On October 2nd, Acacia Research (NASDAQ:ACTG) announced a major acquisition of seven patent portfolios, including over 1900 total patents related to medical technology, particularly in the cardiovascular space. Acacia declined to disclose the source of patents or specific patent numbers, but such large numbers of patents concentrated from a single source can be somewhat easier to track down. According to the press release, the portfolio includes patents relating to "stent grafts, vascular grafts, bypass grafts, graft retrieval technology, vena cava filter technology, and filter retrieval technology from a leading global medical device company." Acacia recently settled patent litigation with a leading medical device company that happens to also own large quantities of patents meeting that description.
Acacia CEO Paul Ryan comments in the press release that "we are now demonstrating that medical technology will be another major growth driver for Acacia." During a private telephone conversation, Ryan elaborated on Acacia's growing interest in med-tech. Ryan referred to the purchase as "another major portfolio on the medical side," referencing a June purchase of orthopedic patents which involved seven licensing programs and 150 patents.
"We're seeing the medical sector as a major area of growth for Acacia," noted Ryan, referencing several revenue-producing licenses from the earlier portfolios that were announced toward the end of the third quarter. "We're getting licensing deals done very quickly," explained Ryan. "We announced licensing deals with Boston Scientific (NYSE:BSX), and with [W.L.] Gore and with Varian [Medical Systems] (NYSE:VAR)."
Body Science LLC recently licensed Boston Scientific for an undisclosed sum to resolve pending litigation. According to analytics provided by Patent Buddy, the Body Science portfolio includes five issued patents, and dates back to 1996. Body Science enforced patents from a portfolio acquired from from LifeSync Holdings. The LifeSync patents were originally owned by Motorola and sold to LyfeSync back in 2009. According to court records, Motorola previously licensed the patents to Welch Allyn to resolve litigation filed in 2004, and further battle tested in litigation with Nonin Medical, which ended with a confidential settlement agreement.
Regarding the other licenses Ryan mentioned, press releases and court records indicate that Acacia subsidiary Endotach LLC and W.L. Gore recently resolved litigation involving US Patents 5,593,417 and 5,122,154. No assignment records exist for either Endotach or the two patents involved in the lawsuit. Both patents list a single inventor, Valentine J. Rhodes, credited with inventing "an intraluminal graft" to hold blood vessels open, for example, during bypass surgery. The Varian settlement similarly involved a patent, 5,398,684, with no assignment history, and credited to inventor Tyrone Hardy. Hardy's invention relates to improvements in image generation suggested to be useful for CT, PET, X-ray, DSA, isotope, and NMR scans.
The leading candidate for Acacia's patent source on this latest acquisition is Boston Scientific. Overall, Ryan expressed enthusiasm about Acacia's early success with med-tech, which has only been a significant part of Acacia's business plan for about 18 months. While two of the portfolios mentioned above appear to be partnerships directly with inventors, Acacia claims this latest acquisition as a partnership with a major medical company as a result of this latest acquisition, although he would not comment on the identity of the company.
However, consider the makeup of the Boston Scientific patent portfolio. Out of 4200+ issued patents, the company leads the world in three key categories: International class A61B, relating to diagnosis, surgery and identification, with 1227 patents, Class A61M relating to devices for introducing media into, or onto, the body, with 1133 patents, and Class A61F relating to filters implantable into blood vessels ... preventing collapsing of tubular structures of the body (e.g. stents) with 1060 patents. Patents covering the subject matter described in Acacia's press release would likely fit into one or more of these three categories, which provides more than enough patent quantity to fill a 1900 patent, seven portfolio purchase order.
Next, consider the timing of the two announcements. Acacia announced resolution of patent litigation with Boston Scientific on September 28th, a Friday. It's press release announcing the purchase went public only a two business days later, but falling over a weekend and after the end of the quarter. This raises the possibility that a Boston Scientific-Acacia partnership was discussed and agreed to as part of the settlement agreement with Body Science.
Finally, Boston Scientific's leading competitors lack sufficient quantity to match the purchase description. The #2 Patent holder in Class A61B, Ethicon Edno-Surgery, has only 870, 99 and 44 patents, respectively, in each of the three same categories. The #2 Patent holder in Class A61M, Becton Dickinson, holds only 541 patents in that class, 112 patents in Class A61B, and none reported in Class A61F. Finally, the #2 Patent holder in Class A61F, Proctor & Gamble, holds only 957 patents in that class, with none being reported in the other two classes. Thus, Boston Scientific is not just the most likely Acacia partner, it is probably the only such partner who could bring such a large portfolio to the table.
This puts further color on some of Ryan's comments espousing his confidence in the newly acquired portfolio. "We think the med-tech business could be as big as the tech business," Ryan said, adding that, "We're now getting traction on the intake side with major portfolios from big companies that are trusting us with their IP assets." On the licensing side, which is where Acacia needs to excel to turn these big acquisitions into revenue, Ryan also offered a bright view of the future, saying "We're already generating revenues and we just got started in the business. We're very pleased with the growth of that aspect and think it can be a very big market for us."
Ryan expects the trend to continue, explaining that royalty rates for medical technologies, on average, are higher than in other sectors. In addition, "People in the medical technology sector ... are more conditioned than some in the tech sector to pay royalties. There's more of a history in honoring IP and paying royalties commensurate with the value."
Ryan may be correct about medical-sector companies being more likely to honor IP rights. However, a 2008 paper by Jonathan E. Kemmerer,and Jiaqing Lu, Ph.D., with Applied Economics Consulting Group, in Austin, Texas, examined royalty rates across many industries as a function of gross profit margin. Kemmerer and Lu's analysis, part of which is shown below, found medical device technology royalty rates to be generally higher than areas such as chemical, electrical, food and automotive technologies, and slightly higher than telecommunications technology. However, despite showing comparable profit margins, medical device technology royalty rates were reported to be substantially lower than Internet/Software technologies.
Regardless of whether royalty rates in med-tech are high or low, volume of usage will determine the true value of Acacia's new partnership. The technologies described in Acacia's press release relate to instruments used in medical procedures such as Coronary Artery Bypass Graft (CABG), performed about 700,000 times per year (and over 250,000 times in the United States), according to this presentation. However, despite Boston Scientific's dominance of even the most narrowly drawn patent classification (A61F - filters implantable into blood vessels), it owns little more than 1/25th of all issued patents in this class (1060 out of a total of over 25,000 patents). The difference between an infringing and a non-infringing device often comes down to very specific details that are impossible to analyze without knowing exactly what patents have been acquired.
However, a fair assumption is that some of the 1900 patents acquired by Acacia should cover technology found in competing medical devices. It will be up to Acacia to identify those patents and execute the appropriate licensing programs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.