Two biotechnology companies vying to establish a foothold in the potentially vast biodefense market are in the midst of duking it out in a multibillion dollar legal battle. The protagonists are PharmAthene (PIP) which, if victorious, could win about $1 billion in damages, and SIGA Technologies (SIGA), which recently was awarded a government contract worth $2.8 billion, a slice of which PharmAthene wants.

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.

The $2.8 billion contract that SIGA received from BARDA has helped lift its stock from a 52-week low of $5.28 to a high of $14.38. The stock has slipped to $12 recently, partly because of PharmAthene's lawsuit.

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.


Increase your money and finance knowledge from home

Basics of Diversification

Learn one of the fundamental concepts of building a portfolio.

View Course »

Investing in Startups

The lucrative and risky world of startups.

View Course »

Add a Comment

*0 / 3000 Character Maximum

4 Comments

Filter by:
Norra

Seems like an awful lot of trouble & expense for a disease that became extinct 30 years ago.

December 20 2010 at 11:56 AM Report abuse +1 rate up rate down Reply
Big John

This is a perfect example of why there will be no cures coming out of the USA. It's not about healing people but how much can we make and take out of the pockets of sick people. I am so glad the vaccine for polio was discovered before the age of GREED!

December 20 2010 at 10:49 AM Report abuse +2 rate up rate down Reply
saksr1of3

Do any of you research what this country makes vaccines with? It appears they use the substance known as MERCURY in all vaccines made in this country. Vacines made in this country are not designed to help you but designed to slowly destroy your internal organs. Why do you think most vaccines are free? They want to destroy us the people for reason of population control. Don't trust vaccines, your own body can and will produce what is necessary to protect you, the vaccines are just a front to fool you the people.

December 20 2010 at 10:19 AM Report abuse rate up rate down Reply
pperc15

ST-246 is not a vaccine, it's a drug.

December 20 2010 at 9:19 AM Report abuse rate up rate down Reply