Tuesday, November 16, 2010

SIGA Paranoia

I've posted enough positives about SIGA (a biotech company with a completely safe/effective cure for smallpox, including weaponized varieties) that I'd be remiss if I didn't express my current concerns.

SIGA's impending (huge) contract award from the government was protested on a technicality by a competitor, Chimerix. That protest was upheld, and has been appealed. For reasons too complex (and insane) to go into, there's a good chance the appeal will uphold the prior decision. However, BARDA (the governmental agency overseeing all this) has many ways to override it all and buy SIGA's drug.

And they very likely will, because the country needs a stockpile of the only known safe and effective cure for smallpox (including weaponized strains). That's why they've offered this contract, worth $500M to $2.8B, in the first place.

Chimerix's drug is less advanced. In primate tests, the monkeys died. That's why the government has signaled that this contract will go to SIGA, and not to Chimerix. So Chimerix is trying to catch up, and part of the strategy is to try to tie up SIGA long enough to stay in the game. So they've been rolling out every conceivable stall tactic. Already, Chimerix has managed to delay this contract over a year (months ago, they protested the terms of the original contract offering, making the government redo it from scratch). Chimerix has political clout; they're located in the politically significant Research Triangle area of North Carolina, and there is reason to suspect management has insider connections with the Small Business Administration, which has adjudicated this protest.

It might be said - and, in fact, I myself said it - that BARDA is likely to override this morass and get SIGA's drug into the nation's stockpile as a national security measure. They do have leverage to do so (though Chimerix will be resourceful in using litigation to try to stall any such move). But, then again, BARDA has allowed itself to be niggled, stalled, and thwarted in its national security aims re: smallpox for a solid year already. Considerable pressure has been applied, and we don't know where it's coming from. Consider that BARDA has drawn very high-level criticism for its ineffectiveness in procuring the bioterror countermeasures it's tasked with facilitating. So whatever's causing BARDA to fear Chimerix is overriding even that pressure. And this scares me a little. If BARDA was inclined to override niggles in the interest of national security, they'd have done so before. But they didn't. And we don't know why.

So further delays seem very likely. But I have a worse fear. If/when SIGA the protest decision is upheld by the appeal judge, SIGA will "officially" lose the contract. Again, BARDA does have funding to buy this drug, and it does want it, and will eventually acquire it, via any of a number of avenues available to it. But the news the market will hear is that SIGA has lost the contract, and its stock price will temporarily crater.

Which doesn't bother me much. Long term prospects are as bright as ever. But I'm worried that billionaire investor Ron Perelman (who's been behind SIGA since forever) might use that opportunity to buy a controlling interest cheaply and then take the company private, depriving the rest of us of the rewards of SIGA's bright future.

There are very good reasons why this will not happen. First, Fidelity and Vanguard, huge institutions both, own a large chunk of SIGA, and if Perelman burns them, it will be awfully tough for him "to do business in this town", as they say. Second, there are legal issues - which, to my layman's understanding, make such a move a clear no-no. Yet the scenario (called a "take-under") has been seen more than once in biotech.

Perelman is now at his lowest level of investment in SIGA in years, apparently because if he owned too much, SIGA might no longer qualify as a small business. Chimerix's protest, in fact, was on those very grounds, though it found traction in spite of Perelman's partial sell-off. But once the small business issue is moot (immediately after the appeal judge's decision), Perelman will want to buy lots more. And if the price crashes over bad news about the appeal, he may be enticed to scoop up tons and tons cheaply. If he goes above 50%, there are grounds for worry.

And if Chimerix can tie up this contract for another 18 months (which seems hard to imagine), and if foreign governments don't pay $$$$$$$$ for SIGA's drug in the meanwhile (and I'm nearly sure they will), Chimerix may reach a point where they have a competitive drug on their hands.

So...I intend to sell enough SIGA stock to redeem my original investment, and leave the rest (the "gravy") in. If the price craters, I may buy a bit more. I think we'll see $40 one day, if we can get through this. And then enjoy acquisition by big pharma.

Lesson learned: even if you spot an undiscovered biotech with a perfectly safe/effective cure for a #1 priority national security issue which the government (and other governments!) would pay billions to acquire, the slime and corruption in the game can still derail your fortunes.

On the other hand, I've quadrupled my investment, so who's complaining?


Ghalib Suleiman said...

This is turning into quite the drama: http://www.siga.com/?ID=154

Reading your post raised a host of doubts in my mind, but in the end I decided to not sell anything. I realise it is a decision I might regret.

Ghalib Suleiman said...

Oops, I just saw your new post, so my previous comment isn't so newsworthy anymore.

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