SIGA Technologies — Protection against a future pandemic

SIGA Technologies is a US-based commercial-stage pharmaceutical company that was founded in 1995 and went public in 1997. It is focused on treating smallpox, a very serious life-threatening disease caused by the variola virus that has a death rate of up to 30%. The US Centers for Disease Control and Prevention (CDC) considers it to be a Category A bioterrorism agent/disease as it can be easily disseminated and transmitted, has a high mortality rate and might cause public panic. SIGA’s lead program is oral TPOXX, which was approved by the FDA in 2018 for the treatment of smallpox. In the same year, SIGA was awarded a re-supply contract by BARDA of up to $602m for the procurement of TPOXX into the Strategic National Stockpile (SNS) as well as additional research and development (there was an initial supply contract awarded to SIGA in 2011). The company is looking to expand its franchise with an IV version (NDA to be submitted in Q221), a liquid formulation mainly for use in small children and a label expansion for TPOXX for use in PEP.

We are initiating coverage of SIGA at $968m or $12.61 per basic share using a risk-adjusted NPV model. This model factors in the current US and Canadian contracts and the additional IV and liquid formulations, the PEP label expansion and contracts with countries across the globe as COVID-19 has elucidated the dangers that a pandemic can cause a country in terms of both health and economic prospects. We view advancement of the PEP indication and contracts with major western economies to be key valuation inflection points for the company.

SIGA reported $117.9m in cash at the end of December and is profitable. For 2020, it reported $125.0m in revenues and net income of $56.3m. Its gross margin is typically over 80%, most of its R&D is reimbursed by the government and SG&A costs are relatively low as there is not a need for much of a dedicated salesforce (the commercial focus is mainly on government procurement). SIGA has a $50m stock repurchase program in place and bought $28.5m of stock to the end of Q420.

Unlike a typical healthcare company, SIGA is heavily dependent on government procurement contracts, which have quite a few unknowns. The contracts are extended at the sole discretion of BARDA and are dependent on congressional appropriations, which can often be delayed due to political maneuvering in a divisive partisan environment. SIGA cannot get paid in the US market unless budget resolutions are passed in Congress. Additionally, the timing of TPOXX deliveries can also be unknown, which has created volatility and lumpiness in SIGA’s revenues in the past. So, although we expect the company to have average annual product sales of over $100m per year for the next several years, some years can be significantly higher or lower. The prospects and timing for international expansion are unknown outside of Canada, which recently awarded two contracts to the company. There is also potential competition from brincidofovir, developed by Chimerix for the treatment of smallpox. There is a PDUFA date in April 2021 and brincidofovir could be included in the SNS. However, this likely will not affect SIGA’s business with BARDA as the agency has often sought at least two sources. Additionally, the stockpile of 1.7m TPOXX courses is only enough to cover 0.5% of the population of the US, much less than what might be required in a widespread smallpox outbreak.

SIGA’s lead product, TPOXX, can already be considered successful with both an FDA approval and a $602m BARDA contract. However, this is just the beginning as the company is making efforts on several fronts to expand the TPOXX franchise, both in the US and internationally. Note, the company’s R&D is mostly funded by the US government, so the net cost of development is exceptionally low. Additionally, as large human clinical studies are unethical (they would need to purposely infect people with smallpox), regulatory approval typically requires safety data in healthy subjects and efficacy data in two animal models. As the company is receiving procurement orders directly from governments for the purpose of stockpiling, regulatory approval is not necessary for landing such a contract. SIGA first received a contract from BARDA in 2011, which specified $508.4m in payments, seven years before FDA approval.

Smallpox is a serious infectious disease caused by the variola virus and humanity has had a long and tortured history with it. Smallpox is thought to have first appeared around the time of the first agricultural settlements, around 10,000 BCE, with the earliest evidence of the skin lesions typically seen in smallpox found on Egyptian mummies from 1570–1085 BCE. The first recorded epidemic came during the time of the Egyptian-Hittite war in 1350 BCE. Over the ages, smallpox killed millions. A large-scale epidemic in the Roman Empire thought to have been smallpox killed between 3.5 million to seven million people around 180 CE, including the Emperor Marcus Aurelius. Tens of millions of Native Americans are also thought to have died from smallpox after the European colonists brought it over and in purposeful use as a biological weapon through infected blankets during the French and Indian War.1 In the 20th century alone, 300 million people have died from the infection.2

It is usually spread through respiratory droplets that generally have a range of six feet but can be aerosolized and spread through a ventilation system, and only a few virions are thought to be necessary to cause infection. In 1970, 17 people in a German hospital on three separate floors developed smallpox despite none of the 17 having direct contact with the initial patient.3 Smallpox has a long incubation period with no symptoms, but often turns into what many would consider a bad case of the flu. Following this, a rash develops that turns into sores and round, deeply embedded pustules. These pustules then begin to scab and only once the scabs have fallen off is the patient considered not to be contagious. The period where the patient is both symptomatic and contagious can last around three weeks (see Exhibit 2).

Smallpox is generally one of the more transmissible of the serious infectious diseases and one of the most deadly. Someone exposed to an infected person has a 90% chance of contracting the disease themselves.4 The reproductive number (R0) of smallpox, which is the number of cases directly generated by one case in the population, is estimated to be between five and seven, while that of COVID-19 is estimated to be between 1.5 and 3.5 (see Exhibit 3). Even at this lower estimate, there have already been 102 million COVID-19 cases globally with 26 million cases in the US alone. Some CDC forecasts estimate that up to 54.5 million people could be infected with smallpox if it were used as a bioterrorist weapon.5

The danger of smallpox being used as a weapon is very real as the DNA sequence of the smallpox genome is in the public domain. A group of Canadian researchers were able to synthesize the horsepox virus, a relative of smallpox, in six months using about $100,000 worth of mail order constituents. Separately, Tonix Pharmaceuticals announced that it was able to synthesize the horsepox virus. Additionally, methods have been published on how to engineer mousepox (another orthopoxvirus related to smallpox) into a highly virulent and vaccine-resistant form.6 Additionally, the US and Russia maintain their smallpox stockpiles, with some highly virulent forms likely in the Russian one. Also, it has been reported that Russian researchers have travelled to other nations (such as Iran) to continue work on biological agents, potentially including smallpox.

While authorities used to require mandatory smallpox vaccinations for the general public, these generally ended in the 1970s, with the US no longer requiring a smallpox vaccination in 1972. Those vaccinated 50 years ago or more likely have almost no residual protection against smallpox transmission, but evidence does suggest there may be residual immunity against fatal complications of smallpox. In a study of outbreaks in Australia from the 1880s to early 1900s, the median duration of partial protection against severe smallpox was 31.7 years and 53.9 years against fatal complications of smallpox.7

TPOXX works by inhibiting viral spread to uninfected cells by specifically inhibiting the protein VP37 (also known as F13 and p37), which is involved in producing extracellular enveloped virions.8 Extracellular enveloped virions are involved with spread of the virus between cells and systemic dissemination.9 Importantly, this protein is highly conserved in all orthopoxviruses, which not only provides TPOXX with an advantage of broad applicability but makes animal testing with smallpox analogs (the only ethical method to test a smallpox treatment) more straightforward and more likely to be indicative of efficacy in humans.

Efficacy was determined in three pivotal studies in cynomolgus macaques infected with the monkeypox virus and an additional two pivotal studies in New Zealand white rabbits infected with rabbitpox. Mortality in these models is nearly universal, with a significantly shorter incubation period than that seen in humans. Human incubation periods can range from seven to 19 days (although are typically 12–14 days on average), while macaques develop skin lesions three to four days after infection, and the rabbits develop systemic viremia at around the same time (with fever consistently seen at day four). In animals treated with TPOXX at day four, when they became symptomatic, the survival rate was between 80% and 100%, with rates consistent between species (see Exhibit 5). As part of Study 3 in cynomolgus macaques, treatment at days five and six post-infection were also investigated, with survival rates for those treated five days after infection being 83% and survival for those treated six days after infection at 50%. This indicates that treatment once symptoms first start will be very important in helping people survive smallpox.

Additionally, besides the marked difference in survival, TPOXX also had dose-dependent effects on lesion counts and viral loads (see Exhibits 6 and 7).

The effective doses in the studies were determined to be 10mg/kg in macaques and 40mg/kg in rabbits (although due to species-specific issues, the exposure level was higher in macaques). A dose of 600mg twice daily for 14 days was selected for human testing, with plasma concentrations higher than that seen in both macaques and rabbits (see Exhibit 8).

For human safety, SIGA ran a Phase III, randomized, placebo-controlled trial with 359 subjects given 600mg of TPOXX twice a day for 14 days and an additional 91 receiving placebo. TPOXX was demonstrated to be safe with only 2% discontinuing treatment in both placebo and TPOXX arms due to adverse events. In total, 37% of patients in the TPOXX arm reported an adverse event compared to 33% in placebo. There was a single serious adverse event in the TPOXX arm (a pulmonary embolism that resulted in death), but that was deemed unrelated to treatment.

TPOXX has been the subject of two separate BARDA procurement contracts; the first was signed in 2011 and expires in December 2024. Per the contract, BARDA agreed to buy 1.7m courses of TPOXX with an additional 300,000 provided at no charge. The contract specified $508.4m in payments, of which $459.8m was received for the delivery of TPOXX and $45.5m was received as reimbursement for development and support activities ($3.1m remains eligible to be received in the future as reimbursement for these activities).

In September 2018, SIGA received a re-supply contract for TPOXX for up to $602m, including $461m for procurement of up to 1,488,000 courses of oral TPOXX (~$310 per course) and $85m for the procurement of up to 212,000 courses (~$401 per course) of IV TPOXX. An additional $56m is allocated for development and support and is essentially used to help fund the company’s R&D. Also, with a seven-year shelf life for oral TPOXX, we estimate that approximately one-seventh of the stockpile would need to be replaced on average every year (this varies depending on the timing of orders from BARDA). The base period for the contract is five years, with the potential to extend it to 10 years through the exercise of options (although this would not modify the contractual value or total dose quantities covered by the contract), which may mean this contract may be in effect until 2028. As of Q420, up to $424m of included potential payments from the 2018 BARDA contract are specified as unexercised options. Altogether, we assume there will be a continuing contractual relationship with the US government similar to its current form (with regards to pricing and volume) until 2034, when the final patents expire for TPOXX. However, we believe the contracts may extend beyond this as there are other barriers to entry for competitors beyond patents, such as the US government procurement system. Additionally, SIGA has a supply chain that is completely US-based, which we believe should be an advantage over the many generic companies that are reliant on international manufacturing.

The doses of TPOXX contracted by BARDA are in the SNS. The SNS also stockpiles three vaccines for smallpox: ACAM2000, Jynneos and Aventis Pasteur (although the Aventis Pasteur vaccine is considered investigational and would only be used if the other vaccines were depleted or not readily available). ACAM2000 is a live, replicating vaccine that carries the risk of considerable side effects (black box warnings for myocarditis, pericarditis, encephalitis, encephalomyelitis, encephalopathy, vaccinia, and Stevens-Johnson syndrome, among others) and is also contraindicated in immune-compromised individuals. Based on clinical studies measuring cutaneous response as a proxy for vaccination success, the vaccine has 84–96% effectiveness according to the FDA label. Additionally, the mode of administration is 15 jabs of a bifurcated needle.

Jynneos is a highly attenuated vaccine that does not replicate in human cells (making it much safer than ACAM2000) and vaccine effectiveness could not be judged by a cutaneous response as there was not one due to the attenuation. In a comparison of the neutralizing antibody response to ACAM2000, Jynneos was judged to be non-inferior although numerically it provided a greater number of neutralizing antibodies. One issue with the dosing is that there are two doses, four weeks apart, which limits the potential usefulness of the vaccine in a true smallpox emergency. Besides preventing infection by vaccinating before exposure, vaccines are thought to have efficacy if provided within three days of exposure (well within the incubation period when people are asymptomatic). If given four to seven days post-exposure there may still be some protection and people exposed to the disease may not get as sick. In an emergency, while vaccines may help protect a certain percentage of the population, as we have seen from COVID-19, timely distribution of vaccines in the US is not without challenges. Once there is an event, therapeutics such as TPOXX will be a very necessary component of the response to the crisis as they can be given at a later time post-exposure and appear to have far fewer side effects than vaccines.

There is also an additional therapeutic in the US stockpile, cidofovir, which is investigational and it is not known if a person with smallpox would benefit from it, according to the FDA. Chimerix is developing brincidofovir for the treatment of smallpox and has tested the therapy in New Zealand white rabbits, who were infected with rabbitpox, and BALB/C mice, who were infected with ectromelia virus. For the rabbits provided therapy three days post exposure, 100% survived, with 90% surviving if provided therapy four days post exposure (as in the TPOXX trials). In untreated rabbits, survival was 29% (compared to 0% in the TPOXX trials). Within the mice treated four days post-exposure, survival was 78% while those untreated had a survival rate of 13%. An NDA has been submitted for the product with a PDUFA date of 7 April 2021. If approved, we would expect a BARDA contract for brincidofovir, although we believe this would be in addition to TPOXX not as a replacement of it. As a reminder, the current TPOXX stockpile only covers approximately 0.5% of the US population and the number at risk is much higher (as mentioned, some CDC forecasts estimate that up to 54.5 million people could be infected with smallpox if it were used as a bioterrorist weapon).10 Additionally, as brincidofovir had a higher survival rate within the placebo animals, the placebo-adjusted survival rate in the TPOXX trials appears to be higher, potentially indicating it may have superior data. We do not believe there are any other near-term potential competitors to TPOXX based on our research.

SIGA has a number of initiatives to expand on TPOXX in the US. The company is currently looking to expand its franchise with an IV version (NDA expected to be submitted in Q221) to treat those who are either too sick or unable to swallow oral TPOXX capsules. A total of $85m of the 2018 BARDA contract is allocated for the procurement of 212,000 doses of an IV version of TPOXX. Additionally, SIGA is working on a pediatric liquid formulation (technically a powder for reconstitution) for people weighing under 13kg. The reason for this is that TPOXX is given as three 200mg capsules twice daily for 14 days to those who weigh 40kg or more, two 200mg capsules for those who weigh between 25kg and 50kg and one 200mg capsule for those between 13kg and 25kg in weight. As there is no way to split a capsule in half, the mg/kg dosage would be too high for small children (and they would find it difficult to swallow a capsule). Timing is unclear for the liquid formulation, but development is underway.

The largest potential expansion of TPOXX would be in PEP. There is a one- to two-week gap in potential treatment of smallpox infection. Vaccines can protect against infection from before exposure to at most three to seven days after exposure. The current label for TPOXX assumes its use once symptoms have started after the incubation period (approximately 12–14 days after exposure on average). So there is a period of time when an exposed person would be unprotected by a vaccine and not likely to get TPOXX under the current labelling. The PEP program is looking to bridge that gap. Under PEP, TPOXX would be given to anyone who has been exposed to someone with smallpox given the high chance that person would become infected (as a reminder, someone exposed to an infected person has a 90% chance of contracting the disease themselves).11 Colonel Peter Weina, chief of research at Walter Reed Military Medical Center, stated at the 1 May 2018 FDA advisory committee meeting that: ‘The reality is that this [smallpox] is so highly infectious, post-exposure prophylaxis is going to be a knee-jerk reaction to anybody at any time if you've got anybody who's been diagnosed. So anybody who's within eyeball shot of somebody who's got a diagnosed case of smallpox is going to be getting this drug [TPOXX].’

According to the company, PEP treatment would be for a 28-day course of therapy (versus 14 days for the approved indication). If BARDA were to purchase an equivalent number of PEP courses compared to the current (post-infection treatment) contract, this opportunity could be double the size (due to double the treatment length and therefore double the number of capsules required). With regards to the development plan, the company has stated that two human studies are planned, one to evaluate if there is interference with the Jynneos smallpox vaccine and an expanded safety study. The studies may begin as early as Q321 (with timing somewhat dependent on the COVID-19 pandemic) with completion expected in 2022. Additionally, based on communications with the FDA, no additional animal studies will likely be needed for approval for the PEP indication. That said, it is uncertain exactly when TPOXX for PEP would be stockpiled (if at all) and it could occur before or after FDA approval. However, for the sake of conservatism and due to the lack of visibility, we currently forecast inclusion in the SNS in 2025. Note that SIGA has been awarded a research contract in 2019 (and expanded in 2020) for up to $26m with the US Department of Defense to support work on the PEP label expansion.

SIGA is partnered with Meridian Medical Technologies, a Pfizer subsidiary focused on health security with a 50-year history of selling medical countermeasures globally, for the marketing of TPOXX outside the US. Other products marketed by Meridian include an antidote treatment for organophosphorus nerve agents such as Sarin and VX and a treatment for cyanide poisoning, among others. Exact terms of the Meridian agreement are undisclosed beyond that it will be a percentage of sales of oral TPOXX net of certain expenses, with the percentage increasing when exceeding a certain threshold.

In April 2020, the first contract outside of the US was signed with the Canadian Department of National Defence (CDND) for up to 15,325 courses of oral TPOXX over four years for a total of $14.3m. Note the per-course amount is $933, approximately triple what has been obtained from the US government. The reason for the lower price for the US government is that it helped fund the development of TPOXX and the large quantity of doses in the stockpile. The CDND made an initial purchase of 2,500 courses for $2.3m in Q220, with up to (subject to option exercise over the course of the contract) 12,825 courses to be ordered following Canadian regulatory approval (expected late 2021/early 2022). With regards to the Canadian approval, the proposed indication would cover all human pathogenic orthopoxviruses such as smallpox, monkeypox (milder than smallpox but still deadly to around 10% of those who catch it, with a 2019 outbreak in Nigeria), cowpox and vaccinia.

In January 2021, SIGA received a second contract from a separate Canadian government agency. The Public Health Agency of Canada (PHAC) awarded a contract for up to $33m of oral TPOXX within five years (though total doses were unspecified). The contract specifies commitments for the purchase of $3.4m by 31 March 2021 and a cumulative purchase of $17.2m by 31 March 2023. The remainder will be purchased after that date with these purchases subject to option exercise by the PHAC.

We believe SIGA and Meridian will focus on key US allies, such as Europe, Australia, Japan and South Korea, and that SIGA will seek partnerships for other territories. The two companies may also be able to find additional clients in South America, Asia and Africa. The sales cycle for these international agreements will likely be long and it is unclear how many courses the different governments may purchase, but the COVID-19 pandemic will certainly have provided a concrete example of how disastrous a pandemic can be. We would expect additional contracts to be signed internationally in the coming years and we believe those contracts could be substantial in size (see Exhibit 9). It is important to note there is an undisclosed payment to Meridian for its international business development services, which will vary based on whether amounts exceed certain thresholds. We currently model this fee to be 20% of sales on average (the company has stated that it expects the margin on international agreements after manufacturing and Meridian fees to be between 65% and 80%). The company submitted an application with the EMA in July 2020 with a proposed indication similar to Canada’s, covering all human pathogenic orthopoxviruses.

SIGA is also developing ST-357, which is in a preclinical stage and has a distinct mechanism of action from TPOXX and may be more broadly active. The target is conserved in all chordopox viruses, including orthopox, molluscum contagiosum and cervidpox. Proof of concept has been demonstrated in three mouse models of orthopoxviruses. SIGA is pursuing support from the US government for further development of the compound.

Unlike a typical healthcare company, SIGA is heavily dependent on government procurement contracts, which carry with them quite a few unknowns. The US contracts and included options are enacted and extended at the sole discretion of BARDA and are dependent on congressional appropriations, which can often be delayed due to political maneuvering in a divisive partisan environment. SIGA simply cannot be paid in the US market unless budget resolutions are passed in Congress. Additionally, the timing of TPOXX deliveries can also be unknown, which has created volatility and lumpiness with SIGA’s revenues in the past. So, while we expect SIGA to have average annual product sales of over $100m per year for the next several years, some years could be significantly higher or lower. The prospects for international expansion are pretty much an unknown outside of Canada, which recently awarded two contracts to SIGA. The prospects and timing for contracts from countries such as the EU, Japan, South Korea and Australia are unknown. There is also potential competition from brincidofovir, developed by Chimerix for the treatment of smallpox. There is a PDUFA date in April 2021 for brincidofovir and the treatment could be included in the SNS. However, this likely will not affect SIGA’s business with BARDA as the agency has often sought at least two sources. Additionally, the current stockpile of 1.7m TPOXX courses is only enough to cover 0.5% of the population of the US, much less than what might be required in a widespread smallpox outbreak.

We are initiating coverage of SIGA at $968m or $12.61 per basic share using a risk-adjusted NPV model. For both the US and Canadian oral TPOXX businesses, we use a 10% discount rate (our standard for commercialized products) and a 100% probability of success, as the contracts have been signed and there is no development risk. For the US base business for oral TPOXX, we assume there will be a contract with the US government similar to its current form (with regards to pricing and volume) until 2034, when the final patents expire for TPOXX. However, we believe the contracts may extend beyond this as there are other barriers to entry for competitors beyond patents, such as the US government procurement system. We take a similar approach to the Canadian contract although there is potential to greatly increase the stockpile there. The planned level of stockpile is only enough for approximately 0.1% of the population, which would likely prove inadequate in any smallpox pandemic scenario to protect anyone beyond a privileged few.

Our IV formulation estimate is based on the allocated amounts in the BARDA contract (reflecting $25.6m per order for bulk drug substance and final drug product), which we assume will occur on an annual basis, starting in 2023 (regulatory filing is expected in Q221). We assign a 90% probability of success, as it is about to be filed for approval, and use a 12.5% discount rate for this program, our standard for non-marketed products. For the pediatric formulation, as we have little detail on development timelines, we assume launch in 2025 with annual revenues of approximately 4% of those for oral TPOXX as that is the proportion of the population that is under 13kg in weight. We assign a 60% probability of success as it is still in formulation stages, although we do know the underlying active ingredient is safe and effective. We expect to increase this probability of success as this program progresses.

For the PEP program, we model double the number of treatment capsules and revenue potential given the 2x longer therapy duration, which is consistent with management’s guidance for the opportunity. We expect launch in 2025 and assign a 40% probability of success. Although it is the same product as that for smallpox treatment and we expect it should work when administered before symptom onset, the program is still in development and there is also government procurement risk.

With regards to international markets outside Canada, we assume a 50% probability of success as there is very little visibility on what the level of uptake is going to be by the different governments. Otherwise, our $97m in peak annual sales assumes approximately 50% of the population of this group of countries will eventually be covered by a TPOXX stockpile. We also assume the stockpile size as a percentage of the population will be at the midpoint of the sizes of the US and Canadian stockpiles as well the price per dose. We expect to start seeing contracts in 2023, although this is mainly for the sake of conservatism and there could be contracts coming in 2021 or 2022. Additionally, there is no reason why TPOXX stockpiles would need to be restricted to these countries as other countries face national security threats that may come from bioterror. That said, there is a wide range of potential outcomes for the international expansion of TPOXX, some of which we present in Exhibit 10.

Based on the current stock price and our valuation model, it appears the current valuation is based on the existing contracts in the US and Canada but may not fully account for the upside coming from the additional formulations, PEP and international expansion, with the latter two providing the most potential upside. Also, in terms of normalized P/E multiples, the stock is trading at around 8x 2020 EPS, a discount to current P/E of 18x for Emergent BioSolutions (EBS), which is also in the health security space, and the P/E of approximately 28x for the S&P 500 Healthcare Index (the S&P500 as a whole trades at 40x). If the stock were to trade at our $12.61 valuation for the company, the P/E would be 15x, a slight discount with EBS but still at a meaningful discount to the larger market as a whole.

In 2020, SIGA reported $125.0m in revenues ($115.5m of which was product sales and services (including $2.3m from Canada) and the remaining $9.5m being reimbursed R&D) and net income of $56.3m. The gross margin for oral TPOXX was 87% and we expect that to expand as international sales, with a likely higher price point, become a greater portion of revenues. Our 2021 estimate for revenue is $119.2m, although we caution that actual results have shown high variability in prior years due to government procurement and budget schedules. There is also a new US administration in power and many political appointees have yet to be confirmed by the Senate. Orders and revenues could very well be back-end loaded to the second half of the year. Our revenue estimate also assumes no additional international contracts are signed, though the company has stated that it is in discussions with multiple governments. We expect reported net income to grow from $56.3m in 2020 to $58.6m in 2021. Given the generally low level of SG&A for the company and that R&D is substantially reimbursed by the US government, a high percentage of revenues from future growth should drop straight to the bottom line.

SIGA reported $117.9m in cash at the end of December and is profitable (although profitability for any specific period will depend on the timing of government orders and payments). SIGA also has a $50m stock-repurchase program in place and bought $28.5m of stock from March 2020 through the end of December. In addition to using cash for share repurchases, the company could use cash to fund growth and/or diversification initiatives.