Friday, January 17, 2014

Selling SIGA

"Nothing is more suicidal than a rational investment strategy in an irrational world."
~John Maynard Keynes

The genome for fabricating smallpox virus is out there. And it's believed that North Korea, Syria, and perhaps others have stockpiles of weaponized-up-the-wazoo, super-virulent smallpox. And vaccine does not protect against weaponized smallpox, so we're all totally vulnerable

Bioterror is one of our greatest dangers, and smallpox is one of the most dangerous agents. SIGA's drug, ST-246 is effective against weaponized varieties, as well as prospective natural world threats such as cowpox and monkeypox. Plus it cures vaccinia, the smallpox-like malady which afflicts a fraction of those receiving any sort of vaccine (ST-246 has been used against vaccinia in several real-life cases with miraculous results, e.g. this amazing story reported by the NY Times). And the next wave of miracle drugs under development includes tons of vaccines (sorry, Ms. McCarthy), so we'll be needing a cure for vaccinia (nothing can match ST-246's safety and effectiveness).

The US government was set to buy over a billion dollars worth of ST-246 for its strategic stockpile, but a competitor, Pharmathene Chimerix, kept gaming the process until a compromise was worked out: the gov would buy a few hundred million dollars worth from SIGA, and the vast remainder would be contracted afterwards, giving Pharmathene Chimerix a better shot (since government health officials prefer back-up and redundancy, I assumed both drugs would be stockpiled, for a win/win).

What's more, the stockpiles would need to be periodically replaced with fresh product (i.e. perpetual revenue stream). Plus: upon FDA approval, ST-246 would be snapped up by other governments and international health agencies for their own stockpiles. The problem with getting FDA approval is that smallpox drugs can't be tested directly. We're not going to infect humans with smallpox, so we test primates and other animals (sorry, PETA). But the procedure-bound FDA has no precedent for approving animal-tested drugs. Progress seemed likely, though, when, a couple years ago, the agency held a major conference to work on the issue.

Additionally, an exciting pipeline of drugs under development presented a possible "kicker" for SIGA's bright future.

I bought SIGA - and recommended it to you - at $2.87 back in 2008, long before anyone had heard of it. And it blasted over $15. But then problems appeared:

• After that one conference, we've heard nothing from FDA on animal-testing (and other alternative pathways for approving drugs for diseases untestable in humans).

• A silly lawsuit hit SIGA with a jaw-dropping verdict, awarding away half its profits on ST-246 to litigant Pharmathene. But half a huge windfall would still be a great thing for SIGA. And the appeals court found the basis for that judgement to have been rectally extracted. But the case is stalled while the original (very very slow) judge devises some new mechanism to put the screws to SIGA.

• While the aforementioned competitor, Pharmathene Chimerix (whose drug is less easily proven), managed to gum things up for SIGA for years, the best drug seemed poised to eventually win. But then "activist shorts" (investors who bet against a stock, then go out and try to tank its price by menacing the company in the real world) had some success in unleashing a process resulting in major media (e.g. the LA Times) and politicians (e.g. Democrat Sen. Claire McCaskill and Republican Darrell Issa) ranting against the prospect of spending tax dollars to stockpile a cure for an eradicated disease. I don't know for a fact that the parties perpetrating this well-synchronized outpouring of phony outrage were short on SIGA, but it's either that or they're complete morons, and I suspect greed here rather than stupidity. SIGA has always been a titanically shorted stock, even when its prospects were brightest.

• As the law suit grinds on and on, the plaintiff has delighted in citing optimistic SIGA press releases and investor conferences in order to inflate their expected share of profits to the various judges. So SIGA's gone into stealth mode, hardly saying a thing. As a result of the possum-playing, its stock price bottomed out.

As SIGA hit these snags (which I analyzed over the course of a long series of Slog postings), I figured it was just a matter of waiting for each to pass. The better drug would win, the batshit-crazy lawsuit would work out, and the shorts who drove SIGA's price from $15 down to $2 would take their profits and move on to fresh victims.

But the combined assaults proved a crippling combination. And then some deeply troubling indications arose:

1.The (large) remainder of the original government contract has never gone back on offer. We waited and waited, but it seems to have gone "poof".
Could the government possibly have changed its mind, declining to stockpile a cure when smallpox is such a titanic threat? Well, consider that one small, primitive, cheap atom bomb exploded in the atmosphere over the NYC/DC metropolis would decimate the power grid for months. And while we could update the grid so it's less of a set of interdependent dominos, our leaders have not lifted a finger to do so.

Just because a threat is unthinkable and a solution's at hand doesn't ensure anything. My guess is that the trumped-up media outrage over stockpiling a drug for "an eradicated disease" was sufficient to cool the government's heels. No politician one wants to get caught funding a boondoggle, and scientific reality has little to do with it. And the problem is that no other revenue is immediately on the least until FDA approves.

2. We've heard nothing about SIGA's drug pipeline in years.
This couldn't have been due to the aforementioned possum-playing, because the lawsuit pertains only to ST-246, not to other drugs. And in early November, SIGA's CEO announced that its R&D department would be closed (under the euphemism of "an optimization program to sharpen focus and increase efficiencies within its operations").

3. As part of that same announcement, the CEO announced that they were trying to sell the company. And it hasn't sold yet.
If SIGA gets bought, it'd presumably be at a premium (i.e. good for stockholders). But the market for a pharmaceutical company isn't like the market for, say, lawnmowers. There are a very small number of potential buyers. And if none of them have bitten yet (admittedly, they might be in negotiations and we simply don't know), takeover will be highly unlikely.

Lack of acquisition interest would confirm a sentiment that no further revenue is forthcoming. Again, the follow-up contract has never been heard from, FDA remains a black hole, and the closure of the R&D department seems to presage a long, grinding run-down (i.e. very very bad for stockholders).

The shuttered R&D work was terrific science, but it was the kind of tough-slog early-ish development which requires a financially healthy company with a multi-decade time frame. In spite of bright prospects, there was nothing poised to come online fast enough to replace ST-246 as lead product.

In other words: checkmate.

A few tepid positives remain: the company may yet sell, which would help the stock price a bit. And, earlier this month, a patent was assigned SIGA for its arenavirus (e.g. lassa fever and hemorrhagic fever) drug, based on previous work before the R&D shut-down. This may have caused the modest uptick this week. And, hey, FDA might miraculously un-jam and the government may change its mind about protecting us from smallpox. Finally, while I'd rather lose my entire investment than wish for it, if bad guys were to unleash smallpox somewhere in the world, you can bet the farm that SIGA would garner gigantic juicy orders galore within days. We eagerly throw money at out-of-barn horses.

But I doubt any of those things, at least in the near-to-mid term. And, since development's halted, that arenavirus patent is nothing more than a minor kicker in the event of a sale. And there may be no sale.

Also, the lawsuit may resolve favorably. But to be intellectually consistent, I must admit that just as half a huge windfall would constitute a great result, retaining 100% of revenues from a drug with no revenue stream won't help much (though the stock price would pop, at least for a while, upon announcement of such a decision).

One other tepid enticement: SIGA hasn't recorded any of the very substantial revenue it's already received from the government...and the stock price certainly hasn't taken any of it into account. But there's an equal and opposite repellant to that enticement: majority investor/shadowy puppeteer* Ron Perelman may have clever ideas for those funds.

* -When I last checked, SIGA CEO Eric Rose made more salary as a VP of Perelman's holding company than as head of SIGA.

In conclusion

To this day, I can't spot any error in my original thesis for investing in SIGA, aside from an over reliance on rationality (per the Keynes quote up top). The drug is safe, effective, and sorely needed, and there's nothing as good out there. No one rational would deny these things. I feel quite certain that I'll never find a brighter, smarter investment ever again. But after all these years, I'm selling....for a damaging loss (I originally bought at $2.87, but a lot more at $5-8).

We live in a country where powerful people can, simply to protect a bet, destroy a company, even if it harms our readiness for a horrendous prospect like smallpox contagion. I won't go on and on about this, as my windy sanctimony would be unseemly given that I, like those short-sellers, stood to personally benefit from my side bet. But side bettors ought to remain on sidelines (you certainly won't see me unleashing smallpox virus in order to goose the market). And it's particularly insane that we allow our leaders to bet against the interests of the country they purport to lead. We hold baseball players to a higher standard than that!

Regardless of what actually happened to SIGA and its contracts, and how the plume of fake outrage was fabricated around a proper and necessary biosecurity contract, the fact is that it's legal for members of Congress to short stocks. Given that they possess the power to crush companies they've bet against, this needs to change.


Jim Leff said...

phil4433 asked:
Looking at their latest 10Q they have $162 Million in long term deferred liabilities. Do you know what that represents?

Phil, that's the income from the currently in-fulfillment government contract. As I said in the posting above,

SIGA hasn't recorded any of the very substantial revenue it's already received from the government...and the stock price certainly hasn't taken any of it into account.

The current contract's worth roughly $400M and is being paid piecemeal, as fulfillment completes various stages. Some of the money may never be paid (e.g. there's a pay-out if ST-246 gains FDA approval during the process).

SIGA is accounting for the revenue in an unorthodox way; it doesn't go on the books as revenue, per se. I'm no accounting expert, but this seems designed to shield (at least for a while) the revenue from the litigant claiming 50% of profits from ST-246. But apparently it's a legitimate accounting method (or, obviously, the SEC, etc, would never let them get away with it).

So, the $162M is deferred revenue, not liability (yeah, it's listed under liabilities, but look closely and you'll see it's deferred revenue). And there'll be more where that came from as the contract fulfills.

FWIW, that 10Q can be viewed at:

Other useful documents:

Financial results for 3rd quarter 2013:

Here are the terms of this contract:

phil4433 said...

I know you've given up on this stock so you don't have to respond to this.

So SIGA sells vaccine to the government but they don't have to recognize the revenue they receive and pay taxes on the profits right away? I can understand why they want to do it but how can that be legal accounting?

Jim Leff said...

Accounting isn't my strength, to say the least.

My understanding is that due to the staged nature of the contract, there are options in accounting, and this is a legitimate one (if it weren't, their litigant would unquestionably ream them on it). Tax will of course will be paid eventually...there's no escaping that (tax on interest, too).

As I said in the article, I understand this tactic in light of the current litigation seeking to get at these profits. But these funds have not been baked into the stock price, and I'm by no means clear on how - or whether - that value would pass to stockholders, unless the company is still standing years from now when lawsuit is over, contract is fully fulfilled, and the funds go on the books. And that appears not to be the company's own desired outcome.

Jim Leff said...

Someone wrote in to ask:

"Why do you still own some if you think, on balance, it’s a bad bet here?"

I don't think it's a bad bet here, just not a "very smart" one as before. Aside from FDA or revenue action (neither of which processes could possibly reach fruition in a timely manner for a company explicitly trying to sell itself), there still remains prospect of an upward blip upon acquisition and/or when lawsuit closes. Plus, as you know, the stock tends to endlessly cycle (due to low volume). I imagine that'll continue, so there may be a more favorable exit moment. At $4 I'd sell more.

One of my primary confidence boosters in this investment has been the conviction that even if it missed big success, there's sufficient intrinsic value that stock price couldn't imaginably fall below my original buy-in cost (high $2s). But I can see, for 1st time, potential of a grind-out to zero (if acquisition fails to materialize). That's not assured or even particularly likely, but I can see a clear pathway to that frightful scenario (and there'd be no "triggers" along that path, just a gradual greying-out), so I'm getting the lion's share of my money out of the way.

So: given the aggregation of old bad factors, and of new bad factors announced in November, and the lack of any movement in the interim, I'm not feeling the sense of buy-price assurance that spurred me to invest a bit more than I could afford to lose....

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