March 27, 2012 - 3:06pm EST by
2012 2013
Price: 1.64 EPS nm nm
Shares Out. (in M): 48 P/E nm nm
Market Cap (in $M): 79 P/FCF nm nm
Net Debt (in $M): -11 EBIT 0 0
TEV (in $M): 68 TEV/EBIT nm nm

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  • Government contractor
  • Litigation
  • Healthcare



We recommend a long position in PharmAthene, Inc.  (“PIP” or the “Company”).  PharmAthene, Inc. is a biodefense company engaged in the development and commercialization of medical countermeasures against biological and chemical weapons. It has four product candidates in various stages of development:

  • SparVax, recombinant protective antigen (rPA) anthrax vaccine;
  • Valortim, a human monoclonal antibody for the prevention and treatment of anthrax infection;
  • Third generation rPA anthrax vaccine,
  • RypVax, a recombinant dual antigen vaccine for pneumonic and bubonic plague. 

More importantly the Company was awarded 50% of the profits from the Smallpox Bioshield Contract awarded to SIGA Technologies Inc. (NASDAQ:SIGA).  The contract, awarded by the Biomedical Advanced Research and Development Authority (Barda) of the US Department of Health and Human Services (HHS), has the potential to generate $433M of revenue for the delivery of 1.7M doses of ST-246, an antiviral with activity against orthopox viruses such as smallpox. We believe the value of the current contract alone (less NPV of G&A and R&D spend) supports a valuation of $1.84 for PIP or 25% upside vs. the 3/23/11 closing price of $1.48.  However, the ST-246 contract and PIP’s current drug portfolio provide a number of free call options which we believe could represent >5x upside to the current share price.  For context PIP is trading at roughly the same level it traded at prior to SIGA being awarded the ST-246 contract and at a ~60% discount to the ~$4 share price it was trading at prior to formally being awarded a claim on the BARDA contract by the Delaware courts. 



The relationship Pip and Siga started when Pip was approached by SIGA for the purpose of licensing their ST-246 small pox anti-viral small molecule drug.  The companies negotiated a license agreement term sheet with SIGA and got to a point where both companies were comfortable with the terms of the deal.  In the course of the negotiations, the focus changed from a license agreement to a merger. Both companies believed a merger would be mutually beneficial.  As part of the merger agreement PharmAthene agreed to provide a bridge loan of $3 million to SIGA for continuing the development of ST-246.  Both, the bridge loan and the merger document contained language that said that if for any reason the merger did not take place, Siga and PIP would negotiate a license agreement for ST-246 according to the terms of the term sheet which was attached to both the bridge loan and the merger document. The merger was not completed and Siga failed to honor its commitment toward the good faith negotiation of a licensing agreement.  As a result, PIP sued SIGA in the Delaware Court of Chancery.   On September 22, 2011 the court of chancery of the state of Delaware ruled to award Pip 50% of the profits from ST-246 for the duration of 10 years, once SIGA earns its first $40M in net profits.  The official ruling provides a good summary of the case and the outcome and can be reviewed here:



On May 13, 2011, SIGA signed a contract (the “Smallpox Bioshield Contract”) with the Biomedical Advanced Research and Development Authority (“BARDA”) of the United States Department of Health and Human Services (“HHS”) to deliver two million courses of its smallpox antiviral, ST- 246®, to the Strategic National Stockpile. The 5- year base contract award is worth $433 million and includes options that could potentially add another $178M for extending the expiration of the drug to 84 months and developing an IV formulation of the drug. Additionally, the contract also used to include options that would raise the Smallpox Bioshield Contract’s total value to approximately $2.8 billion (for the delivery of 12 million doses), if these options were fully exercised.  The contract was modified to remove the option on the incremental 12 million doses.  The base contract and the other options remain unchanged.  The contract modification does not prevent BARDA from purchasing additional courses of ST-246® or other products in the future if it desires.


Under the current version of the Smallpox Bioshield Contract, SIGA will deliver 1.7 million courses of ST- 246.  Additionally, SIGA will contribute 300,000 courses manufactured using federal funds provided by HHS under prior development contracts. In addition, the Smallpox Bioshield Contract will also permit SIGA to continue its work on pediatric and geriatric versions of the drug as well as use of ST- 246 for smallpox prophylaxis.  The $433 million base contract includes the following sub- payment tranches:

  • $41.0 million of advance payments due when SIGA completes certain initial planning and preparatory activities (these payments have been received in 2011)
  • $20.5 million milestone payment for the successful submission to the U.S. Food and Drug Administration (“FDA”) of a complete application for ST- 246 regulatory approval;
  • $8.2 million milestone payment for completion of the current commercial validation program for ST- 246;
  • $12.3 million milestone payment for completion of a product labeling strategy for ST- 246
  • $102.5 million due in respect of FDA approval of ST- 246 for sale in the United States;
  • $225.4 million due in stages as ST- 246 is delivered to the Strategic National Stockpile.
  • $121.3M for development of IV formulation.
  • $50M for FDA approval the development of 84 month expiry. 


Our $1.84 price target for PIP is based on three components:  the liquidation value of the balance sheet (cash + AR – all liabilities; we include this because we are not treating the company as perpetuity), the NPV of its share of profits from the SIGA contract, the negative NPV of PIPs spend on G&A and R&D (we assume no benefit to the company’s R&D spend) over the next 5 years (at this point we assume the SIGA contract terminates and the company winds down). 

 The BARDA contract also embeds a number of call options which we are not including in our valuation: 

1)    Any additional orders from the US government for the replacement of the stock pile, or for post-exposure prophylaxis use are a free option.  The drug currently has a 3 year expiry, so the government would need to repurchase every three years to maintain its existing supply.  We note that every incremental iteration purchase by the government adds an incremental ~$1/share (undiscounted value)to the value of PIP.

2)    Any additional orders from international governments (Britain, Israel, Canada and others already indicated interest) are a free option.  (Note that Pip quantifies these options at NPV at $400M- US and $800M-internationally).  PIPs 50% of international opportunities could be worth $4 - $8 share of incremental value.

3)    Government’s purchase of the full 12.8M doses (this is the amount required to fully provide for the at U.S. at risk population).  The initial contract included this option and the incremental 10M doses added $2.4B to the contract value.  At 25% COGS margin this could add $630M of after tax undiscounted value to PIP or $13.06 per share. 

4)    FDA approval for 84 month Expiry and development of an IV formulation:  $170M ($1.06/share)  

5)    Any additional indications for ST-246 beyond smallpox are a free option.


For further context on Pip’s own activity: Pip has extensive experience identifying high-priority government needs, identifying and acquiring best-in-class products, and collaborating with government to develop and commercialize products.  It has been awarded >$600M in contracts and funding to date and currently is sitting on the following portfolio:


1)    Anthrax Vaccine SparVaxTM -- rPA Anthrax vaccine (management sizes this as a $1.2B potential revenue opportunity between 2015 – 2021)

  1. For pre- and post-exposure protection
  2. Highly purified recombinant version of Protective Antigen
  3. 1 Phase I and 2 Phase II clinical trials completed; >770 individuals -- Vaccine is well-tolerated and stable
  4. Antibody levels similar to protective levels in animals

2)    3rd Generation rPA Anthrax Vaccine

  1. Enhanced stability–maintain stability for 3years at 35 degrees Celsius
  2. Improved potency–induce protective immunity in 2 or fewer doses

3)   Anthrax Anti-Toxin Valortim® (management estimates a potential market >$500M)

  1. Current treatment options are inadequate − Antibiotics are not effective
  2. Vaccines are inappropriate for treatment
  3. Government requirement for anti-toxin
                                                 i.     DHS Material Threat Assessment: 200,000 treatments
                                                  ii.     DHHS procurements to date under 2004 RFP requirement
  4. HGSI – 20,000 doses; 45,000 doses • Cangene – 10,000 doses
  5. Valortim® is well positioned for procurement − USG funding awarded to date: up to ~$27MM − Co-development partner: Bristol-Myers Squibb

 4)    Nerve Agent Bioscavenger

  1. Target Product Profile
                                                   i.     Protection pre- and post-exposure
                                                 ii.     Effective against broad spectrum of nerve agents
                                                iii.     Superior efficacy to standard of care
                                               iv.     No observable neurological deficits
  2. Phase I testing completed



Here is the valuation buid-up: 

       2H 2011  2012 2013 2014 2015 2016 2017
SIGA ST-246 Profitability                  
 Advance Payments:  completion of certain initial planning and preparatory activities   41.0            
 ST-246 Grants       3.3  6.7  6.7  6.7  6.7    
 Successful Submission of NDA to FDA           20.5        
 Completion of FDP Commercial Validation and Report         8.2          
 Completion of Product Labeling Strategy         12.3          
 Payment Upon NDA Approval for Treatment Courses             102.5      
 First Commercial Payment (500k Doses)       -    -    112.7  112.7      
 ST-246 Revenue       44.3  27.2  139.9  221.9  6.7  -    
 FDA Extension to 84 month Expiry       -    -    -    -    -    -    
 IV Formulation       -    -    -    -    -    -    
 Incentive Payments       -    -    -    -    -    -    
 Cost of Sales ST-246  15.0%    6.7  4.1  21.0  33.3  1.0  -    
 Gross Profit       37.7  23.1  118.9  188.6  5.7  -    
 Estimated ST-246 Patent Costs  80.0%    0.5  1.4  1.4  -    -    -    
 ST - 246 R&D       5.0  10.0  5.0  -    -    -    
 ST-S46 Profit Before       32.2  11.7  112.5  188.6  5.7  -    
Profit Threshold 40                
PIP Share 50%    -    2.0  56.3  94.3  2.8  -    
PIP Revenue                  
Siga Profit Share        2.0  56.3  94.3  2.8  -    -  
Sparvax Funding/rPA        20.8  20.8        
Valtorim Funding (Throuhg 9/2011)                  
AES Platform (rBChE program)        5.0  -    -    -    -    -  
         27.8  77.1  94.3  2.8  -    -  
G&A        11.0  11.0  11.0  11.0  11.0  -  
Sparvax/rPA R&D        20.8  20.8        
Valtorim R&D                  
AES R&D        3.3  3.3  3.3  3.3  3.3  -  
Other Costs        0.4  0.4  0.4  0.4  0.4  -  
         35.5  35.5  14.7  14.7  14.7  -  
Pre-tax Profit        (7.73)  41.56  79.59  (11.87)  (14.70)  -  
NOL Used        -    41.56  79.59  -    -    -  
Net Income 35%      (7.7)  41.6  79.6  (11.9)  (14.7)  -  
NOL Schedule        138.9  146.6  105.1  25.5  37.3  52.0
NOL Created        7.7  -    -    11.9  14.7  -  
NOL Consumed        -    (41.6)  (79.6)  -    -    -  
         146.6  105.1  25.5  37.3  52.0  52.0
NPV of Revenue Stream  72.9                
Net Liquidation Value  14.5                
In the Money Options and Warrants  2.2                
Value/Share  $1.80                
Current Share Price  $1.64                
Appreciation 10.0%                
Shares 48,236,172                
Diluted Share Count 49,683,283                
  Share Count Avg. Strike              
Warrants  705,354.00  $3.00              
Warrants 2,572,775  $2.50              
Warrants  500,000.00  $1.89              
Warrants  1,323,214.00  $1.63              
Warrants  100,778.00  $3.97              
Options  6,292,982.00  $2.74              
Restricted Shares  123,897.00                
Liquidation Value                  
Cash  $11,236,771.00                
AR  4,874,632.0                
Unbilled AR  3,021,208.0                
PrePaid  380,395.0                
Restricted Cash  100,000.0                
Accounts Payable  1,445,700.0                
Accrued Expenses and Other  3,169,642.0                
Other Long Term Liabilities  449,709.0                






1)    Siga successfully appeals the ruling:  One of the primary risks to PIP is a loss or reduction in the value of its share of the ST-246 contract as a result of ongoing litigation.  Siga requested an opportunity to reargue the case on Oct. 4, 2011, however this request was denied on Dec. 19, 2011 by the Delaware Court of Chancery.  The only recourse SIGA has is to appeal to the Delaware Supreme Court where <10% of cases are overturned.  In 2011 5.4% of all cases were reversed and an additional 0.8% were partly affirmed and partly reversed.   During the same year 7.2% of civil cases were reversed and 1.1% were partly affirmed and partly reversed. 


2)    BARDA cancels the Siga contract or meaningfully changes the terms:  There have been a number of negative headlines in recent months surrounding the contract. We believe these headlines are driven by 3 potential factors:  the current pressure/strain of the U.S. fiscal budget, an opportunity to attack the Obama administration’s handling of the process, and possible attempts by Chimerix to delay use of the funds.  The key points of contention have been around the process by which the contract was awarded and the need for a smallpox anti-viral.  We have been following the RFP process for the last few years and believe the government has been extremely thorough and objective in awarding the contract to SIGA.    Additionally, we have spoken with Barda representatives on a number of occasions and have been assured that the contract will stand in its current form. Below is some context on why SIGA was sole sourced for the contract and the need for a small pox anti-viral:

  1. ST-246 is currently the only working antiviral cure for smallpox.
  2. Smallpox is the deadliest infectious disease in history (estimated to have killed more people than all the other infectious diseases combined)
  3. Since smallpox vaccinations have been terminated in early 1970’s most of world population is no longer resistant
  4. Ease of manufacturing and delivering an effective terrorist attack using smallpox virus has increased dramatically in recent years.


3)    ST-246 fails to receive FDA approval:  We believe the FDA approval of safety for the drug represents potentially a larger risk to the investment thesis than the recent headline/political noise.  The required FDA approval calls for only demonstration of safety, which is generally a relatively low hurdle.   BARDA told us they will pay for deliveries of ST-246 prior to FDA approval and that they will work with SIGA should the FDA not approve the drug.  Specifically, BARDA said they would not claw back the payments already made should the FDA not approve the safety of the drug and would extend the timeline for obtaining the approval.  Lastly, ST-246 is on emergency basis already being used in humans.  There have been cases of unusual infections related to or in the same family as smallpox - and it has been safe and effective each time (the drug has also been highly effective in animal tests).   Additionally, we would expect an answer on FDA approval to be a 2014 event (our best guess based on management commentary).  While failure to receive FDA approval would reduce some of the milestone payments attributable to the contract and impair some of the option value, Siga could potentially receive ~75% of the contract proceeds without the drug receiving FDA approval.

4)    Pip has to raise capital before the court settles.  According to Delaware Supreme Court, Siga’s last potential appeal against the ruling to share 50% of net profits with Pip, has 90 days for briefing and, 240 days to reach a ruling.   On average, the ruling in civil cases is reached in 16-180 days.  In this context we view the 40% reduction in Pip’s burn as particularly important as it should help to significantly reduce the likelihood that Pip will have to raise capital before it starts receiving payments from Siga.  In particular, Pip assures us that it does not need to raise capital until 2H of 2013.  

















  1. Siga appeal to Delaware Supreme Court is denied, leaving no further recourse in the case
  2. FDA approves safety of ST-246
  3. Barda decides on additional deliveries
  4. Any international country decides to order for own stockpiles (Canada, Britain, Israel, and others expressed interest)
  5. ST-246 is approved for other indications
  6. Milestones associated with the contract are hit – for example Siga is expecting to start delivering product in Q1 2013.
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