Macroware Technology
Quantum Dot (Invitrogen IVGN)
posted Friday, 31 March 2006
I've been researching the company Quantum Dot as a possible investment oportunity in nanotechnology. I first heard about this company in a trade magazine last year. Since I started investigating the company, it was acquired by Invitrogen (IVGN). Apparently according to an article on Physorg.com, the purchase price was $26 million. Quantum Dot had burned through about $40 million in venture capital funding and another article at Physorg.com speculated that the company had run out of funding and that's why Invitrogen was able to acquire it so inexpensively.
Is Invitrogen a nanotechnology investment? Strictly speaking, I think the answer is yes because of the Quantum Dot acquisition, but Invitrogen is mainly a biotechnology company. I will focus on the nanotechnology aspecs of Invitrogen's business for the rule breaker analysis.
An interesting article about the company from 2003 can be found at Smalltimes.org.
What Quantum Dot Does
Quantum Dot's technology is QDot nanocrystals. These nanocrystals absorb light in one frequency spectrum and then efficiently reemit light in another narrow band spectrum so that it appears as a single color. The nanocrystals' size, shape, and composition can be adjusted to tune the spectrum of the light that is emitted so that many different color QDots can be created. Each QDot is composed of three layers. The inner layer, called the core is the actual material that absorbs and emits light and it is made up of CdS, CdSe, CdTe. The next layer is called the shell and it is made up of an inert material that is transparent and non emissive to light. The shell provides a gradual transition from the atomic structure of the core that prevents the surface of the core from atomically reorganzing in the presence of exteral pollutant molecules. If the surface reorganizes, traps can form that trap light reemitted from the core and reduce the light output. The shell material is typically ZnS. The third layer is the coating. The inner core is composed of organic ligands that bond to the shell and provide a sticky surface for the outter coating to attach to. The outter coating provides for solubility of the Qdot and also provides for selective stickiness to certain types of organic molecules. The term bioconjugates describes a Qdot bonded to a certain type of organic molecule which is used to direct binding of the QDots to areas of interest. So Qdots are useful in that they can be formed such that they bond to a certain type of organic molecule and allow it to be detected by shining light on it and watching for the reemitted light from the QDot.
QDot's are said to have some advantages over more traditional dye materials that are currently used for detection such as lower limits of detection, more quantitative results, more photo-stable samples, and higher levels of multiplexability.
One problem with the technology that has not been investigated is the toxicity since the core of QDots is Cd, a highly toxic element. Quantum Dot speculates that the shell prevents the Cd from being absorbed inside of a living thing and that toxicity is probably not a big problem. I'm a little skeptical of that, and I think there may be problems for widespread use of this technology because of toxicity.
Ratio Analysis
Overall my assessment is that IVGN's balance sheet is fairly weak. I did not specifically compare the ratios of IVGN to the rest of their industry but based my conclusions on past experience. Some problem areas are:
Value Model Analysis
I was looking at this stock as a potential rule breaker and investment in nanotechnology. Interestingly, my value model analysis based on current and projected future earnings values the stock at $85.25 per share. The current share price is $70.60 per share. A possible value stock!
Rule Breaker Analysis
IVGN is not a rule breaker according to the definition in [1].
Top dog first mover (yes) - I believe they are a top dog first mover in the nanotech field of biological detection with the acquistion of Quantum Dot. Their biggest competitor in biotech is listed as Applied Biosystems, and the term nanotech does not even show up anywhere on their web site.
Sustainable advantage (yes) - IVGN has a very comprehensive collection of nanotech patents. They also appear to have some momentum and visionary leadership.
Momentum (no) - The relative strength of IVGN is 36, much lowe than the required 90. This is reflected in the fact that the stock is a value with respect to its earnings.
Management (yes) - They seem to have visionary management and a good marketing plan. The term QDots that is used to describe their technology is very catchy.
Smart backing (yes) - Quantum Dot had plenty of Silicon Valley venture capitalist backing, including Abingworth Management Limited and Institutional Venture Partners.
Consumer appeal (no) - The company does not produce consumer products that have mass market appeal. Their products are used in biotech research and development. There is a chance that their nanotech biological detection products could become widespread in use in security against biological attacks in the war on terror. I would still say at least for the time being that they don't meet the criteria of this rule breaker attribute though.
Grossly overvalued (no) - I couldn't find any media publication that listed the stock as grossly overvalued yet, a requirement for it to be a rule breaker.
IVGN is not a rule breaker, but it does have some attributes of one.
Conclusion
I don't think the QDot technology in its current form will become big enough to drive huge gains by Invitrogen. I'm not sure I see the clear advantage this technology has over other dyes that are used in biodetection right now and there are issues of toxicity with the Cd in Qdots. The fact that Invitrogen was able to acquire Quantum Dot for a price significantly below the total investment in the company also makes me think that venture capitalist investors came to a similar conclusion about this technology. On the other hand, the knowledge and patents that Quantum Dot has developed in nanotechnology are a valuable advantage for Invitrogen over their biggest competitor. I'm troubled by IVGN's balance sheet, but I am thinking that their low return on equity and return on capital may be mainly due to the fact that they are investing heavily in new technologies that might have a longer time line to return on investment.
This company does not fit exactly what I'm looking for in a nanotechnology investment. I am putting the stock onto my prioritized list of stocks to purchase this year though as it could be a good value investment.
[1] Gardner, David, and Tom Gardner. 1999. The Motley Fool's Rule Breakers, Rule Makers. New York, NY: Simon & Schuster.
Is Invitrogen a nanotechnology investment? Strictly speaking, I think the answer is yes because of the Quantum Dot acquisition, but Invitrogen is mainly a biotechnology company. I will focus on the nanotechnology aspecs of Invitrogen's business for the rule breaker analysis.
An interesting article about the company from 2003 can be found at Smalltimes.org.
What Quantum Dot Does
Quantum Dot's technology is QDot nanocrystals. These nanocrystals absorb light in one frequency spectrum and then efficiently reemit light in another narrow band spectrum so that it appears as a single color. The nanocrystals' size, shape, and composition can be adjusted to tune the spectrum of the light that is emitted so that many different color QDots can be created. Each QDot is composed of three layers. The inner layer, called the core is the actual material that absorbs and emits light and it is made up of CdS, CdSe, CdTe. The next layer is called the shell and it is made up of an inert material that is transparent and non emissive to light. The shell provides a gradual transition from the atomic structure of the core that prevents the surface of the core from atomically reorganzing in the presence of exteral pollutant molecules. If the surface reorganizes, traps can form that trap light reemitted from the core and reduce the light output. The shell material is typically ZnS. The third layer is the coating. The inner core is composed of organic ligands that bond to the shell and provide a sticky surface for the outter coating to attach to. The outter coating provides for solubility of the Qdot and also provides for selective stickiness to certain types of organic molecules. The term bioconjugates describes a Qdot bonded to a certain type of organic molecule which is used to direct binding of the QDots to areas of interest. So Qdots are useful in that they can be formed such that they bond to a certain type of organic molecule and allow it to be detected by shining light on it and watching for the reemitted light from the QDot.
QDot's are said to have some advantages over more traditional dye materials that are currently used for detection such as lower limits of detection, more quantitative results, more photo-stable samples, and higher levels of multiplexability.
One problem with the technology that has not been investigated is the toxicity since the core of QDots is Cd, a highly toxic element. Quantum Dot speculates that the shell prevents the Cd from being absorbed inside of a living thing and that toxicity is probably not a big problem. I'm a little skeptical of that, and I think there may be problems for widespread use of this technology because of toxicity.
Ratio Analysis
Overall my assessment is that IVGN's balance sheet is fairly weak. I did not specifically compare the ratios of IVGN to the rest of their industry but based my conclusions on past experience. Some problem areas are:
- current liability coverage (quick ratio = 0.3 and current ratio = 0.6)
- return on equity is only 8.5%
- cash to long term debt ratio is 0.4 however it is moving in the right direction
- return on capital employed is only 3.7% trending down
Value Model Analysis
I was looking at this stock as a potential rule breaker and investment in nanotechnology. Interestingly, my value model analysis based on current and projected future earnings values the stock at $85.25 per share. The current share price is $70.60 per share. A possible value stock!
Rule Breaker Analysis
IVGN is not a rule breaker according to the definition in [1].
Top dog first mover (yes) - I believe they are a top dog first mover in the nanotech field of biological detection with the acquistion of Quantum Dot. Their biggest competitor in biotech is listed as Applied Biosystems, and the term nanotech does not even show up anywhere on their web site.
Sustainable advantage (yes) - IVGN has a very comprehensive collection of nanotech patents. They also appear to have some momentum and visionary leadership.
Momentum (no) - The relative strength of IVGN is 36, much lowe than the required 90. This is reflected in the fact that the stock is a value with respect to its earnings.
Management (yes) - They seem to have visionary management and a good marketing plan. The term QDots that is used to describe their technology is very catchy.
Smart backing (yes) - Quantum Dot had plenty of Silicon Valley venture capitalist backing, including Abingworth Management Limited and Institutional Venture Partners.
Consumer appeal (no) - The company does not produce consumer products that have mass market appeal. Their products are used in biotech research and development. There is a chance that their nanotech biological detection products could become widespread in use in security against biological attacks in the war on terror. I would still say at least for the time being that they don't meet the criteria of this rule breaker attribute though.
Grossly overvalued (no) - I couldn't find any media publication that listed the stock as grossly overvalued yet, a requirement for it to be a rule breaker.
IVGN is not a rule breaker, but it does have some attributes of one.
Conclusion
I don't think the QDot technology in its current form will become big enough to drive huge gains by Invitrogen. I'm not sure I see the clear advantage this technology has over other dyes that are used in biodetection right now and there are issues of toxicity with the Cd in Qdots. The fact that Invitrogen was able to acquire Quantum Dot for a price significantly below the total investment in the company also makes me think that venture capitalist investors came to a similar conclusion about this technology. On the other hand, the knowledge and patents that Quantum Dot has developed in nanotechnology are a valuable advantage for Invitrogen over their biggest competitor. I'm troubled by IVGN's balance sheet, but I am thinking that their low return on equity and return on capital may be mainly due to the fact that they are investing heavily in new technologies that might have a longer time line to return on investment.
This company does not fit exactly what I'm looking for in a nanotechnology investment. I am putting the stock onto my prioritized list of stocks to purchase this year though as it could be a good value investment.
[1] Gardner, David, and Tom Gardner. 1999. The Motley Fool's Rule Breakers, Rule Makers. New York, NY: Simon & Schuster.
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