PharmAthene, Siga to Begin Trial Over Smallpox Drug Licensing Rights

PharmAthene Inc.’s former chief executive officer testified Siga Technologies Inc. officials “guaranteed” it would get manufacturing rights to a drug designed to fight smallpox outbreaks linked to terrorist attacks.

To spur merger talks between the two biotechnology companies, Siga’s then-Chairman Donald Drapkin vowed to grant PharmAthene a license to make the smallpox antiviral ST-246 and had terms of the agreement written out, ex-PharmAthene CEO David Wright said yesterday at a trial over the alleged accord.

Drapkin “guaranteed it -- that we would either have a merger or a license to the product,” Wright testified in Delaware Chancery Court in Wilmington.

PharmaAthene, based in Annapolis, Maryland, sued New York- based Siga in 2006, asking a judge to affirm the purported licensing agreement for the drug, which has grabbed the attention of U.S. officials seeking ways to counter potential biological attacks by terrorists. Siga contends that the licensing talks never concluded and that the written term sheet bore the heading “non-binding.”

Siga said in October that the U.S. Health and Human Services Department selected it for a $500 million contract to produce 1.7 million doses of its smallpox antiviral. The contract may generate as much as $2.8 billion, according to court filings. Federal officials are investigating whether Siga qualifies for the contract.

‘Wouldn’t Back Out’

In a January 2006 meeting, Drapkin sought “assurance from the PharmAthene board that the company wanted to do a merger and wouldn’t back out,” Wright said. Wright said he reassured Drapkin, who at the time was also vice chairman of Ronald Perelman’s holding company, MacAndrews & Forbes Holdings Inc.

MacAndrews & Forbes had invested $10 million in Siga and was the company’s largest shareholder when it began talks with PharmaAthene over a possible merger or license for the smallpox treatment, according to court papers.

Drapkin, a former mergers-and-acquisitions lawyer with New York-based law firms Cravath, Swaine & Moore LLP and Skadden, Arps, Slate, Meagher & Flom LLP, joined MacAndrews & Forbes in 1987. Last year, he started Casablanca Capital, a private-equity firm.

At a March 2006 meeting, Drapkin told PharmAthene executives he had secured enough Siga board votes to ensure approval of a merger, and guaranteed that the company would either grant the license or pursue a combination, Wright testified.

No Bentley

“This was also the meeting where he promised that, if we got the stock price over $5 together, he would buy me a Bentley convertible,” Wright recalled. “I never got that either.”

Andre Bouchard, a lawyer representing Siga, denied in court filings that Drapkin “orally guaranteed PharmAthene a license.” The companies “agreed only to negotiate a potential collaboration,” Bouchard wrote.

During cross-examination yesterday, Wright acknowledged that the “non-binding” heading was never removed from the term sheet during the more than six months of negotiations between the companies.

“In hindsight, it was an error of omission,” Wright told Harold Weinberger, one of Siga’s lawyers. Wright also acknowledged that Siga officials paid off a $3 million loan that helped fund the smallpox drug’s development.

‘Got The Product’

Eric Richman, PharmAthene’s CEO and president, said the loan was tied to the prospect of a merger or a licensing deal.

“We weren’t loaning another company money unless we merged or got the product,” Richman testified yesterday.

Richman noted that he was the one who put the “non- binding” heading on documents outlining the terms of the licensing agreement.

“I always put that on documents I sent outside the company,” he explained.

Both biotech firms develop products to counter biological warfare agents, such as smallpox and anthrax. PharmAthene had a net loss of $32.3 million on 2009 sales of $27.6 million. Siga posted a net loss of $17.6 million on revenue of $13.8 million.

Since its founding, PharmAthene has won at least $550 million in U.S. Government contracts and funding, according to its Website.

PharmAthene rose 4 cents, or 1 percent, to $4.27 in NYSE Amex trading yesterday. Siga fell 44 cents, or 3.1 percent, to $13.56 in Nasdaq Stock Market trading yesterday.

The case is PharmAthene Inc. v. Siga Technologies Inc., CA2627, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Sophia Pearson in Wilmington, Delaware, at spearson3@bloomberg.net; Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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