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Nanotechnology
Updating the Merrill Lynch Nanotech Index
Reason for Report: Refined Index Criteria
(1) 212-449-2047
John M.A. Roy, Ph.D.
(1) 212-449-6456
Zhen-Hong Fan, Ph.D.
(1) 212-449-7926
Highlights:
• Based on investor and company feedback, we are making two changes to the
construction of Merrill Lynch Nanotech Index (NNZ): (1) refining the criteria
for inclusion in the Index, and (2) rebalancing the index quarterly rather than
semi-annually. Given the difficulty in defining nanotechnology along with the
dynamic nature of this emerging technology, we believe these changes will
enhance our Index, making it more useful to the marketplace as a way to track
nanotech stock performance.
• Our new criteria for inclusion in the index is companies that indicate in public
documents that nanotechnology initiatives represent a significant component of
their future business strategy. We believe this definition, although still
subjective, is more objective than our previous criteria that companies must have
a significant percentage of future profits tied to nanotech.
• In addition, companies must be listed on a national exchange or quoted on the
NASDAQ National or NASDAQ Small Market systems. We exclude
companies whose valuations, in our view, are not considered to be
nanotechnology-driven by the investing community.
• Based on the new criteria, we have dropped six names and added three to the
Index, which now numbers 22 stocks. The additions are Combimatrix (CBMX),
Novavax (NVAX), and Tegal (TGAL). The deletions are Applied Films
(AFCO), Caliper Life Sciences (CALP), Emcore (EMKR), Nanometrics
(NANO), Three-Five Systems (TFS), and Universal Display (PANL). Being
dropped from the Index does not prevent the name from being added in the
future nor does it mean the company is not involved in nanotechnology.
• Note that the Index is not an investable product. These changes will be reflected
in the index value on Monday, April 19.
• Except for those companies for which Merrill Lynch has a published
recommendation, Merrill Lynch has not performed fundamental equity analysis
on the companies in the index and is not commenting on the investment merit of
any such companies.
Comment
Technology Strategy
16 April 2004
Steven Milunovich, CFA
(1) 212-449-2047
John M.A. Roy, Ph.D.
(1) 212-449-6456
Zhen-Hong Fan, Ph.D.
(1) 212-449-7926
Nanotechnology
Updating the Merrill Lynch Nanotech Index
Reason for Report: Refined Index Criteria
RC#30210711
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Refer to important disclosures on page 4.
Global Securities Research & Economics Group Global Fundamental Equity Research Department
Nanotechnology – 16 April 2004
Refer to important disclosures on page 4. 2
Index Description
The Merrill Lynch Nanotech Index (NNZ) provides a
diversified representation of nanotechnology stocks and
ADRs traded in the United States. The majority of the
components are involved in the following industries:
semiconductors, biotechnology, instrumentation, sensors,
diagnostics, drug delivery, drug development, genomics,
and materials. The Merrill Lynch Nanotech Index is an
equally-weighted index comprised of 22 nanotechnology
stocks. The constituents of the index will be updated
quarterly at Merrill Lynch’s discretion.
Here Comes Nanotechnology
We believe nanotechnology could be the next growth
innovation, similar in importance to information
technology over the past 50 years. We consider nanotech
as the science and technology of fabricating things smaller
than 100 nanometers (a nanometer is one-billionth of a
meter). Like the Internet, nanotech risks being overhyped.
But unlike the Internet, there are intellectual property and
patent barriers to entry but low barriers to adoption.
Nanotech is real—the questions generally are when, not if.
Nanotech is not a separate industry but an approach
applied to multiple disciplines (chemistry, biology, etc.).
We believe nanotechnology is the next logical step in
miniaturization. At 100 nanometers classical physics gives
way to quantum physics. Building at the nanoscale
enables new interactions in materials, semiconductors, and
biological agents. The new scale allows manipulation on
the atomic and cellular level, which should enable new
discoveries in pharmaceuticals, biodefense, and healthcare.
The National Science Foundation (NSF) sees a potential
market totaling $1 trillion in the next 10-12 years as
outlined in Table 1.
Table 1: Potential Impact of Nanotechnology
Sector Size ($B) Share
Materials $340 31%
Electronics 300 28%
Pharmaceuticals 180 17%
Chemical Manufacture 100 9%
Aerospace 70 6%
Tools 20 2%
Improved Healthcare 30 3%
Sustainability 45 4%
Total $1,085 100%
Source: National Science Foundation
Index Constituents
Our new criteria for inclusion in the Merrill Lynch
Nanotech Index is companies that indicate in public
documents that nanotechnology initiatives represent a
significant component of their future business strategy.
Except for those companies for which Merrill Lynch has a
published recommendation, Merrill Lynch has not
performed fundamental equity analysis on the companies
in the index and is not commenting on the investment
merit of any such companies.
The companies must be listed on a national exchange or
quoted on the NASDAQ National or NASDAQ Small
Market systems. We have excluded companies whose
valuations in our opinion are not considered to be
nanotechnology-driven by the investing community.
Consequently, companies such as IBM, GE, and 3M are
not included in the Index.
Table 2: Index Constituents
Company Ticker
Market Cap ($)
(as of 4/14/04) Specialty
Altair Nanotech ALTI 141.1M Materials
Amcol Intl ACO 536.9M Materials
Biosante Pharma BPA 80.6M Nanobio
Cabot CBT 2.005B Materials
Combimatrix 1 CBMX 152.8M Nanobio
FEI Company FEIC 785.7M Instrumentation
Flamel Technol FLML 600.2M Nanobio
Harris & Harris TINY 276.7M Venture Capital
Headwaters HDWR 886.2M Energy
JMAR Tech JMAR 94.4M Instrumentation
M T S Systems MTSC 594.9M Instrumentation
Nanogen NGEN 200.1M Nanobio
Nanophase Tech NANX 167.6M Materials
Novavax NVAX 192.7M Nanobio
NVE NVEC 204.3M Semis
Pharmacopeia ACCL 451.0M Software
Skyepharma ADS SKYE 790.9M Nanobio
Symyx Tech SMMX 895.1M Instrumentation
Tegal TGAL 106.9M Instrumentation
Ultratech UTEK 526.9M Instrumentation
Veeco Instr VECO 882.6M Instrumentation
Westaim WEDX 199.1M Nanobio
Source: ML TechStrat
1 Sometimes referred to as Acacia Research CombiMatrix Corp.
This updated list of constituents replaces any previous
lists. In our report Nanotech Has a Multi-Industry Impact,
Chart 40 on page 45 and its description should be
substituted with the new Index list as well as the attendant
description of its construction.
Nanotechnology – 16 April 2004
Refer to important disclosures on page 4. 3
Nanotech is in its emerging stage, so it’s not surprising that
many of the companies have small market caps. In terms
of sector representation, instrumentation, biotech, and
materials make up most of the index.
Table 4: Index Sector Breakdown
Sector Companies Percentage
Instrumentation 7 32%
Biotech 7 32%
Materials 4 18%
Software 1 5%
Venture Capital 1 5%
Energy 1 5%
Semiconductors 1 5%
Total 22 100%
Source: ML TechStrat
Percentage does not sum to 100% due to rounding
Calculation of Index
The Nanotech Index is an equally-weighted index and will be
rebalanced quarterly. The Index level is set to 250 as of
December 31, 2001 and calculated using an equal dollar
weighting methodology designed to ensure that each security
is represented in an approximately equal dollar amount. The
three new additions will be equally weighted to the average
value of the existing 19 components as of April 9.
The American Stock Exchange (Amex) will act as the
calculation agent for the Index. The Amex will on each
business day: (1) calculate and cause to be disseminated
over CTA Network B to market data vendors the value of
the Index based on the most recent reported prices of the
underlying stocks in the Index at approximately 15-second
intervals during regular Amex business hours, and (2)
calculate and cause to be disseminated over CTA Network
B to market data vendors the closing value of the Index on
such business day based on the closing prices of the
underlying stocks in the Index. In addition, on each
business day the Amex will make available to the public
on request the current formula used by the Amex to
calculate the Index.
The index divisor was initially determined to yield the
benchmark value of 250.00 at the close of trading on
December 31, 2001. Quarterly thereafter following the
close of trading on the third Friday of March, June,
September, and December the Merrill Lynch Nanotech
Index portfolio will be adjusted by changing the number of
whole shares of each component stock so that each
company is again represented in equal dollar amounts.
The new shares are determined using the primary market
closing prices of the second Friday of March, June,
September, and December. When necessary, a divisor
adjustment will be made at the rebalancing/reconstitution
to ensure the continuity of the index. The newly
determined shares will then become the basis for the
portfolio on the first trading day following the quarterly
adjustment.
The number of shares of each component stock in the
Nanotech Index remains fixed between rebalancings
except in the event of certain corporate actions, such as the
payment of a dividend other than ordinary cash, stock
distribution, stock split, reverse stock split, rights offering,
distribution, reorganization, recapitalization, or similar
event with respect to the component stocks. Shares are not
adjusted in the case of a share issuance or stock
repurchase.
Dissemination of Index
The value of the Merrill Lynch Nanotech Index is
published every 15 seconds over the Consolidated Tape
Association’s Network B between the hours of
approximately 9:30 a.m. and 4:15 p.m. (New York time)
under the ticker “NNZ”. The major electronic financial
data vendors—Bloomberg, Quotron, Bridge Information
Systems—republish information on the Index for their
subscribers.
Index Constituent Replacement
The index is calculated and maintained by the Amex in
consultation with Merrill Lynch. Merrill Lynch may advise
Amex regarding the handling of unusual corporate actions.
Routine corporate actions (e.g., stock splits) that require
straightforward index divisor adjustments are handled by
the Exchange staff without consulting Merrill Lynch.
In the case of a merger or the consolidation of a
component company, if the stock remains in the index the
number of shares of that security in the portfolio may be
adjusted to the nearest whole share to maintain the
component's relative weight in the index at the level
immediately prior to the corporate action.
When possible, all stock replacements and unusual divisor
adjustments caused by the occurrence of extraordinary
events such as dissolution, merger, bankruptcy, non-routine
spin-offs, or extraordinary dividends are made by
the Exchange in consultation with Merrill Lynch.
Quarterly Index Rebalancing
Index reconstitution will occur quarterly after the close of
the third Friday of March, June, September, and
December. The reconstitution will take two steps: (1)
determination of index constituents, and (2) share
calculations to ensure equal weighting. Index constituents
will be replaced if a stock is no longer deemed a
representative nanotechnology name. The shares and
volume figures are calculated using the data as of the
second Friday of March, June, September, and December.
Since the nanotech business is immature and companies
are likely to enter and exit, we may change the number of
stocks in the index as we deem necessary.
Nanotechnology – 16 April 2004
Refer to important disclosures on page 4. 4
Important Disclosures
Investment Rating Distribution: Technology Group (as of 31 March 2004)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 109 47.60% Buy 27 24.77%
Neutral 107 46.72% Neutral 19 17.76%
Sell 13 5.68% Sell 2 15.38%
Investment Rating Distribution: Global Group (as of 31 March 2004)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 1085 44.03% Buy 362 33.36%
Neutral 1215 49.31% Neutral 306 25.19%
Sell 164 6.66% Sell 28 17.07%
* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.
OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential
price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month
period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk Securities - 20% or more for High Volatility Risk
securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility Risk securities); 3 - Sell (negative return); and 6 - No
Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not
considered to be secure); and 9 - pays no cash dividend.
The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill
Lynch, including profits derived from investment banking revenues.
Copyright 2004 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. Any unauthorized use or disclosure is prohibited. This report has been
prepared and issued by MLPF&S and/or one of its affiliates and has been approved for publication in the United Kingdom by Merrill Lynch Pierce, Fenner & Smith Limited,
which is regulated by the FSA; has been considered and distributed in Australia by Merrill Lynch Equities (Australia) Limited (ABN 65 006 276 795), licensed under the
Australian Corporations Act, AFSL No 235132; has been considered and distributed in Japan by Merrill Lynch Japan Securities Co, Ltd, a registered securities dealer under
the Securities and Exchange Law in Japan; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC; and is distributed in
Singapore by Merrill Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd, which are regulated by the Monetary Authority of Singapore. The
information herein was obtained from various sources; we do not guarantee its accuracy or completeness.
Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other
derivatives related to such securities ("related investments"). Officers of MLPF&S or one of its affiliates may have a financial interest in securities of the issuer(s) or in related
investments.
This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives,
financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of
investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be
realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may
receive back less than originally invested. Past performance is not necessarily a guide to future performance.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in
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