|Shares Out. (in M):||78||P/E||0||0|
|Market Cap (in $M):||232||P/FCF||0||0|
|Net Debt (in $M):||40||EBIT||0||0|
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SIGA Technologies, Inc.
SIGA Technologies, Inc. (“SIGA,” ticker SIGA) is a biodefense company whose primary product, TPOXX, is the leading antiviral designed to fight smallpox. The drug is currently stockpiled by the US Strategic National Stockpile as a countermeasure against a bioterrorist attack. The value of TPOXX has been obscured by an epic legal struggle that eventually led to a SIGA bankruptcy filing and the payment of over $200 million to a former corporate partner. With the company’s legal struggles behind it, and with TPOXX’s value proposition at its strongest, we believe the stock has the potential for significant near-term appreciation.
"While we fervently hope smallpox would never be used as a weapon, we have a responsibility to develop the drug and vaccine tools to deal with any future contingency — a research and development process that would necessarily require smallpox virus.”
-Bill Clinton, April 1999
Although eradicated in 1979, the unique devastative power of smallpox poses a grave bioterrorist threat, particularly given its known presence in Russian stockpiles and the ability for sophisticated terrorists and terrorist states to synthesize the virus. Smallpox had a mortality rate of ~30% historically, is contagious, and has a 1-2 week incubation period, which makes it particularly hard to contain. If terrorists were to release the virus into, for example, an international airport, a global epidemic could be inevitable.
Smallpox vaccine is no longer available to the general public, but the US government has stockpiled enough vaccine for the entire domestic population. In order to treat those infected early in an outbreak or those not healthy enough to be vaccinated, the government has additionally sought to stockpile an antiviral. TPOXX (aka ST-246), which has been demonstrated to be safe in humans and effective against smallpox-like viruses in animals, is the only smallpox antiviral currently in the Strategic National Stockpile, with 2 million doses procured under a Biomedical Advanced Research and Development Authority (“BARDA") contract.
SIGA had originally faced challenges developing the drug and, in 2005, began discussing a partnership with PharmAthene, Inc. (“PharmAthene,” ticker PIP). These discussions led to a licensing agreement and then merger discussions. While negotiating with PharmAthene, SIGA hid progress it was making with the US government, mysteriously backed out of the merger discussion, and eventually reneged on the licensing contract. In late 2006, PharmAthene sued SIGA, prevailing at trial in mid-2012. There were several appeals, which ultimately led to a final award to PharmAthene of ~$217 million.
SIGA tactically filed for bankruptcy protection in 2014 to allow time to exhaust the appeal process without posting a bond. The unexpected bankruptcy filing was met with dismay from the public markets, resulting in the stock trading to a valuation that suggested insolvency. After losing its final appeal and realizing that it would have to raise the money and pay PharmAthene, SIGA emerged from bankruptcy early in 2016 and fully paid the PharmAthene obligation in November 2016 using a combination of cash-on-hand, new debt, and proceeds from a rights offering, which was backstopped by the largest shareholder, MacAndrews and Forbes, Inc. among others. The company now has approximately $40 million in cash and sufficient resources to operate through 2018 and wait for a decision on FDA approval.
Although BARDA has chosen to stockpile TPOXX far in advance of FDA approval, such approval, viewed globally as the gold standard, is important to the drug’s long-term value, both in terms of expanding US government stockpiling and achieving international sales. As it is unconscionable to expose human study subjects to smallpox, the approval must be sought using the so-called “animal rule,” whereby human safety is demonstrated in healthy volunteers and efficacy is proven using only animal tests. We believe the product has a very high likelihood of approval by the FDA because of the strong animal efficacy and human safety data, much of which has been published, and it is the only drug in development to address such a critical unmet need. The FDA has already reviewed much of the data in connection with BARDA’s decision to procure the drug for the stockpile and has also conducted an evaluation of the contract manufacturing vendor and process. These facts are somewhat unusual and, in our view, make TPOXX far more likely to be approved than would be typical for a similar situated drug in late stage development.
US Stockpile Opportunity
The current BARDA contract pays SIGA up to $595 million to deliver 2 million doses of TPOXX to the stockpile and to achieve various milestones in the development of the drug. Included in the total contract value is $123 million of optional milestone payments, such as a payment for demonstrating seven-year stability of the drug, and the option for SIGA to develop an IV formulation of the drug (currently a gel capsule).
In our base case, we estimate the remaining cash flows from the contract to be $125 million:
$34 million – gross profit of remaining procurement payments (1H 2017; $45 million of procurement proceeds at ~75% gross margin)
$41 million – milestone for FDA approval (1H 2018)
$50 million – milestone for demonstrating seven-year shelf life stability (1H 2018)
Total = $125 million
While there are currently 2 million doses in the stockpile, these doses will start expiring in 2019. Discussions to replenish the stockpile ought to be ongoing. While there are no assurances, we believe that SIGA is likely to land an ongoing replenishment contract that could be worth $40-50 million per year in gross profit.
In addition to replenishing the stockpile, we believe that the government may also expand it dramatically. The original BARDA proposal, based upon the government’s own analysis of what would be required to combat a simultaneous attack on two large cities, was to stockpile 10 million doses but was reduced to 2 million after a competitor to SIGA filed a formal objection. Any increase in the stockpile is more likely to occur after FDA approval, but an increase from the current 2 million doses to 4 million doses is our conservative base-case assumption. This could generate up to $300 million in gross profits plus future profits from the eventual restocking of those doses as they expire.
Foreign governments should also be interested in procuring TPOXX after the FDA approval. While this opportunity could be meaningful, we have ignored it for valuation purposes in our base case. We have also ignored the potential consumer market in our assumptions.
Priority Review Voucher
The December 2016 passage of the 21st Century Cures Act created a large source of value for SIGA, of which the market seems to have taken little notice. Slipped into the bill in the final hours was a provision that, upon approval of TPOXX, will now entitle SIGA to receive an FDA Priority Review Voucher (PRV).
Created as an incentive to fund drug development in areas where Congress believes the public good to be inadequately captured by commercial value, PRVs are transferable vouchers that entitle a drug sponsor to receive an expedited six-month priority review normally reserved for breakthrough therapies, as opposed to the normal ten-month review. For a drug that is expected to be a huge commercial success but is not innovative enough to warrant a priority review on its merits, the PRV shortens time-to-market by 4 months, pulling forward large cash flows and effectively extending the patent life. In many cases, speed-to-market has strategic advantages that cannot be measured by simple cash flow analysis. For these reasons, PRVs have been purchased for as much as $350 million. Based upon recent PRV transactions and our forward outlook, we assume the PRV to be worth $200 million in our base case.
Adding up all the different components in our base case, we believe SIGA could be worth up to $600 million in enterprise value:
$125 million from the existing BARDA contract;
plus $225 million from restocking the existing stockpile ($45 million gross profit capitalized at a 5x multiple);
plus $300m from an increase in the size of the stockpile;
plus $200 million from the sale of the PRV, less $150 million for corporate expenses; and
less $100 million of tax leakage.
After subtracting $40 million of net debt, this implies a price of $7-8 per share versus current trading level of ~$3 per share.
During the PharmAthene litigation and the bankruptcy process, the company communicated minimally with shareholders. With the recent appointment of CEO Phil Gomez, we believe that shareholder communications are likely to improve dramatically. Phil is a strong addition to the management team, as SIGA will benefit from his expertise in drug development and biodefense. We are hopeful that one of his priorities for 2017 will be to normalize investor relations, which should be beneficial for the stock. We believe that convergence toward fair value will be driven by anticipated corporate achievements such as a new contract to replenish and expand the TPOXX stockpile and an early 2018 FDA approval of TPOXX.
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