SVM-RFE and Neogenomics
In HDC’s September 20, 2019 SEC filing relative to the Patent Term Adjustment of almost five years, the company included the following:
"As a result of the issuance of the SVM-RFE Patent, Health Discovery Corporation now has the right to exclude others from developing, commercializing or licensing this patented technology without the uncertainty of the Interference or concerns over the ownership of the all SVM-RFE patents. Additionally, Health Discovery Corporation is taking the necessary steps to protect its sole ownership of SVM-RFE patents against infringement."
As noted, HDC has the exclusive rights to the SVM-RFE Patent, and likely has the opportunity to seek damages from multiple organizations. I assume that Intel is at the top of the list, but time will tell as to how HDC will address historic infringement, not to mention how or if HDC will successfully license the technology. In any event, with the above-referenced statement from HDC in mind, I started to think about Neogenomics (Neo).
Once the arbitration ruling relative to HDC’s dispute with Neo was announced, and certainly after Neo issued the required compensation to HDC, it is logical to assume the HDC may forever be done with any further dealings with Neo. Since the ultimate arbitration findings revealed that Neo was not a trust-worthy business partner, I would personally applaud HDC for refraining from any future collaboration. Yet, I continue to wonder whether or not we’ve heard the last of Neo……not because of collaboration, but rather because of either possible infringement and/or a possible buy-out.
My thoughts around this don’t relate at all to the issues which were reviewed by the arbitration panel (ie, flow cytometry, liquid biopsy prostate test, etc). Rather, they center around SVM-RFE, which actually wasn’t an issue addressed in the proceedings (more on this below). And, as it relates to SVM-RFE, I believe there are two distinct considerations which might not come to pass, but which I believe may have merit. Allow me to outline my thought process around this.
Several years ago, HDC included in one of its filings a statement that, at the time, deeply concerned me, although the issue didn’t rear its ugly head until late 2016 and 2017, when Neo first started to publicly state that it didn’t use HDC intellectual property, and began taking impairment charges on it. When I first read this statement, I sensed that something was wrong, and certainly knew that HDC’s former CEO was in over his head. The statement, as cut and pasted from HDC’s May 15, 2015 10-Q, is as follows:
"The Company believes our relationship with NeoGenomics is instrumental in our medical and diagnostic testing development. We further believe the majority, if not all, of our applications in the medical field will be done in conjunction with NeoGenomics."
Obviously, as circumstances have played out, it is clear that Neo believed it had HDC in its back pocket and, for what it’s worth, I agree that they did (for a period of time). It wasn’t until our current CEO took a firm stand to protect HDC’s rights, as evidenced by the January, 2017 SEC filing which included HDC’s written notice of complaint to Neo, that Neo’s irresponsible strategy with regard to HDC was being challenged.
This leads me to one of my two considerations: a possible HDC buy-out. When the above-referenced 10-Q was published by HDC in 2015, Neo was obviously running roughshod over HDC’s previous CEO, as evidenced by HDC’s desperate statement about exclusivity while, at the same time, Neo was using and/or attempting to use HDC’s intellectual property without compensation. Accordingly, the circumstances reveal that Neo had firm control over HDC and, if the situation had been handled skillfully (or do I say ‘ethically’?) by its senior executives, Neo would likely have ultimately either acquired HDC or at least maintained the upper hand as HDC’s primary business partner. In other words, inasmuch as Neo has enjoyed tremendous growth, my supposition is that its senior executives are having sleepless nights wondering what ‘might have been’. It goes without saying that the USPTO ruling granting HDC exclusive rights to SVM-RFE, coupled with HDC’s success in being approved for a five-year extension of the patent term, provide HDC with realistic opportunities that, if under Neo’s resources and control, could be absolute game changers for the laboratory. It was right there for the taking, and they let it slip away with what I consider to be short-sighted thinking.
With this in mind, let’s turn our attention to my other consideration: potential infringement of the SVM-RFE patent. I suppose there is a chance that Neo never ended up using the technology to advance its laboratory test portfolio although, if they didn’t, it would conflict with their stated intentions. In Neo’s May, 2012 10-Q, the company included the following:
"We are also focused on innovation because we are committed to being a leader in oncology testing. With the recent advances in genomics, proteomics and digital pathology, frequently large amounts of data are generated and managing this data is difficult without the aid of computer-based algorithms and pattern recognition. We believe that the best system for pattern recognition and data analysis is a technology known as Support Vector Machine or “SVM”, especially when combined with a technology called Recursive Feature Elimination or “RFE”.
Health Discovery Corporation has an extensive array of pending and issued patents surrounding SVM and RFE technology. By licensing this technology and combining the expertise that already existed at Health Discovery Corp with our expertise in genomics, proteomics and digital imaging, we believe we are well-positioned to begin developing innovative and proprietary new products.
Our goal is to develop new assays to help our physicians better manage their patients and to enable them to practice evidence-based medicine tailored specifically for each of their patients. High priority will be given to the development of better tests for the diagnosis and prediction of clinical behavior in prostate cancer, pancreatic cancer, breast cancer and leukemia/lymphoma.
We intend to combine and analyze data from genomics, proteomics and digital imaging using SVM-RFE techniques to develop practical, cost-effective and reliable new assays. Using this technology, we believe we will be able to offer a whole line of advanced tests that will help physicians better manage the treatment options for cancer patients."
Obviously, we can expect that Neo would reject any assertion that it used SVM-RFE technology in the development of tests, even though the company publicly announced that it had intended to. And, for what it’s worth, the arbitration proceeding did not include any references to it. Yet, this is where HDC’s closing statement in the September 20th SEC filing comes into play. The arbitration proceeding with Neo started well before the USPTO ruled in favor of HDC for the SVM-RFE patent in late February, and since HDC could not claim exclusive rights to the technology prior to that ruling, it likely wasn’t in a position to include SVM-RFE in the arbitration with Neo, since the company didn’t know if it would ultimately prevail with the USPTO or even if its patent(s) would be invalidated (as Intel’s were). Bingo!
As we now play this forward, it stands to reason that HDC should, at some point, examine whether or not Neo did infringe by using SVM-RFE for the development of tests since the master license agreement was executed in 2012. And, although a legitimate issue of concern around this relates to how much legal proceedings would cost HDC, I would argue that getting to an answer may not be that difficult. If you review the Genomic Testing Cooperative website (this is the lab that Maher Albitar, MD formed in 2018 after leaving Neo), you will see that two other individuals left Neo and joined him that year. One was the director of the Neo molecular laboratory since 2012, and the other was responsible for Neo test development since 2012. Thus, based on their combined expertise, it would stand to reason that HDC could promptly identify from them whether or not SVM-RFE was used without compensation to HDC. And, if HDC were to confirm that Neo used the technology, it could also explain why Neo might wish to acquire HDC, given that it could potentially have much to lose with an infringement challenge.
Putting this into perspective, I do find it interesting that Neo raised a significant amount of money earlier this year. Based on its May 20, 2019 press release, it commenced an underwritten public offering of approximately $150,000,000 of newly issued shares of common stock. And, while it likely raised this money with the intent of using it for another acquisition (time will tell, particularly since its director of investor relations signaled in an earnings call that the capital is not going to be used for its new facility), something isn’t adding up. Neo raised approximately $125 million in August, 2018, and subsequently used the money (plus additional shares) to acquire Genoptix in December, 2018. The unrealistic ability to manage robust back-to-back acquisitions in such a short amount of time, not to mention the abrupt ‘retirement’ of Neo’s CFO literally days after she stated in a recent earnings call that Neo isn’t using HDC intellectual property, leads me to believe that there may be more to the story. Thus, as I mentioned previously, there may be merit to my consideration that Neo may be attempting to acquire HDC because its executives simply can’t let go of the fact that they erred in their approach, and the SVM-RFE would have been right there at their finger-tips.
In summary, inasmuch as I’ve tried to outline why each of these two considerations may have merit, I also have to acknowledge that I personally believe that HDC should, in no way shape or form, entertain it. Based on the inappropriate manner in which Neo handled its affairs with HDC, not to mention the unfathomable potential of the SVM-RFE technology, the point here is that Neo (which at one point in history had the opportunity to control HDC’s technology) can no longer afford us.
Sorry fellas. If all you can raise is $150,000,000, you will need to look elsewhere for an acquisition target.
AI
