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Siga Liable Over PharmAthene Contract; Damages Set Aside

Biological warfare defense firms Siga Technologies Inc. and PharmAthene Inc. may rise today after a court upheld Siga’s liability over a disputed smallpox-medicine licensing agreement while throwing out a potential multibillion-dollar damages ruling for PharmAthene.

The Delaware Supreme Court’s May 24 decision prompted Siga to rise as much as 41 percent after the close of regular trading to $5.15 before it was halted at $4.40 in Nasdaq trading. PharmAthene rose as much as 53 percent to $2.45 before falling back to $2.37.

The state’s highest court upheld a judge’s 2011 finding that Siga violated promises to negotiate in good faith over a license for ST-246, an antiviral drug for use in case of a biological attack. The appeals court also ordered the judge to reconsider the amount of damages PharmAthene can recover.

Siga executives’ bad-faith negotiations were prompted by “seller’s remorse” over giving up control of “what was looking more and more like a multibillion-dollar drug,” Chief Justice Myron Steele wrote in a 42-page ruling.

Delaware Chancery Court Judge Donald Parsons will now have to reassess how much in ``contract-expectation damages” PharmAthene may recover from Siga for violating promises to properly negotiate the licensing agreement, Steele added.

‘Positive Decision’

“We are pleased by this positive decision from the Delaware Supreme Court,” Eric Richman, PharmAthene’s president and chief executive officer, said in a May 26 e-mailed statement. “We look forward to final resolution of the case” before Parsons, he added.

Siga officials said in a May 26 statement that they’ll argue before Parsons that PharmAthene’s contract-expectation damage claims are flawed.

“PharmAthene’s evidence of expectancy damages is speculative and too uncertain, contingent, and conjectural to permit an award,” William Haynes II, Siga’s general counsel, said in an e-mailed statement.

PharmAthene, a developer of biological and chemical defense products based in Annapolis, Maryland, sued New York-based competitor Siga in 2006, claiming it had a licensing agreement for the medicine. PharmAthene’s attorneys argued it should share in as much as $5 billion in potential sales, mostly from government contracts for ST-246.

Licensing Agreement

Parsons ruled in 2011 PharmAthene was entitled to 50 percent of profit from sales of ST-246 once Siga earned a profit of $40 million because of Siga executives’ bad-faith negotiations over the licensing agreement.

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.

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

Lawyers for Siga argued at trial the 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.

Companies Negotiated

PharmAthene executives ultimately loaned Siga $3 million to keep the drug’s development going while the two companies negotiated, according to court testimony. PharmAthene claimed that ex-Siga Chairman Donald 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.

The terms sheet relied upon by PharmAthene’s lawyers as evidence of a contract between the two firms was intended as a “jumping off point” for negotiations if merger talks faltered, Drapkin said.

The Delaware appeals court upheld Parsons’ finding that the term sheet and other evidence in the case showed Drapkin and other Siga executives agreed to hold good-faith negotiations over the licensing agreement.

Although the term sheet “is not signed and contains a footer on each page stating” it contains nonbinding terms, the pact’s combination with other agreements covering loans and a potential merger made it an enforceable contract, the Supreme Court found.

The case is Siga Technologies v. PharmAthene, 12-00314, Delaware Supreme Court. The Chancery Court case is PharmAthene Inc. v. Siga Technologies Inc., CA2627, Delaware Chancery Court (Wilmington).

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