Friday, September 21, 2007

They're Baaaack

Bucky Balls…they are back. This time with under a new name and a ticker symbol - Arrowhead Research Copr. (ARWR: Nasdaq). Arrowhead has taken a portfolio approach to nanotechnology development. The Company has invested in five private start-ups, all focused on using nanotechnology engineering and science to develop materials and components for pharmaceutical, power, energy and semiconductor OEMs and ODMs.

One of the start-ups,
Tego Biosciences, is a nanotechnology initiative founded on technology developed at Rice University. Scientists there discovered a family of unique molecules composed of carbon. They named the molecules buckminister fullerenes (later shortened to “bucky balls”) because they looked the like the geodesic dome make popular by the architect Richard Buckminister Fuller.

Tego believes its “bucky balls” have numerous applications, but management is going after the low hanging fruit first - anti-wrinkle creams and cosmetics. Do not laugh here! The aging baby boomer generation makes this a sizable market. The hollow balls act as excellent carriers for anti-oxidants, wound healing agents, and moisturizers.

Arrowhead’s other four portfolio investments include
Insert Therapeutics (nanoengineered drug delivery for cancer compounds); Calando Pharmaceuticals (nanoengineered RNAi therapeutics); Aonex Technologies (nanoengineered wafer for solar cells); and Unidym, Inc. (nanotube-based products). The only revenue in Arrowhead’s consolidated P&L is from a few technology licenses and research grants and initial sales from an April 2007 acquisition, Carbon Nanotechnology.

So a stake in ARWR is a leap of faith in management to realize the commercial value of highly complex and diverse technologies. There is plenty of high-powered talent at each of the five subsidiaries, which are all run independently but share board members from the parent company and each other. Each of the five subsidiary companies is populated with nationally recognized scientists and engineers.

Arrowhead the parent is led by R. Bruce Stewart, who founded another research portfolio company, Acacia Research. Stewart’s background in the securities industry is balanced out by other Arrowhead board members that include an attorney and a consultant on intellectual property management. The idea is that the parent can provide the business and capital markets saavy, leaving the “brains” in each of the subsidiaries free to perfect their technologies.

Of course, the big carrot for investors is the size and scope of each market addressed by the respective subsidiaries. For example, Insert Therapeutics’ drug delivery technology is designed to deliver into diseased cells effective cancer drugs that otherwise cannot penetrate the cell membrane. Phase I trials of Insert’s lead product candidate, IT-101, are underway. Aonex Technologies is near commercialization of its nanoengineered wafers that could reduce costs for manufacturers of blue and white LEDs, the market for which is approximately $4 billion per year.

One of the first things most investors look at in a developmental stage company is the amount of cash resources available to fund operations. In Arrowhead’s case, there was $30.8 million in cash on the balance sheet at the end of June 2007. We estimate this is enough to fund the operation for another five quarters, barring any significant change in sales receipts. We believe it is more likely than not that Arrowhead will return to the capital markets sometime in the next year. Although a public deal is possible, a private placement seems more likely. Investors taking a stake in ARWR should expect some dilution before the investment thesis fully plays out. What is appealing about Arrowhead’s portfolio approach is the efficiency it affords each of the four operations in raising money as a public company.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. ARWR is profile in the newsletter Small Cap SEARCH with generally favorable commentary.

No comments: