VHC shares are strong today as investors digest a 1/4/13 Pacer filing related to the
VirnetX Inc. Vs. Apple Inc. patent infringement trial in U.S. District Court (ED-TX). Per
the filing, Judge Davis ordered Apple to provide VirnetX with “up-to-date” sales
figures for both accused products (i.e. those named in the August 2010 filing and
sold prior to the trial’s start in October 2011) and newer products (i.e. various Apple
products introduced since the original filing, including the iPhone 5) no later than
1/15/13. The Court also ordered VirnetX to submit an amended motion for postverdict
damages post-receipt of the updated Apple sales figures by 1/22/13. Finally,
the Court ordered Apple to submit details concerning the anticipated cost and time
required to comply with an injunction by 1/15/13.
Injunction Would Increase Odds of VHC’s “Best Outcome”: In our 11/28/12
VHC note entitled “What Happens Post the VirnetX ED-TX Win? Outlining Apple's
Exposure” we identified four potential outcomes for VHC (from “Worst” to “Best”)
when presiding Judge Davis enters his final judgment in the case of VirnetX Inc. Vs.
Apple Inc. In our “Best Outcome” scenario, we outlined how Judge Davis could order
an injunction against the iPhone 4S and other VHC patent-infringing (but stillshipping)
Apple products unless the offending feature (FaceTime in its current
form) is removed or worked-around. Our experience with injunctions (esp. in
Qualcomm v. Broadcom) suggests workarounds are seldom as easy to implement as
engineers envision and thus could be potentially disruptive to Apple’s business. We
believe an injunction is the remedy likely to bring Apple to the negotiating table
most quickly. Another Maps-like blow to the iOS user-experience (i.e. a change to
how FaceTime is/can be used) is something Apple should want to avoid. Injunctive
relief still seems most likely only if Apple will not settle on reasonable terms and/or
quickly update how its infringing products function.
Stock Net: We continue to recommend shares of VHC believing news flow over the
next few weeks is likely to favor the company as it awaits final judgment on the
11/06/12 jury verdict versus Apple. We believe expectations are too low regarding
forward remedies for VHC and we expect the trial judge to at least award VHC an
ongoing royalty for still-infringing products. We continue to value VHC's patents at
$2.7-$3.5B (midpoint $3.1B) and see the potential for shares to appreciate ~70%
relative to the market over the next 12 months.