Merit Medical Systems, Inc.: A Buy Taking Patent Dynamics Into Account

Jan. 17, 2020 2:22 PM ETMerit Medical Systems, Inc. (MMSI)4 Comments
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Innovalpha
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Summary

  • MMSI's patent activity/dynamics with patent scorecard, weekly and historical patent value, risk and disruptive scores in relation to competitors and stock price.
  • A look at MMSI in terms of technical analysis.
  • Implications for MMSI's stock price.

Among the nearly 6,000 companies taken into account by Innovalpha's models (Nasdaq, NYSE, and Amex), Merit Medical Systems, Inc. (NASDAQ:MMSI) has been identified as one of the leaders across all industries taking into account company's patent filing activity, in particular in relation to PCT (Patent Cooperation Treaty) applications. From PCT patent dynamics, Innovalpha provides a weekly patent index for all the 6,000 companies from which patent scores are computed as well as buy and sell signals and recommendations.

The investment thesis is that companies like MMSI:

  1. filing PCT patent applications outperform the ones which don't in out of sample backtestings. Innovalpha is the first company to provide evidence of the strong intrinsic value of PCT patent applications per se. Why so? Because the PCT, administered by the World Intellectual Property Organization (WIPO), is used by nearly all companies worldwide whatever the industry. It is a standardized process used to facilitate patent protection on a global scale. Hence, companies use the PCT when they believe their inventions deserve extended patent protection (several countries). Further, the PCT publications are the earliest publications related to a company's innovation, with only a 6-month delay between the filing date and the publication date. These two unique features represent exceptional advantages and explain to a large extent the outperformance measured by Innovalpha. Investors shall be much more attentive to PCT publications in their investment decision. However, several thousand PCTs are published each week rendering the patent analysis impossible without using automated tools and scores as provided by Innovalpha.
  2. displaying specific patent patterns/clusters, cycles of innovation, and fluctuations over time in the patent index will generate outperformance. The historical patent profile of a company, its patent dynamics, is a storyteller. Typically, a current intense patent filing activity over a defined period of time within a company, in contrast with a previous declining historical profile, will generate positive patent scores. If a company believes that it has developed a valuable invention, it will obviously try to secure such innovation with many patents, which will translate into what is called patent thickets/clusters, all detected by Innovalpha's algorithms. The models built with related outperformance have been validated by out of sample backtestings, real track, and third-party confirmation.

What is essential to understand is that models relying on PCT patent applications capture forward-looking innovation (recent patent activity analyzed), new products that may or are in the process of being launched, which translate into strong market outperformance versus current methods relying on granted patents (past innovation and with inherent drawbacks, e.g. models using U.S. patents will be U.S. centric). For the above reasons, Innovalpha does not assess the value of a patent per se, which, in addition, is probably an impossible task even for a patent/field expert.

As a consequence, detection of companies with PCT clusters/patterns is of particular relevance for the investor, as one can expect such companies to develop and launch new products soon which will hopefully translate into higher market valuation (detection of promising innovation-driven and patent-centric companies). At the minimum, such recent patent patterns reflect management belief that such PCT innovation deserves consideration with consequently substantial financial and human resources allocated through increased patent-filing activity over a defined period of time, a clear indication of growth within a company which makes sense for the rationale as it underlies a sustainable innovation/business (actual innovation is a core/fundamental value of a company).

Indeed, alpha lies in expectations not in past innovation already part of companies' market valuation. Further, our patent models show that patent size doesn't matter (presently, the market doesn't confer a value to important patent portfolios, on the contrary). As a consequence, big patent portfolios are not indicative of future stock market increase. We believe that the combination of Patent Dynamics with financial analyst opinions will increase the likelihood of stock outperformance. An important takeaway is therefore that the number of patents held by a company is not relevant, what matters is PCT patent dynamics.

Previous Innovalpha's articles will provide more information on the methodology used.

Analysis of Merit Medical Systems, Inc.

MMSI is a PCT innovation-centric company as it files PCT applications with clusters/patterns identified (PCT patent dynamics), translating into positive patent scores as shown below which may materialize into new products and equity return. Here, in addition to MMSI's patent dynamics analysis, writer's technical analysis is provided.

Five factors are taken into account in order to reach a conclusion:

  • company's actual patent value scores
  • company's historical patent profiles in relation to its stock price with trend & gap analysis
  • Trends in patent activity in other regions
  • comparison with competitors (is the company an outlier or not)
  • company's technical analysis

Figure 1 shows MMSI's scorecard displaying the patent index, grade, overall patent score, patent value, patent risk, and patent disruptive scores.

MMSI displays good scores, in particular for risk and value scores with a value of 80.4 and 36, ranking the company 16th and 5th respectively out of 533 industry competitors (in NASDAQ, NYSE, and AMEX).

The company displays a high overall patent score of 126.4, which is above average as it ranks MMSI 5th out of 533 industry competitors. The company is in Grade B, a very good grade (grades ranging from A to F, with A being the best grade).

Based on the historical data used, MMSI is considered a mid-stage company that is disruptive, with growth as well as a secure innovation star. It also indicates that MMSI is in relation to all companies in the health care sector:

  1. in 15th position for its patent index,
  2. in 5th position for its patent value score, and
  3. in 14th position for its patent disruptive score,
  4. in 16th position for its patent risk score, as well as
  5. In 5th position for its overall score.

A continuous increase can be seen for the minimum scores indicating a positive future outlook.

The patent value score is conferred by the market, computed from the out of sample backtestings. According to the models, a company is a:

  1. buy if positive patent value score,
  2. hold if patent value score equals zero or below but still having filed at the least one PCT application in the past years (company has a patent index), and
  3. a sell if negative patent value score with no PCT applications filed for the last years (no patent index).

Patent risk score is related to patent activity. A typical example is a company with no PCT activity for a long period of time which will obviously translate into a negative patent risk score. Advantageously, the investor can choose companies according to their patent risk score in order to adapt to the risk profile of the investor.

Patent disruptive score is also related to patent activity and in particular to specific patterns of intense patent activity over a particular period of time. In general, it is more difficult for heavy PCT filers to display high values in such scores. Disruptors are more easily found in new emerging companies.

Figure 1 - Merit Medical Systems, Inc. SCORECARD - Source Innovalpha

Figure 2 displays a summary view of MMSI scores.

Figure 2 - MMSI portfolio view - Source Innovalpha

Figure 3 displays MMSI's patent index and stock price over time. Since Q2 of 2016, a steady growth can be seen for the index score and has been correlating with the stock price very well until recently. In July, a rapid decline in the stock price can be seen and this has created a huge gap between the index and price. Patent dynamics need to be analyzed in order to check if this is a false positive as the size of the patent portfolio is not relevant. If the index continues to rise, we can expect the price to follow and make new highs eventually.

Figure 3 - MMSI's patent index and stock price over time - Source Innovalpha

Figure 4 shows MMSI's overall patent score and its stock price over time, Figure 5 the patent value score and stock price over time and Figure 6 the patent disruptive score and stock price over time. The three graphs are very similar with a strong uptrend since 2016, however, in the past months, a slight decline can be seen.

The gap is confirmed with the patent dynamics scores leading to an undervaluation of the company and represents a potential buying opportunity according to all of the previously mentioned metrics.

Figure 4 - MMSI's overall patent score over time - Source Innovalpha

Figure 5 shows the correlation between MMSI's patent value score and its stock price over time. For several years, since the start of 2016, an overvaluation of the stock price can be seen as it increased slightly faster than the value score. This has changed in Q4 of 2018 as the stock price could not make a new higher high and traded below 60 USD resistance while the value score continued to increase. Further, during the last months, the stock price has declined and has created a large gap representing a buying opportunity.

Figure 5 - MMSI's patent value score over time - Source Innovalpha

Figure 6 - MMSI's patent disruptive score over time - Source Innovalpha

The World Intellectual Property Organization (WIPO) indicates that MMSI principal markets in terms of patent protection are the following countries/regions: USA, PCT applications, EU, Canada, Australia, and Japan as well as some activity in China, Brazil, Denmark, and Spain, see Figure 7.

Throughout the last years, not much has changed in this distribution and indicates that the company remains focused on its key markets with Japan joining the club.

In terms of the various classes under which MMSI filed patent applications, the top two classes have remained constant throughout the 5-year period. An overwhelmingly large majority of patents were filed under: A61M - devices for introducing media into, or onto, the body (introducing media into or onto the bodies of animals a61d 7/00; means for inserting tampons a61f 13/26; devices for administering food or medicines orally a61j; containers for collecting, storing or administering blood or medical fluids a61j 1/05); devices for transducing body media or for taking media from the body (surgery a61b; chemical aspects of surgical articles a61l; magnetotherapy using magnetic elements placed within the body a61n 2/10); devices for producing or ending sleep or stupor.

This class has remained a clear leader, followed by:

A61B - diagnosis; surgery; identification (analysing biological material g01n, e.g. g01n 33/48)

With 3rd most popular being A61F, which has been overtaken by A61F.

Rest of the activity is distributed among 6 other categories and indicates some diversification in their patent portfolio.

Figure 7 - Top patent applications by region/country for MMSI since 2015 - Source WIPO

Figure 8 shows the distribution of companies that are in the same sector as MMSI and indicates that almost all of them are based in the USA.

Figure 8 - Competition in the healthcare sector across the world - Source Innovalpha

Figure 9 is a standard bubble chart showing Merit Medical Systems, Inc. in relation to its competitors with Patent index on the X-axis and overall score on the Y-axis (in all the bubble charts below the size of bubble is proportional to the PI index). MMSI can be seen as an industry leader, however, not an outlier as it is located close to several other companies. Let's check the patent dynamics bubble charts to get an accurate picture.

Figure 9 - MMSI with overall patent score vs patent index - Source Innovalpha

Figure 10 displays a bubble chart that compares the overall score with the patent value score and MMSI can clearly be seen as an outlier to the right. This indicates a very strong performance of the company as it creates innovations that have significant value and leads to giving it a bullish rating.

Figure 10 - MMSI with overall patent score vs patent value score - Source Innovalpha

Figure 11 displays a bubble chart that shows the overall patent score and disruptive score with MMSI being an outlier on the right once again. This indicates that the company is one of the rare ones that are able to produce disruptive technologies and therefore, further strengthens the bullish rating.

Figure 11 - MMSI with overall patent score vs patent disruptive score - Source Innovalpha

Figure 12 displays overall patent score with a risk score and once again shows MMSI being among the industry leaders (several competitors with similar scores). This leads to giving the company a bullish rating when compared to the competitions, however, also indicates that there are companies that potentially are less risky.

Figure 12 - MMSI with overall patent score vs patent risk score - Source Innovalpha

Finally, Figure 13 shows us a long-term technical analysis of MMSI. The trend has been very bearish in the past months as the price peaked around 66.34 USD in October of 2018 and lost 70.61% to the current low of around 20 USD.

This also means that the price has reached a very important support level of 16-20 USD, which served as a very strong resistance several times in the last 2 decades and currently seems to be rejecting further downside as it continues trading higher for the past weeks.

Overall, this leads to believe that the retracement is over and considering that the stock lost 70.61% in little over 1 year, we can see the price as being undervalued and a great potential to the upside can be made in the upcoming years.

Therefore, we give MMSI a very bullish rating from the technical analysis standpoint.

Figure 13 - Technical analysis of MMSI - Source Tradingview

Conclusion

  • MMSI displays impressive patent activity with 3.5 stars in patent risk score, 2.5 stars in value score and a decent 2 stars in the disruptive score which ranks MMSI relatively high among competitors for all of the scores indicating a buy.
  • MMSI appears to be one of the industry leaders in terms of PCT dynamics indicating a bullish rating.
  • Based on MMSI's historical patent profiles, trend seems neutral. However, the gap identified in relation to stock price should lead investors to buy the stock as it appears undervalued.
  • Market patent dynamics in key markets (USA, Europe and now Japan) are in line with PCT dynamics, which is positive. Trend is now neutral.
  • Technical analysis indicates a very bullish rating as the stock has lost 70% and currently shows signs of recovery
  • Therefore, the overall rating for MMSI is bullish.

This article was written by

Innovalpha profile picture
445 Followers
Innovalpha Sàrl is an independent company founded in March 2010 based in Geneva, Switzerland. The author is the originator of the IP models and founder of the company. He has more than ten years of experience in the Intellectual Property field as Patent Search Specialist and Patent Attorney. He is actually working as Legal Counsel and Intellectual Property Director for a small Healthcare company.

Disclosure: I/we 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.

Additional disclosure: The information provided in this document is given for indicative purposes only. Innovalpha Sàrl provides no assurance as to its completeness or accuracy nor the reasonableness of the conclusions based upon such information. This document is not intended to constitute an offer or solicitation for the purchase or sale of an investment program or of any one or more of the models mentioned in the document. There is no assurance that the model's investment objectives will be achieved and investment results may vary significantly over time. Past performance should not be construed as a guide to future performance. The content of this document is subject to change without prior notification. All information and data presented in this document is for informational purpose only and should not be reproduced, distributed or used without the prior written authorization of Innovalpha Sàrl.
The World Intellectual Property Organization (WIPO) bears no responsibility for the integrity or accuracy of the data contained herein, in particular due, but not limited, to any deletion, manipulation, or reformatting of data that may have occurred beyond its control.

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