SIGA Technologies — Onwards and upwards with strong FY23

FY23 was another strong year for SIGA, with the company recording its best top-line performance in the last five years, driven by the strong order book ($164m worth of new orders during the year), including material stockpile deliveries to the Biomedical Advanced Research and Development Authority (BARDA) and further supported by an $18m order from the European Health Emergency Preparedness and Response Authority (HERA). Despite packaging-related bottlenecks hampering deliveries, the company was able to deliver $115.7m worth of orders (c 77% of the planned $151m worth of deliveries). Of the pending deliveries, $22m have since been made in January and February 2024. According to our understanding, the $15m in IV TPOXX deliveries planned for Q423 remain outstanding. Given the strong operating performance, SIGA has announced a special dividend of $0.6/share, marking a third consecutive year of dividend payouts. There were no share buybacks in Q423 and, with the conclusion of the ongoing share repurchase program (as at 31 December 2023), we assume the company will put greater focus on dividend payouts as a means of rewarding shareholders. For FY24, we expect the stockpile deliveries of oral and IV TPOXX to BARDA to drive top-line momentum, with upside optionality from growth in international orders. In the longer term, we expect the potential PEP and pediatric label expansions to support growth.

In FY23, SIGA successfully completed all clinical trial-related activities related to the PEP label expansion. While the expanded safety study was successfully concluded in Q123 and did not indicate any drug-related serious adverse events, the preliminary analysis of the immunogenicity trial (testing TPOXX plus JYNNEOS, an FDA-approved smallpox vaccine) did not reveal any meaningful differences in immunogenicity between the two groups (JYNNEOS + placebo group and JYNNEOS + TPOXX group). Subsequent observations indicated that the measurable immune response to the JYNNEOS vaccine in both groups was lower than expected, which could potentially prevent non-inferior statistical determination from being the primary endpoint of the study as originally planned.

SIGA thereafter arranged for some JYNNEOS + TPOXX samples to be tested by the CDC, which, encouragingly, demonstrated the expected immune response to the vaccine. The company is now working towards getting all samples re-analyzed. In parallel, it aims to submit an sNDA in the next 12 months (previously 2024). Based on these updates, we have conservatively pushed out the launch timeline under the PEP label to 2026, versus 2025 previously. We recognize that the US government can decide to stockpile the drug before FDA approval, but we conservatively assume that the authorities will wait until approval of the PEP indication. We continue to view the PEP label expansion as a key growth driver for SIGA, given that the indication calls for a longer treatment course (28 days versus 14 days of oral TPOXX) and therefore offers the potential to double the market opportunity in the United States for the company.

SIGA provided an update on the mpox clinical trial progress involving TPOXX in the FY23 earnings call. Despite a declining number of mpox cases across the globe, the company continues to enroll patients in its trials and collect data for its studies, indicating continued accumulation of case counts, especially in Africa. Key updates on the clinical trials include:

As a reminder, SIGA is coordinating with government sponsors in running four randomized controlled trials as well as multiple observation studies, to secure TPOXX’s approval for mpox in the United States. We note that TPOXX is already approved for treatment of all orthopoxvirus pathogens, including mpox in both the UK (July 2022) and the European Union (January 2022).

SIGA’s Q423 revenues came in at $116.5m, comprising $115.7m in product sales and another $0.7m in R&D-related revenue. The product sales include $97.9m from oral TPOXX deliveries to the US Strategic National Stockpile (SNS), $6.0m in deliveries to the US Department of Defense (DoD) and $12.0m in international sales. FY23 total revenue stood at $139.9m, up 26.3% y-o-y, driven by a significant growth in product sales (of 50.8% y-o-y to $130.7m), which includes oral TPOXX deliveries to the US SNS ($97.9m), DoD ($10.6m) and international jurisdictions ($21.3m). Growth in product sales was somewhat offset by lower R&D revenues ($9.2m vs $24.1m in FY22), attributed to reduced clinical activity under the government-sponsored PEP label expansion study. Note that while the recorded product revenues were lower than our estimate of $163.7m, the company had previously alluded to the possibility of a slight delay in deliveries due to certain packaging related issues (most pending deliveries have been made in Q124 with the exception of the $15m of IV TPOXX deliveries that had been anticipated in Q423) and was therefore not entirely unexpected. Management has indicated that the company continues to work on normalizing these manufacturing bottlenecks.

Gross profit margin on product sales for the period was reported at 86% in FY23 (gross profit of $112.8m) versus 88% in FY22 ($76.2m in gross profit), primarily reflecting an increase in the manufacturing and delivery costs of oral TPOXX sold to the US government and other international countries. We note, however, that the margins were supported by the delay in delivery of IV TPOXX, which is a lower-margin product versus oral TPOXX (gross margin of less than 40% vs 85% for oral TPOXX). R&D expenses declined by 27.1% y-o-y to $16.4m. This drop was attributed to lower vendor-related expenses in relation to clinical activities for the PEP label expansion study and BARDA contract, partially offset by higher regulatory fees related to the EMA regulatory submissions. Despite an increase in professional fees, SG&A expenses during the year ($22.0m) were significantly lower than the $35.1m recorded in FY22, primarily reflecting a decline in the promotion fees to Meridian as international sales declined from $71m in FY22 to $21m in FY23. Overall SIGA reported a 95.8% yoy increase in its FY23 operating profit (to $83.6m). We note that this was below the company guided figure of $90–100m, which can primarily be attributed to the delay in some TPOXX deliveries due to packaging issues, which appear to be temporary in nature. Net income stood at $68.1m versus $33.9m in FY22.

SIGA’s strong operating performance has resulted in improving cash flows, with the company reporting operating cash flow of $94.8m (more than double the FY22 figure of $41.6m) and a period-end net cash figure of $150.1m (SIGA remains debt-free). This triggered the company to announce a special cash dividend of $0.6/share, to be paid out in April 2024. At the current outstanding share count of 71.1m, this comes to a payout of $42.7m and translates to a solid 11% dividend yield and a payout ratio of more than 60% of FY23 net income of $68.1m. As a reminder, the company had also declared a special dividend of $0.45/share in May 2023 and a similar dividend payout in May 2022, highlighting sustained business strength. With the balance sheet forecast to remain healthy in FY24, we think this trend is likely to continue (albeit it is not assured), which should support investor sentiment.

Based on the Q423 results and improved visibility on deliveries related to contractual obligations, we have made some adjustments to our forecasts. We have revised our FY24 revenue estimate to $190.6m, from our previous forecast of $177.3m, primarily driven by some of the anticipated deliveries in Q423 rolling into 2024 on account of the aforementioned packaging-related issues. This includes $15m in oral TPOXX deliveries as part of the $112.5m due under the BARDA agreement, $6m under the $18m HERA agreement and $15m in IV TPOXX under the July 2022 agreement ($26m in IV TPOXX deliveries). We note that while the oral TPOXX deliveries to the SNS and HERA countries were made in January and February 2024, IV TPOXX deliveries remain outstanding ($20.8m in deferred revenue recognized as a liability in the balance sheet). We expect this to be delivered in 2024. In addition, we also expect BARDA to exercise the remaining $112.5m oral TPOXX option, which continues to be the primary driver of our top-line forecasts for FY24. We assume the entire oral TPOXX order and the $26m August 2022 IV TPOXX order will be delivered in FY24, along with $15m in IV TPOXX from the July 2023 order of $25m. Note that given the lower IV TPOXX margins, SIGA’s primary focus will likely continue to be on oral delivery and therefore our assumption for IV TPOXX deliveries is subject to revision. In terms of international orders, the Canada Department of National Defence holds an option to purchase up to $6.7m of oral TPOXX by December 2025, of which $0.7m of order was delivered in February 2024. We estimate another $3m will be exercised and delivered in FY24, with the remainder in FY25. Our FY25 estimates assume that SIGA will be able to sign a follow-up or new rolling agreement with BARDA for oral TPOXX and incorporate a $103m revenue contribution for the year. It also incorporates c $29m in international deliveries. However, we note that there is a high degree of variability and uncertainty in our assumptions and therefore these figures are subject to change as new information is made available. Exhibit 1 presents a breakdown of our product revenue estimates for FY24 and FY25.

Following the receipt of the final payment under the PEP research contract with the DoD in Q323, we reduce our estimate for FY24 R&D related revenue to $1.9m from $10.7m previously. The corresponding figure for FY25 stands at $2.2m.

We make minor tweaks to our operating expense estimates, reflecting the FY23 trend and run rate. For FY24, we have increased our COGS estimate to $44.9m from $34.0m previously, given the higher proportion of IV TPOXX in the revenue we now assume. We also increase our SG&A expense estimate to $28.7m from $24.3m previously, anticipating a greater sales push in international markets. On the other hand, we lower our R&D estimate to $13.1m ($20.5m previously) to reflect the lower than anticipated research-related expenses in FY23 and slower anticipated activity in FY24. Our revised FY24 operating profit estimate stands at $103.9m ($98.5m previously). For FY25 we estimate an operating profit of $96.3m.

We continue to value SIGA on a risk-adjusted net present value (rNPV) basis for its various programs and contracts, forecasting to the end of the patent life in each geography. Reflecting the discussed changes to our estimates, rolling forward our model (which gets us closer to patent expiry) and incorporating the new net cash figure has resulted in our valuation adjusting to $1.17bn or $16.51/share, from $1.23bn or $17.24/share previously. The key changes to our valuation are the revised launch timelines for the PEP and pediatric label expansions (2026 from 2025 previously) and a slower ramp-up in mpox sales than previously projected. Our revised valuation is presented in Exhibit 2.