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To quote a story making the rounds Monday:

The United States can expect a terrorist attack using nuclear or more likely biological weapons before 2013, reports a bipartisan commission in a study being briefed Tuesday to Vice President-elect Joe Biden. The report suggests the Obama administration bolster efforts to counter and prepare for germ warfare by terrorists.

This theme pops up from time to time and is the timing is certainly notable given the recent tragedy in Mumbai. I mention this as background as it reminds of one of my favorite small cap pharmaceutical plays - SIGA Technologies (SIGA).

Before I go any further, I would like to caution readers that pharmaceuticals are not my "normal" area of investment. I can't begin to translate what is written in medical journals or FDA trial results. However, in SIGA's case I do believe I have enough positive data points to be convinced the risk/reward equation is decidedly positive. If anyone out there finds that my medical terminology etc. that follows is erroneous, please feel free to comment. My goal is relay the general facts.

SIGA's lead drug candidate ST-246 is best known as 'the smallpox drug'. This is different than a vaccine in that the drug would be administered to people who have become infected, while the vaccine is used as a preventative measure. In a story that was not widely reported due to SIGA's ongoing clinical trials, ST-246 was greenlighted as an emergency therapy for a Chicago-area boy who had become infected with a smallpox/smallpox-like virus after being exposed to an uncle who had received the smallpox vaccine. The boy was suffering from organ failure and physicians were already planning an autopsy when he was given a dosage of ST-246. The boy made a full recovery aside from requiring some skin grafts due to the blisters from the virus and their affect on his skin. Because ST-246 is in clinical trials SIGA was not able to publicly discuss this incident and thus it was only sporadically reported.

ST-246 is currently in clinical trials and the general assumption is that the only real buyers for the drug are entities like the US and/or other governments, such as Israel. Furthermore, with respect to the US government, the 'whisper' timeline is that the government's fiscal 2009 (which began on October 1) would be the year in which funds might be allocated for stockpiling of such a drug. With a bipartisan commission recommending the Obama administration place bioterror high on the priority list, the stars appear to be aligning for ST-246.

A second important point to note is SIGA's strong financial position. I was initially attracted to the company a couple years ago after seeing it was awarded over $25 million in federal grant money. For a firm of SIGA's size, that was quite a significant amount. That was followed up by an additional $55 million in Q3 this year. With the annual burn rate most recently in the $5 million range, SIGA clearly appears to be well-funded for quite a while. Also of note in the most recent round was a directive for the company to continue developing its science for other diseases such as Dengue Fever. All of SIGA's clinical trial reporting has been positive thus far and the company's science appears rather promising.

With the stock in the low $2 range, the risk/reward of an investment is rather attractive. If the government chooses to stockpile ST-246 as part of its bioterror preparedness, the result could be an order in the hundreds of millions of dollars (SIGA has already secured a production agreement with Albemarle Corp (ALB)). If that happens, I can well envision SIGA going much, much higher. With the funding the company has received, time is on their side and additional drug candidates in development may offer even more promise.

Disclosure: The author is long SIGA

Source: SIGA Technologies: Bioterror Stock Pick