Vringo's (VRNG) patent infringement lawsuits against Google (GOOG) and many others help to underscore the importance of a company protecting its intellectual property (IP) via patents, copyrights and/or trademarks. Infringements on this IP can have harsh consequences for the guilty party and can prove to be lucrative for the infringed upon entities with fines, royalties and/or compulsory licensing agreements all distinct possibilities. Although I would consider an investment in companies with multiple lawsuits against many companies to be construed as more of a gamble than an investment, I believe solid gains can be made, while consideration of the downside risks should always be major components of the decision-making process. Depending on the terms of the judgments, certain royalty payments can even be viewed as a type of "forced licensing", with long-term financial gains benefiting the company and its shareholders. The type of investment presented by a position in a patent troll such as Vringo is underscored by the wild price swings evident in the 52-week range of $1.75-$5.73 - the investment is certainly not for the risk averse, although the possible gains are evident.
While Vringo still has multiple catalysts ahead of it with many other patent disputes still yet to be decided, I believe a similar company in the pharmaceutical sector can offer comparable gains from its current entry position. The candidate is a relatively unknown company for many investors and hasn't yet garnered the attention of the masses that it could in the near future. Enzo Biochem (ENZ) is an integrated life sciences and biotechnology company with three business segments: Enzo Clinical Labs, Enzo Life Sciences, and Enzo Therapeutics. The company's $89 million market capitalization, 52-week range of $1.33 - $3.16 and current midrange share price of $2.26 make current entry into the company's stock something worth considering in lieu of events transpiring, as I wish to expound upon below. Enzo's technology is used to detect, identify and modify gene expressions as well as regulate immune function as a result of the gene modifications. In doing each of these, its platform has a wide range of applications ranging from academic (research), therapeutics and diagnostics for a host of indications. Although revenue has increased to approximately $100 million annually ($22.4 million in Q2 2013 per its Q1 filing), the company's upcoming IP litigation calendar combined with a history of successes in patent cases is likely to serve as the primary near-term catalyst with regard to share price rather than its current revenue generation.
While even one significant trial could serve to move the stock significantly as Vringo demonstrated, Enzo has four cases that could be heard this Fall. Each has the potential to deliver a blockbuster payment to Enzo if it is successful. The first case is a lawsuit the company filed against Affymetrix (AFFX) in New York Federal Court. Enzo filed suit against Affymetrix in 2003 alleging that Affymetrix violated its distribution and supply contract with Enzo by improperly transferring Enzo business assets to a third party. In addition to being a breach of contract case, this suit is a patent infringement case. The assets in question include Enzo's proprietary systems for labeling and detecting nucleic acids, technology that was developed during the life of contract, as well other Enzo intellectual property.
The second suit, against Roche Diagnostics and Roche Molecular Systems (RHHBY.OB) occurred after Roche filed a Declaratory Judgment against Enzo's patent after Enzo had rejected a cash offer to settle Enzo's claims against Roche for breach of contract and misappropriation of Enzo assets. In 2004, Enzo filed a counterclaim against Roche, alleging mutual breaches of the 1994 agreement, and infringement on Enzo's US patent #4,994,373, as well as infringement on other related to labeling and detection. Nearly 10 years later, the case is scheduled to be heard.
The stakes are also high in a third claim filed more than 10 years ago in which the company has sued Amersham/ Perkin Elmer (PKI) /Molecular Probes/Orchid Biosciences/Sigma Aldrich (SIAL), former distributors of the Company's Life Sciences' products for alleging breach of distribution agreements concerning Enzo's line of labeled DNA probes and detection reagents. Specifically, Enzo alleged, among other things, breach of contract, patent infringement and tortuous interference with business relationships. Sigma Aldrich settled a similar case that Enzo brought against it in 2006.
The fourth case involved actions from 2006, where two patent interferences were declared designating an allowable Enzo patent application against patents now controlled by Siemens Medical and Princeton University concerning a key technology used in nucleic acid diagnostics referred to as "branched DNA". Enzo was named the senior party in both instances by virtue of the fact that its filing pre-dates both of the other parties' filings. The interference was awarded to Enzo and Siemens has filed an appeal, as the stakes are high in determining who first developed this important technology.
Enzo has had some significant successes in defending its intellectual property. In 2004, it sued Digene Corporation over a claimed infringement. Digene had apparently infringed on one of Enzo's patents on nucleic acid detection using its lead product, an HPV DNA test that is used in conjunction with the better-known Pap test to screen for cervical cancer and its precursors in women over 30 years of age. The parties ultimately settled the litigation, with Enzo ultimately licensing the technology to Digene in exchange for $16 million upfront, royalty payments of at least $2.5 million for the following year and at least $3.5 million annually for the next four years. To date, Enzo has generated in excess of $50 million from the license.
Another significant test of Enzo's IP patents came from Life Technologies Inc (LIFE). Enzo initially filed the lawsuit in 2004 and had to endure a longer battle than the one with Digene. On November 2, 2012 the courts ruled in Enzo's favor once again and awarded the company $48.6 million in direct infringement penalties with other interest awards pending according to the press release. Once the money is actually received by Enzo, its investors will feel a little more secure knowing the company's financials will be more solid in the short term and longer term as its IP yet again was shown to be solid and defensible. In its Q2 2013 conference call, Mr. Barry Weiner, president and CFO, mentioned the pending additional awards he expects from Life Technologies in stating "Our legal team has estimated that the addition of the prejudgment award could add additional recoveries potentially in the tens of millions of dollars." A huge and pending catalyst, final judgment in the additional award will be significant for the rapidly emerging pharmaceutical.
With each successful prosecution of its IP via the Courts, Enzo reinforces the strength of its unique products in the market. Each case sets precedence and helps to further validate and even advertises the company's IP patent protection to would-be violators or even suitors looking for solid products to shore up their own pipelines, fortunate for the company's valuation and its investors. The Life Sciences division is and will likely continue to be the prime source of IP infringement-based claims with two major victories to its credit already and other cases likely coming. In January of 2012, Enzo announced that it had filed suit against Roche Holdings, Gene-Probe (GPRO) as well as Life Technologies, this time for U.S. patent 6,992,180 titled "Oligo- or Polynucleotides Comprising Phosphate-Moiety Labeled Nucleotides." In the suit, Enzo claims that its patent was infringed on by at least 14 assays, seven tests, and other products made and protected by its patents. The products that infringed on Enzo's patent are numerous and include multiple instruments from Roche's Cobas AmpliPrep, Cobas TaqMan, and Cobas TaqScreen suite of tools like diagnostics for HIV, HCV, HBV, and West Nile virus. The lawsuit also noted Life Technologies' TaqMan assays as well as Gen-Probe's Aptima line of tests for HIV, HCV, HPV, trichomonas vaginalis and others. While it is difficult to put a price tag on potential awards from this litigation if Enzo is successful, Genetic Engineering & Biotechnology News noted in its report that Gene-Probe reported approximately $350 million in sales of its diagnostics product line in 2011, Roche generated in excess of $1.2 billion over the same time period, and Life Technologies record sales of approximately $1.7 billion. While it remains to be seen exactly how much of each company's product line potentially infringed on Enzo's 6,992,180 patent, the potential award could be significant even with only a few products being involved in the dispute.
Following up its announced suit against Roche, Gene-Probe and Life Technologies, Enzo announced it was suing Abbot Laboratories (ABT), Becton Dickinson & Company (BDX) and Hologic Inc. (HOLX) on March 7th, 2012 over the 6,992,180 patent as well. In that case, the dollar amount sought after was not revealed and only listed as "unspecified damages and an order to stop sales of the allegedly infringing products". Looking for long-term protection, Enzo also requested a "compulsory licensing agreement" if the court does not order the sales termination of the infringing products.
In April of 2012, Enzo turned its focus to protecting another patent with a host of lawsuits filed during that month. The lawsuits focused on U.S. patent 7,064,197 titled "System, array and non-porous solid support comprising fixed or immobilized nucleic acids". Another broad protection patent, the technology is said to be "useful for nucleic acid analyses and a host of applications, including, for example, detection, mutational analysis and quantification" according to the patent description. In the month of April 2012 alone, Enzo sued Siemens Healthcare (SI), Illumina (ILMN), Agilent Technologies (A) and Affymetrix over accused patent infringements.
While awaiting trials and decisions on its many lawsuits initiated in 2012, Enzo started out 2013 with yet another IP protection suit against Luminex (LMNX) and Abbott Laboratories for accused infringements on U.S. patent 8,097,405 titled "Nucleic acid sequencing processes using non-radioactive detectable modified or labeled nucleotides or nucleotide analogs, and other processes for nucleic acid detection and chromosomal characterization using such non-radioactive detectable modified or labeled nucleotides or nucleotide analogs." Such nucleotides or nucleotide analogs are useful in processes for detecting the presence of nucleic acids of interest and for characterizing chromosomal sequences, according to the patent description.
While legal fees can quickly add up and reduce the value of the awards once all has been settled, Enzo appears to have taken this into consideration and has solicited the services of Desmarais LLP on a contingency basis. Desmarais is well known in the life sciences business for its success in winning large awards for its clients associated with IP litigation. With the fees being success-based, Enzo's litigation costs are greatly reduced by having to pay for representation only if there is a favorable outcome to the trials. While many of these cases have and will continue to be drawn out before decisions are made, Enzo appears to be steadfast in its pursuit of those infringing on its patents. While litigation is unpredictable, Enzo has thus far been successful in its defense with additional successes likely coming. The company's $89 million market capitalization could also make it an appealing acquisition target as large pharmaceuticals in need of increasing their own pipelines and IP portfolio due to their own patents' expirations that will leave a hole in their revenue streams. Also to be considered are those companies who may be infringing on Enzo's intellectual property, but have yet been notified by Enzo. If large amounts of revenue could be at stake depending on the products involved, it could be cheaper over the long term to acquire Enzo outright rather than battle it in court and be forced to pay royalties and other fees to the company in the future.
I advise interested investors review Enzo's latest quarterly filing, for the quarter ending January 31st, 2013. Reviewing the three business segments for the six month period, Enzo Therapeutics operated at a loss with no revenue and utilized $629,000 for research and development with a total loss of the period of $629,000. Enzo Clinical Labs had $28,497,000 in revenue for the period with total operational costs of $32,110,000, giving a loss for the period of $3,613,000. Enzo Life Sciences, the source of the patents being disputed as noted above, had product revenue of $16,309,000 and $3,033,000 in royalty fees from previous litigation for total revenue of $19,342,000 with operational expenses of $18,051,000 yielding a profit from the 6 month period of $1,291,000. Net cash used by Enzo Biochem for the 6 month period was approximately $4.6 million, with a monthly cash burn rate of $767,000. Assuming the burn rate remains the same throughout 2013, the company has enough cash to fund its operations into 2014.
I believe Enzo could very well garner additional royalties, compulsory licenses, and other forms of revenue as a result of the many lawsuits the company is and will be involved with in the future in the pursuit of protecting its IP. In addition to its many lawsuits with decisions pending, additional catalysts for 2013 will likely originate from potential licensing deals in its Enzo Life Sciences division, sales growth in the same sector and any indications of financial improvement in its Enzo Clinical Labs division. The latter division has demonstrated impressive revenue growth while still having high costs offset its sales. Just as savvy investors who had early entry into Vringo before its now-famous litigation against Google reaped the rewards of almost 100% at the height of the trial's euphoria, I believe Enzo can offer comparable gains with multiple suits ahead while with a legitimate business model protecting against significant losses.