Stocks With Upcoming Legal Catalysts
Mar 27 2013, 8:40 | by Alexander Maxwell | includes: MGT, MNTA, SIGA, VRNG, PRKR, WDDD.OB, PIP
A legal ruling can be a huge impact on a stock either way. After millions of dollars spent to get to where they are, there are some stocks which are facing some very important court decisions in the coming weeks and months. These cases range from everything from patent infringement cases to a dispute over a merger that never took place. For those of us who are interested in the law, there is a good deal of money to be made out of correctly predicting a court's decision. However, remember that courts are inherently unpredictable, and that at any moment a court decision could go against you. For some of these companies, the court decisions are a lifeblood, for others it is a hope, but one likely not to be fulfilled.
The first company that has an important court catalyst coming up is Momenta Pharmaceuticals (MNTA). Momenta has a very important appeal before the Supreme Court of the State of Delaware. It is related to a competing generic product, and if the court were to rule in MNTA's favor, the PPS rise could be massive. As of the current terms of Momenta's agreement with Sandoz, a generic drug maker, Momenta would receive a 50:50 split of whatever profits were made from a generic version Enoxaparin Sodium Injection. Well, since originally Momenta and Sandoz were the first companies marketing this generic drug, they were able to make a huge amount of money off of a 50:50 split. Now another company has entered the picture, which shifts the agreement to a much less favorable royalty structure for Momenta. This has taken Momenta from making a consistent quarterly profit, to being deep in the red. In the most recent quarter, Momenta reported a loss of $17.7 million. In response Momenta filed a patent infringement lawsuit against Watson Pharmaceuticals. Most recently, Momenta lost in a federal appeals court when it argued that Watson should be barred from selling the generic version until the conclusion of the patent infringement trial. However, the court found that by a 2-1 margin, that Momenta was "not likely" to win in regards to its patent infringement claim. Momenta also recently lost an en blanc decision, when it asked for the full panel of the appeals court to review the 2-1 decision, as the court declined. The CEO of Momenta strongly implied at that time that Momenta would seek an appeal before the US Supreme Court. For those of you who might be unfamiliar with the legal system, the US Supreme Court can choose which cases to take, and it is highly unlikely for the court to take this case. The patent infringement case in itself, however, could be quite important. If it is found by a judge or jury that Amphistar/ Watson did indeed infringe upon Momenta's patents, Momenta has suffered damages of hundreds of millions of dollars. On another interesting court case stemming from the pharmaceutical sector is the PharmAthene Case.
PharmAthene (PIP) is engaged in an interesting piece of litigation versus Siga Technologies (SIGA). This lawsuit centers over the terms of a merger which was discussed, but never culminated. During the course of their merger talks, SIGA was strapped for cash, and PharmAthene offered to give them a $3 million loan, but with the idea that if the merger did not go through, that part of the asset ST-246 (called Arestvyr) would belong to PharmAthene, pursuant to a license agreement agreed to by both parties. Well, the deal did not go through, and SIGA and PIP went their separate ways. This lawsuit was initiated after PIP was not given any part of the asset, and PIP sued SIGA in the state of Delaware. Now, here is where it begins to get interesting. SIGA is awarded a huge contract by the Department of Defense for their smallpox antiviral, estimated to be worth around $412.5 million. Well, the Delaware court finds in favor of PharmAthene and orders that after SIGA makes its first $40 million dollars in net profits, that the profits must be split with PharmAthene 5050 until ten years after the first commercial sale of the product. PharmAthene was also awarded some of its legal fees. As is typical, SIGA decided to appeal (I am not blaming them, in their shoes it was probably the best move they had), after the appeals court largely upheld the aforementioned judgment, SIGA appealed to the Delaware Supreme Court. PharmAthene filed a cross-appeal for aspects of the ruling that it did not agree with. For those of you non-law lovers out there, when a person/company/entity appeals to the court they are questioning the previous court's decision, and asking for the higher court to overturn the lower court. What a cross-appeal means is that since PharmAthene was not the one who asked for the appeal, they decided to appeal parts of the court's verdict which they did not like. What PharmAthene is essentially asking the court to do is to overturn aspects of the lower court's judgment that it did not agree with, but to leave the parts it did agree with intact. SIGA essentially wants the entire judgment thrown out. This appeal represents a significant catalyst for both companies, as once the court comes out with its decision that will be the final say, and if it comes out in SIGA's favor, expect PharmAthene to tank. However, if it comes out in PharmAthene's favor I would expect SIGA to take a hit, but not a huge one like PharmAthene due to the fact that the negative judgment has already been baked into SIGA's stock price. The estimated time for the Delaware Supreme Court to issue its ruling is expected in the next few months. Now, onto some court cases that are not appeals, an interesting case which is shaping up into a David vs. Goliath match is the case of Worlds inc. v. Blizzard.
Worlds Inc. (WDDD.OB) is a small company, with a market cap of $34.59 million. Yet, it is a company with vast potential, due to the fact that it recently filed a patent infringement lawsuit versus Blizzard, Blizzard's Call of Duty and World of Warcraft franchises. Worlds holds a few different patents regarding how to have players interact in a virtual three-dimensional world, WDDD holds patents regarding the construction of this world. When WDDD filed the lawsuit. The primary firm representing Worlds is Susman Godfrey L.L.P. On a quick Google search, you can see that these attorneys are no push over, and they are definitely not new to the game of patent litigation. They are ranked Tier 1 nationwide in intellectual property litigation. The fact that Worlds has a well-respected law firm at the helm leading its charge against Blizzard, helps to reassure shareholders that Worlds will likely not blunder the case due to ineffective counsel, and it shows that Worlds will have some of the best people in the business working on the case. Which helps to show shareholders that Worlds is serious about its claims against Blizzard, and Worlds is ready to go to war. Worlds' lead counsel on the case is Max L. Tribble, a person who has a few notorious wins of his own in the patent world. In regards to legal competency, Worlds is definitely not a bunch of pushovers. There are a few important dates coming up for Worlds in its patent lawsuit, as it will be having a Markman hearing in June 27, 2013. For those of you who don't know, a Markman hearing is when the judge rules about which side's interpretation of the language of the patents is the one that will be used in court. It will also help to set a schedule going forward for the trial. There are also other patent plays, where companies are suing much bigger competitors.
Suing much bigger competitors has helped to get Vringo (VRNG) notoriety. It recently won a large jury verdict against Google (GOOG), related to Vringo's search patents. The jury awarded Vringo 3.5%, however, the lawyers are fighting over whether this is 3.5% of the 20.5% revenue increase, or if it is like the math that the jury did, 3.5% of 2.5%. This question will be huge for Vringo, and I lean towards the former because that was the evidence presented to the jury, regardless of any sort of mathematical error by the jury. Vringo has some important court dates coming up, including when the judge makes his final ruling. The date is not known by either side likely, so it could come at any time. Also, Vringo recently filed lawsuits against both Microsoft (MSFT) and ZTE. Microsoft Vringo is suing for a similar thing as Google, related to the way in which Microsoft's bing search engine ranks ads. Whereas Vringo is suing ZTE in Britain and Germany, related to patents that Vringo acquired from Nokia, related to telecom infrastructure. The upcoming case against ZTE can also represent a huge catalyst for Vringo, as the courts in Germany are much faster than the courts in America, and there has recently been speculation that this case could go to court as early as October of 2013. Vringo over the next few months will definitely be an important stock to watch, if it gets what it wants out of Google, then Vringo's patents will be hard for Microsoft to defend against as well.
Some other patent plays to look into if you are interested in companies which hold patents, for which they are suing other people for violating are ParkerVision (PRKR) in their lawsuit against Qualcomm, MGT Capital Investments, Inc. (MGT) in their lawsuit against various gaming vendors related to casino slot machines with multiple payout events. Also, the largest company of the bunch VirnetX Holding Corp. (VHC) in regards to their recent lawsuit against Apple (AAPL), which has not gone the way that it intended. However, VHC has won many different lawsuits, and we can expect it to win more as time goes on.
For all of the above stocks, legal rulings will represent a catalyst. The above legal rulings have the chance to increase the stock price substantially, with millions of dollars on the line. Overall, these stocks represent very risky investments, especially companies which utilize patents versus larger companies. For those of you who are interested in the law, there can be big money made out of correctly picking legal catalysts.
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.
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