Hot summer bottoms
We're having quite an interesting summer in the world of baby biotech and small pharma. Probably the biggest surprise, at least for me, was FDA approval of Acura's Oxecta coupled with rejection of Pain Therapeutics' Remoxy. Just more evidence that trying to predict the outcome of FDA approval decisions is a doomed trading strategy. Several stocks in my database have run their GBMB course - Transcept has flamed out on rejection of Intermezzo, although not before peaking at 11.73 which would have been a nice double for those sharp enough to have picked them up at my GBMB threshold of 6 (which I didn't do myself). Meanwhile Idera has decided to go the route of Altus and Aryx, sequentially failing in each of their clinical endeavors. I won't call my Idera pick a mistake - I still believe they were underpriced for prospects when I bought them, but the pipeline simply hasn't worked out. That setback hasn't kept me from searching for new prospects for the GBMB, and I've identified several new promising candidates. I'm going to depart from my usual formula when discussing SIGA as there is a rather complicated and fascinating story that has led to my decision to buy the stock.
SIGA Technologies (SIGA) - market cap 444M, share price 8.8. Cash 19M, debt 0, quarterly burn 4-5M.The modern era of SIGA began in October 2010 when BARDA announced their intention to award the company a contract for their smallpox antiviral ST-246. The share price quickly ascended from about 8.5 to over 14. Enthusiasm for the stock may have been tempered by notice of a protest from a rival antiviral developer, Chimerix, that SIGA did not qualify for the award as the BARDA solicitation was limited to small businesses. Indeed, in November the share price dropped back to the low 11's after the Small Business Administration issued a ruling that SIGA did not qualify as a small business. SIGA appealed the ruling and also noted that BARDA appeared to be circumventing the small business restriction by performing a survey of the capability for small business to satisfy the contract.
The share price rose back to the 14 range, only to decline once again to 11 in January 2011 on concerns that an ongoing lawsuit against SIGA by PharmAthene could eat into any revenues SIGA saw from the BARDA contract. The basis of this lawsuit is that in 2006, SIGA sought a merger with PharmAthene and SIGA's CEO promised PharmAthene manufacturing rights to ST-246. LATS (Licensing Agreement Term Sheets) were drawn up although their exact contents are unclear. What has been established is that a "non-binding" header was never removed, and the term sheets were not signed. PharmAthene loaned SIGA three million dollars for ST-246 development, which was paid back in full. PharmAthene's position in their lawsuit seems to be that the promise of manufacturing rights for ST-246 was not contingent on the merger, but was some form of a unilateral good faith concession intended to spur merger negotiations. For good measure, PharmAthene's ex-CEO also contends he was promised a Bentley convertible which he never received. PharmAthene states they would not have loaned the 3M unless they felt assured the merger would proceed. At some point SIGA lost interest in the merger and essentially walked away from the discussions.
In February the stock began another ascent after BARDA announced they had issued a new solicitation for a contract for a smallpox antiviral without the small business restriction, essentially circumventing the Chimerix protest. The share price rose over 15 only to drop back to 12 on a larger than predicted quarterly loss. Over the next two months the share price worked its way back up over 14 in advance of an expected new award by BARDA, and in May the company announced that they had indded been awarded the contract. The terms of the contract were for 433M over five years for 1.7 million courses of ST-246 as a base award, with an option for delivery of up to 12 million additional courses of ST-246 for another 2.4 billion dollars. At that time the share price was in the mid-14's and barely budged on word of the new contract.
The second BARDA contract was closely followed by another protest from Chimerix, although the basis of this is unclear as the second award did not appear to have the small business restriction. The market appeared to shrug off that protest, and in fact Wedbush analyst Gregory Wade raised his fair value estimate of SIGA's share price to 23. The stock finished May at around 14, but then began to decline once again. In June the second Chimerix protest was withdrawn after BARDA amended the contract to delete the language regarding the option to purchase an additional 12 million courses of ST-246. Of course, deleting that language doesn't prevent BARDA from making such a purchase in the future. Furthermore, Republican congressman Darrell Issa has launched an inquiry to determine if the contract award to SIGA was influenced by 30% owner Ron Perelman's Democratic political connections. To complicate matters even further, Issa himself recevied donations from Chimerix's lobbying firm.
In the last seven weeks, the share price has declined steadily from 14.4 to 8.8. A verdict on the PharmAthene lawsuit is expected in August. It is notable that SIGA has twice been refused summary judgments in their favor, and PharmAthene supporters have selectively taken excerpts from these decisions to support their contention that a court decision favoring PharmAthene or a settlement is imminent. My own reading of the ruling against summary judgment is somewhat different, and I have excerpted the critical paragraph here:
"For the reasons stated in this Memorandum Opinion, I conclude that PharmAthenehas demonstrated that there is a material issue of fact as to whether the parties enteredinto a binding licensing agreement. PharmAthene also has shown that it is plausible thatupon a more complete record it may be able to demonstrate by clear and convincing evidence that the parties had agreed on all essential terms and, therefore, PharmAthene may be entitled to specific enforcement of the alleged licensing agreement. I further conclude that, although it is unlikely that PharmAthene will be able to prove its claim for expectation damages or to overcome the objections that such damages are simply too speculative in the context of this action, it would be premature to grant summary judgment on that issue. Rather, it should be considered in the context of all of the issuesand a full record after trial. Therefore, I deny SIGA’s motion for partial summaryjudgment in all respects."
The italics are mine. To my mind it indicates that the judge feels that the case is weighed against PharmAthene, but not to an extent that justifies summary judgment. Although I have absolutely no training or experience with contract law, my gestalt feeling is that PharmAthene allowed themselves to be manipulated by SIGA within the boundaries of the law and does not have strong legal ground to stand on. The term sheets are unsigned and clearly marked "non-binding", which seems to be a difficult obstacle for them to overcome. It seems that the worst-case scenario for SIGA is enforcement of the licensing agreement which would cut their contract revenues as much as 50%, but would leave the BARDA contract intact and still provide significant upside from the current share price.
I fully accept that my interpretation of the legal issues may be completely divorced from reality. After all, something must be pounding SIGA's share price into the dust. The Chimerix protest is withdrawn, the congressional investigation seems to be flawed and moot. So the investing community must see the court decision as going against SIGA, right? That leads to the final observation that has convinced me to purchase a stake in SIGA. While SIGA's share price has dropped from 14.4 to 8.8 in the last seven weeks, PharmAthene's price has dropped from 3.94 to 2.67 over the same time period. Clearly, there hasn't been any trading shift in favor of PharmAthene.
SIGA will issue their net quarterly PR on August 1. Given that PR and the court decision, it seems very likely that if the momentum turns for SIGA it will occur in August. That's why I've decide to buy into SIGA despite continuing downward momentum. I don't have a threshold at this time, but I expect to purchase 1000 shares on Monday barring a dramatic price change at the open. SIGA is my most promising candidate at the moment, but there are a couple of other companies from the low end of the market cap spectrum that I feel have strong potential at current prices.
CytRx (CYTR) - market cap 80M, share price 0.73. Cash 30M, debt 0, quarterly burn 2-7M. I've been around long enough to see CytRx completely turn over their pipeline, concluding with the recent sale of their small molecule chaperone portfolio for peanuts. Together with their divestiture of partial ownership of RXI Pharmaceuticals, this has made CytRx a much easier company to follow. The new pipeline was obtained through the acquisition of privately-held Innovive Pharmaceuticals and consists of three compounds in clinical trials. Kinase inhibitor bafetinib is currently being evaluated in the ENABLE phase II trial in B-CLL. Encouraging interim data was reported in June, although several patients had elevated liver enzymes which forced discontinuation of therapy in one patient. Also in progress since last September is the PROACT phase II trial of bafetinib in advanced prostate cancer. Another pipeline compound, doxorubicin conjugate INNO-206, is formulated to be released from its albumin carrier selectively in the low pH environment of the tumor, allowing for delivery of much higher doses of doxorubicin without toxicity issues. Earlier this month encouraging data was reported from a phase Ib study of INNO-206 in solid tumors showing successful delivery of high doses of doxorubicin. A phase II trial of INNO-206 in solid tumors should kick off later this year. And finally synthetic retinoid tamibarotene is being tested in a phase II trial in NSCLC that has been enrolling since December of last year. The number of clinical sites in this trial was recently increased in order to expedite enrollment. The STAR-1 pivotal phase II trial of tamibarotene in refractory acute promyelocytic leukemia has been in process since 2008 under an SPA, but as of yet only 11 patients have been enrolled. CytRx has reported a high response rate in the limited number of patients in this trial and plans to design a trial of tamibarotene as a combination drug for first line treatment of APL. Tamibarotene is already approved in Japan for refractory APL. This collection of diverse candidates in clinical trials seems to deserve a market cap much higher than 80M, but I am somewhat suspicious of how cheaply the pipeline was acquired by a struggling baby biotech, and also CytRx's repeated failures with their prior pipeline. The share price recently declined sharply from about 1 to a low of 0.68 but has shown signs of stabilization. I would consider a purchase at about 0.7 with further evidence of stability in the share price.
Cyclacel (CYCC) - market cap 66M, share price 1.22. Cash 35M, debt 0, quarterly burn 3-5M. Market cap and cash are adjusted for the most recent dilutive financing. Cyclacel might be more appropriately relegated to the stinky bottom department. The share price has been in a long-term declining trend since a bizarre triple in early 2010 apparently due to publication of articles indicating an in vitro response of K-RAS-expressing lung cancer cell lines to seliciclib. Ironically, seliciclib eventually failed to show a significant effect on PFS in NSCLC in the APPRAISE phase II trial and no longer appears to be a factor in the company’s valuation. In the meantime, mitosis inhibitor sapacitabine has advanced into the SEAMLESS phase III trial in AML in the elderly. A phase II trial for the same indication showed a 30% one-year survival, as compared to historical data of 40% one-year survival for potential competitor Vidaza. Interestingly, the SEAMLESS trial compares sapacitabine with Dacogen, which failed to show significant prolongation of survival in AML in a phase III trial which ended in 2010. This may set the bar lower for success of sapacitabine in SEAMLESS, but in the long-term may make it difficult for sapacitabine to compete with Vidaza even if it is eventually approved. Sapacitabine is also in a phase II trial in NSCLC with topline data expected later this year. I have strong concerns about sapacitabine’s prospects for success in SEAMLESS and in NSCLC, but 65M is a very low market cap for a drug in active phase III and phase II trials for diverse indications and more than a year of cash runway. The share price has recently been bouncing off of an eighteen month low of 1.2 and I think the stock will likely run up ahead of the NSCLC catalyst at the end of the year. Cyclacel is a lower priority buy for me at a GBMB threshold of 1.2.