Priming The Pump Nanotechnology Biotechnology

With the pump thus primed, private enterprise rushed in, and in 2000 biotech boomed. Investors pumped billions into genomics-related companies like Celera Genomics (nyse: CRA - news - people ), Incyte Genomics (nasdaq: INCY - news - people ), Human Genome Sciences (nasdaq: HGSI - news - people ), Affymetrix (nasdaq: AFFX - news - people ) and CuraGen (nasdaq: CRGN - news - people ). Their zooming stocks multiplied, creating tens of billions of dollars in paper wealth.

All this suggests the way the nanotech pattern will develop. As Mark Guyer, director of the Human Genome Project's division of extramural research, points out, one company reaped the lion's share of the government's capital flows: Foster City, Calif., tools merchant Applied Biosystems (nyse: ABI - news - people ). It was the primary supplier of the high-speed DNA sequencers needed for genome decoding

"As a ballpark estimate of the total money the National Genome Research Institute spent, my guess is that 5% to 10% went directly to Applied Biosystems for instrumentation purchases," says Guyer.

Genome research drove Applied Biosystems' sales from $180 million in 1993 to $1.6 billion in fiscal years 2001 and 2002. Government-funded work is still a significant piece of ABI's business, consisting of roughly 50% of sales. Founded in 1981, ABI went public just two years later and was acquired in 1993 by Perkin Elmer.

Recognizing that ABI's 3700 DNA sequencer could dramatically pare the time necessary to sequence the genome, ABI's parent Applera formed Celera Genomics in 1998. Rather than wait for the publicly financed Human Genome Project, Celera used 300 new ABI machines to rapidly sequence the human genome and compile a comprehensive database for subscription sales. The Human Genome Project responded by accelerating its own pace and by buying roughly 200 ABI machines.

ABI had in effect set off a Cold War arms race in which it was the only weapons dealer in town. It emerged as the dominant equipment supplier to the genomics industry.

This bodes well for nanotech instrumentation vendor Veeco Instruments (nasdaq: VECO - news - people ) and modeling and simulation software leader Accelrys, which uses large libraries to help design new materials. Both dominate valuable sectors of research infrastructure for nanotech in the first few innings of the NNI build-out.

The NNI differs from the Human Genome Project because there is no single technology or common goal, like the genome project's race to sequence the genome. The NNI is essentially financing development of the basic nano-building blocks and instrumentation methodologies as the end applications are being determined.

This will require plenty of the kind of tools that Veeco and Accelyrs provide. In the Human Genome Project, companies supplying the necessary testing reagents, like Amersham (nyse: AHM - news - people ) and Invitrogen (nasdaq: IVGN - news - people ), also prospered. Following this pattern, I have no doubt that the mass producers of carbon nanotubes and other nano-building blocks--large chemicals players like Japan's Mitsubishi and Mitsui--will ultimately register considerable sales. The one problem is that margins will most likely shrink as a result of commodity pricing, so whether suppliers will be able to make a healthy profit is another question.

If history is any guide, Veeco and Accelrys will lead in the early stages, but they will need to change as nanotech comes of age. The infrastructure build will not last forever.

In biotech, ABI has tried to mitigate this risk by diversifying its revenue stream to include chemical reagent and array sales. Ultimately, the market shifts value from the means to the end. Those able to use the tools to create new products and devices are valued at a premium, while instrumentation companies' growth levels off. One reason Applera formed Celera to sell genomic information was out of the concern that the instrument business could be marginalized in the long term.

As the initial boom in the tools market crests, we will keep readers informed. Value will then accrue to widespread nanotech applications in biotechnology and IT devices. But that is some time away.

http://www.forbes.com/2002/10/10/1010soapbox_2.html