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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File No. 0-23047
December 31, 2002
SIGA Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3864870
(State or other jurisdiction of (IRS Employer Id. No.)
incorporation or organization)
420 Lexington Avenue, Suite 601 New York, NY 10170
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (212) 672-9100
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
common stock, $.0001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the common stock on March 20,
2003 as reported on the Nasdaq SmallCap Market was approximately $16,268,778. As
of March 20 , 2002 the registrant had outstanding 13,226,649 shares of common
stock. For the year ended December 31, 2002 SIGA had revenues of $344,450.
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SIGA Technologies, Inc.
Form 10-KSB
Table of Contents
Part I Page No.
Item 1 Business........................................................... 1
Item 2 Properties......................................................... 14
Item 3 Legal Proceedings.................................................. 14
Item 4 Submission of Matters to a Vote of Security Holders................ 14
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters............................................................ 15
Item 6 Management's Discussion and Analysis for Financial Condition
and Results of Operations.......................................... 18
Item 7 Financial Statements and Supplementary Data........................ 29
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 30
Part III
Item 9 Directors and Executive Officers of the Registrant................. 31
Item 10 Executive Compensation............................................. 33
Item 11 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ................................... 35
Item 12 Certain Relationships and Related Transactions..................... 38
Part IV
Item 13 Exhibits, Lists and Reports on Form 8-K............................ 39
Item 14 Controls and Procedures............................................ 44
Item 15 Principal Accountant Fees and Services............................. 44
Signatures.................................................................. 45
PART I
Item 1. Business
Certain statements in this Annual Report on Form 10-KSB, including certain
statements contained in "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words or phrases "can be," "expects," "may affect," "may depend," "believes,"
"estimate," "project" and similar words and phrases are intended to identify
such forward-looking statements. Such forward-looking statements are subject to
various known and unknown risks and uncertainties and SIGA cautions you that any
forward-looking information provided by or on behalf of SIGA is not a guarantee
of future performance. SIGA's actual results could differ materially from those
anticipated by such forward-looking statements due to a number of factors, some
of which are beyond SIGA's control, including (i) the volatile and competitive
nature of the biotechnology industry, (ii) changes in domestic and foreign
economic and market conditions, and (iii) the effect of federal, state and
foreign regulation on SIGA's businesses. All such forward-looking statements are
current only as of the date on which such statements were made. SIGA does not
undertake any obligation to publicly update any forward-looking statement to
reflect events or circumstances after the date on which any such statement is
made or to reflect the occurrence of unanticipated events.
SIGA Technologies, Inc. is referred to throughout this report as "SIGA,"
"the Company," "we" or "us."
Introduction
SIGA is a development stage biotechnology company incorporated in Delaware
on December 9, 1996. We aim to discover, develop and commercialize vaccines,
antibiotics and novel anti-infectives for serious infectious diseases. Our lead
vaccine candidate is for the prevention of group A streptococcal pharyngitis or
"strep throat." We are developing a technology for the mucosal delivery of our
vaccines which may allow those vaccines to activate the immune system at the
mucus lined surfaces of the body -- the mouth, the nose, the lungs and the
gastrointestinal and urogenital tracts -- the sites of entry for most infectious
agents. We focus our anti-infectives program on the increasingly serious problem
of drug resistance. These programs are designed to block the ability of bacteria
to attach to human tissue, the first step in the infection process.
Technology
Vaccine Technologies: Mucosal Immunity and Vaccine Delivery
Using proprietary technology licensed from The Rockefeller University
("Rockefeller"), SIGA is developing certain commensal bacteria ("commensals") as
a means to deliver mucosal vaccines. Commensals are harmless bacteria that
naturally inhabit the body's surfaces with different commensals inhabiting
different surfaces, particularly the mucosal surfaces. Our vaccine candidates
use genetically engineered commensals to deliver antigens for a variety of
pathogens to the mucosal immune system. When administered, the genetically
engineered commensals colonize the mucosal surface and replicate. By activating
a local mucosal immune response, our vaccine candidates are designed to prevent
infection and disease at the earliest possible stage. By comparison, most
conventional vaccines are designed to act after infection has already occurred.
Our commensal vaccine candidates use Gram-positive bacteria. Rockefeller
scientists have identified a protein region that is used by Gram-positive
bacteria to anchor proteins to their surfaces. We are using the proprietary
technology licensed from Rockefeller to combine antigens from a wide range of
infectious organisms, both viral and bacterial, with the surface protein anchor
region of a variety of commensal organisms. By combining a specific antigen with
a specific commensal, vaccines may be tailored to both the target pathogen and
its mucosal point of entry.
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To target an immune response to a particular mucosal surface, a commensal
vaccine would employ a commensal organism that naturally inhabits that surface.
For example, vaccines targeting sexually transmitted diseases might employ
Lactobacillus acidophilus, a commensal colonizing the female urogenital tract.
Vaccines targeting gastrointestinal diseases could employ Lactobacillus casei, a
commensal colonizing the gastrointestinal tract. We have conducted initial
experiments using Streptococcus gordonii ("S. gordonii"), a commensal that
colonizes the oral cavity and which may be used in vaccines targeting pathogens
that enter through the upper respiratory tract, such as the influenza virus.
By using an antigen unique to a given pathogen, the technology may
potentially be applied to any infectious agent that enters the body through a
mucosal surface. Our founding scientists have expressed and anchored a variety
of viral and bacterial antigens on the outside of S. gordonii, including the M6
protein from group A streptococcus, a group of organisms that causes a range of
diseases, including strep throat, necrotizing fasciitis, impetigo and scarlet
fever. In addition, proteins from other infectious agents, such as HIV and human
papilloma virus have also been expressed using this system. We believe this
technology will enable the expression of most antigens regardless of size or
shape. In animal studies, we have shown that the administration of a genetically
engineered S. gordonii vaccine prototype induces both a local mucosal immune
response and a systemic immune response.
We believe that mucosal vaccines developed using our proprietary commensal
delivery technology could provide a number of advantages, including:
o More complete protection than conventional vaccines: Mucosal
vaccines in general may be more effective than conventional
parenteral vaccines, due to mucosal vaccines' ability to produce
both a systemic and local (mucosal) immune response.
o Safety advantage over other live vectors: A number of bacterial
pathogens have been genetically rendered less infectious, or
attenuated, for use as live vaccine vectors. Commensals, by virtue
of their substantially harmless nature, may offer a safer delivery
vehicle without fear of genetic reversion to the infectious state
inherent in attenuated pathogens.
o Non-injection administration: Oral, nasal, rectal or vaginal
administration of the vaccine eliminates the need for painful
injections with their potential adverse reactions.
o Potential for combined vaccine delivery: The Children's Vaccine
Initiative, a world wide effort to improve vaccination of children
sponsored by the World Health Organization (WHO), has called for the
development of combined vaccines, specifically to reduce the number
of needle sticks per child, by combining several vaccines into one
injection, thereby increasing compliance and decreasing disease. We
believe our commensal delivery technology can be an effective method
of delivery of multi-component vaccines within a single commensal
organism that address multiple diseases or diseases caused by
multiple strains of an infectious agent.
o Eliminating need for refrigeration: One of the problems confronting
the effective delivery of parenteral vaccines is the need for
refrigeration at all stages prior to injection. The stability of the
commensal organisms in a freeze-dried state would, for the most
part, eliminate the need for special climate conditions, a critical
consideration, especially for the delivery of vaccines in developing
countries.
o Low cost production: By using a live bacterial vector, extensive
downstream processing is eliminated, leading to considerable cost
savings in the production of the vaccine. The potential for
eliminating the need for refrigeration would add considerably to
these savings by reducing the costs inherent in refrigeration for
vaccine delivery.
Anti-Infectives Technology: Prevention of Attachment and Infectivity
The bacterial infectious process generally includes three steps:
colonization, invasion and disease. The adherence of bacteria to a host's
surface is crucial to establishing colonization. Bacteria adhere through a
number of mechanisms, but generally by using highly specialized surface
structures which, in turn, bind to specific structures or molecules on the
host's cells or, as discussed below, to inanimate objects residing in the host.
Once adhered,
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many bacteria will invade the host's cells and either establish residence or
continue invasion into deeper tissues. During any of these stages, the invading
bacteria can cause the outward manifestations of disease, in some cases through
the production and release of toxin molecules. The severity of disease, while
dependent on a large combination of factors, is often the result of the ability
of the bacteria to persist in the host. These bacteria accomplish this
persistence by using surface molecules which can alter the host's nonspecific
mechanisms or its highly specific immune responses to clear or destroy the
organisms.
Unlike conventional antibiotics, as discussed above, our anti-infectives
approaches aim to block the ability of pathogenic bacteria to attach to and
colonize human tissue, thereby preventing infection at its earliest stage. Our
scientific strategy is to inhibit the expression of bacterial surface proteins
required for bacterial infectivity. We believe that this approach has promise in
the areas of hospital-acquired drug-resistant infections and a broad range of
other diseases caused by bacteria.
Many special surface proteins used by bacteria to infect the host are
anchored in the bacterial cell wall. Scientists at Rockefeller University have
identified an amino acid sequence and related enzyme, a selective protease, that
are essential for anchoring proteins to the surface of most Gram-positive
bacteria. Published information indicates that this amino acid sequence is
shared by more than 50 different surface proteins found on a variety of
Gram-positive bacteria. This commonality suggests that this protease represents
a promising target for the development of a new class of antibiotic products for
the treatment of a wide range of infectious diseases. Experiments by our
founding scientists have shown that without this sequence, proteins cannot
become anchored to the bacterial surface and thus the bacteria are no longer
capable of attachment, colonization or infection. Such "disarmed" bacteria
should be readily cleared by the body's immune system. Our drug discovery
strategy is to use a combination of structure-based drug design and high
throughput screening procedures to identify compounds that inhibit the protease,
thereby blocking the anchoring process. If successful, this strategy should
provide relief from many Gram-positive bacterial infections, but may prove
particularly important in combating diseases caused by the emerging antibiotic
resistance of the Gram-positive organisms S. aureus, Streptococcus pneumoniae,
and the enterococci.
In contrast to the above program, which focuses on Gram-positive bacteria,
our pilicide program, based upon initial research performed at Washington
University, focuses on a number of new and novel targets all of which impact on
the ability of Gram-negative bacteria to assemble adhesive pili on their
surfaces. Pili are proteins on the surfaces of Gram-negative bacteria -- such as
E. coli, salmonella, and shigella -- that are required for the attachment of the
bacteria to human tissue, the first step in the infection process. This research
program is based upon the well-characterized interaction between a periplasmic
protein -- a chaperone -- and the protein subunits required to form pili. In
addition to describing the process by which chaperones and pili subunits
interact, we have developed the assay systems necessary to screen for potential
therapeutic compounds, and have provided an initial basis for selecting novel
antibiotics that work by interfering with the pili adhesion mechanism.
Surface Protein Expression System ("SPEX")
The ability to overproduce many bacterial and human proteins has been made
possible through the use of recombinant DNA technology. The introduction of DNA
molecules into E. coli has been the method of choice to express a variety of
gene products, because of this bacteria's rapid reproduction and well-understood
genetics. Yet despite the development of many efficient E. coli-based gene
expression systems, the most important concern continues to be associated with
subsequent purification of the product. Recombinant proteins produced in this
manner do not readily cross E. coli's outer membrane, and as a result, proteins
must be purified from the bacterial cytoplasm or periplasmic space. Purification
of proteins from these cellular compartments can be very difficult. Frequently
encountered problems include low product yields, contamination with potentially
toxic cellular material (i.e., endotoxin) and the formation of large amounts of
partially folded polypeptide chains in non-active aggregates termed inclusion
bodies.
To overcome these problems, we have taken advantage of our knowledge of
Gram-positive bacterial protein expression and anchoring pathways. This pathway
has evolved to handle the transport of surface proteins that vary widely in
size, structure and function. Modifying the approach used to create commensal
mucosal vaccines, we have
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developed methods which, instead of anchoring the foreign protein to the surface
of the recombinant Gram-positive bacteria, result in it being secreted into the
surrounding medium in a manner which is readily amenable to simple batch
purification. We believe the advantages of this approach include the ease and
lower cost of Gram-positive bacterial growth, the likelihood that secreted
recombinant proteins will be folded properly, and the ability to purify
recombinant proteins from the culture medium without having to disrupt the
bacterial cells and liberating cellular contaminants. Gram-positive bacteria may
be grown simply in scales from those required for laboratory research up to
commercial mass production.
Product Candidates and Market Potential
Mucosal Vaccines
Development of our mucosal vaccine candidates involves: (i) identifying a
suitable immunizing antigen from a pathogen; (ii) selecting a commensal that
naturally colonizes the mucosal point of entry for that pathogen; and (iii)
genetically engineering the commensal to express the antigen on its surface for
subsequent delivery to the target population.
Strep Throat Vaccine Candidate. Until the age of 15, many children suffer
recurrent strep throat infections. Up to three percent of ineffectively treated
strep throat cases progress to rheumatic fever, a debilitating heart disease,
which worsens with each succeeding streptococcal infection. Since the advent of
penicillin therapy, rheumatic fever in the United States has experienced a
dramatic decline. However, in the last decade, rheumatic fever has experienced a
resurgence in the United States. Part of the reason for this is the latent
presence of this organism in children who do not display symptoms of a sore
throat, and, therefore, remain untreated and at risk for development of
rheumatic fever. Based on data from the Centers for Disease Control and
Prevention, there are five to 10 million cases of pharyngitis due to group A
streptococcus in the United States each year. There are over 32 million children
in the principal age group targeted by us for vaccination. Worldwide, it is
estimated that one percent of all school age children in the developing world
have rheumatic heart disease. Additionally, despite the relative ease of
treating strep throat with antibiotics, the specter of antibiotic resistance is
always present. In fact, resistance to erythromycin, the second line antibiotic
in patients allergic to penicillin, has appeared in a number of cases.
We believe that the reason no vaccine for strep throat has been developed
is because of problems associated with identifying an antigen that is common to
the more than 120 different serotypes of group A streptococcus, the bacterium
that causes the disease. We have licensed from Rockefeller a proprietary antigen
which is common to most types of group A streptococcus, including types that
have been associated with rheumatic fever. When this antigen was orally
administered to animals, it was shown to provide protection against multiple
types of group A streptococcal infection. Using this antigen, we are seeking to
develop a mucosal vaccine for strep throat.
Our strep throat vaccine candidate expresses the strep throat antigen on
the surface of the commensal S. gordonii, which lives on the surface of the
teeth and gums. Pre-clinical research in mice and rabbits has established the
ability of this vaccine candidate to colonize and induce both a local and
systemic immune response. We are collaborating with the National Institutes of
Health ("NIH") and the University of Maryland Center for Vaccine Development on
the clinical development of this vaccine candidate. In cooperation with the NIH
we filed an Investigational New Drug Application ("IND") with the United States
Food and Drug Administration (the "FDA") in December 1997. The first stage of
these clinical trials, using the commensal delivery system without the strep
throat antigen, were completed at the University of Maryland in 2000. The study
showed the commensal delivery system to be well-tolerated and that it
spontaneously eradicated or was easily eradicated by conventional antibiotics. A
second clinical trial of the commensal delivery system without the strep throat
antigen was initiated in 2000 at the University of Maryland. The study was
completed in January 2002 and the results corroborated the results of the
earlier study regarding tolerance and spontaneous eradication.
In the U.S. there are about 19 million children aged 2 to 6 years who
could be candidates to receive such a vaccine at the time of its introduction
and then around 4 million babies born each year to be protected. Assuming a
charge of $25 per dose and three doses needed for protection, there could be a
potential market for a strep throat
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vaccine of $1.4 billion to immunize the entire U.S. population of 2 to 6 year
olds and, thereafter, $300 million per year to maintain immunization in new
births.
STD Vaccine Candidates. One of the great challenges in vaccine research
remains the development of effective vaccines to prevent sexually transmitted
diseases ("STDs"). Two principal pathogens that are transmitted via this route
are chlamydia, the most common bacterial STD, and Neisseria, the causative agent
of gonorrhea. To date, a great deal of effort has been expended, without
appreciable success, to develop effective injectable prophylactic vaccines
versus these pathogens. Given that both of these pathogens enter the host
through the mucosa, we believe that induction of a vigorous mucosal response to
certain bacterial antigens may protect against acquisition of the initial
infection. To test this hypothesis, we have expressed newly discovered antigens
from these pathogens in our proprietary mucosal vaccine delivery system. These
live genetically engineered vaccines will be delivered to animals and tested for
local and systemic immune response induction, and whether these responses can
block subsequent bacterial infections. We have licensed technology from Oregon
State University and Washington University in support of our chlamydia and
Neisseria programs, respectively. In February 2000 we entered into an option
agreement with the Ross Products Division of Abbott Laboratories ("Ross"), which
will provide funding for further development of an STD vaccine product. The
research program was completed in late 2001 and a report has been sent to Ross.
Following review of the data, the agreement was extended to allow for an
additional set of experiments to be conducted.
Chlamydia is the leading sexually transmitted disease in the U.S., with an
estimated 4 million cases occurring annually. Up to $2.4 billion is spent
annually on the treatment of infections from this pathogen, with the greatest
percentage of this cost directed toward the therapy of chlamydial infection in
women. Vaginal infection with C. trachomatis can progress to pelvic inflammatory
disease, resulting in infertility, or may result in ectopic pregnancies. In
addition, new evidence has linked C. trachomatis infection with an increased
incidence of cervical cancer.
The target population for STD vaccines is likely to be 12 - 18 years of
age. There are currently 27.5 million such individuals in the U.S., with around
4 million entering this age group annually. Once again, assuming $25 per dose
and three doses to complete immunization, there could be a potential market for
a C. trachomatis vaccine of $2 billion to immunize the entire U.S. population of
12 to 18 year olds and, thereafter, $300 million per year to maintain
immunization in those entering this age group.
Mucosal Vaccine Delivery System
We are developing our proprietary mucosal vaccine delivery system, which
is a component of our vaccine program, for license to other vaccine developers.
Our commensal vaccine candidates utilize Gram-positive bacteria to deliver
antigens. We are using proprietary technology to anchor antigens from a wide
range of infectious organisms, both viral and bacterial, to the surface protein
anchor region of a variety of commensal organisms. By combining a specific
antigen with a specific commensal, we believe that vaccines can be tailored to
both the target pathogen and its mucosal point of entry.
We have developed several genetic methods for recombining foreign
sequences into the genome of Gram-positive bacteria at a number of non-essential
sites. Various parameters have been tested and optimized to improve the level of
foreign protein expression and its immunogenicity. In pre-clinical studies,
genetically engineered commensals have been implanted into the oral cavities of
several animal species with no observed deleterious effects. The introduced
vaccine strains have taken up residence for prolonged periods of time and induce
both a local mucosal (IgA) as well as a systemic immune response (IgG and
T-cell).
We have completed two early stage clinical evaluations of our mucosal
vaccine delivery system based on the commensal bacterium, S. gordonii. These
clinical studies were designed to test the safety of the formulation, to monitor
the extent and duration of colonization of the nasal and oral cavities and to
determine if the delivery system could be eradicated at the end of the study
with a regimen of conventional antibiotics. A total of 47 volunteers between the
ages of 18 and 40 completed the first study, performed in the United Kingdom, in
which S. gordonii was delivered to the nasal passage and oral cavity. A total of
60 volunteers completed a second study which was
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conducted at the University of Maryland as part of our strep throat vaccine
program as described above. The results of the studies indicated the delivery
system was well-tolerated and that the delivery system spontaneously eradicated
or was easily eradicated by conventional antibiotics. The ongoing clinical
studies at the University of Maryland are also designed to evaluate S. gordonii
as a commensal bacterial delivery system for our vaccine targeting strep throat.
Experiments are currently underway to optimize and test the vaccine formulation
prior to initiating Phase I human trials with the recombinant commensal vector
based vaccine.
Anti-Infectives
Our anti-infectives program is targeted principally toward drug-resistant
bacteria and hospital-acquired infections. According to estimates from the
Centers for Disease Control, approximately two million hospital-acquired
infections occur each year in the United States.
Our anti-infectives approaches aim to block the ability of bacteria to
attach to and colonize human tissue, thereby blocking infection at the first
stage in the infection process. By comparison, antibiotics available today act
by interfering with either the structure or the metabolism of a bacterial cell,
affecting its ability to survive and to reproduce. No currently available
antibiotics target the attachment of a bacterium to its target tissue. We
believe that, by preventing attachment, the bacteria should be readily cleared
by the body's immune system.
Gram-Positive Antibiotic Technology. Our lead anti-infectives program is
based on a novel target for antibiotic therapy. Our founding scientists have
identified an enzyme, a selective protease, used by most Gram-positive bacteria
to anchor certain proteins to the bacterial cell wall. These surface proteins
are the means by which certain bacteria recognize, adhere to and colonize
specific tissue. Our strategy is to develop protease inhibitors as novel
antibiotics. We believe protease inhibitors will have wide applicability to
Gram-positive bacteria in general, including antibiotic resistant staphylococcus
and a broad range of serious infectious diseases including meningitis and
respiratory tract infections. In 1997, we entered into a collaborative research
and license agreement with Wyeth to identify and develop protease inhibitors as
novel antibiotics. In the first quarter of 2001, we received a milestone payment
from Wyeth for delivery of the first quantities of protease for screening, and
high-throughput screening for protease inhibitors was initiated. In connection
with our effort on this program we have entered into a license agreement with
the University of California at Los Angeles for certain technology that may be
incorporated into our development of products for Wyeth. High throughput
screening of compound libraries has been completed and lead compounds are
currently being evaluated in the laboratory.
Gram-Negative Antibiotic Technology. In 1998 we entered into a set of
technology transfer and related agreements with MedImmune, Inc., Astra AB and
The Washington University, St. Louis ("Washington University"), pursuant to
which we acquired rights to certain Gram-negative antibiotic targets, products,
screens and services developed at Washington University. In February 2000, we
ended our collaborative research and development relationship with Washington
University on this technology. (See "Collaborative Research and Licenses"). We
maintain a non-exclusive license to technology acquired through these related
agreements. We are using this technology in the development of antibiotics
against Gram-negative pathogens. These bacteria use structures called pili to
adhere to target tissue, and we plan to exploit the assembly and export of these
essential infective structures as novel anti-infective targets. We continue to
work on enhancing the intellectual property that we jointly share with
Washington University.
Broad-Spectrum Antibiotic Technology. An initial host response to pathogen
invasion is the release of oxygen radicals, such as superoxide anions and
hydrogen peroxide. The DegP protease is a first-line defense against these toxic
compounds, which are lethal to invading pathogens, and is a demonstrated
virulence factor for several important Gram-negative pathogens: Salmonella
typhimurium, Salmonella typhi, Brucella melitensis and Yersinia enterocolitica.
In all of these pathogens it was demonstrated that organisms lacking a
functional DegP protease were compromised for virulence and showed an increased
sensitivity to oxidative stress. It was also recently demonstrated that in
Pseudomonas aeruginosa conversion to mucoidy, the so-called CF phenotype
involves two DegP homologues.
Our scientists recently demonstrated that the DegP protease is conserved
in most important Gram-positive pathogens, including S. pyogenes, S. pneumoniae,
S. mutans and S. aureus. Moreover, our investigators have shown
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a conservation of function of this important protease in Gram-positive pathogens
and believe that DegP represents a true broad-spectrum anti-infective
development target. Our research has uncovered a virulence-associated target of
the DegP protease that will be used to design an assay for high-throughput
screening for the identification of lead inhibitors of this potentially
important anti-infective target.
There are currently more than 100 million prescriptions written for
antibiotics annually in the U.S. and we estimate the worldwide market for
antibiotics to be more than $26 billion. Although our products are too early in
development to make accurate assessments of how well they might compete, if
successfully developed and marketed against other products currently existing or
in development at this time, the successful capture of even a relatively small
global market share could lead to a large dollar volume of sales.
Biological Defense Program. The U.S. government's budget for the fiscal
year beginning October 1, 2002 proposed a $1.5 billion increase in federal
spending on bioterrorism related research and infrastructure which will bring
total spending in this area to more than $1.7 billion. One of the major concerns
is smallpox -- although declared extinct in 1980 by the World Health
Organization, there is a threat that a rogue nation or a terrorist group may
have an illegal inventory of the virus that causes smallpox. The only legal
inventories of the virus are held under extremely tight security at the Centers
For Disease Control in Atlanta, Georgia and at a laboratory in Russia. As a
result of this threat, the U.S. government has announced its intent to make
significant expenditures on finding a way to counteract the virus if turned
loose by terrorists or on a battlefield.
We believe that two recent events have made this area a particularly
attractive business opportunity. First, the federal government has committed
approximately $9 billion of new money to support research on biowarfare defense
in the upcoming year. Second, the FDA has amended its regulations, effective
June 30, 2002, so that certain new drug and biological products used to reduce
or prevent the toxicity of chemical, biological, radiological, or nuclear
substances may be approved for use in humans based on evidence of effectiveness
derived only from appropriate animal studies and any additional supporting data.
We believe that this change could make it possible for us to have potential
products in animal models within six months and approved for sale within two
years if the program is successful. Our Chief Scientific Officer, Dennis Hruby
has over 20 years experience working on smallpox-related research and has been
leading a SIGA/Oregon State University consortium working on an antiviral drug
development project for the past two years.
SIGA Biological Warfare Defense Product Portfolio
Bacterial Commensal Vectors: Our scientists have developed methods that
allow essentially any gene sequence to be expressed in GRAS gram-positive
bacteria, with the foreign protein being displayed on the surface of the live
recombinant organisms. Since these organisms are inexpensive to grow and are
very stable, this technology affords the possibility of rapidly producing live
recombinant vaccines against any variety of biological agent that might be
encountered such as Bacillus anthracis (anthrax) or smallpox.
Surface Protein Expression (SPEX) System: Our scientists have harnessed
the protein expression pathways of gram-positive bacteria and turned them into
protein productions factories. Using our proprietary SPEX system, we can produce
foreign proteins at high levels in the laboratory for use in subunit vaccine
formulations. Furthermore, we can envision engineering these bacteria to
colonize the mucosal surfaces of soldiers and/or civilians and secrete
anti-toxins that protect against aerosolized botulism toxin.
Antibiotics: To combat the problems associated with emerging antibiotic
resistance, SIGA scientists are developing drugs designed to hit a new target -
the bacterial adhesion organelles. Specifically, by using novel enzymes required
for the transport and/or assembly of the proteins and structures that bacteria
require for adhesion or colonization, we are developing new classes of broad
spectrum antibiotics. This may prove invaluable in providing prompt treatment to
individuals encountering an unknown bacterial pathogen in the air or food
supply.
Anti-Smallpox Drugs: While deliberate introduction of any pathogenic
agent would be devastating, the one that holds, we believe, the greatest
potential for harming the general U.S. population is smallpox. At present
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there is no effective drug with which to treat or prevent smallpox infections.
To address this serious risk, our scientists have identified two key smallpox
proteinases and are using their expertise in the design of proteinase inhibitors
to attempt to develop an effective antiviral drug that could treat a smallpox
infection.
The market potential for our biological warfare defense products has
not been quantified as yet beyond the potential to obtain a share of the
approximately $9 billion the federal government is committing to support
research in the coming year. The government's purchase of approximately $800
million worth of smallpox vaccines to have an inventory on hand if needed is
evidence of such market potential.
Veterinary Vaccines
One application of our technology is the development of live vaccines that
are delivered to a specific mucosal niche where they can colonize and thereby
present antigen to the immune system and produce local immunity at the site
where the corresponding pathogen may attempt to enter. Since the proprietary
expression pathway that we use is conserved in essentially all Gram-positive
bacteria, this should allow the same strategy to be employed in the development
of veterinary vaccines. A commensal bacterium can be isolated from the mucosa of
the target species, engineered to express a desired antigen and then
reintroduced to the species in order to produce immunity against subsequent
infection by the corresponding pathogen. Examples of potential targets for this
technology in the area of animal health include prevention of salmonid
aquaculture disease problems or canine papilloma virus infections.
Veterinary Program. We believe our vaccine and anti-infectives
technologies also provide opportunities to develop biopharmaceutical products
for the veterinary health care market. Based on sales of the major companies in
the veterinary market, we estimate the world wide veterinary market to have been
approximately $4 billion in 2001. In the U.S. alone, there are 120 million cats
and dogs, 2 million horses, 100 million cattle, 56 million hogs and 8 million
sheep and goats. We are in discussions with a number of potential strategic
partners to undertake collaborative development agreements in this field. To
date, we have not concluded any agreements with these potential strategic
partners. In April 2002 we executed a proof-of-concept research agreement with
one of the major vaccine providers to test our commensal vector technology. This
project has been completed and the partner company is currently evaluating the
data.
Surface Protein Expression System
Our proprietary SPEX system uses the protein export and anchoring pathway
of Gram-positive bacteria as a means to facilitate the production and
purification of biopharmaceutical proteins. We have developed vectors which
allow foreign genes to be inserted into the chromosome of Gram-positive bacteria
in a manner such that the encoded protein is synthesized, transported to the
cell surface and secreted into the medium. This system has been used to produce
milligram quantities of soluble antigenically authentic protein that can be
easily purified from the culture medium by affinity chromatography. We have
recently used the SPEX system to obtain large quantities of pure M protein
subunit antigen for preclinical studies. We believe this technology can be
extended to a variety of different antigens and enzymes.
We have commenced yield optimization and process validation of this
system. This program is designed to transfer the method from a laboratory scale
environment to a commercial production facility. Our business strategy is to
license this technology on a non-exclusive basis for a broad range of
applications.
Collaborative Research and Licenses
We have entered into the following license agreements and collaborative
research arrangements:
Rockefeller University. In accordance with an exclusive worldwide license
agreement with Rockefeller, we have obtained the right and license to make, use
and sell mucosal vaccines based on gram-positive organisms and products for the
therapy, prevention and diagnosis of diseases caused by streptococcus,
staphylococcus and other organisms. The license covers two issued U.S. patents
and one issued European patent, as well as 11 pending U.S.
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patent applications and corresponding foreign patent applications. The issued
United States patents expire in 2005 and 2014, respectively. The agreement
generally requires us to pay royalties on sales of products developed from the
licensed technologies and fees on revenues from sublicensees, where applicable,
and we are responsible for certain milestone payments and for the costs of
filing and prosecuting patent applications. The primary potential products from
this collaboration are the strep vaccine and the broad spectrum antibiotic.
Under the agreement, we paid the university approximately $850,000 to support
research at Rockefeller. The agreement to fund research has ended and no
payments have been made to the university since the year ended December 31,
1999. Under the agreement we are obligated to pay Rockefeller a royalty on net
sales by SIGA at rates between 2.5% and 5% depending on product and amount of
sales. On sales by any sub-licensee, we will pay Rockefeller a royalty of 15% of
anything we receive. The term of the agreement is for the duration of the
patents licensed. At the end of that period, we have the right to continue to
practice the then existing technical information as a fully paid, perpetual
license.
Oregon State University. Oregon State University ("OSU") is also a party
to our license agreement with Rockefeller whereby we have obtained the right and
license to make, use and sell products for the therapy, prevention and diagnosis
of diseases caused by streptococcus. Pursuant to a separate research support
agreement with OSU, we provided funding for sponsored research through December
31, 1999, with exclusive license rights to all inventions and discoveries
resulting from this research. At this time, no additional funding is
contemplated under this agreement, however we retain the exclusive licensing
rights to the inventions and discoveries that may arise from this collaboration.
During 1999, we acquired an option to enter into a license with OSU in
which we will acquire the rights to certain technology pertaining to the
potential development of a chlamydia vaccine. In February 2000, we exercised our
option and pursuant to an exclusive license agreement dated March 2000, we have
made payments to OSU of approximately $25,000 as part of our obligation under
the option.
In September 2000, we entered into a subcontract with OSU. The contract is
for a project which is targeted towards developing novel antiviral drugs capable
of preventing disease and pathology for smallpox in the event this pathogen were
to be used as an agent of bioterrorism. The project is being funded by a grant
from the NIH. The basic virology aspects of the project will be conducted at OSU
and the drug development will be performed by us under the subcontract. The
budget for the subcontract work will be negotiated on a year by year basis with
OSU depending on progress of the program and funding available. In the year
ended December 31, 2001 we recognized revenue of $15,000. On October 5, 2001 the
agreement was extended through August 31, 2002. For the period ended December
31, 2002 we recognized $75,000 in revenue. The agreement was extended again
through August 31, 2003. The sub-contract is on a year to year renewal. Through
December 31, 2002 we have received a total of $90,000 under the agreement.
Wyeth. We have entered into a collaborative research and license agreement
with Wyeth in connection with the discovery and development of anti-infectives
for the treatment of gram-positive bacterial infections. Pursuant to the
agreement, Wyeth provided funding for a joint research and development program,
subject to certain milestones, through September 30, 1999 and is responsible for
additional milestone payments. In May 2001, we entered into an amendment to the
July 1, 1997 agreement. The amendment extended the term of the original
agreement to September 30, 2001. The extension provided for Wyeth to continue to
pay us at a rate of $450,000 per year through the term of the amended agreement.
During the term of the agreement as amended, we received $787,500 from Wyeth to
support work performed by SIGA under the agreement and $237,500 for achieving a
research milestone. For the year ended December 31, 2001 we recognized revenue
of $1,025,000. The agreement to fund additional research was not extended beyond
September 30, 2001.
Wyeth is obligated to make milestone payments to us as any product
developed progresses through the FDA approval process. For product developed we
could receive up to approximately $13 million in milestone payments for approval
of the product in the U.S. and Japan. We would also receive royalty payments of
2% on the first $300,000 of cumulative licensed product sales, 4% on annual
sales up to $100 million, 6% on annual sales between $100 million and $250
million and 8% on annual sales above $250 million. The license will expire on
the earlier of 10 years or the last to expire issued patent. Wyeth has the right
to terminate the agreement early, on ninety days written notice. If terminated
early, all rights granted to Wyeth revert to SIGA except with respect to any
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compound identified by Wyeth as of the date of termination and subject to the
milestone and royalty obligations of the agreement.
National Institutes of Health. We have entered into a clinical trials
agreement with the NIH pursuant to which the NIH, with our cooperation, will
conduct clinical trials of our strep throat vaccine candidate. The agreement
will fund trials through Phase II of the FDA approval process. To date, two
Phase I clinical trials have been conducted for the strep vaccine delivery
system. We are working to optimize and test the vaccine formulation prior to
initiating Phase I clinical trials with the recombinant commensal vector based
vaccine. The agreement may be terminated unilaterally by the parties upon sixty
days prior notice. If terminated we will receive copies of all data, reports and
other information related to the trials and any unused vaccine.
In May, August and September 2000, we were awarded three Phase I Small
Business Innovation Research ("SBIR") grants from the NIH in the amounts of
$26,000, $96,000 and $125,000 respectively. The grants were for the periods May
3, 2000 to August 31, 2000, August 1, 2000 to January 31, 2001, and September
15, 2000 to March 14, 2001 respectively, and supported our antibiotic and
vaccine development programs. In June 2002 we received a Phase II SBIR grant for
approximately $865,000. The grant was for the two year period beginning June, 1,
2002 and ending May 31, 2004. For the years ending December 31, 2002, 2001 and
2000, we have recognized revenue from grants of $270,000, $64,500 and $182,643,
respectively.
As part of our operational strategy we routinely submit grants to the
NIH. There is no assurance that we will receive additional grants
Washington University. In February 1998, we entered into a research
collaboration and worldwide license agreement with Washington University
pursuant to which we obtained the right and license to make, use and sell
antibiotic products based on gram-negative technology for all human and
veterinary diagnostic and therapeutic uses. The license covered five pending
United States patent applications and corresponding foreign patent applications.
The agreement generally required us to pay royalties on sales of products
developed from the licensed technologies and fees on revenues from sublicensees,
where applicable, and we were responsible for certain milestone payments and for
the costs of filing and prosecuting patent applications. Pursuant to the
agreement, we agreed to provide funding to Washington University for sponsored
research through February 6, 2001, with exclusive license rights to all
inventions and discoveries resulting from this research. During 1999, a dispute
arose between the parties regarding their respective performance under the
agreement. In February 2000, the parties reached a settlement agreement and
mutual release of their obligations under the research collaboration agreement.
Under the terms of the settlement, we are released from any further payments to
Washington University and have disclaimed any rights to the patents licensed
under the original agreement. As part of the settlement agreement, we entered
into a non-exclusive license to certain patents covered in the original
agreement. SIGA and Washington University will share equally the responsibility
for the administration and the expenses for the prosecution of patent
applications and /or patents in the agreement. The collaboration is for the
gram-negative product opportunity. We will receive licensing revenue from
Washington University that derive from the commercialization of products covered
by patent rights of the agreement. The royalty will be 20% of the first $400,000
received and 10% of the next $1,000,000 received with a total payment of
licensing revenues to us not to exceed $500,000.
Abbott Laboratories. In March 2000, we entered into an agreement with the
Ross Products Division of Abbott Laboratories ("Ross"). The agreement grants
Ross an exclusive option to negotiate an exclusive license to certain SIGA
technology and patents in addition to certain research development services. In
exchange for research services and the option, Ross was obligated to pay us
$120,000 in three installments of $40,000. The first payment of $40,000 was
received in March 2000 and was recognized ratably, over the term of the
arrangement. The remaining installments are contingent upon meeting certain
milestones under the agreement and will be recognized as revenue upon completion
and acceptance of such milestones. The first milestone was met, and we received
an additional payment of $40,000 in the quarter ended September 30, 2000. During
the years ended December 31, 2001 and 2000, we recognized revenue in the amount
of $45,000 and $80,000, respectively. The development agreement was for the
sexually transmitted disease product opportunity. Work under the agreement has
been completed and no revenue was recognized in 2002. Ross is currently
evaluating whether it will go forward with a
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license. If Ross does not exercise the option to negotiate a license with us,
all rights to the technology and possible products revert to SIGA.
Regents of the University of California. In December 2000, we entered into
an exclusive license agreement and a sponsored research agreement with the
Regents of the University of California ("Regents"). Under the license agreement
we obtained rights for the exclusive commercial development, use and sale of
products related to certain inventions in exchange for a non-refundable license
issuance fee of $15,000 and an annual maintenance fee of $10,000. As of December
31, 2001 we have made payments of approximately $25,000 under the license In the
event that we sub-license the license, we must pay Regents 15% of all royalty
payments made to SIGA. Under the agreement, we will also pay Regents 15% of all
royalties received from Wyeth. The agreement applies to the gram positive
product opportunity and our collaborative agreement with Wyeth. The term of the
agreement is until the expiration of the last-to-expire patent licensed under
this agreement. The agreement may be terminated by Regents if we default on any
of our obligations, the agreement with Wyeth is terminated and a substitute
agreement is not entered into or if we give notice that we do not intend to make
product from the licensed technology.
TransTech Pharma, Inc. In October 2002, we entered into a drug discovery
collaboration agreement. Under the agreement, SIGA and TransTech will
collaborate on the discovery, optimization and development of lead compounds to
therapeutic agents. The costs of development will be shared. SIGA and TransTech
would share revenues generated from licensing and profits from any
commercialized product sales. The agreement will be in effect until terminated
by the parties or upon cessation of research or sales of all products developed
under the agreement. If the agreement is terminated, relinquished or expires for
any reason certain rights and benefits will survive the termination. Obligations
not expressly indicated to survive the agreement will terminate with the
agreement. No revenues were recognized in 2002 from this collaboration.
Intellectual Property and Proprietary Rights
Protection of our proprietary compounds and technology is essential to our
business. Our policy is to seek, when appropriate, protection for our lead
compounds and certain other proprietary technology by filing patent applications
in the United States and other countries. We have licensed the rights to seven
issued United States patents and two issued European patents. These patents have
varying lives and they are related to the technology licensed from Rockefeller
University for the strep and gram positive products. We have three additional
patent applications in the U.S. and three applications in Europe relating to
this technology. We are joint owner with Washington University of four issued
patents in the U.S. and one in Europe. In addition, there are seven co-owned
patent applications in the U.S. and one in Europe. These patents are for the
technology used for the gram-negative product opportunities. We are also
exclusive owner of two U.S. patents and three U.S. patent applications.
Furthermore, there are three U.S. patent applications and two European
applications. These patents relate to our DegP product opportunities.
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Licensed from Co-owned with
Rockefeller Washington Owned by
PATENTS Univ. Univ. SIGA
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U.S. 7 4 2
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Europe 2 1
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Japan 4
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Australia 6 1
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Canada 3
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Mexico 1
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APPLICATIONS
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U.S. 3 7 3
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Europe 3 2
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Japan 2 1 2
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Canada 5 1 2
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Hungary 1
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China 1
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Korea 1
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New Zeland 1
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Australia 2
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We also rely upon trade secret protection for our confidential and
proprietary information. No assurance can be given that other companies will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or that we can
meaningfully protect our trade secrets.
Government Regulation
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
biopharmaceutical products that we may develop. The nature and the extent to
which such regulations may apply to us will vary depending on the nature of any
such products. Virtually all of our potential biopharmaceutical products will
require regulatory approval by governmental agencies prior to commercialization.
In particular, human therapeutic products are subject to rigorous pre-clinical
and clinical testing and other approval procedures by the FDA and similar health
authorities in foreign countries. Various federal statutes and regulations also
govern or influence the manufacturing, safety, labeling, storage, record keeping
and marketing of such products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations requires the expenditure of substantial resources.
In order to test clinically, produce and market products for diagnostic or
therapeutic use, a company must comply with mandatory procedures and safety
standards established by the FDA and comparable agencies in foreign countries.
Before beginning human clinical testing of a potential new drug, a company must
file an IND and receive clearance from the FDA. This application is a summary of
the pre-clinical studies that were conducted to characterize the drug, including
toxicity and safety studies, as well as an in-depth discussion of the human
clinical studies that are being proposed.
- 12 -
The pre-marketing program required for approval by the FDA of a new drug
typically involves a time-consuming and costly three-phase process. In Phase I,
trials are conducted with a small number of patients to determine the early
safety profile, the pattern of drug distribution and metabolism. In Phase II,
trials are conducted with small groups of patients afflicted with a target
disease in order to determine preliminary efficacy, optimal dosages and expanded
evidence of safety. In Phase III, large scale, multi-center comparative trials
are conducted with patients afflicted with a target disease in order to provide
enough data for statistical proof of efficacy and safety required by the FDA and
others.
The FDA closely monitors the progress of each of the three phases of
clinical testing and may, in its discretion, reevaluate, alter, suspend or
terminate the testing based on the data that have been accumulated to that point
and its assessment of the risk/benefit ratio to the patient. Estimates of the
total time required for carrying out such clinical testing vary between two and
ten years. Upon completion of such clinical testing, a company typically submits
a New Drug Application ("NDA") or Product License Application ("PLA") to the FDA
that summarizes the results and observations of the drug during the clinical
testing. Based on its review of the NDA or PLA, the FDA will decide whether to
approve the drug. This review process can be quite lengthy, and approval for the
production and marketing of a new pharmaceutical product can require a number of
years and substantial funding; there can be no assurance that any approvals will
be granted on a timely basis, if at all.
Once the product is approved for sale, FDA regulations govern the
production process and marketing activities, and a post-marketing testing and
surveillance program may be required to monitor continuously a product's usage
and its effects. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained. Other countries in which any products
developed by us may be marketed could impose a similar regulatory process.
Commercialization of animal health products can be accomplished more
rapidly than human health products. Unlike the human market, potential vaccine
or therapeutic products can be tested directly on the target animal as soon as
the product leaves the research laboratory. The data collected in these trials
is submitted to the U.S. Department of Agriculture for review and eventual
product approval.
Competition
The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. Our competitors include
most of the major pharmaceutical companies, which have financial, technical and
marketing resources significantly greater than ours. Biotechnology and other
pharmaceutical competitors include Cubist Pharmaceuticals, Inc., Corixa
Corporation, Microcide Pharmaceuticals, Inc., ID Vaccines Ltd., Actinova PLC,
and Antex Biologics, Inc. Academic institutions, governmental agencies and other
public and private research organizations are also conducting research
activities and seeking patent protection and may commercialize products on their
own or through joint venture. There can be no assurance that our competitors
will not succeed in developing products that are more effective or less costly
than any which are being developed by us or which would render our technology
and future products obsolete and noncompetitive.
Human Resources and Facilities
As of March 20, 2003 we had 17 full time employees. None of our employees
are covered by a collective bargaining agreement and we consider our employee
relations to be good.
Availability of Reports and Other Information
Our website is www.sigatechnologies.com. We make available on this
website, free of charge, our annual, quarterly and current reports and other
documents filed by us with the Securities and Exchange Commission as soon as
reasonably practicable after the filing date.
- 13 -
Item 2. Properties
Our headquarters are located in New York City and our research and
development facilities are located in Corvallis, Oregon. In New York, we lease
approximately 1,600 square feet under a lease that expires in November 2007. In
Corvallis, we lease approximately 10,000 square feet under a lease that expires
in December 2004.
Item 3. Legal Proceedings
SIGA is not a party, nor is its property the subject of, any pending legal
proceedings other than routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Stockholders held on December 10, 2002, our
stockholders re-elected to our board each member of our board of directors and
ratified our selection of independent auditors:
The following nominees were elected to our board of directors upon the
following votes:
Nominee Votes For Votes Against Abstained
- ------- --------- ------------- ---------
Donald G. Drapkin 7,514,929 0 7,890
Gabriel M. Cerrone 7,514,929 0 7,890
Thomas E. Constance 7,514,929 0 7,890
Mehmet C. Oz 7,410,613 0 112,206
Eric A. Rose 7,514,929 0 7,890
Michael Weiner 7,410,613 0 112,206
Our stockholders ratified the selection of PricewaterhouseCoopers LLP as
our independent auditors for the fiscal year ending December 31, 2002 by casting
7,508,629 votes in favor of this proposal, 12,150 votes against the proposal and
2,040 abstained.
- 14 -
Part II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
Our common stock has been traded on the Nasdaq SmallCap Market since
September 9, 1997 and trades under the symbol "SIGA." Prior to that time there
was no public market for our common stock. The following table sets forth, for
the periods indicated, the high and low closing sales prices for the common
stock, as reported on the Nasdaq SmallCap Market.
Price Range
2001 High Low
------ ------
First Quarter $4.09 $1.65
Second Quarter $4.24 $1.75
Third Quarter $4.05 $2.29
Fourth Quarter $4.00 $2.03
2002 High Low
------ ------
First Quarter $2.85 $2.10
Second Quarter $2.53 $1.05
Third Quarter $1.39 $0.81
Fourth Quarter $1.87 $0.71
As of March 20, 2003, the closing bid price of our common stock was $1.23
per share. There were 96 holders of record as of March 20, 2003. We believe that
the number of beneficial owners of our common stock is substantially greater
than the number of record holders, because a large portion of common stock is
held in broker "street names."
We have paid no dividends on our common stock and we do not expect to pay
cash dividends in the foreseeable future. We are not under any contractual
restriction as to our present or future ability to pay dividends. We currently
intend to retain any future earnings to finance the growth and development of
our business.
Recent Sales of Unregistered Securities
All of the following sales of unregistered securities were made without
registration under the Securities Act in reliance upon the exemption from
registration afforded under Section 4(6) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder. Accordingly, the transfer of the securities
are subject to substantial restrictions. Securities were only purchased by
"Accredited Investors" as that term is defined under Rule 501 of Regulation D.
Proceeds from the offerings were used for general working capital purposes.
In December 2002 and January 2003, we completed a private placement of 34
units consisting of 1.7 million shares of common stock to a group of private
investors. The gross proceeds from the offering were $1,865,000 with net
proceeds to SIGA of approximately $1,682,000.
- 15 -
In October 2002, we completed a private placement of units consisting of
an aggregate of 1,037,500 shares of common stock and warrants to purchase
518,750 shares of common stock at an exercise price of $2.25 per share to a
group of private investors. The offering yielded net proceeds of approximately
$935,000.
In October 2001, we raised gross proceeds of $2.55 million in a private
offering of common stock and warrants to purchase our common stock. We sold
850,000 shares of common stock and 425,000 warrants. These warrants are
exercisable at $3.60 and have a term of seven years. In connection with the
offering we issued 100,000 warrants to purchase shares of the our common stock
to consultants. The consultants' warrants are exercisable at a price of $3.60
and have a term of five years. The fair value of the warrants on the date of
grant was approximately $221,300.
In August 2001, we raised gross proceeds of $1,159,500 in a private
offering of 409,636 shares of common stock and 307,226 warrants to purchase
shares of our common stock. The warrants are exercisable at $3.55 per share and
have a term of seven years.
In May 2001, we raised gross proceeds of $850,000 in a private offering of
common stock and warrants to purchase shares of our common stock. We sold
425,000 shares of common stock and 425,000 warrants. The warrants are
exercisable at $2.94 and have a term of seven years. The investors consisted of
members of the board of directors, existing investors and new investors
representing, at that time, 43.4%, 5.9% and 50.8% of the investors in the
transaction, respectively. We recorded a charge to earnings in the amount of
$103,040 representing the intrinsic value of the restricted stock purchased by
members of the board of directors.
In March 2000, we entered into an agreement to sell 600,000 shares of our
common stock and 450,000 warrants to acquire shares of our common stock (the
"March Financing") for gross proceeds of $3,000,000. Of the warrants issued,
210,000, 120,000 and 120,000 are exercisable at $5.00, $6.38 and $6.90,
respectively. The warrants have a term of three years and are redeemable at
$0.01 each by SIGA upon meeting certain conditions. Offering expenses of
$117,000 were paid in April 2000. At December 31, 2002, all 450,000 warrants
were outstanding.
In connection with the March Financing, we issued a total of 379,000
warrants to purchase shares of the our common stock to Fahnestock & Co. (the
"Fahnestock Warrants") in consideration for services related to the March
financing. The warrants had an exercise price of $5.00 per share and are
exercisable at any time until March 28, 2005. In November 2000, we entered into
a one year consulting agreement with Fahnestock and Co. under which we will
receive marketing, public relations acquisitions and strategic planning service.
In exchange for such services, we canceled the Fahnestock Warrants and reissued
them to effectuate an amendment to the exercise price to $2.00 per share. In
connection with such amendment, we recorded a charge of approximately $270,000
in the year ended December 31, 2000.
In January 2000 we completed a private placement of 6% convertible
debentures at an aggregate principal amount of $1,500,000 and 1,043,478 warrants
to purchase shares of our common stock with a purchase price of $0.05 per
warrant (the "January Financing"). We received net proceeds of $1,499,674 from
the total $1,552,174 gross proceeds raised. The debentures are convertible into
common stock at $1.4375 per share. Interest at the rate of 6% per annum was
payable on the principal of each convertible debenture in cash or shares of our
common stock, at the our discretion upon conversion or at maturity. The warrants
have a term of five years and are exercisable at $3.4059 per share.
SIGA has the right to require the holder to exercise the January Financing
warrants within five days under the following circumstances: (i) a registration
statement is effective; and (ii) the closing bid price for the Company's common
stock, for each of any 15 consecutive trading days is at least 200% of the
exercise price of such warrants. If the holder does not exercise the warrants
after notice is given, the unexercised warrants will expire. The warrants are
exercisable for a period of five years.
In connection with the placement of the debentures and warrants in January
2000, we recorded debt discount of approximately $1.0 million. Such amount
represents the value of the warrants calculated using the
- 16 -
Black-Scholes valuation model. The discount is amortized over the term of the
debentures. Additionally, during the years ended December 31, 2001 and 2000, we
recorded interest expense of $232,393 and $589,312 respectively, related to the
amortization of such debt discount. In 2001 and 2000, debentures with a
principal amount of $1,375,000 and $108,664, respectively, along with accrued
interest, were converted into 1,011,593 and 108,884 shares of the Company's
preferred and common stock, respectively.
In connection with the January financing, we issued warrants to purchase a
total of 275,000 shares of common stock to the placement agent and the
investors' counsel (or their respective designees). These warrants have a term
of five years and are exercisable at $1.45 per share. In connection with the
issuance of such warrants, the Company recorded a deferred charge of $280,653,
which was amortized over the term of the debentures.
Holders of the Series A Convertible Preferred Stock are entitled to (i)
cumulative dividends at the annual rate of 6% payable when and if declared by
our board of directors; (ii) in the event of liquidation of SIGA, each holder is
entitled to receive $1.4375 per share (subject to certain adjustment) plus all
accrued but unpaid dividends; (iii) convert each share of Series A to a number
of fully paid and non-assessable shares of common stock as calculated by
dividing $1.4375 by the Series A Conversion Price (shall initially be $1.4375);
and (iv) vote with the holders of other classes of shares on an as converted
basis.
As of December 31, 2001, all of the debentures were converted into shares
of the Company's common stock.
Recent Developments
In December 2002, we entered into a contract with the U.S. Army to develop
a drug to treat Smallpox. The effective date of the contract is January 1, 2003.
The contract is for a period of four years for a total of approximately $1.6
million. Payment over the term of the agreement will be approximately $400,000
per year.
In February 2003, we entered into a market contract with the Four Star
Group. Four Star will work on our behalf to obtain additional government
contracts and grants. Under the contract, we make certain cash payments for
their services and, if they are successful in obtaining new government funding,
they will receive warrants to purchase shares of our stock. The number of
warrants they can receive will depend on the amount of any contract and grant
funding they obtain. We have the right to cancel the agreement after six months.
In March 2003, we entered into a non-binding letter of intent to acquire
substantially all of the assets of Plexus Vaccines, Inc. ("Plexus"). The
transaction is subject to certain conditions, including, without limitation, the
completion of due diligence and the negotiation and execution of definitive
agreements. As part of the agreement, we have pursuant to a promissory note made
a loan to Plexus in the amount of $50,000. If the transaction is not completed
by November 30, 2003 or if certain other events occur the loan plus accrued
interest is to be repaid to SIGA.
- 17 -
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our financial
statements and notes to those statements and other financial information
appearing elsewhere in this Annual Report. In addition to historical
information, the following discussion and other parts of this Annual Report
contain forward-looking information that involves risks and uncertainties.
Overview
We are a development stage biotechnology company, whose primary focus is
on biopharmaceutical product development. Since inception in December 1995 our
efforts have been principally devoted to research and development, securing
patent protection, obtaining corporate relationships and raising capital. Since
inception through December 31, 2002, we have sustained cumulative net losses of
$29,531,402, including non-cash charges in the amount of $1,457,458 for the
write-off of research and development expenses associated with the acquisition
of certain technology rights acquired from a third party in exchange for our
common stock. In addition, a non-cash charge of $2,996,784 was incurred for
stock option and warrant compensation expense. Our losses have resulted
primarily from expenditures incurred in connection with research and
development, patent preparation and prosecution and general and administrative
expenses. From inception through December 31, 2002, research and development
expenses amounted to $13,775,444, patent preparation and prosecution expenses
totaled $1,459,454, general and administration expenses amounted to $17,221,915.
From inception through December 31, 2002 revenues from research and development
agreements and government grants totaled $3,631,631.
Since inception, SIGA has had limited resources, has incurred cumulative
net operating losses of $29,531,402 and expects to incur additional losses to
perform further research and development activities. We do not have commercial
biomedical products, and we do not expect to have such for several years, if at
all. We believe that we will need additional funds to complete the development
of our biomedical products. Our plans with regard to these matters include
continued development of our products as well as seeking additional research
support funds and financial arrangements. Although we continue to pursue these
plans, there is no assurance that we will be successful in obtaining sufficient
financing on terms acceptable to us. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. Management
believes it has sufficient funds to support operations through the first quarter
of 2004.
Our biotechnology operations are run out of our research facility in
Corvallis, Oregon. We continue to seek to fund a major portion of our ongoing
vaccine and antibiotic programs through a combination of government grants and
strategic alliances. While we have had success in obtaining strategic alliances
and grants, no assurance can be given that we will continue to be successful in
obtaining funds from these sources. Until additional relationships are
established, we expect to continue to incur significant research and development
costs and costs associated with the manufacturing of product for use in clinical
trials and pre-clinical testing. It is expected that general and administrative
costs, including patent and regulatory costs, necessary to support clinical
trials and research and development will continue to be significant in the
future.
To date, we have not marketed, or generated revenues from the commercial
sale of any products. Our biopharmaceutical product candidates are not expected
to be commercially available for several years, if at all. Accordingly, we
expect to incur operating losses for the foreseeable future. There can be no
assurance that we will ever achieve profitable operations.
Significant Accounting Policies
Financial Reporting Release No. 60, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 of the Notes to the Financial Statements include a
summary of the significant accounting policies and methods used in the
preparation of our Financial Statements. The following is a brief discussion of
the more significant accounting policies and methods used by us. In addition,
Financial Reporting Release No. 61 was released by the SEC to require all
companies to
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include a discussion to address, among other things, liquidity, off-balance
sheet arrangements, contractual obligations and commercial commitments.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as
amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be
met before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured. Under the provisions
of SAB 101 the Company recognizes revenue from government research grants,
contract research and development and progress payments as services are
performed, provided a contractual arrangement exists, the contract price is
fixed or determinable, and the collection of the resulting receivable is
probable. Milestones, which generally are related to substantial scientific or
technical achievement, are recognized in revenue when the milestone is
accomplished.
Valuation of Investments
We periodically review the carrying value of our investments for continued
appropriateness. This review is based upon our projections of anticipated future
cash flows. While we believe that our estimates of future cash flows are
reasonable, different assumptions regarding such cash flows could materially
affect our evaluations.
Off-Balance Sheet Arrangements
SIGA does not have any significant off-balance sheet arrangements.
Results of Operations
Twelve Months ended December 31, 2002 and December 31, 2001.
Revenues from grants and research and development contracts were $344,450
for the twelve months ended December 31, 2002 compared to $1,159,500 for the
same period of 2001, an approximate 70% decrease. Revenue for the twelve months
ended December 31, 2001 included recognition of $562,500 from payments made by
Wyeth that had been made to fund research in prior periods and were recorded as
deferred revenue pending signing of a contract extension. In total, $1,025,000
of revenue recorded for the twelve months ended December 31, 2001 was received
from Wyeth. For the twelve months ended December 31, 2002 revenue was comprised
primarily of approximately $270,000 from a Phase II Small Business Innovation
Research ("SBIR") grant and $75,000 received under a sub-contract with Oregon
State University. In December 2002, we entered into a contract with the U.S.
Army to develop a drug to treat Smallpox. The contract is a four year agreement
for approximately $1.6 million with an average annual payment to us of
approximately $400,000. The contract became effective on January 1, 2003.
General and administrative expenses for the twelve months ended December
31, 2002 were $1,838,470, a decrease of approximately 28% from an expense of
$2,570,869 for the twelve months ended December 31, 2001. Included in the
expenses for the twelve months ended December 31, 2001 was a non-cash charge of
$612,750 to reflect the granting of options to directors with an exercise price
that was less than the fair market value of our shares at the time of the grant.
Excluding these charges, general and administrative expenses for the twelve
months ended December 31, 2002 were approximately $120,000 less than the same
period of the prior year. Payroll expenses declined by 52.1% as a result of
reduction of executive management staff, professional fees were approximately
31% higher in the twelve months ended December 31, 2002 compared to the same
period of 2001 due to the charges incurred as the result of a potential merger.
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Research and development expenses increased approximately 2% to $1,766,368
for the twelve months ended December 31, 2002 from $1,733,188 for the same
period in 2001. There were no significant changes in the pattern of expenses
between the two twelve month periods. All of our product programs are in the
early stage of development except for the strep vaccine which is in Phase I
clinical trial. At this stage of development, we can not make estimates of the
potential cost for any program to be completed or the time it will take to
complete the project. We do not track the costs of each product program except
for portions of the development program that is being funded by NIH grants. The
risk of completion of any program is high risk because of the long lead time to
program completion and uncertainty of the costs. Net cash inflows from any
products developed from these programs is at least two to three years away.
However, we could receive additional grants, contracts or technology licenses in
the short-term. The potential cash and timing is not known and we can not be
certain if they will ever occur.
Patent preparation expense for the twelve months ended December 31, 2002
were $104,700 compared to $117,264 for the twelve months ended December 31,
2001. The $12,564 or approximate 11% decrease does not reflect any significant
change in our patent preparation activities.
Total operating loss for the twelve months ended December 31, 2002 was
$3,365,088 an approximate 3% increase from the $3,261,821 loss incurred for the
twelve months ended December 31, 2001. The increase in the loss is the result of
lower revenue recognition in the 2002 period, offset by the reduction in
operating expenses.
Net interest income was $34,061 for the twelve months ended December 31,
2002 compared to interest expense of $192,679 for the twelve months ended
December 31, 2001. The improvement is a result of the conversion of the
remainder of the $1,500,000 principle amount of the 6% convertible debenture and
accrued interest during the twelve months ended December 31, 2001.
During the twelve months ended December 31, 2001 the company recorded a
charge of $275,106 for the impairment of an investment associated with its
interest in Open-i Media.
Quarterly Results of Operations
The following table sets forth selected unaudited quarterly statements of
operations data, in dollar amounts and as percentages of net revenue, for the
four quarters ended December 31, 2001 and for the four quarters ended December
31, 2002. This information has been prepared substantially on the same basis as
the audited financial statements appearing elsewhere in this annual statement,
and all necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts stated below to present fairly the unaudited
quarterly results of operations data. The quarterly data should be read with our
financial statement and then noted to those statements appearing elsewhere in
the annual statement.
2001
($ in 000's) Q1 Q2 Q3 Q4
-------- -------- -------- --------
Revenue $ 305 $ 683 $ 158 $ 15
G&A $ 65 $ 635 $ 1,259 $ 611
% of Revenue 21% 93% 797% 4,073%
R&D $ 431 $ 429 $ 498 $ 376
% of Revenue 141% 63% 315% 2,507%
Patent Prep. Costs $ 18 $ 63 $ (11) $ 47
% of Revenue 6% 9% (7)% 313%
Operating Loss $ 209 $ 445 $ 1,588 $ 1,019
% of Revenue 69% 65% 1,005% 6,793%
Net Loss $ 368 $ 520 $ 1,591 $ 1,251
% of Revenue 121% 76% 1,007% 8,340%
Basic and
diluted loss
per share (0.05) (0.07) (0.19) (0.13)
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2002
($ in 000's) Q1 Q2 Q3 Q4
-------- -------- -------- --------
Revenue $ 0 $ 139 $ 90 $ 115
G&A $ 341 $ 668 $ 273 $ 556
% of Revenue NA 480% 305% 483%
R&D $ 357 $ 414 $ 424 $ 571
% of Revenue NA 297% 472% 497%
Patent Prep. Costs $ 27 $ 18 $ 27 $ 33
% of Revenue NA 13% 30% 29%
Operating Loss $ 725 $ 961 $ 634 $ 1,045
% of Revenue NA 689% 704% 909%
Net Loss $ 712 $ 951 $ 630 $ 1,038
% of Revenue NA 683% 700% 902%
Basic and
diluted loss
per share (0.07) (0.09) (0.06) (0.10)
Liquidity and Capital Resources
As of December 31, 2002 we had $2,069,004 in cash and cash equivalents. In
addition, we had stock subscriptions outstanding of $791,940 from a private
placement of our common shares that closed in December 2002 and January 2003.
In March 2002, we signed a non-binding letter of intent to acquire all of
the outstanding shares of Allergy Therapeutics (Holdings) Limited in a stock for
stock transaction. In July 2002, the letter of intent was terminated due to
changes in market conditions. We incurred approximately $600,000 of expenses in
connection with this contemplated transaction. Approximately $200,000 of these
expenses remains unpaid.
In June 2002, we received an SBIR grant from the NIH. The grant is for
approximately $865,000 to support research over a two year period. Of the total
grant, approximately $521,000 has been allotted for work to be performed in the
first twelve months of the grant. During the twelve months ended December 31,
2002, we recorded revenue in the amount of $270,000.
In December 2002, we were awarded an initial U.S. government contract with
the U.S. Army to develop an effective Smallpox antiviral drug. The total
estimated revenue under the contract is $1.6 million for the periods January 1,
2003 to May 31, 2007.
In October 2002, we entered into a collaborative research agreement with
TransTech Pharma, Inc. for the discovery and treatment of human diseases. Under
the terms of the agreement, Trans Tech and SIGA have agreed to contribute their
respective services and products and share in equal costs of specified research
projects. In consideration of the services performed by Trans Tech and use of
its proprietary technology, we granted an exclusive, fully-paid,
nontransferable, nonsublicenseable, limited license to use existing rights to
patents and technologies. We will share equally in the ownership of compounds
and related intellectual property derived from such research efforts.
In December 2002, we raised gross proceeds of $1.865 million in a private
offering of common stock and warrants to purchase our common stock. We sold
1,700,000 shares of common stock in this offering. In connection with the
offering we issued 171,216 warrants to purchase shares of our common stock to
consultants. The warrants are initially exercisable at a price of $1.65 per
share and have a term of five years. The fair value of the warrants on the date
of grant was approximately $188,970. We received net proceeds from the offering
of $891,000 prior to December 31, 2002 and net proceeds of $791,940 after
December 31, 2002.
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In October 2002, we raised gross proceeds of $1.04 million in a private
offering of common stock and warrants to purchase our common stock. We sold
1,037,500 shares of common stock and 518,750 warrants. These warrants are
initially exercisable at $2.25 per share and have a term of five years. We
received net proceeds of approximately $935,000. In connection with the offering
we issued another 103,750 warrants to purchase shares of our common stock to
consultants. The consultants' warrants are initially exercisable at a price of
$1.50 per share and have a term of five years.
In March 2003 we entered into a non-binding letter of intent to acquire
substantially all of the assets of Plexus Vaccines, Inc. ("Plexus"). The
transaction is subject to certain conditions, including, without limitation, the
completion of due diligence and the negotiation and execution of definitive
agreements. As part of the agreement, we have pursuant to a promissory note made
a loan to Plexus in the amount of $50,000. If the transaction is not completed
by November 30, 2003 or if certain other events occur the loan plus accrued
interest is to be repaid to SIGA.
We anticipate that our current resources will be sufficient to finance our
currently anticipated needs for operating and capital expenditures approximately
through the first quarter of 2004. In addition, we will attempt to generate
additional working capital through a combination of collaborative agreements,
strategic alliances, research grants, equity and debt financing. However, no
assurance can be provided that additional capital will be obtained through these
sources or, if obtained, will be on commercially reasonable terms.
Our working capital and capital requirements will depend upon numerous
factors, including pharmaceutical research and development programs;
pre-clinical and clinical testing; timing and cost of obtaining regulatory
approvals; levels of resources that we devote to the development of
manufacturing and marketing capabilities; technological advances; status of
competitors; and our ability to establish collaborative arrangements with other
organizations.
SIGA leases certain facilities and office space under operating leases.
Minimum future rental commitments under operating leases having noncancellable
lease terms are $164,115 $173,821 and $66,982 for the years ending December 31,
2003, 2004 and 2005, respectively. Future minimum leases payments for equipment
under capital leases amount to $11,326 for the year ended December 31, 2003.
Risk Factors That May Affect Results of Operations and Financial Condition
This report contains forward-looking statements and other prospective
information relating to future events. These forward-looking statements and
other information are subject to risks and uncertainties that could cause our
actual results to differ materially from our historical results or currently
anticipated results including the following:
We have incurred operating losses since our inception and expect to incur
net losses and negative cash flow for the foreseeable future. We incurred net
losses of $3.3 million and $3.7 million for the years ended December 31, 2002
and 2001, respectively. As of December 31, 2002 and December 31, 2001, our
accumulated deficit was $29.5 million and $26.2 million, respectively. We expect
to continue to incur significant operating expenditures. However we do not
foresee significant capital expenditures in the near future. We will need to
generate significant revenues to achieve and maintain profitability. SIGA
currently has sufficient operation capital to finance its operations through
approximately the first quarter of 2004. Our annual operating needs vary from
year to year depending upon the amount of revenue generated through grants and
licenses. We do not expect a significant change from our current cash burn rate
which is generally consistent throughout the year in the next fiscal year.
We cannot guarantee that we will achieve sufficient revenues for
profitability. Even if we do achieve profitability, we cannot guarantee that we
can sustain or increase profitability on a quarterly or annual basis in the
future. If revenues grow slower than we anticipate, or if operating expenses
exceed our expectations or cannot be adjusted accordingly, then our business,
results of operations and financial condition will be materially and adversely
affected. Because our strategy includes acquisitions of other businesses,
acquisition expenses and any cash used to make these acquisitions will reduce
our available cash.
Our business will suffer if we are unable to raise additional equity
funding. We continue to be dependent on our ability to raise money in the equity
markets. There is no guarantee that we will continue to be successful in raising
such funds. If we are unable to raise additional equity funds, we may be forced
to discontinue or cease certain operations.
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Our stock price is, and we expect it to remain, volatile, which could
limit investors' ability to sell stock at a profit. The volatile price of our
stock makes it difficult for investors to predict the value of their investment,
to sell shares at a profit at any given time, or to plan purchases and sales in
advance. A variety of factors may affect the market price of our common stock.
These include, but are not limited to:
o publicity regarding actual or potential clinical results relating to
products under development by our competitors or us;
o delay or failure in initiating, completing or analyzing pre-clinical
or clinical trials or the unsatisfactory design or results of these
trials;
o achievement or rejection of regulatory approvals by our competitors
or us;
o announcements of technological innovations or new commercial
products by our competitors or us;
o developments concerning proprietary rights, including patents;
o developments concerning our collaborations;
o regulatory developments in the United States and foreign countries;
o economic or other crises and other external factors;
o period-to-period fluctuations in our revenues and other results of
operations;
o changes in financial estimates by securities analysts; and
o sales of our common stock.
Additionally, because there is not a high volume of trading in our stock,
any information about SIGA in the media may result in significant volatility in
our stock price.
We will not be able to control many of these factors, and we believe that
period-to-period comparisons of our financial results will not necessarily be
indicative of our future performance.
In addition, the stock market in general, and the market for biotechnology
companies in particular, has experienced extreme price and volume fluctuations
that may have been unrelated or disproportionate to the operating performance of
individual companies. These broad market and industry factors may seriously harm
the market price of our common stock, regardless of our operating performance.
The following table presents the high and low bid range of our stock for
the past two years.
Bid Range
2001 High Low
------ ------
First Quarter $4.88 $1.62
Second Quarter $4.48 $1.62
Third Quarter $4.05 $2.24
Fourth Quarter $5.21 $1.91
2002 High Low
------ ------
First Quarter $2.89 $2.01
Second Quarter $2.63 $0.81
Third Quarter $1.39 $0.65
Fourth Quarter $2.15 $0.65
We are in various stages of product development and there can be no
assurance of successful commercialization. In general, our research and
development programs are at an early stage of development. The
- 23 -
strep vaccine program is in Phase I clinical trials. All other programs are in
the pre-clinical stage of development. Our biological warfare defense products
do not need human clinical trials for approval by the FDA. We will need to
perform two animal models and provide safety data for a product to be approved.
Our other products will be subject to the approval guidelines under FDA
regulatory requirements which include a number of phases of testing in humans.
The FDA has not approved any of our biopharmaceutical product candidates.
Any drug candidates developed by us will require significant additional research
and development efforts, including extensive pre-clinical and clinical testing
and regulatory approval, prior to commercial sale. We cannot be sure our
approach to drug discovery will be effective or will result in the development
of any drug. We cannot expect that any drugs resulting from our research and
development efforts will be commercially available for many years, if at all.
We have limited experience in conducting pre-clinical testing and clinical
trials. Even if we receive initially positive pre-clinical or clinical results,
such results do not mean that similar results will be obtained in the later
stages of drug development, such as additional pre-clinical testing or human
clinical trials. All of our potential drug candidates are prone to the risks of
failure inherent in pharmaceutical product development, including the
possibility that none of our drug candidates will or can:
o be safe, non-toxic and effective;
o otherwise meet applicable regulatory standards;
o receive the necessary regulatory approvals;
o develop into commercially viable drugs;
o be manufactured or produced economically and on a large scale;
o be successfully marketed;
o be reimbursed by government and private insurers; and
o achieve customer acceptance.
In addition, third parties may preclude us from marketing our drugs
through enforcement of their proprietary rights, or third parties may succeed in
marketing equivalent or superior drug products. Our failure to develop safe,
commercially viable drugs would have a material adverse effect on our business,
financial condition and results of operations.
Most of our immediately foreseeable future revenues are contingent upon
collaborative and license agreements and we may not achieve sufficient revenues
from these agreements to attain profitability. Until and unless we successfully
make a product, our ability to generate revenues will largely depend on our
ability to enter into additional collaborative and license agreements with third
parties and maintain the agreements we currently have in place. We will receive
little or no revenues under our collaborative agreements if our collaborators'
research, development or marketing efforts are unsuccessful, or if our
agreements are terminated early. Additionally, if we do not enter into new
collaborative agreements, we will not receive future revenues from new sources.
Our future revenue is substantially dependent on the continuing grant and
contract work being performed for the NIH which expires in May 2004 and the U.S.
Army which expires at the end of December 2007. These agreements are for
specific work to be performed under the agreements and could only be cancelled
for non-performance.
Several factors will affect our future receipt of revenues from
collaborative arrangements, including the amount of time and effort expended by
our collaborators, the timing of the identification of useful drug targets and
the timing of the discovery and development of drug candidates. Under our
existing agreements, we may not earn significant milestone payments until our
collaborators have advanced products into clinical testing, which may not occur
for many years, if at all.
- 24 -
We may not find sufficient acquisition candidates to implement our
business strategy. As part of our business strategy we expect to enter into
business combinations and acquisitions. We compete for acquisition candidates
with other entities, some of which have greater financial and other resources
than we have. Increased competition for acquisition candidates may make fewer
acquisition candidates available to us and may cause acquisitions to be made on
less attractive terms, such as higher purchase prices. Acquisition costs may
increase to levels that are beyond our financial capability or that would
adversely affect our results of operations and financial condition. Our ability
to make acquisitions will depend in part on the relative attractiveness of
shares of our common stock as consideration for potential acquisition
candidates. This attractiveness may depend largely on the relative market price,
our ability to register common stock and capital appreciation prospects of our
common stock. If the market price of our common stock were to decline materially
over a prolonged period of time, our acquisition program could be materially
adversely affected.
We may face limitations on our ability to attract suitable acquisition
opportunities or to integrate additional acquired businesses and the failure to
consummate an acquisition may significantly drain our resources. As part of our
business strategy we expect to enter into business combinations and
acquisitions. Some of these transactions could be material in size and scope.
While we will continually be searching for additional acquisition opportunities,
we may not be successful in identifying suitable acquisitions. We compete for
acquisition candidates with other entities, some of which have greater financial
and other resources than we have. Increased competition for acquisition
candidates may make fewer acquisition candidates available to us and may cause
acquisitions to be made on less attractive terms, such as higher purchase
prices. Acquisition costs may increase to levels that are beyond our financial
capability or that would adversely affect our results of operations and
financial condition. Our ability to make acquisitions will depend in part on the
relative attractiveness of shares of our common stock as consideration for
potential acquisition candidates. This attractiveness may depend largely on the
relative market price, our ability to register common stock and capital
appreciation prospects of our common stock. If the market price of our common
stock were to decline materially over a prolonged period of time, our
acquisition program could be materially adversely affected. Failure to making an
acquisition will limit our ability to grow, but will not be central to our
continued existence. Costs associated with failed acquisitions, such as our
plans to merge with Allergy Therapeutics and Hypernix, may result in significant
operating costs that may need to be financed from operations or from additional
equity capital. The total costs associated with the failed acquisition of
Allergy Therapeutics were approximately $625,000, of which approximately
$200,000 remain unpaid. The costs were associated with professional fees for
attorneys and accountants. Additionally, there was significant time spent by our
management in the contemplated transaction. The proposed Hypernix transaction
resulted in expenses of $511,000 for advances made to them. We recovered
approximately $85,000 from them.
We may not be able to consummate potential acquisitions or an acquisition
may not enhance our business or may decrease rather than increase our earnings.
In the future, we may issue additional securities in connection with one or more
acquisitions, which may dilute our existing shareholders. Future acquisitions
could also divert substantial management time and result in short term
reductions in earnings or special transaction or other charges. In addition, we
cannot guarantee that we will be able to successfully integrate the businesses
that we may acquire into our existing business. Our shareholders may not have
the opportunity to review, vote on or evaluate future acquisitions.
The biopharmaceutical market in which we compete and will compete is
highly competitive. The biopharmaceutical industry is characterized by rapid and
significant technological change. Our success will depend on our ability to
develop and apply our technologies in the design and development of our product
candidates and to establish and maintain a market for our product candidates.
There also are many companies, both public and private, including major
pharmaceutical and chemical companies, specialized biotechnology firms,
universities and other research institutions engaged in developing
pharmaceutical and biotechnology products. Many of these companies have
substantially greater financial, technical, research and development, and human
resources than us. Competitors may develop products or other technologies that
are more effective than any that are being developed by us or may obtain FDA
approval for products more rapidly than us. If we commence commercial sales of
products, we still must compete in the manufacturing and marketing of such
products, areas in which we have no experience. Many of these companies also
have manufacturing facilities and established marketing capabilities that would
enable such companies to market competing products through existing channels of
distribution. Two companies with similar profiles are VaxGen, Inc. which is
developing vaccines against anthrax, Smallpox and HIV/AIDS; and Avant
Immunotherapeutics, Inc. which has vaccine programs for agents of biological
warfare.
- 25 -
Because we must obtain regulatory clearance to test and market our
products in the United States, we cannot predict whether or when we will be
permitted to commercialize our products. A pharmaceutical product cannot be
marketed in the U.S. until it has completed rigorous pre-clinical testing and
clinical trials and an extensive regulatory clearance process implemented by the
FDA. Pharmaceutical products typically take many years to satisfy regulatory
requirements and require the expenditure of substantial resources depending on
the type, complexity and novelty of the product.
Before commencing clinical trials in humans, we must submit and receive
clearance from the FDA by means of an Investigational New Drug ("IND")
application. Institutional review boards and the FDA oversee clinical trials and
such trials:
o must be conducted in conformance with the FDA's good laboratory
practice regulations;
o must meet requirements for institutional review board oversight;
o must meet requirements for informed consent;
o must meet requirements for good clinical and manufacturing
practices;
o are subject to continuing FDA oversight;
o may require large numbers of test subjects; and
o may be suspended by us or the FDA at any time if it is believed that
the subjects participating in these trials are being exposed to
unacceptable health risks or if the FDA finds deficiencies in the
IND application or the conduct of these trials.
Before receiving FDA clearance to market a product, we must demonstrate
that the product is safe and effective on the patient population that will be
treated. Data we obtain from preclinical and clinical activities are susceptible
to varying interpretations that could delay, limit or prevent regulatory
clearances. Additionally, we have limited experience in conducting and managing
the clinical trials and manufacturing processes necessary to obtain regulatory
clearance.
If regulatory clearance of a product is granted, this clearance will be
limited only to those states and conditions for which the product is
demonstrated through clinical trials to be safe and efficacious. We cannot
ensure that any compound developed by us, alone or with others, will prove to be
safe and efficacious in clinical trials and will meet all of the applicable
regulatory requirements needed to receive marketing clearance.
If our technologies or those of our collaborators are alleged or found to
infringe the patents or proprietary rights of others, we may be sued or have to
license those rights from others on unfavorable terms. Our commercial success
will depend significantly on our ability to operate without infringing the
patents and proprietary rights of third parties. Our technologies, along with
our licensors' and our collaborators' technologies, may infringe the patents or
proprietary rights of others. If there is an adverse outcome in litigation or an
interference to determine priority or other proceeding in a court or patent
office, then we, or our collaborators an licensors, could be subjected to
significant liabilities, required be license disputed rights from or to other
parties and/or required to cease using a technology necessary to carry out
research, development and commercialization. At present we are unaware of any or
potential infringement claims against our patent portfolio.
The costs to establish the validity of patents, to defend against patent
infringement claims of others and to assert infringement claims against others
can be expensive and time consuming, even if the outcome is favorable. An
outcome of any patent prosecution or litigation that is unfavorable to us or one
of our licensors or collaborators may have a material adverse effect on us. We
could incur substantial costs if we are required to defend ourselves in patent
suits brought by third parties, if we participate in patent suits brought
against or initiated by our licensors or collaborators or if we initiate such
suits. We may not have sufficient funds or resources in the event of litigation.
Additionally, we may not prevail in any such action.
- 26 -
Any conflicts resulting from third-party patent applications and patents
could significantly reduce the coverage of the patents owned, optioned by or
licensed to us or our collaborators and limit our ability or that of our
collaborators to obtain meaningful patent protection. If patents are issued to
third parties that contain competitive or conflicting claims, we, our licensors
or our collaborators may be legally prohibited from researching, developing or
commercializing of potential products or be required to obtain licenses to these
patents or to develop or obtain alternative technology. We, our licensors and/or
our collaborators may be legally prohibited from using patented technology, may
not be able to obtain any license to the patents and technologies of third
parties on acceptable terms, if at all, or may not be able to obtain or develop
alternative technologies.
In addition, like many biopharmaceutical companies, we may from time to
time hire scientific personnel formerly employed by other companies involved in
one or more areas similar to the activities conducted by us. We and/or these
individuals may be subject to allegations of trade secret misappropriation or
other similar claims as a result of their prior affiliations.
Our ability to compete may decrease if we do not adequately protect our
intellectual property rights. Our commercial success will depend in part on our
and our collaborators' ability to obtain and maintain patent protection for our
proprietary technologies, drug targets and potential products and to effectively
preserve our trade secrets. Because of the substantial length of time and
expense associated with bringing potential products through the development and
regulatory clearance processes to reach the marketplace, the pharmaceutical
industry places considerable importance on obtaining patent and trade secret
protection. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. Accordingly, we cannot predict the type and breadth
of claims allowed in these patents.
We also rely on copyright protection, trade secrets, know-how, continuing
technological innovation and licensing opportunities. In an effort to maintain
the confidentiality and ownership of trade secrets and proprietary information,
we require our employees, consultants and some collaborators to execute
confidentiality and invention assignment agreements upon commencement of a
relationship with us. These agreements may not provide meaningful protection for
our trade secrets, confidential information or inventions in the event of
unauthorized use or disclosure of such information, and adequate remedies may
not exist in the event of such unauthorized use or disclosure.
We may have difficulty managing our growth. We expect to experience growth
in the number of our employees and the scope of our operat