously amenable to memory, says Daniel Baker, the chief executive of NVE. Again, its smaller and faster. And because data storage is based on the spin of electrons, information doesnt disappear when the power is shut off. The technique is called magnetic random access memory (MRAM).
NVE has licensed its MRAM technology to Cypress Semiconductor (CY, news, msgs) and Motorola (MOT, news, msgs). The latter hopes to use the technology to make much smaller cell phones. Lux Capitals Wolfe thinks MRAM could become a $50 billion industry by the end of the decade.
The tiny Nano-Proprietary, meanwhile, holds patents on the way certain types of nanotubes send off emissions. The science is complex, but some of the applications are simple. Nanotube emissions can be used to create images on flat-panel television screens, and Samsung is working on one that may be out next year. Canon (CAJ, news, msgs) and Toshiba (JP:6502, news, msgs) also are working on these kinds of screens.
Zvi Yaniv, the chief executive of Applied Nanotech, a subsidiary of Nano-Proprietary, thinks his companys nanotube emission technology will also be used to make sensors that can detect chemicals for use in security, or devices that will create emissions inside the body to treat cancer.
Given the absence of mutual funds geared toward nanotech, investors should know about the tiny Harris & Harris Group (TINY, news, msgs). Its a publicly traded venture capital fund that invests in lots of private startup companies in the field. Wolfe, however, cautions that the shares look expensive at recent levels of around $6.65. He thinks fair value is closer to $3 per share.
Medical uses of nanotech
To figure out nanotech applications in the medical field, lets turn to an expert like Philip Chen -- a Harvard-trained research and medical doctor who helped start a medical testing lab called Cognoscenti Health Institute in Orlando, Fla. The lab uses cutting-edge nanochips that can identify certain diseases, like cystic fibrosis, and scan DNA for signs of predisposition to other ailments. His lab is one of a few in the country that use nanochips for these applications. He gets them from Nanogen, a tiny company thats not yet selling enough to turn a profit. But Nanogen has decent cash levels of $32.6 million and a quarterly cash burn rate of $4.5 million. That means it should have the strength to stay around until the market develops.
Further down the road, Chen says, nanotech will be used in medicine in at least three other ways. First, nanochips will detect proteins in the body that signal a disease is present. Second, doctors will use molecular radiology to find cancer in the body. Certain kinds of DNA that recognize cancer will be attached to metallic molecules and injected into the body. It is like a probe that goes out and seeks cancer cells and attaches to them, says Chen. He thinks this technique will be in trials within three to five years.
Nanochips also will be used at some point in the next several years to develop a genetic profile of patients to help doctors determine which drugs will have the least side effects. This will be the fastest-growing sector in the use of nanotech in medicine, says Chen.
Celera Diagnostics, a joint venture between Applied Biosystems Group (ABI, news, msgs) and Celera Genomics Group (CRA, news, msgs), is doing a lot of the development work in these areas. Celera Diagnostics has an alliance with Abbott Laboratories (ABT, news, msgs), which markets products made by Celera, and a research alliance with Merck (MRK, news, msgs).
Nanotech also will be used some day in new coatings on medical devices put inside the body -- to encourage body tissue to attach to these devices, or discourage bacterial growth, says Larry Bock, the executive chairman of Nanosys, a private research company that holds a multitude of nanotech patents. Nanotech also can help in drug delivery, since breaking down a drug into tiny particles means theres more surface area, thus better absorption. So you need smaller amounts of expensive drugs. Two companies working on this kind of drug delivery are SkyePharma and Flamel Technologies.
The pick-and-shovel plays
Some of the earlier beneficiaries of nanotech will be the companies that sell the tools used to develop it. Governments around the world are making nanotech a national priority, pushing worldwide funding for research to $3 billion this year, says Wolfe. He thinks that will help Veeco, which has a 70% market share in atomic force microscopes used in nanotech research.
These are devices that can see and manipulate atoms and molecules, says Veeco President Don Kania. More importantly, he says, new features can be added as new needs arise. Wolfe also has FEI in his nanotech portfolio; the company makes ion and electron beam microscopes used in the field.
The risks are still unknown
While nanotech seems like the wonder tech that will change so many things in our lives, there are also plenty of unknowns and potential risks. That's because, among other things, we dont yet know all the side effects of breaking materials down into tiny pieces.
For example, some researchers have found that rats which breathe a small amount of nano-particles suffocate because their lungs dont know how to deal with the tiny particles. And what about the environmental implications? Again, we just dont know because the field is so new.
Barring potential disasters for the field on this front, one upside to nanotech is that so many in the investing community are still so confused about it -- and skeptical, given the big losses sustained in the dot-com bubble.
Investors on the whole have still not grasped nanotech, and I actually think expectations are still too low, says Wolfe. Lingering skepticism is keeping a lid on the valuations, and that creates opportunity for those willing to do their homework.
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