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Home > Nanotechnology Columns > Alan Shalleck-NanoClarity > Nanosphere, NanoDynamics and NanoOpto (RIP)

Alan Shalleck
President
NanoClarity LLC

Abstract:
Summer months are usually financially dull. Not this year in the nanotechnology world. Events this summer have been dramatic. The fates of three nanotechnology companies that were on every nano-expert's (and Wall Street underwriter's) possible IPO list had divergent pathways. Two opted for IPO with different results and the other … well, see below.

August 16th, 2007

Nanosphere, NanoDynamics and NanoOpto (RIP)

Nanosphere, NanoDynamics and NanoOpto (RIP)
IPO Candidates - Different Trajectories.
By
Alan B. Shalleck
NanoClarity LLC
August 2007

Summer months are usually financially dull. Not this year in the nanotechnology world. Events this summer have been dramatic. The fates of three nanotechnology companies that were on every nano-expert's (and Wall Street underwriter's) possible IPO list had divergent pathways. Two opted for IPO with different results and the other … well, see below.

The $100 million IPO seems to be a threshold. In May NanoDynamics, Inc. (with Jefferies & Co. as lead underwriter) filed for a $100 million IPO. Nanosphere Inc. with different underwriters has just filed a preliminary S-1 for a $100 million Fall IPO. NanoOpto was not given the chance … but it, too, could have filed for about $100 million if its investors had allowed it to file. Note all you nanotech entrepreneurs … $100 million is the target amount at which Wall Street (at least today) will get involved with a nanotech IPO. That the Street is becoming involved is good. All we need now is a successful underwriting and the Nanotech industry will have a third financing leg on which to build a commercially strong base - independent of the VC's.

During the past two months I examined NanoDynamics and its nano-green IPO strategy. All looked fine … the investor book was filling … the issue was set to be priced … but a week before the final IPO stock pricing the stock market severely dropped and it has continued downward killing all prospects for a successful ND IPO this summer. (I am told that ND's IPO, which is not dead, will be re-visited this fall when markets settle.)

Successful IPO's have rules. A successful IPO needs positive investor psychology during a period of continuing upward market momentum. The underwriters try to price an IPO at a good dollar yield for the company … but also not too high … leaving the new public stock with a residual demand that increases the trading price. An IPO is successfully priced when the post -IPO price of the stock is at a premium above issued price. Success means everyone wins financially.

Some on the ND deal insiders have claimed that there was a final price dispute between the underwriter who wanted a price at about $8 - $10/share ($70 million) which would have sold out and ND (with its ownership) who wanted a price of about $13 - $14/share ($100 million) which might not have sold out and that this pricing dispute was why the deal was postponed. Objectively, that "dispute" was not a sufficient reason to postpone. A compromise could have been worked out to get the deal done in a strong market … but this deal would have floated in a weak precipitous market, regardless of price, and would have quickly been underwater.

An underwater deal is not a successful deal and no one in the nanotech industry or the Street wanted a sour deal. Note: ND has not changed by postponing the IPO. ND is still an attractive nano-green company with a great up side. ND will be an even more interesting investment option when the deal is re-addressed later in the fall.

Here is the next nanotech opportunity. Nanosphere, Inc. (NS), the Chad Mirken inspired nanotech based molecular diagnostic system company has just filed for its IPO this fall. Nanosphere is a pioneer in the molecular diagnostic system business. Molecular diagnostics is where all medical diagnostics are heading. In Vitro Diagnostics is a $34 Billion mature market. However, there is a technical shift within that market to Molecular (DNA based) diagnostics. MD is about 40% of the total IVD market and is growing at 23% per year. MD is the future of diagnostic testing.

Nanosphere has developed an entire system for broad molecular diagnostic application. It is called Verigene and is a superb technical achievement. Bill Moffitt who is President and CEO of Nanosphere is a professional and seasoned proven executive. The company has spent over $112 million of VC funds and borrowings to date and is losing about $ 8 million per quarter. In sum, Nanosphere may have the right product in the right segment of a large market for a long-term economic success.

The IVD market however is a tough way to earn a quick profit. NS needs 510.k's from the FDA for every product variant or reagent specific test put into the Verigene system before it can sell the developed product. Every test needs clinical testing before 510.K submittal. Once approved, each test has to be approved for reimbursement by all the medical payers… Medicare, insurance companies, HMO's, etc. Then the test's informational value has to be sold to every interested prescribing doctor and each doctor then has to begin to request the information from the test in great volume for NS to begin to earn revenue and generate profits. NS is only in the 510.k limited application to the FDA stage. My model shows that NS is 4-5 years from significant reagent and system positive cash flow. The funds from a successful IPO might accelerate the timetable. In sum, the entire commercial development process … customers, volume and profitable sales … is just beginning at NS and that is fully disclosed in the S-1. Let us watch closely over the next few months to see how the Street and the SEC react.

Last to NanoOpto, Lux's Nanotechnology Company of 2006. It is no more. Early in July, the VC's who owned the company put NanoOpto management on the street, wrote off $56 million in investment and sold the NanoOpto assets for a meager $4 million to a non-nanocompany called API. It was a fire sale and a virtual liquidation.

After five years of solid work and excellent technical achievement, and beginning sales and marketing realization, the VC's pulled the plug on the company.

I have talked to ex-management, the VC's and to others in the last 30 days to uncover what really occurred. It was a mess. Management blamed the VC's, saying the company was 15 to 18 months away from positive cash flow with at least two new lucrative contracts and they VC's wouldn't put the required funds in. The VC's blame management for not producing sales fast enough, for not dynamically changing management when required, for "wishful thinking" about sales and earnings possibilities, and not meeting agreed targets. And, interestingly, the VC's blame each other.

It seems there were two camps in the VC board members. Those who wanted to go on and those who wanted to liquidate. One VC told me that their Fund was 6 years into a 7-year fund lifetime and it had to begin to prepare to liquidate the fund. Another VC said that cash flow, money was all that mattered, and its company portfolio had prospects that are more profitable so they made a cold financial decision. Another said they were willing to consider other than liquidation options but a VC with a large position insisted on just closing the doors. An IPO was not on the table.

No one thought of the workers or the amount of dedication Barry W. and his team had demonstrated in solving the technology and beginning to grow into a high volume production company with excellent quality control. None of the VC's thought about the non-VC shareholders and finding value for them … like for the stock options employees had been granted in lieu of cash compensation. Not a single humanistic sentiment was sustained at the Board level. In sum, the VC owners just sold the works for a bargain basement price and walked away with nothing, leaving many lives in shambles, and killing a promising nanotechnology company.

It was a sad event and one that every entrepreneur who is contemplating obtaining funding from a VC should review and consider. The VC's perspective is never operating management's perspective. One NanoOpto ex-executive sadly told me that when you sign up with VC's and they offer you an employment agreement, there is never a golden parachute in that agreement in case of involuntary VC initiated shutdown or fire sale. NanoOpto is no more … there were other surviving business strategies to pursue but at least one VC on the NanoOpto board would not talk of anything but a liquidation or fire sale.

That is why a successful IPO is so important now for the nanotech industry. We need to prevent future bloodbaths (with no viable public options) to a VC initiated bloodbath such as NanoOpto.

©2007 - NanoClarity LLC. All rights reserved.
Alan B. Shalleck
NanoClarity LLC
www.nanoclarity.com


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