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Francisco Javier Garcia
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I have a degree in Economics from the University of Seville. Master in Accounting and finance. Currently working in a large Spanish bank. I've been investing in the stock market for several years. I like reading and sports.
  • SIGA: How The BARDA Contract Will Change Their Market Value 0 comments
    Jun 18, 2013 6:22 PM | about stocks: SIGA

    SIGA (NASDAQ:SIGA) is a small biotechnology company responsible for research, development and commercialization of vaccines and drugs against diseases and viruses. Its products are also used for defense against biological weapons. . It develops also anti-arenavirus drug candidates for hemorrhagic fever viruses, treats including dengue fever, rift valley fever, lymphocytic choriomeningitis virus and ebola. In Addition, the company offers broad spectrum antiviral candidates against viruses in the Poxviridae, Filoviridae, Bunyaviridae, Arenaviridae, Flaviviridae, Togaviridae, Retroviridae, and Picornaviridae families. Further, it has four drug series in the pre-clinical development stage against four serotypes of virus. The company was founded in 1995 and is headquartered in New York, New York.

    The company signed in May 2011 a contract with the Biomedical Advanced Research and Development Authority of the United States Department of Health and Human Services (BARDA) whose economic impact should be reflected sooner or later in the value of the company. The terms of the contract are concerned the sale of 1.7 million doses of antiviral Avestyr (ST-246), a drug against smallpox developed and patented by SIGA. The price signed of each dose was $200, and the total amount of the contract was $ 441 million, which received $ 41 million in 2011 as advance. The impact that the contract had on the stock price was spectacular, as seen in the stock chart that is shown below.

    In fact, in 2011 the price rose dramatically to reach $ 15 (from $ 2.5 in 2008). Later, due to some uncertainties regarding to the dispute that SIGA has with the competitor PhermaAthene (NYSEMKT:PIP), which requires compensation for the damage inflicted, the price fell to around $ 2 in late 2011.

    (click to enlarge)

    Source: yahoo finance

    After reading the facts and figures behind the contract signed by SIGA and the Government of the United States in May 2011, by which SIGA would provide 1.7 million doses of antiviral Avestyr to "BARDA" for a total amount of $441 M, we can draw some interesting conclusions. Let's assume that we are in the worst scenario in the current dispute with Pharmaathene (PIP), by which SIGA would have to share 50% of the benefits with PIP.

    Below is shown some financial ratios with the impact that BARDA will have on the company:

    1) Of the total amount $441 million, SIGA has already received about $41 million, so remaining $400 million to receive up to 2016 (5-year contract from 2011). Assuming a uniform payment schedule over the next three years, SIGA would receive 133 million per year (400/3) on average. So that 50% of this amount (assuming compensation to Pharmaathene) would be about $66.5 millions per year.

    2) Given that the average annual income of SIGA represent about $9 million, with BARDA would increase by 7.5 times over the next three years! (From $9 mill. to $66.5mill)

    3) Price / Sales, which currently stands at 19.35 (166.29 / 9) would drop to 2.20 (166.29/75.5). A very low ratio which would indicate that the company is tremendously devalued, dirt cheap. In this ratio, Price, indicates the current market capitalization, and Sales, the annual gross sales which would increase in $66.5 mill per year with BARDA.

    4) Price / book, which is currently 6.36 times, would decrease to 0.78. Again, a very low value which indicates a significant upside potential of the stock price. Price, is given by current market capitalization (166.29), and the book value would be the amount given by accounting books. Book value after BARDA is calculated by adding the current book value ($26.15 mill), and incomes from BARDA contract in the next three years, I mean, 26.15 +200 = $226 million (We are assuming only 50% of incomes).

    The following table summarizes ratios discussed above and show the difference between SIGA before and after BARDA:

    RATIO

    SIGA(before BARDA)

    SIGA(after BARDA)

    % diference

    PRICE/SALES

    19.35

    2.37

    -87.75%

    EPS

    -0.28

    1.44

    +614%

    Annual income

    9mill

    75.5mill

    +800%

    Book value

    25 mill

    225 Mill

    +900%

    Source: yahoo finance

    Conclusion:

    As can be seen in the information presented above, revenues that will receive after delivery of the Avestyr drug doses, significantly will affect SIGA's financial ratios, and hence, will affect to its price. The size of revenues, compared with current sales is huge, and its influence should be reflected in the market. The current price of SIGA, around $ 3.10,do not reflect the numbers of the contract with BARDA, what they reflect is the current uncertainty in the market about the terms on which finally will be solved the litigation. Keep in mind that Parson must determine the percentage of profits that SIGA will have to distribute with Pharmathene yet, and that the Supreme Court, following an appeal by SIGA, has ruled that there can only be compensation if "damage is demonstrated with reasonable certainty to Pharmathene". This leaves an opportunity to SIGA to minimize the percentage of compensation to be paid to Pharmathene.

    The book value after receiving the total amount ($200 million) would rise up to $225mill, so the theoretical book value of stocks would be $4.32. Given that the stock prices of biotechnology sector is about 3 times its book value, this give us an idea that hypothetical target price of the stock would be around $12.96, which represent a potential revaluation of over 400% compared with current price (3.15$).

    With all this data presented, and placing ourselves in the worst case scenario, which is compensation of 50% of profits for Pharmathene, we conclude that SIGA has much to gain, and therefore, its price should reflect that situation soon. On the other hand, all the uncertainties and negative news about the company are discounted in its current price. Surely, when SIGA begin receiving the cash from BARDA and uncertainties are resolved, the stock price will have free hand for a recovery and we will see it over the 10$ mark without much effort in coming months.

    Disclosure: I am long SIGA.

    Stocks: SIGA
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