Harris & Harris and the Nanotech Renaissance

We initiated coverage of Harris & Harris (TINY) in January and published another update Thursday. The recent IPO of NeoPhotonics (NASDAQ: NPTN) and acquisition of BioVex for around $1B were certainly positive developments. But things have continued to get better. In fact, we see a growing number of companies across an expanding set of industries that are enjoying commercial success with nanotechnology. And when I say that I mean impressive revenue growth, profitability and reaching a scale of operation that will allow some (like Solazyme) to become public companies and others to become desirable and substantive acquisition targets. The improved environment for “liquidity” directly benefits the Harris & Harris business and investment model.

The highlights of our Harris & Harris Coverage Update Report April 28 2011 (pdf) are provided below and include more background on several Harris & Harris portfolio companies. The report also takes a deeper dive into Metabolon in the molecular diagnostics space and Laser Light Engines, which represents a key part of what will be the next generation of digital projectors and entertainment. As described in our original report, Harris & Harris has a diverse portfolio of outstanding companies in these and other nanotechnology-focused innovation areas. We believe the current NAV of the portfolio understates the value of the assets and that the company deserves a premium to NAV which it will earn over time. Our intrinsic value estimate (IV) remains $12.

Highlights

• Harris & Harris Group (H&H) is experiencing a renaissance. The main catalysts for the renewal are more favorable financial market conditions for liquidity events and increasing penetration of nano-enabled products in global markets.
• So far this year H&H has experienced two liquidity events – Amgen’s (AMGN) acquisition of BioVex for up to $1 billion and an $82.5 million IPO by NeoPhotonics. Several more such events are likely in the next 6-12 months, including a potential exciting IPO by Solazyme. Solazyme is H&H’s largest holding and a successful IPO could provide a significant boost to H&H’s NAV.
• Revenues and profitability are rising in many H&H portfolio companies as nano-enabled products gain traction in the market. We’ve seen upbeat assessments from H&H portfolio companies in all three focus areas – healthcare, clean tech, and semis & electronics. Solazyme’s revenues are up sharply over the past year driven by the launch of several key partnerships, joint ventures and new consumer product offerings. LED manufacturer Bridgelux expects revenues to triple this year as it ramps up production, while ABS Materials sees explosive growth in the years ahead for its nano-enabled water remediation technology.
• Metabolon is a late stage H&H portfolio company in the healthcare sector that is building out an innovative molecular diagnostics business based on its metabolomics technology. Our in-depth analysis of Metabolon in this report suggests the company has considerable scope to grow and provides an attractive venture capital return for H&H in the future.
• Laser Light Engines is poised to deliver the laser-based lighting technology that will be required for the next generation of digital and 3D projectors. Not only will the quality of 3D cinema improve markedly but the operating costs and energy bills for theater owners will be dropping as well. IMAX is a strategic investor and will be a leader in commercializing the technology.
• The coming decade will likely provide the growth and investment returns venture capitalists and long-term investors have been expecting from nanotechnology. We expect to see a 10-fold rise in the final product value of nano-enabled products globally. H&H offers investors a unique investment vehicle to capitalize on the growth in nanotech commercialization that lies ahead.
• TINY has historically traded at a P/NAV of 2x, with a range in the past several years as high at 8.8x to as low as 0.57x. The reported NAV as of December 31, 2010 was $4.76 and the stock is currently trading at 1.1x NAV. Our ongoing analysis of H&H portfolio companies suggests that the current NAV understates the intrinsic portfolio value by 45%, which implies a fully valued share price of $12 for TINY.

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