The core of the battle is a breach-of-contract lawsuit filed against SIGA by PharmAthene, which is developing medical countermeasures against biological and chemical threats. PharmAthene and SIGA had agreed in 2006 to merge to advance the development of ST-246, a smallpox vaccine. At the time, SIGA needed financing to further its work on the vaccine. So PharmAthene extended a $3 million bridge loan to SIGA.
However, SIGA terminated the merger after it received a $16.5 million grant from the National Institute of Allergy and Infectious Diseases to support development of the smallpox therapy. It did so primarily because it no longer needed any financial help from PharmAthene. On Oct. 13, SIGA landed a big contract worth $2.8 billion from the U.S. Biomedical Advanced Research and Development Authority, or BARDA, to supply it with doses of ST-246 for stockpiling purposes.
Trial Set for Jan. 3, 2011
In its lawsuit, PharmAthene is pursuing the rights to ST-246 because it believes it's entitled to them under the 2006 merger agreement with SIGA. That merger pact contained a licensing agreement for the drug in favor of PharmAthene. The smallpox vaccine received positive preclinical results demonstrating that it could potentially be used as a prophylactic and a therapeutic against smallpox, which is a major government biodefense priority.
SIGA contends that PharmAthene, which is seeking recovery of lost profits or enforcement of the original licensing agreement or royalties on ST-246 from SIGA, doesn't have any rights to the smallpox vaccine.
The Delaware Court of Chancery has denied SIGA's motion to throw out PharmAthene's lawsuit. So, a trial is set to start on Jan. 3, 2011. Some analysts estimate that if victorious, PharmAthene's damages could run to as much as $1 billion. Some believe a settlement may be possible, but sources say SIGA is adamantly against settling out of court.
Jason Kolbert, managing director and health care analyst at National Securities, believes PharmAthene is skating on thin ice on its claim, and he expects SIGA will win the court case.
"An Attractive Investment"
However, other analysts are hopeful for a pretrial settlement or that SIGA could very possibly lose. "We continue to be encouraged by the continued incremental progress toward a favorable outcome for PharmAthene," says Joseph Pantginis, senior research analyst at Roth Capital Partners, who rates PharmAthene a buy. Currently trading at $3.63 a share, the stock is worth $4.50 a share, figures Pantginis, who believes the court battle could end in a pretrial settlement.
A major player in biodefense product development, PharmAthene "represents an attractive investment based on a defined interest and established market potential for biodefense countermeasures by the U.S. government," says the analyst. He expects PharmAthene will be next in line for a major procurement government contract.
"We believe the trial is likely to have a favorable outcome [for PharmAthene] since all claims have been moved up to go to trial," says Raghuram Selvaraju, analyst at investment firm Noble Financial, who rates the stock a buy, with a 12-month target of $20 a share. Yes, that's $20, based on his view that "the stock remains significantly undervalued in the context of the upcoming trial."
PharmAthene, he says, could receive damages in the form of sales royalties, upfront payments or a punitive award for breach of contract. And PharmAthene, he adds, may win partial rights to the $2.8 billion contract that SIGA received from BARDA.
A Big Winner?
Eric I. Richman, president and CEO of PharmAthene, notes that after SIGA entered into a merger agreement with PharmAthene, PharmAthene in good faith provided SIGA with a $3 million bridge loan to complete preclinical trials of ST-246. "So we are seeking financial remedies from the court for SIGA's breach of contract related to the development and licensing of ST-246 smallpox vaccine," says Richman. SIGA has already paid back the loan.
At this point, PharmAthene's stock could be a big winner for investors at its current price because of the possibility that SIGA might offer an out-of-court settlement. Or it could eventually win its breach-of-contract case. That, obviously, is part of the reason why Noble Financial's Kupinski is betting that the stock could hit $20 a share in 12 months.
Nonetheless, SIGA could also emerge as the winner, in which case its stock should soar, and PharmAthene's would tumble.
It's a close call, to be sure, and some investors have bought shares in both companies as a way of leveraging their positions. Stay tuned.