Joff Wild

Shares in VirnetX Holding Corp plunged by 28% yesterday after a Texas jury found that Cisco had not infringed patents held by the NPE, which had been demanding a damages payment of over $250 million. In intensive trading, the VirnetX saw over $500 million wiped from its market capitalisation, with further falls occurring in after hours trading. Previously, the NPE had used some of the same patents to secure a verdict worth at least $368.2 million against Apple (although it has failed to secure an injunction against the company) and a $200 million settlement with Microsoft in 2010. In one piece of good news, VirnetX reported that the Texas jury had not found that the patents in suit in the case against Cisco were invalid.  

Until yesterday, VirnetX had enjoyed a steady recent rise in its market cap – with shares climbing from $22.67 in July 2012 to stand at $35.67 on the eve of the decision. That the company’s value has now declined so steeply so quickly once again emphasises the dangers of investing in what have become known as PIPCOs (Public IP Companies). A business model that is so reliant on what is inherently an uncertain process – the ability (or not) to get others take a licence to patents – is bound to be susceptible to sharp swings in investor sentiment on the back of decisions handed down by judges and juries. This is especially the case when a PIPCO does not have a diversified portfolio of rights, and/or a strong R&D base. Then the downside can be particularly dramatic. On top of that, you have to throw in the fact that most investors lack patent knowledge and may not be making entirely rational decisions when it comes to PIPCOs in the first place. In many ways, investors who do “get it” are actually at the mercy of those that do not.  

Of course, if you do have nerves of steel and an intimate understanding of how the patent system works there are always going to be opportunities. For example, I’d imagine that savvy investors may now be looking at the opportunities that the sharp fall in VirnetX’s share price offers for getting hold of its stock relatively cheaply. After all, the firm might decide to appeal the Texas decision and win, while the patents themselves – at least as of now – remain valid and so may afford further assertion opportunities.  Should the NPE have some good news to announce at some stage soon the stock could start heading north quite rapidly again. Alternatively, this may be the start of a bear run as the markets decide, reasonably or not, that VirnetX is a busted flush. On such calls are fortunes won and lost.