PharmAthene Wins Rights to Profit From Siga Smallpox Drug

Siga Technologies Inc. (SIGA) must share with PharmAthene Inc. profit from sales of a smallpox drug that may total more than $400 million, a judge ruled. Siga plunged as much as 38 percent in Nasdaq trading.

Delaware Chancery Court Judge Donald Parsons Jr. in Wilmington said today New York-based Siga breached its obligation to negotiate in good faith on ST-246, an antiviral drug for use in case of a biological attack. Parsons rejected PharmAthene’s claim that Siga breached a binding license agreement. He also denied claims for a lump sum award and instead ordered the companies to split the profits.

“The plaintiff is entitled to share in any profits realized from the sale of the drug in question,” Parsons said today in a 118-page opinion.

Siga probably will appeal “unfavorable aspects” of the decision, Chief Executive Officer Eric A. Rose said.

“We are gratified that the court appreciated that the draft term sheet did not constitute a binding license agreement,” Rose said in a statement. “We respectfully disagree with the unprecedented decision to grant to PharmAthene a continuing interest in the net profits.”

Eric Richman, PharmAthene’s chief executive officer, called the ruling “transformative” for the Annapolis, Maryland-based company.

“As a result of this ruling, we will appropriately share in the financial success of ST-246 without any of the associated infrastructure and related expenses,” Richman said in a statement.

50 Percent Split

Siga fell $1.72, or 36 percent, to $3 at 3:04 p.m. New York time in Nasdaq Stock Market trading. It earlier touched $2.93, the lowest since December 2008. PharmAthene rose 48 cents, or 21 percent, to $2.74, before trading was halted on the NYSE Amex stock exchange.

Parsons ruled that PharmAthene is entitled to 50 percent of all net profit from sales of ST-246 once Siga earns $40 million in net profit. PharmAthene would get the payment for 10 years following the first commercial sale of any product derived from ST-246, according to the opinion. Siga must keep sales records for the drug, which PharmAthene has the right to examine annually, Parsons wrote.

‘I’m Shocked’

“I’m shocked by this decision,” John Lewis, a Siga investor and president of Gardner Lewis Asset Management, said in a phone interview. “We feel like the judge made a bad decision based on Delaware corporate law and validated an agreement that was always stamped as non-binding.”

Lewis said his Chadds Ford, Pennsylvania-based firm is one of Siga’s five largest shareholders. It holds more than 2.1 million shares of Siga stock, according to data compiled by Bloomberg.

PharmAthene sued Siga in 2006 claiming the biotechnology firm lost more than $1 billion in potential profits when its rival reneged on the licensing agreement for the smallpox drug. Government officials awarded Siga a $433 million contract to provide ST-246 to the U.S. Department of Health and Human Services, the company said in May.

‘Non-Binding’

Lawyers for Siga argued at trial that licensing talks were never completed and documents outlining proposed terms were marked as “non-binding.” A PharmAthene official said in court that the heading was left on the documents by mistake.

PharmAthene’s attorneys argued during a two-week trial in January that Siga was running out of money to develop ST-246 in late 2005 when it proposed a merger or license agreement.

PharmAthene executives ultimately loaned Siga $3 million to keep the drug’s development going while the two companies negotiated, according to court testimony. Company officials claimed that ex-Siga Chairman Donald G. Drapkin guaranteed the companies would either merge or Siga would grant PharmAthene a license for the medicine.

Drapkin, a former executive of billionaire Ronald Perelman’s MacAndrews & Forbes Holdings Inc. holding company, countered during the trial that he never promised PharmAthene officials a license. A term sheet was intended to serve as a “jumping off point” for negotiations if merger talks faltered, Drapkin said.

In his ruling, Parsons said the evidence showed PharmAthene wouldn’t have loaned Siga the money without assurance that it reasonably could expect to control ST-246 through either a merger or a license agreement. Siga likely experienced “seller’s remorse” when it appeared the drug would be a success, Parsons wrote in the opinion.

“With the benefit of hindsight, it appears M&F and Siga’s board made a terrible business decision in opting to offer a major stake in ST-246 for a relatively small capital infusion,” Parsons wrote. “The evidence is unmistakable, however, that Drapkin and Siga knew what they were doing and went ahead anyway.”

The case is PharmAthene Inc. (PIP) 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; Dawn McCarty in Wilmington, Delaware, at dmccarty@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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