|Closer Look: PharmAthene and their lawsuit against SIGA Technologies|
|Friday, 03 December 2010 06:14|
In late October, Eric I. Richman was named President and Chief Executive Officer of PharmAthene, Inc. (Amex: PIP) - the biodefense company developing medical countermeasures against biological and chemical threats which has been making big headlines on Wall Street after filing a breach of contract lawsuit against SIGA Technologies Inc. (Nasdaq: SIGA).
That case is set to begin Jan. 3 despite the fact that SIGA tried twice to dismiss the case or portions of the case. Who exactly is PharmAthene and why do they feel they have a chance against SIGA in court?
SIGA has recently told analysts and investors that BARDA is "conducting to determine if there is enough capacity among true small businesses to supply the needed smallpox vaccines" and that has prompted some analysts who have been following the drama on Wall Street to point out that “BARDA will likely find a way to get that contract to SIGA because the SIGA technology is really, in the end, what they want and what meets the highest standards."
That brings us back to PharmAthene, whose stock has traded from $1.13 to as high as $4.96 after articles like “Why Pharmathene Could Go From $2 to $20” began to pop up on some of the web's most-read investing publications.
BioMedReports invited Mr. Richman to chat with us about his company and to share with us some of his perspective of the events surrounding the matter.
We were joined on the call by Jordan Karp, J.D. who is the Senior Vice President, General Counsel for PharmAthene. Mr. Karp has more than seventeen years of legal experience in a variety of areas, including SEC compliance, corporate governance, mergers and acquisitions, government and commercial contracting, and intellectual property to the company.
BioMedReports: Thanks for taking the time to speak with us.
Eric Richman, President and Chief Exec. Officer, PharmAthene: Well, It is certainly our pleasure and we appreciate your interest in PharmAthene and we can spend the time however you would like. Maybe the best way to start is to give you a very brief overview of the company and then talk about what we are looking at right now – our current situation and some of the catalysts over the next few months that we think are quite valuable and exciting for the company.
BioMedReports: Let us talk about these news headlines. The developments with SIGA; can you talk about that for a bit? Maybe tells us about some of the history there.
Eric Richman, President and Chief Exec. Officer, PharmAthene: Sure. Jordan Karp, our General Counsel is also with is so maybe he can fill in some of the blanks.
Essentially several years ago – in 2006 SIGA and PharmAthene entered into an arrangement where we were to merge. Initially we were approached by SIGA for the purpose of licensing their ST-246 their small pox anti-viral product. We negotiated a license agreement term sheet and got to a point where both companies were comfortable with the terms of the deal and then the conversation switched from a license agreement to a merger; which both parties thought was a good idea.
We entered into a merger arrangement, we find the merger document and we also – both parties wanted the product to not be idle – wanted to develop the product. In order to do so they have asked PharmAthene to loan them – you know provide a bridge loan of three $3 million to continue the development of ST-246. So we also signed a bridge loan and both the bridge loan and the merger document contained language that said that for any reason that the merger did not – was not consummated that the asset ST-246 would becomes PharmAthene’s – licensed to PharmAthene according to the terms of the license agreement term sheet which is attached to both the bridge loan and the merger document. Both parties were very comfortable with that and filed a proxy with the SEC and we are waiting for the SEC comments to – for the SEC to approve the merger.
At that time we functioned as a single company; they fired their CEO and we basically did support a lot of activities including a phase 1 clinical study and various efficacy trials.
As the data started coming out, their stock went from $0.80 a share to $5 a share, they called us up and they said that they were no longer interested in merging. That was fine because we had an obligation under the agreement to then continue developing the drug under a license agreement and there was an obligation to negotiate in good faith according to the terms that were attached to the documents. In our view that did not happen.
So we then sued them for breach of contract and for failure to negotiate in good faith. Immediately they filed a motion to dismiss the suit and after a very long year the judge upheld all their claims. Then we entered into a period of discovery and that ended in approximately February of this year and when the discovery was completed SIGA filed a partial motion for summary judgment. We had a hearing and during that hearing the judge indicated that he wanted to hear all the evidence associated with the case and that he was going to issue his ruling on the hearing by the end of October (which he did).
[Editor's Note: According to the transcripts which are publicly available and to various observers it seemed obvious that the judge fully expected the case to go to trial and set a trial date of January third. As pointed out in the recent press release, the trial will go on as scheduled.]
Eric Richman, President and Chief Exec. Officer, PharmAthene: One of the arguments that SIGA have all along is that the judge could not possible award damages to PharmAthene which is what we were seeking because the product – the value of the product was too speculative.
What happened recently which is it initiated a lot of attention in PharmAthene was that BARDA announced an intention – or SIGA announced that BARDA intended to award them a contract with a potential of $2.8 billion in revenue. When that happened – that was important because that established a value for the product and so the whole argument about speculation and that the judge cannot award damages because the value was too speculative, that argument has disappeared.
Suddenly I think that investors realized that this product has true value and if PharmAthene’s case – if PharmAthene is successful in winning the case that there is certainly an ability for the judge to award damages to PharmAthene which would be very significant. In SIGA’s SEC filings they note that damages could be up to $1 billion. So for a small company like PharmAthene with a market capital of a little over a hundred million damages that could approach a billion dollars is certainly a significant valuation catalyst.
BioMedReports: You have seen I am sure the latest news about SIGA’s designation as a small business. How is that affecting what is going on? Has that in any way dissuaded you or affected what you are trying to prove?
Eric Richman, President and Chief Exec. Officer, PharmAthene: In my view- and Jordan can chime in- the issue that is going on between the protest; the protest between Chimerix and SIGA and BARDA is something which really does not affect our case. Our case has been ongoing since 2006 and it affects the contracting mechanism. BARDA has several deferent ways that they could – SIGA has announced that there are several different methods they could use to amend the contract, reissue the contract to procure this product. In our view that ST-246 meets the needs of the RFP and is the most advanced product and the best product candidate for the strategic national stockpile. We believe that they are going to purchase the product, they will figure out the contracting mechanism, they will correct it however it needs to be adjusted. When the protest is resolved or whatever the outcome is of this speed bump or this bump on the road; whatever the outcome is, in our view the product is too important for the strategic national stock pile for the government not to enter the procurement contract.
BioMedReports: Somebody informed us that you guys have been involved in other legal battles in the past. Can you talk about that at all?
Eric Richman, President and Chief Exec. Officer, PharmAthene: Sure. Earlier this year- in February of this year- PharmAthene was awarded $78 million contract for advanced development of our Anthrax Vaccine. That was issued through a contract modification. That was protested by a competitor and we spent the next 90 days defending our position along with BARDA and the protest was ultimately denied and we received the $78 million contract. But that is something that happens in defense contracting. The underlying message is that when the government needs a product, wants the product that was identified the best class product; they are going to – they are going to defend it. Even if there is a protest, they will work with the company to defend their contract. So that was the legal battle that we that we had earlier this year.
BioMedReports: Okay, but have there been other legal battles in the past prior to that?
Eric Richman, President and Chief Exec. Officer, PharmAthene: With PharmAthene? Jordan is there anything?
Jordan Karp, J.D. , Senior Vice President, General Counsel for PharmAthene: I am not aware of anything.
BioMedReports: Okay let’s shift focus a bit and talk about your company. What can you tell us for people who are not fully familiar with it?
Eric Richman, President and Chief Exec. Officer, PharmAthene: Well, our company today is totally focused in the bio-defense space and bio-defense is a relatively new area in biotechnology. We see it as a cross between defense contracting, government contracting and biotechnology. We are basically developing and providing biotech products to the government. We are rapidly emerging as a leader in this space; there are very few companies in this space. In our view the markets are quite large and quite significant for companies like PharmAthene. The barriers to entry are very high. The ability to be able to work with all the brancesh of the government as we have organized our company to able to do, is something that cannot be done in a large biotech company or in a large pharmaceutical company without real concentration and really dedicating the infrastructure of the company to be able to work effectively with the government; PharmAthene has done that.
As we sit here today the company has assembled a portfolio of what we call next generation products to meet the needs of the government. These are second generation Anthrax Vaccine, a monoclonal antibody for treatment of Anthrax, a recombinant enzyme to protect the war fighter from chemical and nerve agents; basically we are using recombinant technology to develop the next class of medical countermeasures for bioterrorism.
BioMedReports: So you have how many products do you have in the pipeline?
Eric Richman, President and Chief Exec. Officer, PharmAthene: At this point, we have four products in the pipeline. We consider them to be layer stage, in that they are in advanced development. The bio-defense models are slightly different than the typical commercial product in that the efficacy of the product is established in animal models not in human clinical studies.
Eric Richman, President and Chief Exec. Officer, PharmAthene: Safety is established in humans. We know very early on whether our products are effective because we can test them in animal models. So we do not have to go through the Phase 1, Phase 2, Phase 3 series of testing which could cost several hundreds of millions of dollars to then find out ten years down the road that our products do not work. We know from a very early stage that our products are effective and the development costs are dramatically reduced because there is no commercial market for these products.
Since the government wants these products they fund to a large extent the development cost. Every dollar that we spend on development for our products the government spends about $5 or $6. So it is a relatively efficient use of capital. To date, we have been successful in receiving in excess of $600 million in government funding for these products and we are making good progress towards completing the development and transitioning to providing the products, selling them government.
BioMedReports: Obviously your stock price has been impacted by the news of the lawsuit and the award to SIGA. It seems a lot of speculators moved in, but let us talk about your company as a self-standing entity that has got all these products in development and so forth. Do you think that the valuation currently is accurate? Is it undervalued? What is your opinion on that if you can share it?
Eric Richman, President and Chief Exec. Officer, PharmAthene: My opinion is that it is tremendously undervalued. Even a year ago our stock was trading comfortably between $3 and $4 a share until December when the contract was canceled; we lost about 75% of our market value. That contract was canceled but then 60 days later we received a portion of the contract and the product has not stopped, it has not slowed down, it is still on track. I think that even from that perspective, not even factoring in SIGA’s – the contribution that could come from damage award from the SIGA litigation, our base businesses is tremendously undervalued.
I think that the biotech investor does not have a good understanding of how defense contracting works. Companies like Lockheed-Martin and Boeing and companies like that produce missiles and submarines for the government, they have a different investor base and I think there is a good understanding of valuation of those companies. But when it comes to bio-defense, I think that there have been many companies that have failed in this space. There is a real lack of understanding of how – of the risks associated with the costumer and a lack of understanding how the companies can become profitable and because of those reasons I think that the company is tremendously undervalued.
BioMedReports: Can you kind of educate us about when you see some potential movement, upcoming catalysts et cetera in your pipeline?
Eric Richman, President and Chief Exec. Officer, PharmAthene: Well, first of all. One of the near terms catalyst would be the trial related to the SIGA lawsuit. But related to our products, we have a product which was on partial clinical hold that should be going back into a clinical study. We expect that we will be going back into a clinical study with the FDA approval late this year or in early January. This is a monoclonal antibody. That is an important step into that program. Secondly, we are expecting somewhere between $250 and $300 million dollars in additional contracts in the next year. Those awards will complete the advanced development for two of our products. That is significant because there is no additional capital needed, to raise, to finish developments of those products and then they will be eligible for procurement.
BioMedReports: These are what, the Anthrax vaccine, the Anthrax antibody or..?
Eric Richman, President and Chief Exec. Officer, PharmAthene: Yes. The second generation Anthrax vaccine called SparVax and a monoclonal antibody called Valortim.
[Editor's Note: Valortim® is a fully human monoclonal antibody designed to protect against inhalation anthrax, the most lethal form of illness in humans caused by the Bacillus anthracis bacterium. The investigational antibody targets a protein component of lethal toxins produced by the bacterium known as the anthrax protective antigen. The anthrax protective antigen initiates the onset of the illness by attaching to cells in the infected person, and then facilitates the entry of additional destructive toxins into the cells. Valortim® is designed to target anthrax protective antigen and protect the cells from damage by the anthrax toxins. In preclinical studies, Valortim® both protected against infection, and when administered some time after exposure, it induced recovery and survival in animals exposed to lethal doses of inhalation anthrax spores.]
BioMedReports: Okay. Then after it does go back into clinical, what is the timeline that you see for that product?
Eric Richman, President and Chief Exec. Officer, PharmAthene: It will probably require an additional two years of development and then we expect a contract – a procurement contract could be issued in 2013 and that is probably a $300 million to $400 million dollar market for that product.
BioMedReports: What is the best value proposition that would differentiate your company from other companies that are in your business to investors.
Eric Richman, President and Chief Exec. Officer, PharmAthene: Well, I think that the products that we are developing are products that the government has not only expressed an interest in buying but there is a requirement within the government for them to develop and purchase. They represent the leading products, for example our SparVaxs second generation Anthrax vaccine is the leading second generation Anthrax vaccine program that we are aware of. This is a product that the institute of medicine has issued a report that there is a need for. There is a requirement for the strategic national stockpile. Our product is moving along very well. We know that from the data that we generated, we know that it is effective and the studies that we have conducted in almost 800 individuals, we know that it is safe and that it meets the needs of the government. So we have the leading programs in areas which are of the highest importance to the government.
There are other companies in the bio-defense space, they have products which we – some of them are – we think are less valuable targets. Our products address Anthrax which is the number 1 bioterrorism threat. There are other companies that are developing products for example Ebola or Marburg which are not the number 1 threats. As far as what is the most important product, the biggest market, we believe is Anthrax. Our products are the leading products in that category.
BioMedReports: Can you tell us a little bit about your financial structure?
Eric Richman, President and Chief Exec. Officer, PharmAthene: One of the big events that we have, one of things that we are very excited about is we just completed a financing last week. We also have $20 million convertible note that is due in July of next year. We wanted to use the proceeds of the financing to retire the debt for those convertible note holders that do not convert. So we expect that most of the note holders will convert and about half have already converted into stock. We will use the remaining proceeds of the financing to basically pay up the note early and retire that debt. At this point, as we are going through this exercise of who is converting, who is not converting, I do not have a accurate and exact share count but in terms of basic shares – Jordan, do you know where we are at this point?
Jordan Karp, J.D. , Senior Vice President, General Counsel for PharmAthene: I believe so.
Eric Richman, President and Chief Exec. Officer, PharmAthene: Forty-one, is that right.
Jordan Karp, J.D. , Senior Vice President, General Counsel for PharmAthene: Yes.
Eric Richman, President and Chief Exec. Officer, PharmAthene: So 41 million basic shares and with the conversion I think we get to somewhere – depending on the percentage of note holders that convert, probably around 50 million shares.
BioMedReports: Do you know any statistics as far as how much of that is closely held? Or how many of those shares are held by individuals or funds or companies that are interested in holding for the longer term?
Eric Richman, President and Chief Exec. Officer, PharmAthene: I know that our original venture capital investors which include Healthcare Ventures and MPM Capital have converted their notes into shares. They have participated in every financing that we have done since 2003. MPM Capital also invested in this most recent round of financing. It is hard for us to – at this point, say with any clarity who owns the shares because since the news with SIGA and their award of $2.8 billion, since that news hit in October, there has been over a hundred million shares that have traded. So you know who owns. I think our float is somewhere around 20 million. We know that Healthcare Ventures and MPM Capital and other institutions such as Empery Asset Management and Ontario Teacher’s Pension Plan and Baker Brothers are investors in the company.
BioMedReports: Let us talk about this important upcoming catalyst in January. It appears to us that you guys seem confident about the case. Is there something, maybe, that has not been talked about or perhaps that people may not be aware of in regard to that matter?
Eric Richman, President and Chief Exec. Officer, PharmAthene: I do not think that we can comment on anything specifically, but what we have talked about is that we are looking forward to the evidence being presented and our case being presented at trial.
Jordan Karp, J.D. , Senior Vice President, General Counsel for PharmAthene : The briefs that have been filed in the case are publicly available. We talked about the summary judgment briefs. If you read both what SIGA filed and what we filed, I think it really does set out our position on many of the key issues. I also think the judge’s ruling from ‘08 that Erick mentioned give a really good background on the case and the issues and why the parties each feel they should prevail. I think they speak for themselves and if you read through them they are pretty clear and detailed. That would give you I think a really good sense of where each side is coming from.
BioMedReports: Is there anything else you would like to add?
Eric Richman, President and Chief Exec. Officer, PharmAthene: There is one thing I would like to mention because with all of the attention on PharmAthene in the last few weeks – and most of it has been related to SIGA – what we are hoping is that investors look at PharmAthene, they understand the enormous upside related to the SIGA lawsuit but when they look at the company they got a better understanding of our base business and the value of our base business. For example, our second generation Anthrax vaccine, this is a product that has been – the government has tried to develop for the last ten years. The difficulty for Anthrax vaccine is if you go back and you look at the problems that Vaxgen had and what caused them to lose their almost $900 million contract is stability. We have a product now that has demonstrated stability.
Eric Richman, President and Chief Exec. Officer, PharmAthene: We have a 56-month stability time point up coming up at the end of this month which is a huge milestone for the development of Anthrax vaccines. We have been able to develop an Anthrax vaccine in collaboration with government agencies that is both effective and stable and safe. So we are very excited about the prospects for that product and we believe that represents an enormous opportunity and know that the market is quite large.
We have contract with the Department of Defense but most importantly with BARDA. The way that we develop our products is truly a collaboration, because these agents cannot be tested in laboratories; nerve agents, chemical agents, Anthrax cannot be tested in commercial laboratories. We work very closely with the government agencies to develop these products and we have you know joint team meetings. The way that almost a biotech company would co-develop a product with a pharmaceutical company, we look at the way we develop our products as a co-development arrangement with the government.
BioMedReports: Can you talk a little bit about that?
Eric Richman, President and Chief Exec. Officer, PharmAthene: We have a development plan and we execute according to the development plan, the results are shared at weekly tea meetings that are made of approximately 50% of PharmAthene, 50% government subject matters experts. We make decisions as a team in which way to move forward and have to overcome certain obstacles. So it is a very collaborative type of approach where the government is very supportive and it actually makes very valuable contributions to the development of this product.
BioMedReports: Thank you for your time and for sharing all of that information with our readers.
Disclosure: Long PIP