Sunday, November 27, 2011

SIGA Stress

I started buying stock in SIGA (a firm that's developed an impeccably safe and effective cure for smallpox - including the weaponized varieties which are a major bioterror threat) at about $3.50 (my average is about $6), and, after remaining in the mid-teens as recently as June, it's now down to $1.90. I'll be holding onto my eight year old Toyota for a while.

All of this story is painful, but some of it's interesting, even if you aren't a SIGA investor. I'll compress it as tersely as possible. First, let's review the villains:

SIGA lost a lawsuit this year. Pharmathene, the company with whom they long ago discussed merger (but never signed a deal - all paperwork was stamped - by Pharmathene! - "Non-Binding") was awarded 50% of profits from SIGA's lead drug, ST-246, without any risk or participation in development or marketing. Nice work if you can get it! If that seems crazy, thank Delaware Chancery judge Donald Parsons. Oh, and just before this judgement came out, SIGA's stock was shorted massively

Note: a "short" is a bet that a stock will go down, and it can be hugely profitable when it works - because you don't put up any actual money.

Chimerix is SIGA's only competitor in smallpox antivirals (not vaccines; ST-246 is an out-and-out cure, which works even after infection, and works on weaponized varieties, which vaccines do not). Their drug doesn't cure smallpox in monkeys, and since we can't infect humans with smallpox in order to test it, that makes it a deal-killer, according to the FDA, according to the government agencies that want to stockpile a smallpox cure, and according to most scientists in the field. Chimerix won't go quietly into the night, however. They've protested every effort of the government to award a large stockpiling contract to SIGA. Their monkey-killing drug couldn't win the contract, but they could stall the bejesus out of the process via endless protests (finally, the government, in frustration, made it a sole source contract just to get the damned thing done). And, oh: before each stall, SIGA's stock was shorted massively.

Darrell Issa is an extraordinarily wealthy Republican congressman with numerous ethical and financial issues (for starters, this and this). A few months ago he made noise about a potential investigation of SIGA's contract. Issa proclaimed that this was a sweetheart deal, using a slippery sole-source contract, perpetrated by Obama (never mind that SIGA was supported and nurtured during the Bush administration, or that it might actually be good to protect millions of citizens from bioterror).

The investigation never occurred. But neither did Issa ever retract his allegations. The threat tanked the stock (already weakened from the lawsuit and the collapse of the biotech sector as a whole in light of the Tea Party slash-and-burn ethos - which actually won't affect SIGA, because funding for bioterror countermeasures is pre-allocated). And...just before Issa made his announcement, SIGA's stock was shorted massively.

Getting the picture?

It was revealed that Chimerix' lobbyist, McKenna, Long, and Aldrigde, is a longtime contributor to Issa. So the football was handed off to the right-wing press, salivating for another Solyndra-like boondoggle to trumpet. Last week's press wave was started by a journalist with impeccable credentials and no visible ties to Issa, Chimerix, or McKenna, Long, and Aldrigde, who published a wildly unbalanced and inaccurate hatchet job in the LA Times. I won't take time to rebut the article point for point, so let me just characterize it with a single word: "No."

Fox News picked it up, as did Rush and Glen and all the rest. Obama is throwing big money to SIGA (even though smallpox has been eradicated!) as payback to Ron Pereleman, the company's major investor, because he's a Democratic contributor (Pereleman also contributes to Republicans, and Frances Townsend, Bush's homeland security advisor, sits on SIGA's board, and, again, this deal was brewed by the Bush administration, plus - yes, I'm nearly hysterical at this point - this is the sole safe/effective cure for a major national security gap considering that any smart scientist with the right tools can synthesize smallpox virus in a lab and it's a dandy way to make tens of millions of Americans die....but, hey, let's not quibble).

Need I mention that SIGA's stock was massively shorted before this press onslaught launched? You see, shorting's where the real money is! It's hard to make a stock go up, so better to bet that it'll go down, and then do stuff to make it go down! That's a much smarter bet! Not unrelated, you may have seen the 60 Minutes report last week revealing that congressmen are free to short the bejesus out of stocks without restraint - even stocks impacted by their own actions.

Meanwhile, SIGA's drug is very close to FDA approval...and has been for a couple years. The hold-up is determination of dosage - a technicality. Why's FDA stalling? They're not an apolitical agency, so the aforementioned shenanigans are almost surely at play. Next month FDA makes a crucial ruling as to whether, gee whiz, monkeys are really the best test after all. Obviously, Chimerix - which is about to IPO, by the way - would love to see the rule overturned. This has been their game plan: use political leverage to overturn the monkey rule while stalling SIGA in every possible way. FDA's super-sluggish treatment of SIGA indicates they may be sympathetic - or even shorting! Stay tuned for more laughs and excitement.

So that's how my "sure thing" wound up at $1.90. It's basically deus ex machina. And if, meanwhile, terrorists unleash smallpox, just duck and cover. Works like a charm.

On the positive side: forces this titanic aren't randomly unleashed. This is all happening because there are, indeed, gobs and gobs of money at stake (which is why I invested in the first place). So unless SIGA completely dies, which I don't think it will, there should be eventual success. They may be forced to share profits with Pharmathene, thanks to the nutty judge. And they may split contracts with Chimerix, thanks to the crooked Congress and agencies. But it's a great big pot. And right now the stock price doesn't even reflect the $40M shortly due free/clear as down payment for their signed contract with BARDA. But even at $1.90, the shorts are still all in. So it may well go lower before then. The upshot is, as I wrote in September, the stock will go nowhere until multiple contracts are signed (for example, with any country concerned with bioterror) and money's in hand. At this point, news won't do it; only revenue will. So I hold and wait.

The best potential of all is completely undiscussed: ST-246 cures eczema vaccinatum (EV), a rare but life-threatening complication of vaccines that's very similar to smallpox. And lots of major impending medical breakthroughs depend on delivery via vaccine. Plus: don't even get me started on SIGA's pipeline of other drugs (it would be nice if SIGA would update us on them).

On the negative side, SIGA is not defending itself or talking to stockholders. They have not even issued a press release to (easily) rebut the outrageous claims of the recent press blitz. Which makes me wonder about Ron Pereleman's role in all this. I'm not nearly smart enough to see through the veil, but one thing's certain: so long as this company, with prospects so bright as to attract a blitzkrieg of nefariousness, remains a near-penny stock, we'll need to worry about Perelman finding some way to take it he gets all the money (could he be shorting? My head hurts!). This remains my main long-term concern.

In the short and medium term, it's all about yet more patient waiting. Hey, I said from the start that the way would be slow and bumpy!

[Update: there've been some good comments to this post. You may want to give them a read]


Anonymous said...

Key phrase in your post ""sure thing", there is NEVER sure thing.

I'm still waiting to read your horse racing tips. ;-)

Jim Leff said...

Oh, sure.

OTOH, this insane blitzkrieg indicates that lots of people way smarter, richer, and more powerful than me agree that this is a short thing.

If there turned out to be no pot of gold at all, I'd feel like a misguided sap. But the presence of bustling pepper-spraying crowds around the pot strikes me as vindication.

Expensive frigging vindication (friggication?)!

OTOH, it ain't over yet.

jim said...

Or it could get bought out by the Russians at a bargain price.

Jim Leff said...

The lawsuit seems headed for appeal. I don't believe the company will be acquired until that shakes out. It's impossible to assess valuation with that uncertainty.

Perelman is privy to plenty of inside information (he really controls the company; management is his employees), so better positioned to make such a play. Also he's a bit of a gambler. Plus he's used to judicial clouds; the guy is practically allergic to settling (unfortunately for us investors).

So Perelman is the concern, IMO.

Jim Leff said...

I wrote, in a comment above:

" this insane blitzkrieg indicates that lots of people way smarter, richer, and more powerful than me agree that this is a short thing"

Interesting Freudian slip. I meant "sure" thing.

Anonymous said...

I'm just curious: What qualifies you to evaluate a biotech company? I searched you on the web and could not find any info indicating you are a medical or financial expert.

Jim Leff said...

Funny you should ask. As a matter of fact, I'm sanctioned by the very same body that found you expert enough to evaluate bloggers!

Jim Leff said...

This comment came in via email from a banker friend:

It's dangerous to aggressively short a small cap! curiosity piqued, i looked up nasdaq

so it looks like the short interest is fairly consistent between 6 to 8 million shares - or between 12 to 14 percent of the outstanding shares. that is fairly average i'd say.

fwiw, its not true that shorting requires no cash - you have to put up margin, which could be as much as 50%. also, the guys who own siga shares could easily make short selling tough - all they would have to do is tell their broker not to lend the shares.

I'll respond in a separate comment later today.

jim said...

Gee. I feel a lot better. For a moment or two I was thinking that the market might be rigged against small guys.

Jim Leff said...

Don't feel too much better. Again, stay tuned for my response (busy day).

And it's not rigged against small guys. It's rigged against small guys who try to invest like big guys - i.e. counting on fast, dramatic results. Big guys for the most part can't buy-and-hold for years (opportunity cost issues). But we can. And SIGA remains an excellent buy-and-hold opportunity (with all the caveats I keep repeating). Small guys with a narrower window got clobbered. But small guys with narrow windows, IMO, shouldn't be in this game.

Jim Leff said...

Ok, responding to the banker's comments, posted under my name three comments up:

"fwiw, its not true that shorting requires no cash - you have to put up margin, which could be as much as 50%. also, the guys who own siga shares could easily make short selling tough - all they would have to do is tell their broker not to lend the shares."

I'm not talking about retail (i.e. small investor) shorts. I'm talking about big powerful shorts for whom margin isn't an issue. And, as you know, margin calls are only a risk if the stock goes up. The point of my article is that the people shorting are not horse race bettors, they seem to be the people controlling the horses.

"It's dangerous to aggressively short a small cap!"

Again, I'm not talking about retail shorts, I'm talking about hedge funds, congressmen, and powerful parties privy to lots of insider information (e.g. the timing of Chimerix's protests, the direction of the judge's decision, the timing of the congressman's statement and of the LA Times article, etc.). Golman Sachs, for example, is in the mix, as I reported here:

For those parties, it's not at all dangerous to aggressively short this small cap. And they've made a mint as they've brought it down from $16 to $1.90.

" curiosity piqued, i looked up nasdaq so it looks like the short interest is fairly consistent between 6 to 8 million shares - or between 12 to 14 percent of the outstanding shares. that is fairly average i'd say. "

First, not for a company with a firm, signed contract with BARDA, a $40M downpayment due before the end of the year (plus $12M cash on hand). The contract is for $433M over five years, and BARDA is brewing up a more ambitious RFP worth well over $1B. The science is proven and tested, the need is obvious, and the sole competing drug kills monkeys, and we're at $1.90 and the sole material diff between now and $16 is that a judge made a stupid, likely overturnable decision to divide some profits (for limited time and only after expenses are recouped) with another company. At this point, in this situation, with this company, an "average" short interest seems appropriate?

Second, that's a freeze frame. Look at the history and correlate the dates.

jim said...

I'm not so confident about the Russians. The thing that makes a bio-weapon powerful is if you also have the antidote.

Anonymous said...

Jim, you can do better than that!

Jim Leff said...

Anonymous -

I loved that scene. I had huge hopes for Cuba Gooding, but he's never done anything this good since!

After the chuckle, my first thought was horror - do I really carry that sort of unrestrained greed?

No. Thing is, I'm not really making a living. I discovered, to my horror, that, post-chowhound, people have long ago forgotten me as a writer. My sole appeal is as a zany web personality, and that's something I have no interest in capitalizing on. So....investment's been how I paid the bills the past few years. And it went pretty well, until all this stuff happened.

So: no jumping up and down over profit. And no despair over loss, either. Just trying to see things clearly....and getting quite upset at the corruption. Forget my investment, America needs to stockpile this drug. Smallpox bioterror would be very bad news indeed. How can anyone the least bit patriotic (or even just humanistic) work to destroy the only proven cure?

darelleisthebest said...

I have been a major buyer of SIGA stock in the past month. I own 3-4% of the company. The risk to the stock is Perelman did something inappropriate to facilitate the single source contract, and the sanction is the loss of the contract. But as you point out, since SIGA has the only drug that works and is safe, and since the need is clear and, more than that, already funded, even this risk has a finite impact on ultimate value. The sources of upside are many: The PIP appeal is very valuable; the options being exercised to increase dosage above 1.7mm units are much more valuable than that; foreign government demand for the product is assured if the FDA approves the drug, though the odds there seem more uncertain.

You can make a fair case for 15-20 in value if PIP appeal is won and some of the options are exercised to get the units toward 8-10mm. We will indeed need more than 1.7mm doses if a terror attack with smallpox occurs. (Scary and disturbing, but imagine the panic if smallpox reports occur in a major city). The money to pay for this is there. Against 2 dollars of risk, the risk reward here is clear. The short case is hard to understand at 2.

Jim Leff said...

Thanks, Darrell. I had to read this part a few times to suss out what you were saying:

"The risk to the stock is Perelman did something inappropriate to facilitate the single source contract, and the sanction is the loss of the contract."

I believe you mean that the risk would be IF Perelman HAD done something inappropriate. You're not saying he did....right?

Of course, the contract process was completely open. All parties were given open opportunity to compete. But there was a requirement for monkey testing as proof of effectiveness (because, again, we can't test smallpox on humans), which is reasonable and widely-accepted among scientists. Chimerix, the only other company competing, couldn't meet those terms. They protested via every mechanism and technicality available, stalling award for 2 years. When it became clear they'd stop at nothing to block stockpiling of a drug needed for nat'l security, a compromise was reached: the gov split off the more lucrative portion of the contract to be dealt with at a later date (and, as I said in my article, it's worth well over $1B), and awarded SIGA a sole-source contract worth something like $400M.

The gov well knew only SIGA'sdrug met the stated requirements, but went through an open contract process to avoid the appearance of impropriety that comes with sole source contracting. Having forced the gov to resort to sole source, Chimerix played the obvious next card: they got friendly politicians (and press) to scream about sole source "IMPROPRIETY!!!", as if there was never open competition. That's what's happening with all this press (almost none of which even mentions Chimerix). It's entirely trumped up.

So while I hold nothing past him, I see no room in this instance for Perelman to have perpetrated actual impropriety re: the sole-source contract. Again, there was open competition - to the point of absurdity, given that SIGA has the only safe/effective drug meeting the gov's original terms. Occam's Razor says this is just a crafty competitor slinging mud to mire a company with a superior product about to reap great reward.

"The short case is hard to understand at 2."

The short case is indeed hard to understand at $2, but it was equally bewildering at $10, $8, $6, $4, and $3. But cards have played, shoes have dropped, the shorts were always right (because, per my article, I find it obvious at this point that the shorts are themselves the shoe droppers). So I'm disinclined to scoff at them at $2.

A secondary seems unlikely, but are you at all worried about a PIPE?

One concern is that if this stalls terribly much more (like 8 years +), the coming generation of broad spectrum antivirals will make ST-246 obsolete. On the other hand, such drugs are burdensome to test. And, as a human, if not as a SIGA investor, I'd love to see such drugs available ASAP.

Also, how did you manage to accumulate all those shares without the price rising?

Jim Leff said...

woops, forgot to reply to this:

You can make a fair case for 15-20 in value if PIP appeal is won and some of the options are exercised to get the units toward 8-10mm

That's the level we were at before the judgement, with only the base contract rewarded. Are you saying it was overbought at that time?

If appeal wins and options are exercised (which would mean multiple clouds lifted and quite serious revenue) I'd hope we'd be quite above that level.

Anonymous said...

>Funny you should ask. As a matter of fact, I'm sanctioned by the very same body that found you expert enough to evaluate bloggers!

I'm sanctioned to evaluate bloggers because you are writing for me - you want readers, right? But evaluating securities and biomed securities is a fairly complicated business. And to evaluate this company, you also need some insight into the legal and political systems.

I'm just curious. I don't mean to be casting any aspersions.

Jim Leff said...

No, I'm not writing for you. I never invited you here; you simply showed up. But you're welcome to stay, in the event that your evaluative skills find me well-informed and clear-thinking.

And that judgement must be entirely yours. I haven't yet matriculated from Bio-Tech Stock Blogging University, so I'm regrettably unsanctioned!

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