Monday, May 27, 2013

SIGA: The Judge's Paradox

The holiday weekend gives us lots of time to ponder the Sphinx-like appeal decision. As I wrote on Saturday, Judge Parson, who found expectation damages impossible to assess, has been ordered to assess expectation damages. So where will he go?

The last time Judge Parsons felt sufficiently exasperated to split a baby, he literally split the baby, arbitrarily awarding 50% of net profits of ST-246 to Pharmathene. But the rationale for that split has been kicked out from under him. The principle of promissory estoppel allows a judge to impose an arbitrary, speculative, Solomonic solution, but the Supreme Court ruled that promissory estoppel doesn't apply here. So this time the judge must be non-speculative in awarding damages. But this is a judge who's gone on record saying that expectation damages would be too speculative to award.

This sounds like good news for SIGA, but the philosophy major in me quakes. One of the first lessons in logic is that when premises are contradictory, any conclusion's as good as any other (including, famously, "The moon is made of green cheese"). In other words, literally anything could come out of this situation.

Judge Parsons, groping for safe ground (he doesn't want to be reversed twice on the same case), may resort to the original terms SIGA and Pharmathene had been negotiating those many years ago. They would have assigned the drug to Pharmathene, who'd pay SIGA a small licensing fee of 8-12%. The problem is that Pharmathene never did any of the many things required to earn this control of the drug. And it's impossible to roll back the clock and determine where Pharmathene would be right now, money-wise, if they had (and thus determine their "injury"). It's hardly fair for SIGA to lose nearly all revenue from a drug whose development, marketing, and risk was footed entirely by them.

SIGA investors may take comfort in Judge Parsons previous declaration this term sheet oughtn't apply in present day. But, then again, he also declared that there's no non-speculative way to assess expectation damages. Judge Parsons is down a rabbit hole, and anyone who tells you they can predict the outcome is lying.

When lost in paradox, it's always smart to seek solid ground. In that spirit, I offer a few highly pragmatic observations:

1. Half an Enormous Jackpot is Still Huge
In the end, I'm figuring the worst-case downside remains something like where we're at today: Pharmathene getting roughly half the net profits from this drug. At trial, Pharmathene estimated the drug's potential as $4 Billion, and I don't think that's far off. And SIGA can do very well, indeed, with $2B.

2.Cloud Be Gone!
SIGA's stock is priced irrationally, even with a 50/50 split. That's mostly due to the legal cloud, which is hopefully near an end. At this point, I'm more eager for an end to this litigation than I am for an optimal result.

3. Pipeline
When last we heard, SIGA was going great guns with its dengue drug. Dengue Fever is a huge real-world problem, so potential profits greatly exceed those for smallpox. SIGA had been working on other promising early-stage drugs, too, plus they have a great antiviral discovery and development platform. And it's important to remember that this lawsuit affects only the smallpox drug, ST-246.

While there are high-flying biotech stocks whose entire portfolios are at the early stages of SIGA's pipeline, the market currently values SIGA's pipeline at precisely zero.

4. Ignore the Ticker
SIGA and Pharmathene stock may, over the next few weeks, go absolutely crazy. But none of that, in my opinion, will be predictive of anything. Again, Judge Parsons is down a rabbit hole, and anyone who tells you they can predict the outcome is lying.

5. New Law
This was not the decision I was expecting, obviously (though it may yet turn out favorable for SIGA). I hadn't anticipated that the Delaware Supreme court would make new law.

FWIW: There was no actual bad faith in this case. What happened is that former SIGA CEO Donald Drapkin was best friends with SIGA mega-investor Ron Perelman. When their relationship soured, Drapkin was treated egregiously, and he lashed back via his testimony in this case (the merger negotiation was under his management, so he was a key witness). The combination of an axe-grinding witness and shameless lying by Pharmathene's counsel was enough to skew the finding of facts and turn the judge violently against SIGA.

No comments:

Blog Archive