January 04, 2010 - 10:36am EST by
2010 2011
Price: 5.80 EPS nm nm
Shares Out. (in M): 43 P/E nm nm
Market Cap (in $M): 250 P/FCF nm nm
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 250 TEV/EBIT nm nm

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Long Siga Technologies ($5.80)


Siga represents an interesting investment for the current environment and a compelling risk/reward.  I am not a biotech expert, and came across the name looking at defense companies...and think it is more a defense play than a biotech although there is a free call on a biotech portfolio.  Siga has an interesting history.  They have a backlog of drugs/vaccines designed to combat infectious diseases especially ones that might be used in biological warfare.  They have some promising drugs for diseases like Denge fever - which the WHO is seemingly focused on.  I have no strong view on what the value of that pipeline is, and I don't think you have to worry about it to invest here (it's a free option).


One drug that Siga does have is ST-246.  ST-246 is the only proven cure for smallpox.  We stopped vaccinating people against smallpox in 1972, and as a result, much of the world population is no longer resistant.  The release of any amount of smallpox as part of a terrorist plot or otherwise, would have devastating consequences.  It's not worth going through the history of smallpox - but it has devastated entire populations throughout history and given our modern world travel it would represent a global catastrophe within a very short time frame.  In fact the NIH believes smallpox has killed more people than all over infectious diseases combined.  As part of our government's effort to stockpile drugs for our biodefense - a government entity was set up and funded called BARDA to spearhead this effort.  BARDA realizes that smallpox is one of the largest threats we are currently unprepared for.  Looking at the vaccination process, including the public resistance and the logistical issues of the swine flu epidemic, vaccination after a release of smallpox somewhere would be less than ideal and almost impossible to implement as a preventative measure.  In addition, the smallpox vaccine carries with it serious side effects and significant risks that dwarf any issue people had with the swine flu vaccine.  As such, BARDA has put out an RFP to stockpile a smallpox cure (link):


It contemplates and initial order of 1.7 million doses with potential follow-up orders of 12 million doses.  All of which would then need to be replenished overtime as the stockpile ages (unclear what the shelf life is - seems about 3 years).  In addition, an order by the US would most likely be met with orders by other countries (Canada, Israel, etc) as well as by the WHO.  Dr. Rose, the CEO talked about $300/dose being a conservative estimate for a "fair price."  The cost of making the drug is minimal - margins likely in the 90+% range.  So the initial 1.7 million order could be worth $500+ million conservatively.  The more likely scenario seems maybe north of $300/dose given the discussion below, and then there is the addition 12 million doses BARDA wants as well as the International/WHO opportunity and the perpetuity of restocking the inventory overtime.  That gets you a multi-billion dollar revenue opportunity and one that will need to be replaced/reordered every few years.  Its not hard to come up with a $30+ ($50+?) stock price - and perhaps more and that is not valuing the non-ST-246 portfolio.  There is downside only if the world decides it doesn't want to be protected from a potential smallpox threat - which given even recent events (terrorism, pandemics) to me seems unlikely.


The only other drug that is being used to address smallpox is CMX-001, developed by a private company called Chimerix.  Chimerix has yet to show its effectiveness in a primate study and according to Dr. Rose is at least 3 years away from being in a position to pass the needed hurdles (they have thus far fallen short).  In fact I think that all the monkeys died in the study - which, although as I said before I am not a biotech guy, strikes me as problematic to say the least.  In addition, there seems to be some recent questioning as to whether it has even been shown effective in mice - but I am not an expert.



Some other key points -

  • 1) the NIH has spent up to $100 million with Siga to help develop the drug
  • 2) ST-246 has been used in humans on a charity/emergency basis when there have been some unusual infections related to or in the same family as smallpox - and it has been proven safe and effective each time (the only drug to be in a position to do so). There was a recent case where the boy of a US soldier who was given the vaccine (US soldiers are vaccinated against smallpox) but had some sort of a skin condition and managed to infect his kid. The FDA/CDC reached out to Siga to get an emergency dose of ST-246 and it worked effectively, curing the child.
  • 3) Dr. Rose has indicated on conference calls that an order was imminent. It sounds like there were some internal security issues that Siga had to audit and prove out that took some time, but that they now meet government standards. The award was originally expected for Sept 09...does not seem to be a reason for much more of a delay especially given the renewed focus the current administration needs to show on anti-terrorism issues.
  • 4) Perhaps most importantly - Ronald Perelman bought $27 million of additional stock at $6.24 from a company he controls. Interesting because it was a non-public deal, so he could have used a big boy agreement (ie no insider information concerns if a private deal). Also, this is the only company he has put money into in recent memory. Also the CEO is his employee - so my guess is he gets a good read on contract talks.
  • 5) There was a recent private placement deal - part of the explanation of which was to help get research coverage. No one covers the company. RBC and Cowen did the deal. It was not public so they had to bring clients over the wall for what they thought was a great deal (it was priced in the hole) and that was at $7.35. My guess is that as we get past the 30 day waiting period, coverage gets picked up with some strong buys and high price targets - if they told their clients it was a steal at $'s a better deal now. I certainly think they have a little egg on their face and want the stock to work.


Other issues to note -

  • 1) The stock just got hammered - from $10 to $5-6. What happened?
  • 2) For one the run to $10 was a little mo based - once it starts moving up everyone assumes that someone thinks the contract is about to be announced the next day. Then there was an equity offering at $7.35 - which made the deal seem less likely to be days away. The reason for the deal was like many biotech companies Siga does not have much cash nor any cash flow and the government works on its own time - so the board thought it prudent to raise some cash and get some more institutional owners/coverage - but that knocked some of the mo players out.
  • 3) The day after the deal - BARDA announced there would be an amendment to the RFP. It's the 9th amendment I believe. But the timing the day after the offering looked bad and created panic - causing some traders to assume management sold stock in front of what they thought would be an adverse change. First, I highly doubt they knew the change was coming and almost certainly the underwriters did not. Second, the change actually is rather innocuous and shows, I think the strong position of Siga. The issue is that Siga is the only company that can answer the RFP (it required an effective primate study to respond) and the RFP was originally structured to have only one company participate in both the initial 1.7 million doses and the 12 million follow-on. I am sure that made someone nervous about the pricing negotiation - like $300/dose would be conservative, $400 nice - but why not much more if no one else can answer the RFP? The amendment says that BARDA can award the contract to one or more as opposed to originally it said just one since it seems like no one else can deliver on the initial order and then that would lock Siga into all the rest. Also it allows companies (ie Chimerix) that have not proven a primate study to submit proposals in the process, but they still need to prove a primate study to eventually get a contract. As I said - the original RFP was custom tailored for Siga - it required a primate study and Siga was the only one who had one, which I assume someone in the government thought might raise a flag. I think this was just a way of keeping someone else in the process if not for the initial order at least for part of the backend at some future date - assuming their drug actually works which so far it has not. Anyway at this price if Chimerix one day get a piece of the order or not would not seem to matter. Also, the CEO and Board members bought stock post the RFP amendmaent. Also, once the actual amendment is posted, it seems likely that the perceived risk will be lessened and the buy interest should get stronger - which should happen any day (website says expected on or about Dec 28th).


In sum, the contract seems to be forthcoming.  Wall Street coverage should be forthcoming.  And the actual latest amendment should be any day.  All of these seem to be large positive catalysts the sum total of which should drive the stock north of $30.




Street coverage, Actual Posting of latest amendment, and government contract

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