No, the $15 billion patent play does not belong to Vringo (NASDAQ:VRNG), though Vringo is an interesting case that sets the precedent for this other company - Trovagene (NASDAQ:TROV). Who is Trovagene, what has it to do with Vringo, patents, and $15 billion up for grabs? We'll look at it in a moment. But first, a bit of background.
Vringo is a testament, a bonafide example, of how corporate balance sheets sometimes misrepresent the intrinsic value of a company's assets. Before merging with Innovate/Protect, Inc. (I/P), Vringo was a software start-up valued in the market at no more than $10 million. Today, fully-diluted, there are ~113MM shares out, which implies a market capitalization of $357 million. A jury awarded Vringo ~$30 million in damages pertaining to a suit alleging AOL (NYSE:AOL), Google (NASDAQ:GOOG), and others, infringed on the company's patents. In addition, the jury also suggested that Vringo should be entitled to a 3.5% royalty on Google's U.S. adwords revenue until their patents expire. Altucher does a quasi-sensitivity analysis of the value of this suit here. Meanwhile, Vringo has gone on to raise more than $76 million from institutional investors this fiscal year, acquired over 500 "telecom infrastructure" patents/applications from Nokia (NYSE:NOK), and filed numerous infringement suits against ZTE Corporation (OTCPK:ZTCOF) in Europe. Elsewhere, the threat of an infringement suit hangs over Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO). The future value of these activities cannot be captured on a balance sheet, which brings us full circle on how financials sometimes misrepresent the value of a company's assets or their ability to generate a return for investors. Further, this paves way to a diagnostics company called Trovagene.
Why Trovagene Is The Next Big Patent Play
In 2013, Trovagene will begin to commercialize several urine-based diagnostic tests to screen for cancer and infectious diseases. This company owns a very broad patent estate that covers virtually every use of transrenal molecular testing - cancer diagnosis and monitoring, infectious diseases, prenatal and genetic testing. By 2014, the molecular diagnostics market will be worth $15 Billion, according to Renub Research. Further, the report states that, globally, this market is seeing a compounded annual growth rate (OTCPK:CAGR) of 19%.
The fastest growing segment is infectious disease [...]; the next fastest growing segment is oncology testing due to rising cases of cancer patients.
The reason Trovagene is potentially a multi-billion dollar patent-play, rather than simply a diagnostics company, is that its patent position is the equivalent of a monopoly on blood tests performed today to screen for cancers and infectious diseases. Screening for infectious diseases accounted for more than 21% share of the molecular diagnostics market in 2010. Blood screening and genetic testing is expected to have a combined market share of 26% in 2014. Non-coincidentally, these are the targets Trovagene is going after. And its patents will create a colossal barrier to entry; an impasse for competitors in the next-generation of screening technologies. Screening using urine samples over blood or biopsies has distinct advantages (as shown, below), and could be the answer to large, systemic, readily available/accessible and frequent samples that are necessary to monitor cancers.
Trovagene provides a few interesting estimates on the opportunity for their oncology test kit in the future (see their corporate presentation). Thus, these estimates exclude any potential opportunities in infectious disease, prenatal screening, etc.
- The market for cancer patient monitoring is at least $2.4 billion by 2020. The first assumption is that there are 8MM people in the United States who are (then) cancer survivors. The second assumption is that cancer survivors would screen themselves for cancer twice a year. The cost is $300. $300 * 8MM = $2.4 billion.
- The bigger market is in early cancer detection. Though, ultimately, we're still talking about the same test at $300 a pop. The assumptions here, however, are that there are roughly 180MM people over the age of 40 living in the United States by 2020 who screen themselves for cancer once every two years. Thus, $300 * 180MM/2 = $27 billion.
Trovagene's technology enables these screens because they're easier to collect, are available at any time and in greater quantity, and offer superior accuracy (because of the sample size available for collection versus blood). And, further to their benefit, it's a non-invasive sample. Technologies have advanced to the point where urine samples are economically viable and moreover comparable to the cost of analyzing a blood sample (and it is expected that the cost will continue to decline).
Exact Sciences Validates Trovagene's Opportunity
If these numbers seem a tad optimistic, consider Exact Sciences (NASDAQ:EXAS). This is a development-stage company that is attempting to commercialize a stool-based screening technology for colorectal cancer. The market has valued the company at more than $650 million based upon this one test for one type of cancer. Compare that to Trovagene's multiple-cancer screening technology, a company sporting a $60 million enterprise value. We're either looking at an unfathomable arbitrage opportunity or a tremendous patent play in Trovagene.
Whichever way you look at it, you're dealing with numbers in the billions of dollars. And more importantly, there's an unsurpassable barrier to entry. Trovagene holds the key to potentially billions of dollars in recurring revenue, and the only way in is to lease the key from the company for a fair bit of money ("lease" as in licensing deals).
What To Look For in 2013
As with all companies, the promise of great returns comes with potential risks, including being able to raise the capital necessary to execute on their business plan (which they've successfully done this year, at good terms) and the ability to retain talented executives and directors (which a close look at top executives and directors will show has been accomplished). Like Vringo, Trovagene has successfully raised > $14 million in capital from institutional investors at fair terms ("fair" meaning reasonable within the scope of offerings in general) and appears well-capitalized to perform in 2013. The key in the ensuing 12 months will be for Trovagene to launch 3 commercial cancer tests, attract the interest of scientific partners/collaborators; the endorsement of key opinion leaders, and generate clinical data around their products. 2013 will be a year of validation: we'll have a better understanding of how effectively Vringo is able to monetize their patent portfolio; how well-received Trovagene's screens are in the diagnostics sector.
It's this author's opinion that Trovagene will be the multi-billion dollar patent-play no one saw coming. And Trovagene's management would probably agree as they've accounted for roughly an average day's volume with open-market purchases in the last few months.