SIGA Or Pharmathene: Who Really Won?

Includes: PIP, SIGA
by: G. Hudson

Both SIGA (NASDAQ:SIGA) and Pharmathene (NYSEMKT:PIP) released press releases after the May 24th opinion issued by the Supreme Court of Delaware for their appeal of the Court of Chancery May 31, 2012 Final Order and Judgment. Each press release made it seem like each company believed they won based upon the decision reached.

Pharmathene released its press release first with a headline- "Delaware Supreme Court Affirms Lower Court's Ruling That SIGA Technologies Breached Its Contractual Obligation To Negotiate In Good Faith - Delaware High Court Confirms Availability of Expectancy Damages" As part of this press release, Pharmathene's President and Chief Officer, Eric I. Richman made the following comments:

"We are pleased by this positive decision from the Delaware Supreme Court, which conclusively affirms SIGA's liability for their failure to negotiate the terms of a license agreement with us in good faith,"

"Further, the Court established new Delaware law making expectation damages available in these circumstances. This is a significant legal victory for our Company and an important decision with respect to Delaware law. We look forward to final resolution of the case in front of the Delaware Court of Chancery."

SIGA then released its press release with a headline- "Delaware Supreme Court Reverses Equitable Payment Stream to PharmAthene and Remands Litigation to Trial Court for New Determination of Damages". As part of this press release SIGA's General Counsel, William J. Haynes II made the following comment:

"We are pleased with the Delaware Supreme Court ruling issued on Friday. The Supreme Court's decision states that PharmAthene may only obtain damages for its lost expectancy if it can prove them 'with reasonable certainty.' We intend to establish to the Chancery Court, consistent with that Court's earlier conclusions, that PharmAthene's evidence of expectancy damages is speculative and too uncertain, contingent, and conjectural to permit an award."

At first glance it appears both companies think they have won based upon the Supreme Court's decision. However if we really look at these two press releases, there are really two significant areas to understand. First in the headline of SIGA's press release we find out that the Supreme Court decision reversed the Chancery Courts major judgment which could have resulted in hundreds of millions of dollars being owed by SIGA to Pharmathene. SIGA was going to be required to pay as high as 50% of its net profits from its ST-246 drug to Pharmathene as a result of the Chancery Courts Final Judgment on May 31, 2012 as documented by this excerpt from the June 1, 2012 press release issued by Pharmathene- "PharmAthene says court issues final judgment in litigation with SIGA Technologies":

"Under the Court's ruling, once SIGA earns $40M in "net profits," PharmAthene shall be paid 50% of all net profits for a period from the date of entry of the Court's final order until ten years from "first commercial sale."

SIGA's press release documents that this payment was reversed but Pharmathene's press release failed to even mention anything concerning this major win by SIGA.

Second both press releases mentioned expectation damages and the fact that both companies will be going back in front of the Delaware Court of Chancery for the final decision. Pharmathene's press release indicates that expectation damages are "available" while SIGA's press release indicates that they are available only if Pharmathene "can prove them 'with reasonable certainty". Both companies' statements are accurate but Pharmathene will have to meet all the requirements to prove expectancy damages "with reasonable certainty". SIGA will not be liable for expectancy damages if Pharmathene fails to overcome that it is too "speculative and too uncertain, contingent, and conjectural to permit an award."

Pharmathene has a difficult task ahead since the Chancery Court judge has already made the following statements after taking into effect a significant amount of analysis and evidence regarding expectation damages within his September 22, 2011 opinion-

(Excerpt from bottom of page 84 and top of page 85 of the opinion):

"Applying these precedents to the facts before me, I conclude that I cannot award PharmAthene the present value of its estimated lost profits on a license agreement that (1) would have contained the risk of receiving no profits and (2) was never consummated, because such an award would be speculative."

(Excerpt from page 95 of the opinion):

"Having carefully reviewed the testimony and reports of PharmAthene's experts, including especially Baliban, I find that PharmAthene's claims for expectation damages in the form of a specific sum of money representing the present value of the future profits it would have received absent SIGA's breach is speculative and too uncertain, contingent, and conjectural.220 Therefore, I decline to award such relief. The evidence adduced at trial proved that numerous uncertainties exist regarding the marketability of ST-246 and that it remains possible that it will not generate any profits at all. These uncertainties relate to, among other things, regulatory matters, questions of demand, price, competition, and the parties' marketing competency."

If SIGA prevails in the battle over the awarding of expectancy damages, SIGA could still be liable to pay Pharmathene for reliance damages as was the case in this example excerpted from the above September 22, 2011 opinion-

(Excerpt from page 83 of the opinion):

"Because the court could not determine "what agreement would have been reached, there was no way to measure the lost expectation."187 Therefore, the court limited the relief available to the developer to its reliance interests."

"187 Id. at 374 (quoting 1 Farnsworth, Contracts § 3.26a)."

Per Wikipedia - "Reliance damages is the measure of compensation given to a person who suffered an economic harm for acting in reliance on a party who failed to fulfill their obligation. Reliance damages are valued by a party's reliance interest for the foreseeable amount. They put the injured party in the same money position as if the contract had never been formed."

As part of SIGA's oral testimonial before the Supreme Court on January 10, 2013, SIGA stated that Pharmathene never put on any evidence of a claim for reliance damages before the Chancery Court and SIGA contended that these reliance damages would have only amounted to a few hundred thousand dollars. So if the Chancery Court is not able to award Pharmathene expectation damages, and if the Chancery Court is able to only award reliance damages, if any award is given at all, the May 24th 2013 Supreme Court opinion will dramatically reduce the damage award that SIGA will owe Pharmathene.

The May 24th 2013 Supreme Court opinion, as documented below with excerpts from that opinion, required any new damage award to include an adjustment of attorney fees and expert witness fees to be reevaluated in light of any new damage award. If SIGA's liability for a new damage award is significantly reduced, then the amount of award for attorneys' fees and expert witness fees should be reduced as well.

(Excerpt from page 41 of the opinion):

"When considering his fee award, the Vice Chancellor properly tailored the award to the bases for liability on which Pharmathene prevailed."111111 PharmAthene III, 2011 WL 4390726, at *44 ("My sense is that only one third Of PharmAthene's arguments, time, and expense related to the bases of liability and form of relief I have found and ordered, respectively.").

(Excerpt from page 41 of the opinion):

"On remand, the Vice Chancellor shall redetermine his damage award in light of this opinion and is free to reevaluate the helpfulness of expert testimony."

Since the Supreme Court opinion ruled that SIGA breached the contractual duty to negotiate in good faith, it would seem that Pharmathene won the moral battle. However, since SIGA may end up paying Pharmathene significantly less if expectation damages are not awarded, it would appear that SIGA has won the financial battle.

Disclosure: I am long SIGA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.