There's a drama unfolding in the health care field that is as
dramatic as the daytime soap operas. Lots of "he said, she said"
has been tossed around, and just to add a little spice, a "bete
noire" has also appeared on the scene to cause trouble. If this
drama plays out a certain way, then shareholders of one or two of
the companies involved may see a big windfall.
The drama began back in 2006 when little-known
Siga Technologies (Nasdaq:
for damages stemming from a broken business deal. Pharmathene had
loaned Siga money to fund research into a vaccination against
smallpox. The loan was presumed to be an interim step before the
two firms eventually merged. At a minimum, Pharmathene hoped to at
least be granted rights to Siga's drug, known as ST-246. The two
firms had even drawn up documents that appear to imply a
discussion was the eventual expected result.
Siga appeared to eventually lose interest in any deal, figuring
that it no longer needed Pharmathene's stronger
to help fund the development of ST-246. In October 2010, this
dispute suddenly became a very big deal. The U.S. Department of
Health and Human Services (
) awarded Siga a $500 million contract for ST-246, with an
to take it up to $2.8 billion. (Stay tuned, as these numbers really
imply the wide range of potential benefits that these firms are
Two months later, in January 2011, the long-awaited trial finally
got under way. Predictably, both companies hold very different
views on what took place five years ago. Pharmathene's President,
Eric Richman, told the court "we weren't loaning another company
money unless we merged or got the product," according to Bloomberg
news. Siga only recalls making oral commitments to merge or license
ST-246, and insists it was within its rights to ultimately walk
away from the talks. During the course of a week's testimony,
Pharmathene's lawyers provided ample evidence that advanced talks
took place, but failed to actually produce any sort of signed final
agreement. Investors have since been left to wonder if "an
agreement to agree" is a legally binding action.
In coming weeks (or perhaps in a month or two), the court is
finally expected to decide. Parsing the judge's comments, it does
appear some sort of beneficial outcome will result for Pharmathene.
It could be as modest as $10 million or $20 million to compensate
Pharmathene for minor damages and legal expenses or it could be a
truly Solomonic solution, where both parties equally benefit from
the HHS contract award.
Although investor message boards are filled with partisan rhetoric
on both sides, predicting an outright victory for one stock or the
other, it's quite possible that both stocks will rally on a verdict
if a worst-case scenario for either party is avoided. This is not a
But that HHS contract award may look better than it actually is.
Investors are fixated on a potential $2.8 billion payday, but Uncle
Sam has only committed to a $500 million deal. In light of the
current budget woes in Washington, it's prudent to assume that a
$500 million smallpox vaccine will have to suffice for now. That's
not peanuts, but probably not enough to enable each of these stocks
to post 100% to 200% gains the most bullish investors are
expecting. Instead, upside closer to 50% for each or both parties
may be the best for which they can hope.
The plot thickens...
Just as this drama appeared to almost be at an end, another twist
has emerged. Privately-held Chimerix has protested the HHS contract
award, citing the fact that Siga does not possess the required
"small business" designation that is stipulated as part of the
contract award. Siga is backed by MacAndrews & Forbes, the
run by Ron Perelman. And that affiliation implies Siga has ample
access to capital, unlike a true small business.
Congressman Darrell Issa (R-CA) supports Chimerix's protest. The
Congressman has a stated mission of halting and investigating
virtually any contract award doled out under the Obama
administration. So it's easy to dismiss his support for Chimerix as
merely partisan politics. It doesn't help that Chimerix's law firm
has been a financial backer for Issa, making his motives even
murkier. Chimerix's challenge will need to be addressed by August
2010, and the company appears to have little chance of succeeding.
But it was enough to spook investors in Siga Technologies and
Pharmathene. Both stocks have plunged in recent days and weeks.
Action to Take -->
That plunge actually opens a nice opportunity for investors not yet
in these stocks.
of Pharmathene had been up near the $4 range in anticipation of a
beneficial verdict that would take shares to $5, $6 or beyond.
Shares are now below $3. Siga's shares have fallen from $14.50 to
$11 in the last few weeks on those same Chimerix-related concerns.
This sets up a potential double, if Siga's most ardent backers are
correct in their analysis.
The gains for both of these stocks may prove to be more modest if
investors stop fixating on a $2.8 billion contract and instead
think about a $500 million contract. Nonetheless, an imminent legal
ruling and closure with the Chimerix challenge could help to give
one or both of these stocks a nice quick gain later this
-- David Sterman
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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