Industry Update
October 1, 2014
IP Monetization
INDUSTRY NOTE
JAMES McILREE, CFA, Senior Analyst, 646-465-9034
jmcilree@chardancm.com
Sales and trading, 7 a.m. to 7 p.m. ET (646) 465-9090
Sales and trading, 7 p.m. to 7 a.m. ET (646) 465-9063
IP Monetization: September 2014 Update. Focus on Marathon Patent Group
Our universe of IP-related stocks is down 5.0% (market weighted) year-to-date, however there is a wide performance disparity with the best performing stock, Marathon Patent Group, up over 125% and the worst performing stock, Spherix, down 80%. There is also a wide disparity between the four categories (see our taxonomy of IP stocks below) of IP stocks, with companies with active R&D programs up 15%, and non-practicing entities down 40%. Other big winners, year-to-date, include Straight Path, Worlds Inc. Unwired Planet, Tessera, InterDigital, Rambus, ITUS and 22nd Century. Big losers for the year are Spherix, ParkerVision, Vringo, VirnetX, MGT Gaming, Neonode, DSS, Paid and Finjan.
For the month, big winners included Straight Path, Marathon and Worlds Inc. Straight Path rose on news of complaints filed against Apple, Avaya, Cisco Systems and Verizon claiming infringement of the company’s VoIP patents. Marathon was up after the USPTO denied ARM’s petition for inter partes review (IPR) of Marathon subsidiary Vantage Point Technology's U.S. Patent No. 5,463,750 ('750 patent).” Vantage Point claims Acer America, Amazon.com, ASUS Computer, Barnes & Noble, Broadcom, Freescale Semiconductor, Hisense, HTC America, Huawei Device USA, Kyocera, Lenovo, LG Electronics, Microsoft, NEC, NVIDIA, Pantech Wireless, Qualcomm, Renesas Electronics, Samsung, Texas Instruments, ViewSonic, Wacom Technology, Apple, Inc., LSI Corp., MediaTek USA, Panasonic Corp. of North America, Sharp Electronics infringe the ‘750 patent by using ARMS’ technology. Worlds Inc. was up probably due to the scheduled Markman hearing next month.
Big losers for the month include VirnetX, MGT Gaming, Neonode, Document Security Systems, Finjan, and MMRGlobal. VirnetX fell after a Court of Appeals vacated a jury’s damages award of $368 million against Apple. However, the court did confirm the validity of VirnetX’s patents and confirmed the jury’s findings of infringement. Part of Document Security Systems’ decline relates to a finding by PTAB that VirtualAgility’s patent is invalid under the Alice Corp. standard. PTAB found the patent as an abstract idea and lacked an inventive concept, or “claims of the ’413 patent do not add any inventive concept to the abstract idea of managing collaborative activity”. DSS will take a $7 million write-down on its investment in VirtualAgility. MMRGlobal decline came despite a favorable Markman hearing order that adopted 6 of 8 claim terms proposed by MMR in its suits against Quest Diagnostics, Inc., Jardogs, LLC, Allscripts Healthcare Solutions, Inc., and WebMD Health Corp. and WebMD Health Services Group. Trial is scheduled for May of 2015.
On page 2 we highlight Marathon Patent Group, the best performing stock in our universe year-to-date. Marathon is up over 125% year-to-date. The company has over 120 patents and complaints filed against over 100 defendants. Its patent portfolio is broad, ranging from automotive, to communications to biotechnology. Marathon also has a special relationship with IPNav to source and evaluate new patent portfolios.
Our taxonomy of intellectual property companies begins on page 6. We have segmented the investment universe into five categories: 1) Active R&D/Licensing 2) NPE-Organic 3) NPE-Acquired 4) Agent 5) Fully integrated. Clearly companies can span more than one category as an NPE (non-practicing entity) that starts out with IP developed internally, can then purse acquired IP and supplement it with active R&D to advance the technology and increase its value. We will focus mostly on companies in the technology markets, but clearly IP monetization strategies are active in bio-tech, medical devices, and life sciences as well.
This note includes an index showing the performance of this universe of IP monetization names over the past 21 months. One index, weighted by market capitalization is down 6% since the beginning of the year after posting a 0.4% increase in 2013. This index is driven mostly by the performance of the five largest cap names (InterDigital, Rambus, Tessera, Acacia, RPX) which comprise 71% of the $8.3 billion market cap of the group. The second index is equal weighted, and is much more volatile given large movements in penny stocks will have a large impact on the overall performance of the index. Since the beginning of the year, our equal-weighted index is down 12% and in 2013 was up 6.4%.
Important Research Disclosures
Distribution of Ratings/IB Services
Chardan Capital Markets
IB Serv./Past 12 Mos.
Rating
Count
Percent
Count
Percent
BUY [BUY]
32
72.73
10
31.25
HOLD [NEUTRAL]
9
20.45
1
11.11
SELL [SELL]
2
4.55
1
50.00
NOT RATED [NR]
1
2.27
0
0.00
Regulation Analyst Certification ("Reg AC") — JAMES McILREE, CFA
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RATINGS
Buy: Expected to materially outperform sector average over 12 months and indicates total return of at least 10% over the next 12 months.
Neutral: Returns expected to be in line with sector average over 12 months and indicates total return between negative 10% and 10% over the next 12 months.
Sell: Returns expected to be materially below sector average over 12 months and indicates total price decline of at least 10% over the next 12 months.
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