SIGA Technologies — Diamond in the rough amid macro weakness

We expect SIGA’s FY23 topline performance to be driven by domestic deliveries under BARDA contracts for oral and IV TPOXX. Based on upcoming expirations in the US strategic national stockpile, we continue to estimate oral TPOXX deliveries for BARDA of $112.5m each in FY23 and FY24. Additionally, we anticipate upside from international oral TPOXX orders of c $8m including $1m of oral TPOXX delivered in April 2023 and $7m in pending order deliveries for contracts signed in FY22 and to be delivered by July 2023, along with IV TPOXX orders worth c $26m, to be fulfilled (at least partially) during the year. Out of total $10.7m contract from US Department of Defense (DoD), signed in September 2022, the company delivered oral TPOXX worth $5.1m in Q123. We expect the pending $5.5m of deliveries under the contract to be delivered in FY23 as the US DoD exercised an option for the remaining $5.5m of oral TPOXX orders in March 2023. Though we expect a strong operating performance in FY23 and FY24, we note the possibility of variability in the timings of the orders. As per the latest company release, management expects to receive $112.5m of US government orders in Q323, which suggests the FY23 performance will be driven by the second half of the year. Currently, our FY23 and FY24 estimates remain unchanged.

Under its PEP label expansion program, SIGA is currently running two clinical trials for oral TPOXX in smallpox treatment. Of the two clinical trials, one is an expanded safety study, with nine clinical sites in the United States, where dosing commenced in Q222. The second study is the TPOXX plus JYNNEOS immunogenicity trial, which is being conducted at two sites. This trial is a comparison of the enrolled participants’ immune response with the JYNNEOS smallpox vaccines compared with the immune response with JYNNEOS while on TPOXX treatment. The study is designed to determine if TPOXX interferes with the development of an effective immune response to the vaccine. With patient enrolment complete for both clinical trials, the upcoming data readout from these trials, expected in July 2023, remains the key potential revenue growth catalyst in medium term. If results are favorable, this should lead to a supplementary new drug application by early 2024, followed by a possible initiation of PEP sales in 2025.

As a reminder, SIGA received a multi-year research contract (PEP Label Expansion R&D Contract) from the US DoD, worth $19.5m, in September 2022, for conducting research work for potential label expansion for oral TPOXX that includes PEP for smallpox treatment. In following revisions, the DoD increased the scope and funding of the contract to c $27m and the contract runs until 31 January 2025. As the PEP study is nearing its completion, as of 31 March 2023, up to $5m in research revenue remains to be recognized under the contract.

We note that the typical treatment cycle with oral TPOXX involves a 14-day course of therapy. In comparison, a PEP indication involves a longer course of therapy (28 days, or twice the length of the current FDA-approved treatment label). Typically, an infected individual would receive a 14-day course of treatment, whereas an individual at risk of exposure (but not showing symptoms) would receive a PEP treatment (over 28 days). Given that the US stockpile expansion opportunity (over the next few years) for SIGA is centered around expanding oral TPOXX usage to include PEP, if approved and contracted with the US government, we estimate that the same number of oral treatments will be ordered as in the current BARDA contract (about 1.7m), but there would be four bottles allocated per treatment rather than two (as in previous orders). Given the probable high volumes of sales, in our view the PEP label expansion has significant upside potential for the company’s topline and is a meaningful catalyst to expand its addressable market. We continue to assume a 50% probability of success for SIGA’s PEP label expansion opportunity.

SIGA is a profitable company, with operating margins of 39% in FY22 and 67% in FY21. In May 2023, SIGA declared a $0.45/share special cash dividend, supported by a strong net cash balance of $115.7m as of 31 March. At the current outstanding share count of 71.3m, this comes to a payout of $32.1m and translates to a healthy 8% dividend yield and a payout ratio of c 44% of our projected FY23 net income of $73.5m. We note that the company announced a similar dividend payout in May 2022, highlighting sustained balance sheet strength.

SIGA is a dividend-paying, commercial-stage, revenue-generating company, which differentiates it from the typical development-stage or non-profitable biotechs. SIGA also continued share buybacks in Q123 and we calculate a total 1.14m shares were bought back in the quarter for $7.6m. We note that (including the recent dividend declaration) the company has spent close to $150m in share buybacks and dividends since early 2020. Note that our current valuation of SIGA ($17.53/share) incorporates pro-forma cash that is ex-dividend ($83.6m). However, it is uncertain whether the company expects to provide similar payouts in future years.

With mpox cases significantly declining globally, in May 2023, the WHO declared that the mpox outbreak is not a global health emergency anymore. Between January 2022 and April 2023, there were more than 87,000 cases of mpox globally, with over 30,000 cases reported in the US. In the three months to 30 April 2023, mpox cases dropped by 90% compared to the previous 90 days. Despite the waning numbers globally, an increased number of cases have been reported recently in certain Asian countries, such as Japan, South Korea and China. While not alarming, this highlights the continued latent threat of future escalations and therefore the ongoing requirement for both preventative vaccines and therapeutics, such as TPOXX, which is currently the only antiviral treatment approved for treatment of all orthopoxvirus pathogens, including mpox, in both the UK (approved in July 2022) and the European Union (approved in January 2022).

Though US mpox cases have declined significantly to a seven-day average of one to two cases, we continue to see an opportunity (though limited) for TPOXX for mpox treatment. As a reminder, TPOXX has been used to treat more than 6,900 mpox patients in the United States on a compassionate basis and SIGA is participating in a total of nine trials (from Q322) to assess the safety and efficacy of TPOXX in participants with mpox (the trials are required to receive regulatory approval from the US FDA). Five of these are randomized, placebo-controlled clinical trials and, as per latest the available information, 175 patients have been enrolled across the studies. The pace of recruitment has been hindered by the reducing caseload globally, creating uncertainty in terms of full enrolment, readouts and FDA submission. SIGA has highlighted possible discussions with regulators to allow pooling of interim data from various studies as an alternative to completing the originally planned enrolment targets from a single study. If there is progress on this front, it may allow for faster regulatory submission.

We maintain our valuation for SIGA at $1.25bn or $17.53 per share, based on a risk-adjusted net present value (rNPV) for its various programs and contracts, forecasting to the end of the patent life in each geography. Exhibit 3 provides detailed overview of our rNPV estimates across different geographies: