PharmAthene Vs. Siga: An Open Letter To Delaware's Vice Chancellor Parsons

| About: SIGA Technologies (SIGA)

Vice Chancellor Parsons,

I know you must have been disappointed when the Delaware Supreme Court remanded the damage award to PharmAthene (NYSEMKT:PIP) back to your court for reconsideration, but hopefully you can still be open minded in determining any of your future rulings concerning this case. Since you believe SIGA's management unjustly enriched their company at the expense of PharmAthene, I understand your desire to try to award damages that will put PharmAthene back in the same position it would have been had SIGA (NASDAQ:SIGA) in good faith negotiated the LATS.

I agree with your ruling that SIGA acted in bad faith while negotiating with PharmAthene during that process. However, I also believe that the large damage award you are seeking exceeds the amount of damages PharmAthene should be entitled to based upon what its commitment was to SIGA at the time of the breach as well as the knowable damages at that time. Since it appears that SIGA's Arestvyr (Tecovirimat, formerly known as ST-246) might become a very successful drug, you seem to be evaluating this case from PharmAthene's current point of view and not based on the many other outcomes that could have occurred.

If ST-246 had failed in any of the many tests and hurdles that it still faced after both companies signed and agreed to the terms of the Bridge Loan Agreement and the Merger Agreement, I am confident PharmAthene would not have pursued this case in court to enforce the terms of the LATS which would have required an additional investment of millions of dollars to launch the drug. What do you think would have happened if the results released in October 2006 (after the two above signed agreements had been consummated but before any negotiations had started for the LATS) of the primate trial had revealed some unexpected side affects?

Would PharmAthene have been held liable for negotiating in bad faith if it had decided to walk away from negotiating the LATS as a result of any event that made its management question whether it was good to complete the deal? Even if the LATS had been signed, PharmAthene had plenty of jumping off points if certain requirements were not met by SIGA and its ST-246 drug based upon the LATS per this excerpt from the Delaware Supreme Court's opinion-

"PharmAthene was scheduled to pay a "License Fee" of $6 million in total, which consisted of $2 million cash upfront, $2.5 million as a deferred license fee to be paid twelve months after execution of a license agreement if certain events occurred, and $1.5 million after SIGA obtained financing in excess of $15 million. In addition, the LATS contained a provision under which PharmAthene would pay an additional $10 million based on the achievement of specific milestones relating to certain sales targets and regulatory approvals."

So in the proposed LATS, PharmAthene did a nice job of hedging its bet as to not lose a lot of money if things did not turn out the way its management had hoped it would. Now PharmAthene is trying to get an even better deal from you. PharmAthene does not have to risk any money as an investment. It doesn't even have to share in any of the potential many downsides (potential lawsuits, other unexpected losses, etc.). And if ST-246 becomes a success, PharmAthene gets to share in the profits of the drug. Any large damage award would be a fantastic return on PharmAthene's investment in SIGA since the three million dollar loan plus interest was fully paid back to PharmAthene by SIGA, and excluding the amount of money PharmAthene has spent in pursuing this case, its total out of pocket expenses in assisting SIGA with launching ST-246 as well as with the negotiating of the two agreements was probably well under a million dollars.

Anyone who has been in business for very long has usually made a bad decision that they regret. I think SIGA made a big mistake not doing a better job of pursuing other resources for its cash needs as well as in agreeing to negotiate in good faith terms that would have given away a large portion of a potential billion dollar business for a measly three million dollar loan that was fully secured and which did not require a definite commitment by PharmAthene to provide any additional funding. On the other hand, PharmAthene and its attorneys failed to make sure that there was a clear definition of damages, in its two agreements with SIGA, which would have to be awarded to PharmAthene if SIGA breached its contracts and failed to negotiate the LATS in good faith even though, from both company's actions, it was obvious that could be the potential outcome.

In your September 22, 2011, opinion, you included an entire section explaining why the LATS was missing essential elements titled "The LATS does not contain all of the essential elements of a license agreement." Do you want to try to set the precedent that when attorneys fail to adequately spell out the terms of an agreement, the court system can be relied upon to use creative law and accounting to fill in the blanks? I think the message from this case should be that attorneys need to do a better job in either filling in those blanks or more clearly defining the damages due the non-breaching party of a contract.

I know that you are aware in the prior merger attempted in December of 2003, by these two companies, it was PharmAthene who unexpectedly backed out of the attempted merger. Here are your exact words from your September 22, 2011 opinion: "SIGA resisted that approach because it had tried to accomplish a merger with PharmAthene before, only to be left high and dry when PharmAthene got cold feet." The only difference this time is the tables were turned at a time that PharmAthene was the one left high and dry. I guess turnabout is not fair business conduct in Delaware.

So SIGA and PharmAthene's agreement to negotiate in good faith gave PharmAthene several opportunities to cut its losses for the funding of ST-246 while SIGA was required to negotiate in good faith in obtaining a completed and signed LATS per your rulings or be subject to damages that could split potentially hundreds of millions of dollars in future profits with PharmAthene. Sounds like a terrific hedged bet of less than a million dollars of unsecured funds by PharmAthene.

So I assume you understand the comment by one of the Supreme Court Judges at the January 10th 2013 Supreme Court hearing when he said this was a heads I win, tails you lose situation. If PharmAthene determined that the opportunity for ST-246 was moving forward toward a potential profitable situation (heads- PharmAthene wins), it could bind SIGA with the LATS but if it determined that there were potential problems ahead for the drug, PharmAthene could drop out and cut its losses (tails- SIGA loses). Now PharmAthene has you on its side trying to help it win a large damage award despite its comparatively minimal investment in ST- 246.

I do not think you are helping either company by allowing this case to linger on, especially if you devise another decision that could be in jeopardy of being over turned by the Delaware Supreme Court. Over the last three years both company's stocks have continued on a downward trajectory so apparently any thoughts of this case helping either company is not expected by most investors. As a matter of fact, by creating the situation where both companies have to run up large legal and expert witness fees, you are hurting both companies.

I hope your next ruling is within the Delaware Supreme Court's guidance, "damages award consistent with this opinion," or I believe you risk the chance of another appeal and remand. I am sure you are aware that the next damage award needs to be in line with the various cases referred to in the Supreme Court's May 24th 2013 opinion regarding when and if expectation damages are available including those cases specifically referenced in note #99.

My research in my Seeking Alpha article "PharmAthene's Damage Award Will Be Limited To Reliance Damages" and my comments there below support the case that an unrealistic expectation damage award could potentially open up this case for another appeal and remand. Any outcome that is not a solid well documented damage award which can withstand an appeal will just result in PharmAthene, as well as SIGA, incurring a lot more legal expenses that probably will not be reimbursed by the other party.

Since it appears that you are trying to make sure that PharmAthene receives as large of a damage award as legally possible, I think an aggressive approach in determining reliance damages is the best possible solution for this case. My suggestion would be to award PharmAthene the actual cost of those services and efforts provided by PharmAthene to SIGA as a result of its assistance in advancing the ST-246 drug toward its commercialization. In addition to those costs incurred by PharmAthene, since the record documents that there was a significant contribution by PharmAthene, I would also add to the reliance damage award a significant amount of profit mark up on those services. SIGA would certainly have had to pay PharmAthene significantly more than the cost basis of those type of services if there had not been an expected agreement.

I believe as long as you do not get overzealous in your reliance damage award, SIGA will be satisfied that the case has been resolved with a reasonable settlement and PharmAthene can get the best possible damage award currently available, cut its losses, and move forward with its own business plan. There is no real winner in this case as both parties have expended a lot of money fighting this battle.

Since you should already have most of the information needed to settle this case, I would recommend that you immediately notify both companies of your intention to award reliance damages. I would have PharmAthene and SIGA present briefs documenting the dollar amount of the reliance damages that each party believes should be awarded to PharmAthene including an estimated commercial value of those services. Then I would decide the actual damage award as soon as possible so both companies can stop wasting money on these efforts. As a shareholder of both companies (I own significantly more shares of SIGA), I think the sooner you can accomplish this, the sooner both companies can get on with business, and the sooner both company's stock share price will recover from this legal battle.

Yours truly,

Glenn E. Hudson

Disclosure: I am long SIGA, PIP. 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.