After Nanosys IPO withdrawal: CDT to brave Nasdaq

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Sept. 14, 2004 – When Nanosys withdrew its initial public offering in early August, the debate over what its withdrawal meant was so loud and vociferous that it effectively drowned out the news that Cambridge Display Technology (CDT) Corp., a developer of organic molecules for display applications, had filed to go public just a few days earlier.

The Nanosys withdrawal and its causes suggest CDT will also have a tough time on the public markets. In addition, CDT’s public offering, which could have occurred by the time you read this, can retroactively tell us even more about the market encountered and ultimately eschewed by Nanosys. Nanosys has decided not to comment on its decision other than a press release citing “adverse market conditions.”

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Cambridge, England-based CDT is in many ways similar to Palo Alto, Calif.’s Nanosys. Like Nanosys, its key asset is an extensive portfolio of intellectual property covering materials and processing know-how, which it licenses to manufacturing partners to generate revenue.

Like Nanosys, it already has key relationships in place. And its technology is also widely considered potentially disruptive — in CDT’s case, for next-generation displays on everything from cell phones to big-screen TVs. And, like Nanosys, CDT is not yet profitable.

“They are in a funny position,” said Kimberly Allen, director of technology and strategic research at iSuppli/Stanford Resources, an El Segundo, Calif., market research firm that follows the display sector closely. “Commercialization is in the hands of their licensees and partners.” Ultimately, it may be that more vertically oriented, product-centric companies have the best model for today’s market.

CDT owns some of the key IP in the field of polymer organic light emitting diodes, or polymer OLEDs. But polymer OLED technology is just one route to next-generation displays. Manufacturers might license competing technology or develop their own type of OLED or other display device, leaving CDT and its IP portfolio out in the cold. For that and other reasons, Allen considers it as a high-risk investment.

Being similarly high risk hampered Nanosys, but not because there is never a market for such offerings. Risk tolerance comes and goes, but in August it appeared at a low. By Aug. 16, nine IPOs had already been withdrawn, according to Nasdaq.com, and seven were withdrawn in July, up from an average of 1.8 per month for the first six months of year.

As the markets fell, the market for higher risk issues fell more precipitously. For example, for the six months ending Aug. 20, the Dow Jones Industrial Average was down about 5 percent and the Nasdaq about 10 percent. But the Punk Ziegel Nanotechnology Index was down 42 percent and the Merrill Lynch Nanotech Index, which launched April 1, was down 28 percent.

Meanwhile, the highest profile IPO of the year, Google, scaled back significantly as stock markets reeled in reaction to rising oil prices and other decidedly non-nano news.

“I think this (Nanosys’ withdrawal) is a statement about where the market is right now rather than about nanotechnology in general or Nanosys in particular,” said Lynn Foster, the emerging technologies director of Greenberg Traurig Consulting and a longtime nanotech industry observer.

“There are other companies making steady progress right now that will continue to gain traction and this won’t affect the timelines of their exit events,” he added, summarizing the views of many in the nanotech startup sector.

Now CDT will face the same scrutiny. It is one of just two companies — the other being Kodak — with a sizable portion of the patent pie surrounding OLED technology. Proponents are pushing the technology as the heir to the liquid crystal display, or LCD, most commonly used today in mobile phones, laptop computers and other consumer electronic devices.

Kodak, which discovered OLED technology in the early 1980s, uses a vapor-deposition process to build layers of OLED material onto a substrate. CDT suspends the OLEDs in a polymer solution that can be inkjet printed onto a substrate. As a result, says Allen, it can be used to make bigger displays like monitors and televisions.

But the company faces daunting challenges, not the least of which is the fact that, according to Allen, 98 percent of the product value currently on the market traces its roots to Kodak’s IP, not CDT’s. And, she says, even if you buy the idea that CDT’s portfolio deserves a premium for its future value when manufacturers build larger OLED devices like computer monitors and flat screen TVs, there’s no guarantee such devices will be OLED-based.

Add to that longevity issues. OLEDs degrade over time. Cell phones are the ideal proving ground for OLED technology because, among other reasons, consumers frequently upgrade to new phones. On the other hand, computer monitors and televisions are expected to function for years without a noticeable performance drop. CDT will have to significantly improve the lifetime of its displays for them to be viable in such markets, Allen says.

If CDT pulls off a successful IPO, it may be a sign that the market has become more risk tolerant or that investors are comforted by the fact that CDT’s manufacturing partners already have products on the market.

On the other hand, a withdrawn CDT offering or a poor performance would support the contention that the platform technology model is out of synch with the current stock market. It would suggest companies promoting the promise and potential of nanotech have less appeal than companies with new and better products tailored to a specific existing market, with scalable processes, solid relationships, and sustainable and growing revenues. If they also happen to be enabled by nanotech, so be it.

That was the approach taken by Immunicon Corp., which went public in April and raised $43 million in net proceeds. The company makes systems to collect and analyze rare cells from blood for cancer diagnostics and other purposes. It mentioned just once in its 122-page prospectus that its products use patented magnetic nanoparticles.

“Don’t try to sell your technology,” said Ed Erickson, chairman and chief executive. Instead, he advised, “Try to find some niche markets where you have specific leverage.”

The advice runs counter to the biotech boutique model and the platform play. In essence, Erickson maintains, companies should put the product horse before the platform cart, not the other way around.

By moving forward with a specific product in a proven market, he maintains, you prove your technology platform. You can branch out into other product markets later.

In a stock market skeptical of grandiose claims and high-risk ventures, the breakthrough nanotechnology IPO could be something as mundane as a market-focused diagnostics company. The breakthrough is that it presents a workable template for other nanotech-enabled startups to copy, and to go public despite an IPO market with a withering appetite for risk.

And in that sense, Immunicon might well have been the watershed nanotech IPO of 2004, precisely because it wasn’t a watershed at all.

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