Nanotech is slowly sparking the imagination of the broader public, and that means Wall Street is moving ever more quickly to start picking its own favorites to sell to investors.

On one hand, that’s great for serious nanotech and disruptive technology (distech) investors. Finally there’s increasing exposure to the enormous applications of these new technologies. And for the small companies that reflect the Pioneers part of my Portfolio, some of them are getting much-needed press and sector promotion.

On the other hand, Wall Street never does anything without getting something in return. These small companies make the map, but the big players (with big positions) run them up–then run them down and so on because they have money on both sides of the trades. Individual investors have to suck up the volatility and stick with the stocks or jump in and out and back in, generating commissions for the brokerage firms, mutual funds and money managers that are causing all the action.

That’s why I also have a collection of Big Dogs in the Portfolio. These are companies that are some of the best corporations in the world in the most-promising industries for nanotech and distech. They’re beyond the games the little guys have to deal with.

They’re the companies that have already incorporated nanotech into their products and business models without the pomp and circumstance a small cap nanotech needs to get its product–or company–the slightest exposure to the broad investment community.

Granted, in the larger companies, nanotech isn’t going to make or break their future. But the fact that they have committed resources and research and development and that they roll out strategies to these cutting-edge technologies is testament to forward-thinking, competitive companies that are exploring every opportunity science affords them.

And in this market, it’s to your advantage to strike a balance between sexy, swing-for-the-fences fry and steady, smart, diversified global players.

What’s more, it’s important for you to come to grips with the fact that science doesn’t begin and end at the shores of the US. Countries around the globe are committing enormous resources to capture strategic footholds in this burgeoning market. As my colleague and Sector Spotlight contributor Dr. Tim Harper is fond of saying, “Nanotechnology is to the 21st century what chemistry was to the 20th.”

You could also say that developing the infrastructure to help realize the potentials of nanotechnology is like the modern version of inventing the assembly line or interchangeable parts. It’s the newest iteration of the capitalist mantra, “Market it, and mass produce it.”

Yet ironically, both Tim and I have undertaken to cast a jaundiced eye at all the hype that surrounds nanotech. The reality is most small companies will never make it across the Valley of Death between the lab and fabrication. The safest way to take advantage of this revolution is to buy the Big Dogs–the companies that will fatten their bottom lines by introducing nanotech into their existing businesses and increasingly dominate their market sectors.

But pragmatism doesn’t get investors’ hearts thumping in such an exciting and potentially lucrative sector. That’s where the Pioneers come in. I’ve collected a group of companies that best represent what I perceive as the most-important sectors for nanotech to make its market in the next year or two, particularly energy storage, drug delivery and defense.

These sectors also resonate in the Big Dogs as well. But there, you’re also looking at industries like electronics, chemicals and medicine.

Perhaps it’s easier to explain by illustration.

I’m adding Bayer (NYSE: BAY, www.bayer.com) to the Big Dogs Portfolio as a buy up to 60. I’m guessing your first thought was, “The aspirin company?”

Well, technically, Bayer invented aspirin and trademarked the name. But the trademark became part of the lexicon, and US analgesic makers tossed the term on their bottles. By the time Bayer tried to step in for trademark infringement, the US courts invalidated the trademark rather than make every aspirin maker in the US change their labeling.

The story may seem a bit tangential, but the point is this company has a long, successful history of innovation. I’m guessing it also has a much more virile legal patent and trademark department as well.

On the business side, net profit and operating margins continue to rise, which is a very encouraging sign for a German conglomerate. On the stock side, it’s a bargain. Bayer’s price to sales, price to book, price to cash flow and price to free cash flow are less than half the industry average.

For the nanotech side of things, Bayer recently announced at the NanoTech fair in Tokyo it’s developed a cost-effective way to produce carbon nanotubes for industrial applications. That means mass-producing the little fellas and maintaining quality control over huge amounts of the product while being able to produce and harvest them efficiently. No small feat. The proprietary product is Baytubes.

However, this advancement won’t send Bayer stock or revenue soaring. What it will do is allow the company to start researching possible uses for Baytubes across its divisions and product lines. Baytubes impact will resonate throughout the company but won’t be a headliner. It will mean stronger, lighter ski poles, better antistatic packaging or perhaps better drug delivery devices for medications.

The company has been around almost 150 years and will likely be around in another 150. This is a Big Dog.

On the other side of the coin is Australia-based Pioneer Starpharma (www.starpharma.com).

This “bionano” is working with one of the most fascinating macromolecules to come around in a long time–dendrimers. The thing is the numbers on this company’s income statement read with the usually obligatory zeros in the columns. Total revenue last year wasn’t AUD6 billion; it was AUD6 million.

Fundamentally, Starpharma has one Big Idea. If it works, this will be a moonshot. If it doesn’t, it will languish in obscurity, continually groping for grant money, trying to keep its doors open and scientists working. This is also the type of company that makes balance sheets and valuations completely abstract concepts. You have to look at the technology, the business plan, the management and the trends. It strips growth investing down to its most-elemental aspects, like bare-knuckle brawling or bull fighting.

The thing is, as Hemingway noted so many years ago, there’s no one on the planet sexier than a matador. So let’s see what this bull has under the hood:

Dendrimers are the Next Hot Thing in the bionano drug delivery world. (Check out this article and this article for more on dendrimers). What’s more, Starpharma has a product, VivaGel, that’s received some serious funding from the US National Institutes of Health (NIH) for use in the prevention of genital herpes and HIV. That’s right, imagine preventing HIV and AIDS by simply applying a cream. Starpharma already has studies underway in San Francisco and Kenya. In January, it also received fast-track status from the US Food and Drug Administration (FDA) for its use in the prevention of AIDS.

Starpharma also just inked a deal with Big Pharma Merck & Co’s subsidiary EMD Biosciences to supply Priofect transfection reagents based on Priostar proprietary dendrimers for the DNA and siRNA transfection research markets. This is a big deal because siRNA (small interfering RNA) is becoming the new spot many researchers think they can outwit cancer cells.

And dendrimers have already proven effective in accessing healthy as well as cancerous cells without setting off the body’s natural hellhounds. Here’s an article from a leading pharma site on new cancer methodologies like siRNA gateways.

But Starpharma and its newly acquired US-based subsidiary Dendritic Nanotechnologies (www.dnanotech.com) isn’t exactly a household name. That’s good if you’re looking to get in on the ground floor. It’s also dangerous because the ground floor may also be its penthouse.

But there’s too many good things going on here not to take a shot. The technology is in clinical trials, and the management is doing a good job keeping the burn rate in chech while developing products; it’s cut some good deals and has made some solid connections in the US market.

Starpharma is building a formidable position in this nascent sector and has some very powerful allies, including NIH and FDA. Phase III trials for VivaGel should be concluded in 2008; any real hope to slamming one out of the park rests on that conclusion, because licensing deals will or won’t come based on those results. However, everything looks very promising, and this stock could soar as that trial starts to wrap up.

The addition of Dendritic Nanotechnologies certainly will give the company a great revenue-generating component, as well as a facility to produce dendrimers for further research. It also establishes a sizable footprint in the US market and business community.

This is a Pioneer. Starpharma is buy below 4.25.
  Portfolio Precepts

I follow four precepts in screening companies. They are as follows:

• It’s What You Do With Size That Matters There’s an old Texas saying: It’s not the size of the dog in the fight, it’s the size of the fight in the dog. Size has a point of diminishing returns. Intellect and agility are always prized attributes in the race to the top of the food chain.


• Show Me The Money A big firm has to be looking for a way to make the economies of scale work. Ideas being tweaked in R&D year after year without management committed to rolling out a product are worse than worthless.


• Friends In High Places Being well-connected can be an enormous benefit if you’re big or little. The national defense industry is always looking for the Next Big Thing and usually has the money to throw at anything reasonably attractive. It’s always encouraging to see little guys working with the big guns for a piece of the subcontractor crumbs–it’s the best way to make it big or get bought out.


• Wake Up, Sleepy Dreamer Companies have to pick a spot and do battle—with a plan. Cool ideas with 50 different applications mean a company is looking for handouts for a buyout of the idea, not any specific product. Until a company has the guts to develop a clear strategy on how it plans to exploit a market, its investment value is limited at best.