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SIGA (NASDAQ:SIGA) is a small biotechnology company carrying out research, development and the commercialization of vaccines and drugs against diseases and viruses. Its products are also used for defense against biological weapons. In addition, it develops anti-arenavirus candidate drugs for hemorrhagic fever viruses, treatments against dengue fever, Rift Valley fever, lymphocytic choriomeningitis virus and Ebola, among other afflictions. Furthermore, the company offers a broad spectrum of candidate antivirals against viruses forming part of the Poxviridae, Filoviridae, Bunyaviridae, Arenaviridae, Flaviviridae, Togaviridae, Retroviridae, and Picornaviridae families. Last, but not least, it has four series of drugs against four serotypes of virus in the pre-clinical development stage. The company was founded in 1995 and its headquarters is in New York City.

In May 2011, the company signed a contract with the Advanced Research and Development Authority (BARDA) of the United States Department of Health and Human Services (HHS), the economic impact of which must work through sooner or later in the stock exchange value of the company. The objective of the contract was the sale of 1.7 million doses of the Avestyr antiviral (ST-246), a countermeasure against smallpox developed and patented by SIGA. The price signed for each dose was $200, and the total amount for the contract was $441 million, of which the company received $41 million in 2011 as a prepayment. The impact that the signing of this contract had on the share price was spectacular, as can be seen in the share price graph below.

In fact, in 2011 the share price rose dramatically to reach a peak of $15 (from $2.5 in 2008). Later, in that same year, due to some uncertainty about the outcome of a lawsuit between SIGA and a competitor, PharmAthene (NYSEMKT:PIP), which is demanding a compensation for the profits that SIGA will obtain with the future sale of the antiviral, the share price plummeted to $2 at the end of 2011, and has since remained in the doldrums.

(click to enlarge)

Source: Yahoo Finance

Having analyzed the terms of the contract with BARDA, which will mean SIGA will supply 1.7 million doses of Avestyr for a total amount of $441 million, we can draw some interesting conclusions.

When it comes to making an analysis of the stock's market potential, we must remember that in the current lawsuit between SIGA and PharmAthene, the Vice Chancellor of the Delaware State Courts, Donald F. Parsons, has already handed down a verdict which obliges SIGA to share with the latter 50% of the future profits obtained from the sale of this drug. This obligation of SIGA will kick in once it has earned a profit of $40 million. Of course, SIGA did not remain on the side lines and appealed to the Supreme Court, which recently issued a sentence recommending Judge Parsons to reconsider the compensation, "contract expectation damages," that SIGA could have to pay to PIP. Due to all these events, there is currently a state of uncertainty which is excessively marking down the share price of SIGA. Whatever the case may be, it is probable that Judge Parsons reconsiders the compensation to be paid by SIGA, reducing it, which is in SIGA's favor.

In the following analysis I have considered the scenario currently existing: that any future profits must be split 50-50 for each company, over and above $40 million. Working on this scenario I have set out a series of financial ratios of the impact the BARDA contract will have on SIGA:

1) Of the total quantity of $441 million, SIGA has already received $41 million, therefore there are $400 million still to be received up to 2016 (the contract runs for 5 years, starting from 2011). Supposing that over the next three years a uniform amount of income is received each year, SIGA will receive 133 million dollars a year (400/3 = 133.3), on average. Therefore 50% of this quantity (supposing a compensation of 50% to PharmAthene) would mean around $66.5 million a year.

2) Working on the basis that the average annual income of SIGA would have been $9 million, assuming there was no BARDA contract, with it this will increase 7.4 times over the next three years (from $9 million to $66.5million).

3) The price to earnings ratio (P/E) is currently 19.35 (166.29 / 9), which would be reduced to 2.20 (166.29/75.5) counting in the BARDA sales. This low ratio would indicate that the company is heavily undervalued. In this ratio the current stock market value of the company is indicated, divided by the gross annual sales, which would increase to $75.5 million a year with the BARDA contract.

4) The current stock market value / accountancy value (Price/Book) is 6.36; this would be reduced to 0,78. Once again, a very low ratio and it reveals that there is great potential for a significant increase in the share price. The stock market value is the current capitalization (166.29), and book value is the quantity stated in the financial statements. To get the price/book ratio during the next three years we must add to the present value in books ($26.15 million), the revenues from the BARDA contract over the next three years, which are 26,15+ 200 = $226 million (we are supposing SIGA only receives 50% of the revenues and is forced to hand over the rest).
The table below summarizes these ratios mentioned before and show the impact of the SIGA-BARDA on the cashflows, the "with" and the "with-out:"

RATIO

SIGA (before BARDA)

SIGA (after BARDA)

% difference

Price to earnings ratio

19.35

2.37

-87.75%

EPS

-0.28

1.44

+614%

Annual income

9 million

75.5 million

+800%

Value in books

25 million

225 million

+900%

Source: Yahoo Finance

Conclusion:

As can be seen in the figures presented above, the incomes SIGA will receive after delivering the doses of the Avestyr antiviral will have a significant positive impact on the financial ratios of SIGA, therefore pushing up its share price. The size of the incomes coming through from the BARDA contract, so high compared to what they would have been without the contract, has to be reflected in the stock market value. The current stock market price of SIGA, around $2.85, has not taken into account the value of the incomes from the BARDA contract. This is a manifestation of the uneasiness, or doubts, the market currently feels about on what terms the lawsuit will finally be settled. Bear in mind that Judge Parsons still has to give a final resolution on the profits SIGA will have to hand over to PharmAthene, and that Delaware Supreme Court, based on the appeal filed by SIGA, has declared that there can only be a compensation if the "loss suffered can be shown with reasonable certainty by PharmAthene." This means there are many suggestions that SIGA could see the percentage of future incomes it must pay to PharmAthene to compensate it for the loss of its participation in sales reassessed considerably in its favor.

Once the effect of incomes from the viral sales ($200 million) work their way through into the company's net asset worth, the company should have a value of $225 million, and the theoretical share price should be $4.32, in terms of the accountancy. However, the market value has to reflect the growth potential, and as in the bio-technological sector market share prices are about three times this value, this gives us an idea that the target price of the SIGA shares should be around $12.96. So the gain in the price can be over 400%, compared to the current stock market price ($2.86).

In the light of all the figures presented, and even in the worst case analysis of the judge deciding on a compensation of 50% of profits for PharmAthene, we can only conclude that SIGA stands to gain a lot, and therefore its share price will have to reflect this. Another positive factor is all the uncertainty and bad news about the company are already discounted into the current market price. It is sure that when the incomes from the BARDA contract starts to flow into SIGA, and the final ruling from Judge Parsons is handed down, the shares will be freed from these constraints, moving upwards spectacularly to over the $10 mark, a surge which is not going to require too much effort in the next few months.

Source: How The BARDA Government Contract Will Impact SIGA's Share Value