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Siga Shouldn’t Have to Pay PharmAthene, Lawyer Says

Jan. 10 (Bloomberg) -- Siga Technologies Inc. shouldn’t have to give half of the profits from a smallpox medicine to PharmAthene Inc., lawyers for Siga told an appeals court.

PharmAthene officials sought “lottery ticket damages” over ST-246, used to combat smallpox terrorist attacks, even though they didn’t have a valid licensing agreement for the drug, Stephen Lamb, a Siga lawyer, told the Delaware Supreme Court today.

“They wanted damages for a deal that never happened and for a deal they never had a right to,” Lamb told the Dover, Delaware-based appeals court.

PharmAthene, based in Annapolis, Maryland, sued New York-based Siga in 2006 claiming it had a licensing agreement and should share in as much as $5 billion in potential sales, mostly from government contracts for the antiviral drug.

Delaware Chancery Judge Donald Parsons Jr. found in 2011 that Siga breached its obligation to negotiate a licensing agreement for the drug in good faith. He ruled PharmAthene is entitled to 50 percent of profit from sales of ST-246 once Siga earns a profit of $40 million.

PharmAthene would get the payments for 10 years following the first commercial sale of any product derived from ST-246, according to the opinion. Siga must keep drug-sales records, which PharmAthene has the right to examine annually.

‘Valuable Product’

PharmAthene’s lawyers argued that Parsons correctly found the drugmaker had a claim to profits.

‘There’s no question that PharmAthene was harmed,’’ Roger Crane, one of the company’s lawyers told the appeals court today. “This was a valuable product.”

PharmAthene, closed unchanged at $1.13 in New York trading after earlier falling as much as 9.7 percent. Siga rose 1 cent to $2.84.

Siga officials said last year that the company won a five-year U.S. government contract for 2 million doses of ST-246 in a deal that could be worth as much as $2.8 billion.

The agreement with the Department of Health and Human Services is initially valued at $433 million for the medicine The government may order as many as 12 million additional courses of ST-246 under the contract, Siga executives said.

In their suit, PharmAthene officials argued they had a claim to ST-246’s profits because they helped fund the drug’s development and Siga reneged on promises to grant a licensing agreement.

PharmAthene’s attorneys sought to show that Siga was running out of money to develop ST-246 in late 2005 when it proposed a merger or license agreement.

Siga Loan

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 to sell the medicine.

Drapkin, a former executive of billionaire Ronald Perelman’s MacAndrews & Forbes 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.

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.

Evidence Cited

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.

The trial judge wrongly found that Siga officials failed to negotiate the licensing deal in good faith, simply because they didn’t base the later talks on the non-binding terms the parties discussed earlier, Lamb told Delaware’s highest court today.

Parsons also erred by “engaging in speculation” on what the outcome of the negotiations over the drug would have been, and awarding damages on that basis, Lamb said.

PharmAthene officials contend the licensing terms that were discussed before merger talks collapsed should have been considered “locked in completely,” Crane countered.

“If the parties come to an agreement on specific terms, it’s a breach of the duty to negotiate in good faith to try and change those terms” down the road, Crane said.

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

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net; Phil Milford in Wilmington, Delaware at pmilford@bloomberg.net

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

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