Arrowhead points to Nanotech but its stock isn't microscopic.

WHEN a stock rises tenfold in just a year, ere is often a bigger story to tell.

Take Arrowhead Research Corp., a little Bulletin Board stock that jumped to the Nasdaq market last week and trades at $5.70 a share.

Arrowhead has no revenues and no earnings. It is a development stage company focused on the fledgling nanotechnology field and has exclusive licensing agreements with researchers at Caltech.

R. Bruce Stewart, a local entrepreneur who has founded 18 companies, including Acacia Research Corp.. a Newport Beach incubator of technology companies, formed Arrowhead in May 2003.

"I like to start companies from scratch and build them and go on and do it again," said Stewart, 67, who spent three years fishing on his yacht after selling most of his stake in Acacia. "Somebody came to me and said they had a nanotech idea and I discovered this is the future of technology," he said.

By initially sponsoring research projects at Caltech, Arrowhead has an exclusive license on roughly 100 U.S. and foreign patents and patent applications, which it plans to use to spin-off companies and commercialize products. It has created three majority-owned subsidiaries in the nanotechnology fields of semiconductors, drug delivery systems and material science.

Nanotechnology, the process of making products at the molecular level in nanometers. or one-billionth of a meter, has become a buzzword on Wall Street.

In December, President Bush signed the 21st Century Nanotechnology Research and Development Act, authorizing $3.7 billion over four years lot nanotechnology initiatives. Since then, investors have rushed into nano stocks--and many have rushed out after realizing most of the companies had no products and no revenue.

"We're just in the first stages of seeing revenues and small profits at some of these companies," said Al Kaschalk, vice president of equity research at MDB Capital in Santa Monica. "Nanotechnology is really the process of supplying materials to further enhance products. It's not a product that they're developing, but a material that makes things stronger, more durable, lighter."

The company went public through a reverse-merger of a shell corporation in May 2003. The stock, trading at 50 cents a share a year ago, has jumped 10-fold to $5.70. To increase the float, Arrowhead is in the process of selling an additional 13.5 million shares and another 13.5 million warrants.

Stewart said some of the proceeds from the stock sales will go toward building a $20 million fabrication plant in Pasadena, with the ability to mass-produce nanotechnology products.

Todd Copper, an analyst at Stephens Inc., said two of Arrowhead's subsidiaries, Insert Therapeutics Inc., which makes drug-delivery systems, and Nanotechnica Inc., a materials and systems company, are expected to generate revenues as early as next year.

The third, Annex Technologies, which works in the semiconductor field, is a few years from generating revenues. Cooper grouped Arrowhead with two other nanotech start-ups--Nanosys Inc., of Palo Alto, which yanked its IPO in early August because of "adverse market conditions," and IP2IPO Group pie, a London-based intellectual property company that specializes in turning university-led research into viable spin-offs.

"A lot of the intellectual property in nanotechnology lies at universities, so it's kind of a patent grab at this point," he said. "We think we're still in the very early stages of nanotechnology, analogous to the early 1990s with the Internet."

Caltech still owns most of the actual patents to its own research, since it receives funding through grants from the federal government. But Arrowhead holds exclusive licenses to turn some of those patents into real products. In return, Arrowhead likely will end up paying a royalty to the school or give Caltech an equity stake as payment for the licenses, Stewart said.

Last month, a research project at Caltech funded by Arrowhead found a new method for coating single-walled carbon nanotubes, which ultimately can be used for high-resolution imaging. Caltech has filed for patent protection on the invention, and Arrowhead has the right to obtain an exclusive license from Caltech.

The company has six directors, including two Caltech researchers, Charles Patrick Collier and Marc Bockrath.

"If they come up with something that can turn into a product quickly, then we take that intellectual property and commercialize it," Stewart said. "The difference between Arrowhead's model and many other models is that we're not an investment company. Our goal is to own a majority interest in several companies, to become a nanotech pure-play."

Arrowhead Research Corp.

NINE MONTHS ENDED JUNE 30

Revenue (thousands)           $37.2
Total Expenses (millions)       1.3
Operating Loss (millions)     (1.3)
Net Loss (millions)             (1)
LOSS Per Share              ($0.10)

SUMMARY

Business: Finances nanotechnology research
Headquarters: Pasadena
President: Ft. Bruce Stewart
Market Cap: $69.1 million Dividend Yield: None
Total Liabilities: $372.961 P/E Ratio: NA
Long-Term Debt: None

Staff reporter Kate Berry can be reached at [phone], ext. 228, or at [e-mail].