Thursday, January 28, 2010

SIGA Technologies (NASDAQ:SIGA): Initiate coverage w/ Outperform; to be awarded a big gov. contract - RBC Capital

RBC Capital is picking up coverage on SIGA Technologies (NASDAQ:SIGA) with Outperform rating and $11 price target, while noting that depending on contract size SIGA's NPV could be as high as $26/per share.

Firm notes their positive thesis is based on the likelihood that SIGA Technologies, Inc. will be awarded a lucrative contract under Project BioShield to supply the U.S. Government with its oral treatment for smallpox (ST-246, tecovirimat). SIGA shares traded lower following an unexpected amendment to the Request for Proposals (RFP), which they believe creates an attractive entry point. The timing of a contract is uncertain but is likely to occur in the firsthalf 2010. The recent negative assessment of the U.S. Government’s preparedness also increases political pressure to get a contract signed, in RBC's opinion. The simple oral dosing, compelling animal data, anecdotal efficacy in humans against related viral infections, and secure and audited supply chain make ST-246 an attractive asset to the U.S. Government and others interested in effective counter measures against smallpox.

Key Reasons to Expect BARDA Contract
- Small pox counter measures are a high priority at Biomedical Advanced Research and Development Authority (BARDA) given the vulnerability of the population following the discontinuation of routine vaccination in 1972.

- Only two known drugs are vying for the government contract, and the amended RFP permits the government to acquire both.

- ST-246 has demonstrated safety in humans and efficacy across multiple animal species, including non-human primates.

- This week a bipartisan commission issued a scathing report giving the U.S. Government an “F” for preparedness, increasing the political pressure for the government to act now.

Initial Contract worth Approximately $500 million; Expansion Potential to over $1 billion
- Assuming $250-300 per course of treatment and an initial contract for 1.7 million courses, the total sale could be $425-510 million over a three-year period.

- The initial contract has an option to expand to 12 million courses (a blockbuster opportunity even if price is adjusted downward for the increased volume).

- Other governments are likely to place orders after the United States

Competition – Room for Two Drugs
- Privately held Chimerix Inc. is developing a competitive agent for the treatment of smallpox. Because Chimerix is private, there are limited public disclosures regarding the status of its program.

- CMX001 is Chimerix’s oral version of the broadly active antiviral cidofovir. It is active in most animal models of smallpox but cannot be tested in non-human primates, which may provide a competitive advantage for SIGA because the RFP requires that the company demonstrates efficacy in non-human primates.

Governmental Purchasing and Regulation are the Key Risks
SIGA is seeking government contracts for ST-246. As a result, SIGA is dependent on the vagaries of timing, purchase size and pricing. The U.S. Government could also change its mind or amend the contract. In addition, gaining FDA approval will require SIGA to use the ‘animal rule’ because efficacy studies in humans are not possible with smallpox. Although there are guidelines for approval based on animal studies, the path is not well trodden, and there remains significant regulatory risk. FDA approval is not necessary for initial government purchases, but it may be required for longer-term contracts or sales in other countries.

Government Funding History Suggests Strong Interest in ST-246
Over the past-two years, SIGA has received contracts and grants totalling $78 million specifically for the development of ST-246. This amount includes a $55 million contract to develop alternative intravenous formulations of ST-246 for seriously ill patients and a $20 million extension to a $16.5 million, 2006, three-year contract for the development of ST-246. Given the government’s investment in this program, and the advanced stage of clinical and regulatory development of the program, we believe a contract to purchase ST-246 for the Strategic National Stockpile (SNS) is highly likely.

Notablecalls: SIGA Tech (SIGA) certainly presents an interesting situation for traders here as RBC Capital seems to be the 1st firm to pick up coverage on this biodefense name. Biodefense (and homeland def. in general) has become a hit topic once again & contracts usually follow.

Note that SIGA has a long history getting funding from the U.S. Government. Since 2004, SIGA has secured approximately $122 million in government grants, contracts and awards to fund the development of ST-246 and other novel antiviral agents.

I really don't think the Government will leave SIGA empty-handed after plowing $100m+ into the co.

As noted, RBC estimates the stock could be worth up to $26 if everything goes right. That's some upside.

I think this call will get traders' attention and will serve to push the stock higher by 10%+, putting $7 level possibly in play.s

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