Enzo Biochem, Inc. (ENZ) is an integrated life sciences and biotechnology company divided into three segments: Enzo Clinical Labs, Enzo Life Sciences, and Enzo Therapeutics. But what should catch investors' interest is the possible financial impact from over 10 lawsuits the company has filed over the few years. The lawsuits pertain to Intellectual property (IP) patents owned by Enzo, and claims these patents were infringed upon, and continue to be infringed upon, enriching a number of major companies over several years. If Enzo is successful in its patent lawsuits, the company could see verdicts, or settlements, amounting in the billions of dollars.
Enzo is familiar with patent litigation, and is still reaping the benefits from a patent infringement settlement it won in 2004 against the Digene Co, now part of the Dutch company, Qiagen (QGEN). Enzo received $30.5 million settling a long-standing patent dispute involving technology used in Digene's premier product, a test for human papillomavirus (HPV), which netted Digene $75.5 million in sales in 2003. The settlement could eventually reach over $100 million, as Enzo has already collected upwards of $50 million in royalties and fees, which will continue through 2018, as Qiagen still controls around 10% of the HPV testing market.
Patent 8,097,405 - A Win For Enzo Over Life Technologies
In what could be a glimpse into the future of the disposition of many of the lawsuits Enzo has filed, toward the end of 2012 a jury found Life Technologies (LIFE) did infringe on Enzo's patent 8,097,405 (405) relating to compounds used in DNA sequencing systems, which are utilized in reading the genetic code for diagnosing human diseases such as cancer. The jury found that Life Technologies owed Enzo a licensing fee of $49 million, and considering that the infringement of patent 405 began a number of years earlier, the company anticipates that additional interest will be awarded to Enzo by the court.
Enzo Biochem's President and CFO, Barry Weiner, commented on the possible additional penalties the company expects. "Our legal team has estimated that the addition of the prejudgment award could add additional recoveries potentially in the tens of millions of dollars. The sales of such instruments during the time that the patents have been enforceable have been estimated to be about $770 million. We also believe that this decision could have a positive impact on the resolution of pending actions that we brought in the U.S. Southern District Court in New York City, which involve additional defendants, patents and contract issues."
If Mr. Weiner is correct, the decision by the jury should bode well for Enzo's other lawsuits pertaining to patent 405 against both Abbott Laboratories (ABT) for patent infringement for nucleic acid sequencing processes by producing certain DNA fluorescent in situ hybridization probes, and Luminex Corp. (LMNX), also for its infringement of patent 405 due to the company's distribution of its Multicode products. It is conceivable that Enzo could be awarded well over $100 million dollars just for infringements on patent 405.
Patent 6,990,180 - Infringements Have A Market Value Of Almost $9 Billion
There are other patent infringements that Enzo has filed and expects to see verdicts on in its favor. In 2012, Enzo filed suit separate suits against Abbott Laboratories, Gen-Probe Inc. (GPRO), Becton, Dickinson (BDX), Life Technologies, and Roche (OTCQX:RHHBY), seeking financial damages on Enzo's gene-mapping patent 6,990,180 (180) the company registered in 2006, but is based on filings dating back to 1982. Abbott, Enzo claims, infringed on the patent with its nucleic acid probes used in Abbott's RealTime HCV assays, which detects hepatitis B virus, and has an estimated market value to be $4.1 billion. In a separate suit, Enzo claims that Gen-Probe has infringed on patent 180 with five different products, and claims Gen-Probe enriched itself on these products, which have an estimated market value of $876 million. Separately, Enzo filed suit against Becton, Dickinson, for patent 180 infringement and estimates the company had $1 billion in sales in products related to the patent. And, according to Enzo, Life Technologies, separate from the earlier patent infringement case, infringed on patent 180 using products with an estimated market value of $1.8 billion. Enzo also filed suit against Roche's Molecular Diagnostics business infringing on patent 180 in what could be well in excess of $1.2 billion in market value. All totaled, Enzo sees its patent 180 has been infringed on by these companies to a market value, past and present, close to $9 billion.
Though it is difficult to determine what the financial outcomes will be, it is clear that the products that utilize Enzo's IPs are significant contributors -- past, present, and future -- to these defendants' corporate growth. Therefore, if one figures a low royalty rate of 5% the dollar amount of IP infringements, not including future royalties and fees, the amount could come to roughly $450 million dollars.
Defendant Companies' Estimated market value
Abbott Laboratories $4.1 billion
Life Technologies $1.8 billion
Roche $1.2 billion
Becton, Dickinson $1.0 billion
Gen-Probe $876 million
Total $8.97 billion
The estimated market values above do not reflect future values, which could be worth hundreds of millions for Enzo, as patent 108, named "Oligo- or Polynucleotides Comprising Phosphate-Moiety Labeled Nucleotides," does not run out until 2023.
Patent 7,064,197 - Infringements Have A Market Value Of Almost $4.5 Billion
Enzo has also filed suit against a number of companies that infringed on patent 7,064,197 (197) issued in June 2006 and titled "System, array and non-porous solid support comprising fixed or immobilized nucleic acids." These lawsuits claim that the offending companies have infringed on patent 197 and have enriched themselves in the billions of dollars. The company is seeking damages against Illumina, Inc. (ILMN) for infringement on patent 197 used in a number of Illumina's products, and has an estimated market value of $1 billion. Enzo is also suing Siemens (SI) for infringing on patent 197 covering its HIV and hepatitis viral load monitoring technology by making and selling certain nucleic acid array products based on bDNA technology; the products have a market value between $500 million and $1 billion. Separately, the company has also filed suits against both Agilent Technologies, Inc. (A) and Affymetrix, Inc. (AFFX), with market value on the infringed patents in excess of $2 billion and $384 million, respectively. As before, if one figures a low royalty rate of 5%, if successful, Enzo could be owed $210 million, not including future royalties and fees.
Defendant Companies' Estimated market value
Illumina Inc. $1.0 billion
Seimens $1.0 billion
Agilent Technologies $2.0 billion
Affymetrix Inc. $384 million
Total $4.384 billion
While some scoff at the notion of investing in a biotechnical company to just profit from patent infringements on the company's IP, one must realize that fortunes have been made in buying IPs and suing giant companies for patent infringements. Patent monetization has become a giant industry where billions of dollars are at stake almost daily, mostly by a non-practicing entities (NPE) that acquire patents or other IP with a sole purpose to force by negotiation or litigation both upfront monetary payments for past incursions and ongoing royalty and licensing fees. Vringo, Inc. (VRNG), which started out in the smart phone ringtones business and merged with IP Engine and its lucrative IP portfolio business, has spent millions filing litigation cases against giants such as Google (GOOG) and Microsoft (MSFT), with a goal of receiving hundreds of millions in patent infringement revenues. Acacia Research Corp. (ACTG), an IP company now controlling over 250 patent portfolios, has seen its market capitalization rise from $100 million to $1.17 billion, and its stock rise from $2.07 to $42.43 in less than five years, while its bank account soared to $313 million in cash and short-term investments. Though Enzo is not considered an IP company, it does have a number of very valuable patents; and as an investor, I would look at Enzo's lawsuits as another avenue for the company to generate revenue, and perhaps a lot of revenue, as it owns a deep IP portfolio with patent coverage across a number of key enabling technologies.
Enzo's legal expenses have been $3.7 million annually over the past two years, mostly relating to general legal services and patent and litigation matters, a drop in the bucket compared to what the company could gain with legal victories. The company is being represented on a contingency basis by Desmarais LLP, a law firm that specializes in the litigation of complex, technology-driven disputes, which has successfully tried some of the most important intellectual property disputes in recent times.
Enzo Biochem is an $82.9 million market cap company. But if litigations go in favor of Enzo, the company could find itself with hundreds of millions, if not billions, of dollars for past royalties, fees, and damages -- and that does not include future revenue from the three patents being litigated. I also look for the company's value to rise considerably on any positive announcements on the cases. Enzo's stock has dropped 20% year to date on lower earnings, but the company attributes the lower earnings to its decision to emphasize higher-margin sales, which resulted in fewer products offered over last year. Also, Hurricane Sandy caused a delay in rolling out new platforms and products that were planned for revenue growth. Enzo Biochem stock closed on Friday, April 26th at $2.16 per share, which I consider an excellent entry price.
The value of IP lawsuits is generally based on three factors: Profits a company made infringing on the other company's IP, the future value of such infringements, and punitive damages whether the act was deliberate or accidental. Though there is no guarantee about the outcome of the trials, if last year's verdict in favor of Enzo is any indication, Enzo could be awarded quite a windfall, and investors who bought early may find themselves cashing in on profits. But as always, caution is advised. Though I believe that Enzo will be successful, there are risks that it may not prevail in any one or all of its lawsuits. Today I see Enzo at an excellent entry price, and I think those who own the stock and are patient may well profit heavily.