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March 19, 2012 alphaedgeinc@gmail.com

Zecotek patent lawsuit could be worth over $200 million

On February 23, 2012, a division of a little-known Vancouver-based company, Zecotek Photonics Inc.

(ZMS:TSX-V), filed a lawsuit in Los Angeles District Court against a unit of the French conglomerate

Saint-Gobain and Phillips, seeking damages for infringing Zecotek's patent for scintillation crystals.

Although patent lawsuits are launched every day, this one may be more significant than most, with

damages that we estimate could well exceed $200 million if Zecotek's infringement claims are recognized

by the court. This estimate is based on recent court judgements in closely-related cases regarding the

highly specialized technology used in PET medical imaging, in which Zecotek (current market cap $37

million) is one of small number of participants and technology providers, along with some very large

corporations such as Saint-Gobain, Philips, Siemens and GE.

Scintillation crystals: Scintillation crystals are a specialized technology at the heart of the medical

imaging systems known as PET scanners (Positron Emission Tomography) used in clinical oncology,

brain imaging, cardiology, medical and pharmaceutical research. A PET scanner would typically contain

20,000 to 30,000 of these crystals.

PET scanners can provide detailed three-dimensional images of molecular activity going on in the body.

They are almost invariably sold bundled with CT (Computerized Tomography, another imaging

technique) as PET/CT scanners. About 800 PET/CT scanners are installed worldwide, at a price of about

$1.5 million to $2 million per unit. Crystals make up about a third of the manufacturers' cost of the

machine.

Scintillation crystals have previously been the centre of multi-million dollar patent litigation, notably in a

2007 patent lawsuit initiated by Siemens Medical Systems against Saint-Gobain, that is now headed to the

US Supreme Court. That lawsuit initially awarded Siemens $44.9 million in damages September 2008. In

February 2011, a Federal Appeals Court, affirmed the earlier ruling and increased the damages on the

basis of crystals that Saint-Gobain supplied to Philips for 79 PET/CT imaging machines. Several years

prior to its lawsuit, Siemens had acquired CTI Molecular Imaging Inc. of Knoxville, TN. in 2005, paying

$1 billion for the company (over 50x earnings), largely because of its patented crystal technology and

PET technology using them.

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PET scanners: Briefly, this is how a PET scan systems works: A patient is injected with a slightly

radioactive isotope bonded with glucose that travel through the patient's body. The resulting collisions of

electrons and positrons in the patient's body create low-level photon emissions (gamma rays) that are

picked up the sensitive crystals in the PET scanner and cause them to scintillate (flash) for fractions of a

second (not visible to the naked eye). These light flashes are picked up by sensitive photodetectors that

amplify the light inputs and produce electrical signals that are then interpreted by software as images.

PET manufacturers: The market for PET imaging systems is dominated almost entirely by three

companies: Siemens Medical Solutions, Philips Medical Systems and GE Healthcare. The crystals (along

with photo-detectors) are the key technology components in a PET scanner and the performance of the

crystals has a direct effect on the quality and accuracy of the images. As the court noted in its judgment,

Siemens and Philips are considered to be the two key players in the high-end of the market, providing

detail and accuracy not available from GE's systems which are based on a different non-lutetium crystal.

Zecotek background: Zecotek Photonics Inc. was founded in 2003 by Dr. Faouzi Zerrouk, who received

his PhD in Theoretical Physics from the University of Sussex and held research and teaching positions at

Oxford University and elsewhere. In the 1990's he began developing relationships with leading Russian

physicists under a British-Russian exchange program as the old Soviet system was collapsing. These

included crystal experts (members of the Russian Academy of Scientists) as well as scientists developing

silicon photodetectors used to detect the weak flashes emitted by the crystals.

Zecotek holds 55 patents in several areas including 3D display systems that don't require glasses and

specialized fibre lasers. But perhaps its largest effort over the years has been its attempt to develop and

commercialize its leading-edge technologies for medical imaging through which it planned to become a

supplier to the industry. Its technologies had been recognized by many of the leading researchers in the

industry. In 2009, Zecotek received a Frost and Sullivan award for Best Enabling Technology for its LFS

(Lutetium Fine Silicate) crystals and photodetectors for medical imaging and in particular PET, PET/CT

and PET/MRI.

Zecotek is no mere patent troll but has invested millions in trying to develop its medical imaging

technology business. It recently formed a manufacturing partnership with Beijing Opto-Electronics

Technology Co. Ltd., (a co-plaintiff in Zecotek's lawsuit) for large-scale production of its LFS crystals.

(Zecotek's crystals contain lutetium, an expensive rare earth element, found primarily in China). The

company also recently announced a relationship with NuCare, a South Korean medical imaging

manufacturer, to produce PET scanners. Zecotek claims that tests conducted by the European

Organization for Nuclear Research (CERN) show its LFS-8 crystals to be the fastest and brightest

scintillation crystals based on lutetium oxide material. Another version LFS-3, Zecotek considers optimal

for PET imaging and it has produced modules combining these with its proprietary MAPD

photodetectors.

Basis for awards in patent law: Damages for patent claims can encompass both reasonable royalties (i.e.

what a patent holder might have received under license), profit sharing from revenues through sub-

contract manufacturing and sales as well as lost profits (the cost of lost business opportunities to the

plaintiff).

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In addition, if patent violation is deemed to be wilful, there are grounds to seek treble damages (up to

three times reasonable royalties and lost profits) or multiples of the original award. Evidence on these

points will come out in the court case. We think it likely that Zecotek and its technologies were well-

known to both Saint-Gobain and Philips. We believe Zecotek had discussions with both companies over

the past decade, perhaps with the intention of entering into some kind of licensing, partnership or sale

agreement. In the end, no such agreements were made and Zecotek's stock price has floundered over the

past few years.

Doctrine of equivalence: The key issue in the Zecotek lawsuit is the chemical composition of the

crystals: Siemens, Saint-Gobain and Zecotek all produce crystals based on lutetium silicates. A basic idea

in patent law is that minor modifications will not allow you to circumvent a patent. Siemens produces a

patented crystal called LSO (cerium-activated lutetium oxyorthosilicate). Saint-Gobain produced a

scintillation crystal called LYSO (cerium-doped lutetium yttrium orthosilicate). The two are roughly

equivalent except that in Saint-Gobain's version 10% of the lutetium atoms are replaced with yttrium

atoms. Saint-Gobain had argued that because it had its own patent, the doctrine of equivalence was

insufficient to establish infringement, an argument rejected by both the district court and the Federal

Appeals Court. The Siemens vs. Saint-Gobain case is being watched closely in the patent law profession

and some of the issues will be decided by the US Supreme Court. But however, the Supreme Court rules,

we think Zecotek's case remains very strong and carries even greater arguments for infringement.

Basis for Siemens award: The judge in the 2008 jury trial awarded damages of $44.94 million to

Siemens based on the sale of crystals to Philips for 61 machines, including estimation of lost profits to

Siemens. That's $737,000 per machine. The Federal Appeals judge upheld the earlier ruling and went on

to increase the damages awarded to include an additional 18 machines for which crystals were sold by

Saint-Gobain.

Philips and Saint-Gobain: Since the 2008 judgment, Philips has continued to produce its high-end

PET/CT machines. In a press release dated June 6, 2011, announcing the launch of its Truflight Select

Astonish PET/CT line, Philips mentions that 260 of its Gemini TF Pet/CT systems have been installed

worldwide since 2006 (the year Zecotek's patent was granted). We believe that all these systems use

Saint-Gobain's crystals.

The Siemens patent expired in 2009. Filings from the US Patent Office indicate that a renewed patent

application for LSO crystals filed by Siemens in 2010 was rejected primarily because of prior art

established by the Zecotek patent in 2006.

It is not unreasonable to estimate an additional 40 Philips PET/CT scanners sold since last year's press

release, bringing the total units to 300. Assuming the same $737,000 per machine would bring the total

award to $221 million. Zecotek might also be able to claim the loss in stock value due to loss of

opportunity, loss of opportunity to advertise sales and win other deals with customers such as GE, for

similar number of PET systems etc. And there are grounds for claiming increased damages and court

costs on the grounds of deliberate patent violation. So the potential award could range from $200 to $300

million, assuming Zecotek's patent rights are recognized by the court, as we believe they will be.

Although the case could take 2-3 years to wind its way through the courts, we think that a possible

settlement could be reached earlier. At the current price ($39 million market cap) we think Zecotek’s

stock is an attractive speculation based on the lawsuit alone. We have not taken into account its other

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business opportunities such as 3D display systems and the potential to supply its crystals and

photodetectors to CERN for detecting nuclear collisions (the latter business potentially worth tens of

millions at high margin).

Disclaimer: The views presented in this report are the opinion of AlphaEdge Inc. and no other entity. The views contained here may not

represent the views of Zecotek Photonics Inc. and its related entities, its management or legal advisors. The information contained in this

report is drawn from sources believed to be reliable, but the accuracy or completeness of the information and opinions expressed is not

guaranteed, nor in providing it does AlphaEdge Inc. assume any responsibility of liability. Patent law and litigation are complex areas and

AlphaEdge Inc. claims no legal qualifications in the field. This report is not to be construed as an offer to sell nor the solicitation of an offer to

buy any securities. AlphaEdge Inc. and its principal shareholder hold shares of Zecotek.