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ST-246, SIGA's Golden Egg

|Includes:SIGA Technologies Inc. (SIGA)

SIGA is a company with one product: ST-246, the only current successful smallpox treatment. The Biomedical Advanced Research and Development Authority (BARDA), a government institution, has pre-announced that they will award SIGA a $2.7B contract for stockpiles of ST-246 as a bioterrorism countermeasure. Investors seem worried that BARDA’s pre-announcement is not enough of a guarantee, since it is not yet a contractual obligation, and that the money may go to another company, such as Chimerix who claims their product CMX001 is also a viable treatment (although they have not yet run successful human or non-human primate studies).

 

The contract calls for an initial purchase of 1.7M doses for $500M and, with a larger possible purchase of 12M doses for the full $2.7B. It is likely that SIGA will receive the initial purchase as an upfront payment, followed by delivery of 1/3 of the total order made in 3 consecutive quarters (Q2, Q3 and Q4).

 

One lawsuit creating near term uncertainty is from competitor Chimerix. They filed a complaint with the SBA that SIGA should not be considered a small business despite the fact that it has a mere 55 employees and <30M in revenue because Ron Perelman, through MacAndrews & Forbes, owns a significant amount (about half) of the company; they think it should be considered an affiliate. The Small Business Association (SBA) upheld its decision that SIGA is indeed not a small business, and BARDA moved quickly to issue a research contract to Chimerix which led to SIGA’s stock dropping 20%. However BARDA moved to amend and cancel the original request for protocol (NYSE:RFP), which called for a small business set aside in order to issue a new RFP without the small business set aside. The new RFP was issued February 22, 2011, and the deadline for submitting a bid was due February 28, 2011; in my opinion the short notice was to quickly allow SIGA to resubmit their bid, and leave no time other competitors to submit a revised entry.

 

Although BARDA awarded Chimerix a research contract, there should be no doubt that SIGA will win the bio-defense contract. ST-246 is essentially a perfect treatment from the medical standpoint. As a novel compound, nothing similar exists, and it has been produced specifically for BARDA’s goals. The compound stops infection at the protein level, inhibiting spread of viral DNA, and inoculating the disease. Targeting key replication proteins, rather than sites on DNA, in theory makes the compound less likely that the virus will form a resistant strain, a credible threat to all anti-viral medications.  It has a secondary “bonus” effect of lowering the chance of one human spreading the disease to another through their breath. Extensive clinical trials have shown ST-246 to be safe in humans at effective and super-effective levels with essentially no adverse effects (some reported headache at the highest levels of administration, far exceeding an effective dose). ST-246 has also been used to treat complications following smallpox vaccination, opening the possibility for redistribution of smallpox vaccination and opening a new market for the drug to be sold in, although renewed stockpiling may be more profitable. SIGA is also ready to deliver, and can begin supplying the government as early as Q3.

 

Furthermore, there is some imminence for BARDA to add a smallpox treatment to national stockpiles and they don't intend to wait several more years for a competitor; in fact, it is very likely that BARDA will make its final decision before April 2011. The stockpile needs to be renewed continually as drugs expire, so there is room in the market for two competitors going forward and it is possible to see Chimerix and SIGA both in the program 5 years from now (studies have shown that when CMX001 and ST-246 are used in conjunction there is a synergistic effect), however CMX001 has shown potential for adverse effects and is very likely to have a resistant strain of virus grow against it, much more likely than ST-246 anyway, so purchase of CMX001 is unnecessary.

 

SIGA is a definite buy. After looking at its one year chart, SIGA is showing great signs of strength across its major indicators. The stock is in a clear uptrend as its price crosses the 20, 50, and 200 day moving averages. A minor concern involving its underlying trend is that the 20 day SMA is below the 50 day SMA, but because the price used the 20 day SMA as an area of support I am going to be optimistic and consider it in a complete uptrend. The stock has also been rated to outperform its current $15/share value, and has been predicted to reach $23/share by some and even $30/share by others.

 

Any institution looking for a smallpox treatment for those infected or for complications following vaccination will turn to ST-246. After winning the BARDA contract, and ideally after FDA approval it is very likely for other organizations around the world to purchase a ST-246 as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

 
 

Stocks: SIGA