Companies I like: Starpharma

In investing, shares, technology on November 5, 2010 at 2:56 am

Disclaimer: All the information provided here is not financial advice. The information presented is my opinion and may be completely inaccurate.

Starpharma Holdings Limited (SPL) is engaged in the development of dendrimer technology.

From wikipedia:

Dendrimers are repeatedly branched, roughly spherical large molecules. The name comes from the Greek word “δένδρον” (pronounced dendron), which translates to “tree”. Synonymous terms for dendrimer include arborols and cascade molecules. However, dendrimer is currently the internationally accepted term. A dendrimer is typically symmetric around the core, and often adopts a spherical three-dimensional morphology. The word dendron is also encountered frequently. A dendron usually contains a single chemically addressable group called the focal point. The difference between dendrons and dendrimers is illustrated in figure one, but the terms are typically encountered interchangeably.

Dendrimer structure

Key financial ratios: This company is not currently comparable to other companies I have commented on from a financial ratio perspective. I.e. Starpharma does not currently exhibit strong ROE, low DER and the like.

Qualities that attract me:

Very significant patent ownership. Probably (at the time of writing) the largest share of dendrimer related patents. This was achieved by acquiring DNT. Notably these achievements stemmed from the work of Donald Tomalia and work he did at Dow chemical.
Dow chemical still has a decent stake in Starpharma, via the DNT acquisition.
Platform technology is potentially applicable to many different products, this lowers risk.
Applications of the platform are developed in conjunction with experienced and well funded partner organisations (e.g. pharmaceutical companies), again, this lowers risk.
Business model should be moderately resilient to a downturn, since healthcare products tend to be needed regardless of what’s happening in the economy. Caveat: deals may be much harder to come by and interest in niche technologies might wane if there is a serious meltdown, this is pure speculation on my part.

Things that concern me:

Dendrimer patent applications are likely to continue rising. Starpharma needs to continue innovating. Other companies, with deep pockets, may push harder into this space and substitute Starpharma’s technology. This bit is completely unknowable, an inherent risk when investing in cutting-edge technology firms.
The company needs to increase cash flow, the business model, in my mind, is therefore still not completely proven.