Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended
December 31, 2004 (Commission File No. 0-23047)
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 408 10170
New York, NY (zip code)
(Address of principal executive offices)
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-K 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-K or any amendment to this
Form 10-K. |_|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
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 28,
2005 as reported on the Nasdaq SmallCap Market was approximately $37,485,991. As
of March 28, 2005 the registrant had outstanding 24,500,648 shares of common
stock.
Portions of the registrant's definitive proxy statement, which will be filed
within 120 days of December 31, 2004, are incorporated by reference into Part
III.
================================================================================
SIGA Technologies, Inc.
Form 10-K
Table of Contents
Page No.
PART I
Item 1. Business..........................................................................2
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, Related Stockholder Matters and
Issuer Purchases of Equity Securities............................................16
Item 6. Selected Financial Data..........................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................33
Item 8. Financial Statements and Supplementary Data......................................34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................56
Item 9A. Controls and Procedures..........................................................56
Item 9B. Other Information................................................................56
PART III
Item 10. Directors and Executive Officers of the Registrant...............................57
Item 11. Executive Compensation...........................................................57
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters..............................................................57
Item 13. Certain Relationships and Related Transactions...................................57
Item 14. Principal Accountant Fees and Services...........................................57
PART IV
Item 15. Exhibits.........................................................................58
SIGNATURES..................................................................................62
Item 1. Business
Certain statements in this Annual Report on Form 10-K, 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.
Introduction
SIGA Technologies, Inc. is referred to throughout this report as "SIGA,"
"the Company," "we" or "us."
SIGA is a biotechnology company incorporated in Delaware on December 9,
1996. We aim to discover, develop and commercialize novel anti-infectives,
antibiotics and vaccines for serious infectious diseases, including products for
use in defense against biological warfare agents such as Smallpox and
Arenaviruses (hemorrhagic fevers). Our anti-viral programs are designed to
prevent or limit the replication of the viral pathogen. Our anti-infectives
programs are aimed at 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. We are also developing a
technology for the mucosal delivery of our vaccines which may allow the 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.
Product Candidates and Market Potential
SIGA Biological Warfare Defense Product Portfolio
Anti-Smallpox Drug: While deliberate introduction of any pathogenic agent
would be devastating, we believe the one that holds the greatest potential for
harming the general U.S. population is Smallpox. At present there is no
effective drug with which to treat or prevent Smallpox infections. To address
this serious risk, SIGA scientists have identified a lead drug candidate,
SIGA-246, which inhibits vaccinia, cowpox, ectromelia (mousepox), monkeypox,
camelpox, and variola replication in cell culture but not other unrelated
viruses. Given the safety concerns with the current smallpox vaccine, there
should be several uses for an effective smallpox antiviral drug:
prophylactically, to protect the non-immune who are at risk to exposure;
therapeutically, to prevent disease or death in those exposed to smallpox; and
lastly, as an adjunct treatment to the immunocompromised. SIGA scientists are
also working on several other smallpox drug targets, including the viral
proteinases, to develop additional drug candidates for use in combination
therapy if necessary.
Anti-Arenavirus Drug: Arenaviruses are hemorrhagic fever viruses that have
been classified as Category A agents by the Centers for Disease Control and
Prevention (CDC) due to the great risk that they pose to public health and
national safety. Among the Category A viruses recognized by the Centers for
Disease Control and Prevention, there are four hemorrhagic fever arenaviruses
(Junin, Machupo, Guanarito and Sabia viruses) for which there are no United
States Food and Drug Administration (FDA) approved treatments available. In
order to meet this threat, SIGA scientists have identified a lead drug
candidate, ST-294, which has demonstrated significant antiviral activity in cell
culture assays against arenavirus pathogens. SIGA also has earlier stage
programs against other hemorrhagic fever viruses including Lassa virus,
Lymphocytic choriomeningitis virus (LCMV), and Ebola in development. We
2
believe that the availability of arenavirus antiviral drugs will address
national and global security needs by acting as a significant deterrent and
defense against the use of arenaviruses as weapons of bioterrorism.
Bacterial Commensal Vectors: Our scientists have developed methods that
allow essentially any gene sequence to be expressed in Generally Regarded As
Safe (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
agents that might be encountered, such as Bacillus anthracis (anthrax) or
Smallpox. SIGA scientists are working to develop an alternative vaccine with
improved safety for use in preventing human disease caused by pathogenic
orthopoxviruses such as variola virus. To accomplish this goal we are utilizing
our newly-developed BCV (bacterial commensal vector) technology. BCV utilizes
gram-positive commensal bacteria, such as Streptococcus gordonii, to express
heterologous antigens of interest, either in secreted form or attached to its
external surface. Phase I human clinical trials indicate that this S. gordonii
strain is safe and well-tolerated in humans. In several different animal model
systems S. gordonii has been shown to efficiently express various antigens and
elicit protective immune responses (cellular, humoral and mucosal). We believe
that the delivery of selected vaccinia virus antigens via this live bacterial
vector system will provide an effective and safe method for prevention of
smallpox in humans.
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, our 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.
Market for Biological Defense Programs.
The U.S. government's proposed budget for the Department of Homeland
Security (the "DHS") for the fiscal year beginning October 1, 2005 includes $2.5
billion of federal spending on Project BioShield. In addition to contributing
funds to the DHS, the Department of Defense will be looking for innovative
approaches to the prevention and treatment of biological warfare agents. 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 and Prevention (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. The Congressional Budget Office (the "CBO") reported that the DHS
projects the acquisition of 60 million doses of new Smallpox vaccines over a
three year period, commencing in 2005. At an estimated $15 per dose, the cost
would be approximately $900 million. Further the CBO reports that the DHS will
spend an additional $1 billion to replace expired stocks in 2007-2013.
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
approved for sale within a relatively short time frame if our programs are
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.
3
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 an older version Smallpox vaccines to have an inventory on hand
if needed is evidence of such market potential.
SIGA Anti-Infectives Product Portfolio
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: One of our key anti-infective
programs is based on a novel target for antibiotic therapy. Our 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 and in animals.
Gram-Negative Antibiotic Technology: In 1998, we entered into a set of
technology transfer and related agreements with MedImmune, Inc., Astra AB and
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. As
described above, 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 Gram-positive pathogens, including S. pyogenes, S. pneumoniae, S. mutans and
S. aureus. Moreover, our investigators have shown a conservation of function of
this important protease in Gram-positive pathogens and we 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.
4
Market for Anti-infective Programs.
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.
Technology
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, 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, 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 The Rockefeller University
("Rockefeller") 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 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 Streptococcu, 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 in St. Louis ("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 an
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.
5
Vaccine Technologies: Mucosal Immunity and Vaccine Delivery
Using proprietary technology licensed from Rockefeller, SIGA is developing
specific commensal bacteria ("commensals") as a means to deliver mucosal
vaccines. Commensals are harmless bacteria that naturally occupy 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, as opposed to most conventional vaccines which 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.
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 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 worldwide 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
6
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.
Strep Throat Vaccine Candidate. Until the age of 15, many children suffer
from 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 two decades, 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.
o 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.
o SIGA has taken a parallel vaccine development track with two
formulations of the cross-protective streptococcal antigen. One
approach expresses the strep throat antigen on the surface of the
commensal bacterium, Streptococcus 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. The
other candidate uses a subunit (purified protein) approach, in which
the antigen is delivered intranasally with a mucosal adjuvant
(enhances the immune response). Like the commensal approach, the
subunit approach has provided significant protection in mice from
challenges by multiple serotypes. 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 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. Further development continues
principally on the subunit approach, which is currently in
pre-clinical studies.
o 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
7
for a strep throat 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.
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 these 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 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.
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 eight issued U.S. patents
and three issued European patents, as well as one pending U.S. patent
application and one pending European application. The issued United States
patents expire in 2008, 2014 (4), 2015 (2), and 2016. 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 the costs of filing and prosecuting
patent applications. The agreement also requires us to pay 15% of certain
milestone payments we receive from Wyeth to Rockefeller, if any, under our
collaborative and license agreement with Wyeth. Accordingly, under the
agreement, which is our only agreement that requires us to make milestone
payments, we could be required to make milestone payments to Rockefeller of up
to an aggregate amount of approximately $1.1 million. To date, we have not
received any milestone payments from Wyeth that would require us to make a
payment to Rockefeller. 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. As we do
not currently know when any patents pending or future patents will expire, we
cannot at this time determine the term of this agreement. At the end of that
term of the agreement, we have the right to continue to practice the then
existing technical information as a fully paid, perpetual license. The agreement
can be terminated earlier if we are in breach of the provisions of the agreement
and do not cure the breach in the allowed cure period. We are compliant in all
our obligations under the agreement.
8
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.
The term of the agreement is for the duration of the patents licensed. As we do
not currently know when any patents pending or future patents will expire, we
cannot at this time determine the term of this agreement. The agreement can be
terminated earlier if we are in breach of the provisions of the agreement and do
not cure the breach in the allowed cure period. We are compliant in all our
obligations under the agreement.
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 was negotiated on a year by year basis with OSU
and depended on the 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, 2003 we received a total of $130,000 under the agreement. During
the year ended December 31, 2003 work under the subcontract was completed.
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 under our agreement with
Wyeth, which is the only agreement pursuant to which we are entitled to receive
milestone payments. For products 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 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
9
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.
Prior to 2002 we received grants amounting to $247,000 to support our
antibiotic and vaccine development programs. In June 2002, we received a Phase
II Small Business Innovation Research (SBIR) grant for approximately $865,000.
The grant was for the two year period beginning June, 1, 2002 and ending May 31,
2004. In August 2004 we were awarded two Phase I and two Phase II grants
totaling approximately $12.1 million to support our work on Smallpox and
Arenaviruses. The grants were acquired as part of our acquisition of certain
assets from ViroPharma Incorporated ("Viropharma"). For the years ending
December 31, 2004, 2003 and, 2002, we have recognized revenue from the SBIR
grants of $1,415,000, $388,000 and $270,000, 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 derives 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. The term of our agreement
with Washington University is for the duration of the patents and a number of
pending patents. As we do not currently know when any patents pending or future
patents will expire, we cannot at this time definitively determine the term of
this agreement. The agreement cannot be terminated unless we fail to pay our
share of the joint patent costs for the technology licensed. We have currently
met all our obligations under this agreement.
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 a
sexually transmitted disease potential product opportunity. The research program
was completed in late 2001 and additional work was performed into 2003, however
the additional work could not be completed due to the inability of one of our
sub-contractors to perform. As a result, we gave Ross notice of termination on
January 26, 2004 and all rights to the technology reverted to us.
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
10
fee of $10,000. As of December 31, 2004 we have made payments of approximately
$91,000 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.
We have currently met all our obligations under this agreement.
U.S. Army Medical Research Acquisition Activity. In December 2002, we
entered into a four years contract with the U.S. Army Medical Research
Acquisition Activity (USAMRAA) to develop a drug to treat Smallpox. The contract
start date was January 1, 2003 and the total amount approximated $1.6 million.
Annual payments over the term of the agreement will be approximately $400,000.
TransTech Pharma, Inc. In October 2002, we entered into a drug discovery
collaboration agreement with TransTech Pharma, Inc. ("TransTech Pharma"). Under
the agreement, SIGA and TransTech Pharma collaborate on the discovery,
optimization and development of lead compounds to therapeutic agents. The costs
of development are shared. SIGA and TransTech Pharma 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 2004, 2003 and 2002 from this collaboration.
Intellectual Property and Proprietary 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 have licensed the rights to eight issued U.S. patents and three 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 one additional patent application in the U.S. and one
application in Europe relating to this technology. We are joint owner with
Washington University of seven issued patents in the U.S. and one in Europe. In
addition, there are four co-owned U.S. patent applications. These patents are
for the technology used for the gram-negative product opportunities. We are also
exclusive owner of one U.S. patent and three U.S. patent applications. One of
these U.S. patent applications relates to our DegP product opportunities.
The following are our patent positions as of December 31, 2004.
- ----------------------------------------------------------------------------------------------------------------------
Number
Number Number Exclusively Number
Exclusively Co-Exclusively Licensed Exclusively Number
PATENTS Licensed Licensed from Licensed Owned by Patent Expiration Dates
from with Oregon from UCLA SIGA
Rockefeller Washington State
Univ. Univ. University
- ----------------------------------------------------------------------------------------------------------------------
2008, 2013(2), 2014 (6),
U.S. 8 7 1 1 2015 (2), 2016 (2), 2017,
2019, 2020 (2)
- ----------------------------------------------------------------------------------------------------------------------
11
- ----------------------------------------------------------------------------------------------------------------------
Number
Number Number Exclusively Number
Exclusively Co-Exclusively Licensed Exclusively Number
PATENTS Licensed Licensed from Licensed Owned by Patent Expiration Dates
from with Oregon from UCLA SIGA
Rockefeller Washington State
Univ. Univ. University
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
2009, 2013, 2014 (2),
Australia 5 2 1 2015, 2016, 2019,2020
- ----------------------------------------------------------------------------------------------------------------------
Canada 2 2010, 2019
- ----------------------------------------------------------------------------------------------------------------------
Europe 3 1 1 2009, 2010, 2013, 2019,
2020
- ----------------------------------------------------------------------------------------------------------------------
Hungary 1 2013
- ----------------------------------------------------------------------------------------------------------------------
Japan 2 2010, 2012
- ----------------------------------------------------------------------------------------------------------------------
Mexico 1 2016
- ----------------------------------------------------------------------------------------------------------------------
New Zealand 1 2016
- ----------------------------------------------------------------------------------------------------------------------
China 1 2016
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Number
Number Number Exclusively
Exclusively Co-Exclusively Licensed Number Number
Licensed Licensed from Exclusively Owned by
APPLICATIONS from with Oregon Licensed SIGA
Rockefeller Washington State from UCLA
Univ. Univ. University
- -----------------------------------------------------------------------------------------------
U.S. applications 1 4 2 3
- -----------------------------------------------------------------------------------------------
U.S. provisionals 4
- -----------------------------------------------------------------------------------------------
PCT 2
- -----------------------------------------------------------------------------------------------
Australia 1 1 2
- -----------------------------------------------------------------------------------------------
Canada 3 2 2 1 1
- -----------------------------------------------------------------------------------------------
Europe 1 1 1 1 2
- -----------------------------------------------------------------------------------------------
Finland 1
- -----------------------------------------------------------------------------------------------
Japan 3 2 1 1 2
- -----------------------------------------------------------------------------------------------
Hungary 1
- -----------------------------------------------------------------------------------------------
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.
12
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.
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 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. To date, the FDA has not
given clearance to any products submitted under the amended regulations.
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 Acambis, AVI Biopharma, Avant
Immuno-therapeutics, Inc, Bavarian Nordic AS, Chimerix Inc., Dynport Vaccine
Company, Bioport, Dor Biopharma, Inc., Pharmathene, and Microbiotix, 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.
13
Human Resources and Facilities
As of March 14, 2005 we had 35 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
We file annual, quarterly, and current reports, proxy statements, and
other documents with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 (the "Exchange Act"). The public may read and
copy any materials that we file with the SEC at the SEC's Public Reference Room
at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including us, that file electronically with the SEC. The public can
obtain any documents that we file with the SEC at http://www.sec.gov.
In addition, our company website can be found on the Internet at
www.siga.com. The website contains information about us and our operations.
Copies of each of our filings with the SEC on Form 10-K, Form 10-KSB, Form 10-Q,
Form 10-QSB and Form 8-K, and all amendments to those reports, can be viewed and
downloaded free of charge as soon as reasonably practicable after the reports
and amendments are electronically filed with or furnished to the SEC. To view
the reports, access www.siga.com/investor.html and click on "SEC Filing".
The following corporate governance related documents are also available on
our website:
o Code of Ethics and Business Conduct
o Amended and Restated Audit Committee Charter
o Compensation Committee Charter
o Nominating and Corporate Governance Committee Charter
o Procedure for Sending Communications to the Board of Directors
o Procedures for Security Holder Submission of Nominating
Recommendations
o 2004 Policy on Confidentiality of Information and Securities Trading
To review these documents, access www.siga.com/investor.html and click on
"Corporate Governance". Any of the above documents can also be obtained in print
by any shareholder upon request to the Secretary, SIGA Technologies, Inc., 420
Lexington Avenue, Suite 408, New York, New York 10170
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 3,000 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 2007.
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 14, 2004, our
stockholders elected our Board of Directors and ratified our selection of
independent registered public accounting firm:
14
The following nominees were elected to our Board of Directors upon the
following votes:
Director Votes For Withheld
-------- --------- --------
Donald G. Drapkin 20,719,841 914,668
Bernard L. Kasten, M.D. 21,456,084 178,425
Thomas E. Constance 21,454,002 180,507
Adnan M. Mjalli, Ph.D. 21,457,759 176,750
Mehmet C. Oz, M.D. 20,717,866 916,643
Eric A. Rose, M.D. 21,458,009 175,500
Paul G. Savas 21,457,602 176,907
Michael A. Weiner, M.D. 21,459,189 175,320
Judy S. Slotkin 21,459,682 174,827
James J. Antal 21,457,264 177,245
Our stockholders ratified the selection of PricewaterhouseCoopers LLP as
our independent registered public accounting firm for the fiscal year ending
December 31, 2004 by casting 21,550,273 votes in favor of this proposal, 26,320
votes against the proposal and 57,916 abstained.
15
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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
2003 High Low
First Quarter ..................................... $ 1.49 $ 1.02
Second Quarter .................................... $ 1.91 $ 1.09
Third Quarter ..................................... $ 2.13 $ 1.61
Fourth Quarter .................................... $ 2.60 $ 1.80
2004 High Low
First Quarter ..................................... $ 2.34 $ 1.85
Second Quarter .................................... $ 1.93 $ 1.29
Third Quarter ..................................... $ 1.63 $ 1.23
Fourth Quarter .................................... $ 1.75 $ 1.35
As of March 28, 2005, the closing bid price of our common stock was $1.53
per share. There were 106 holders of record as of March 28, 2005. 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
is 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 August 2004, we acquired certain government grants and two early stage
antiviral programs, Smallpox and Arenavirus, targeting certain agents of
biological warfare from ViroPharma. As part of the purchase price for these
assets they were issued 1,000,000 shares of our common stock.
In August 2003, we entered into an agreement with MacAndrews & Forbes
Holdings Inc. ("MacAndrews & Forbes"), a holding company of which the Company's
Chairman of the Board of Directors is Vice Chairman and a director. Upon
consummation of the agreement, MacAndrews & Forbes and its permitted assignees
invested an initial $1,000,000 in SIGA in exchange for 694,444 shares of our
common stock at a price of $1.44 per share and warrants to purchase 347,222
shares of common stock at an initial exercise price of $2.00 per share.
MacAndrews & Forbes and its permitted assignees also received an option,
exercisable through October 13, 2003, to invest up to an additional $9,000,000
in SIGA on the same terms. Upon exercise of the option in October 2003, we
received gross
16
proceeds of $2,159,405 in exchange for 1,499,587 shares of common stock at a
price of $1.44 per share and warrants to purchase 749,794 shares of common stock
at an initial exercise price of $2.00 per share. In January 2004, upon approval
of the Company's shareholders, MacAndrews & Forbes and its permitted assignee,
TransTech Pharma, Inc., invested the remaining $6,840,595 in exchange for
4,750,413 shares of common stock and warrants to purchase 2,375,206 shares of
common stock at an exercise price of $2.00 per share. All warrants issued under
the agreement have a term of seven years.
In June 2003, the Company raised gross proceeds of $1.5 million in a
private offering of 1,250,000 shares of common stock. In connection with the
offering the Company issued warrants to purchase 625,000 shares of the Company's
common stock to placement agents. The warrants are exercisable at a price of
$2.00 per share and have a term of five years.
In May 2003, we acquired substantially all of the assets of Plexus in
exchange for 1,950,000 shares of our common stock and the assumption of certain
liabilities, including promissory notes for loans we previously made to Plexus
for $50,000 and $20,000.
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.
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.
See Item 12 for certain equity compensation information with respect to
equity compensation plans.
Other Transactions
In 2004, the Company reached a settlement agreement for breach of contract
with a founder of the Company, whereby the founder returned 40,938 common
shares, 150,000 warrants and $15,000 to the Company. The common shares were
retired by the Company. The Company recorded the $15,000 settlement amount as
other income.
Item 6. Selected Financial Data (in thousands, except share and per share data)
The following table sets forth selected financial information derived from our
audited consolidated financial statements as of and for the years ended December
31, 2004, 2003, 2002, 2001 and 2000.
Selling, general In-process
The year ended & Research and Patent research and Impairment of
December 31, Revenues administrative development preparation fees development intangible assets
- -------------- -------- ---------------- ------------ ---------------- ------------ -----------------
2004 $ 1,839 $ 4,042 $ 4,165 $ 393 $ 568 $ 2,118
2003 $ 732 $ 2,646 $ 2,943 $ 300 $ 137
2002 $ 344 $ 1,838 $ 1,766 $ 105
2001 $ 1,160 $ 2,571 $ 1,733 $ 117
2000 $ 483 $ 4,851 $ 2,609 $ 107
Weighted average
The year ended Loss per share: shares outstanding
December 31, Operating loss Net Loss basic & diluted basic & diluted
- -------------- -------------- -------- --------------- ------------------
2004 $ (9,448) $ (9,373) $ (0.40) 23,724,026
2003 $ (5,296) $ (5,277) $ (0.34) 15,717,138
2002 $ (3,365) $ (3,331) $ (0.32) 10,450,529
2001 $ (3,262) $ (3,730) $ (0.44) 8,499,961
2000 $ (7,084) $ (7,790) $ (1.08) 7,202,856
17
Total Net cash used
As of and for the year Cash & cash stockholders' in operating
ended December 31, Total assets equivalents equity activities
- ------------------ ------------ ----------- ------------- -------------
2004 $ 6,111 $ 2,021 $ 4,559 $ (4,890)
2003 $ 6,100 $ 1,441 $ 5,551 $ (5,332)
2002 $ 2,830 $ 2,069 $ 2,173 $ (2,648)
2001 $ 4,208 $ 3,148 $ 3,541 $ (2,944)
2000 $ 3,210 $ 1,707 $ 925 $ (3,938)
Item 7. 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
Since our inception in December 1995, we have been principally engaged in
the research and development of novel products for the prevention and treatment
of serious infectious diseases, including products for use in the defense
against biological warfare agents such as Smallpox and Arenaviruses. The effort
to develop a drug for Smallpox is being aided by SBIR grants from the NIH
totaling approximately $5.8 million that were awarded in the third quarter of
2004 and a $1.6 million contract with the U.S. Army which began in January 2003.
The Arenavirus program is being supported by SBIR grants from the NIH totaling
approximately $6.3 million that were awarded in the third quarter of 2004.
Our anti-viral programs are designed to prevent or limit the replication
of the viral pathogen. Our anti-infectives programs are aimed at 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. We are also developing a technology for the mucosal delivery
of our vaccines which may allow the 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 do not have commercial biomedical products, and we do not expect to
have such products 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 and
projected cash flows to support operations beyond December 31, 2005.
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
antiviral, antibiotic and vaccine 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.
18
Accordingly, we expect to incur operating losses for the foreseeable future.
There can be no assurance that we will ever achieve profitable operations.
Critical Accounting Estimates
The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results we report in our financial
statements, which we discuss under the heading "Results of Operations" following
this section of our MD&A. Some of our accounting policies require us to make
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Our most critical accounting
estimates include the assessment of recoverability of goodwill, which impacts
goodwill impairments; assessment of recoverability of long-lived assets, which
primarily impacts operating income when we impair intangible assets. Below, we
discuss these policies further, as well as the estimates and judgments involved.
We also have other policies that we consider key accounting policies, such as
for revenue recognition; however, these policies do not require us to make
estimates or judgments that are difficult or subjective.
Significant Accounting Policies
The following is a brief discussion of the more significant accounting
policies and methods used by us in the preparation of our financial statements.
Note 2 of the Notes to the Consolidated Financial Statements includes a summary
of all of the significant accounting policies.
Revenue Recognition
The Company recognizes revenue from contract research and development and
research progress payments in accordance with SEC Staff Accounting Bulletin No.
104, Revenue Recognition, ("SAB 104"). In accordance with SAB 104, revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable, collectibility is reasonably
assured, contractual obligations have been satisfied and title and risk of loss
have been transferred to the customer. The Company recognizes revenue from
non-refundable up-front payments, not tied to achieving a specific performance
milestone, over the period which the Company is obligated to perform services or
based on the percentage of costs incurred to date, estimated costs to complete
and total expected contract revenue. Payments for development activities are
recognized as revenue is earned, over the period of effort. Substantive at-risk
milestone payments, which are based on achieving a specific performance
milestone, are recognized as revenue when the milestone is achieved and the
related payment is due, providing there is no future service obligation
associated with that milestone. In situations where the Company receives payment
in advance of the performance of services, such amounts are deferred and
recognized as revenue as the related services are performed.
Goodwill
Goodwill is recorded when the purchase price paid for an acquisition
exceeds the estimated fair value of the net identified tangible and intangible
assets acquired.
The Company performs an annual review in the fourth quarter of each year,
or more frequently if indicators of potential impairment exist, to determine if
the carrying value of the recorded goodwill is impaired. Goodwill impairment is
determined using a two-step approach in accordance with Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142"). The impairment review process compares the fair value of the reporting
unit in which goodwill resides to its carrying value. In 2004, the Company
operated as one business and one reporting unit. Therefore, the goodwill
impairment analysis was performed on the basis of the Company as a whole using
the market capitalization of the Company as an estimate of its fair value. The
estimated fair values might produce significantly different results if other
reasonable assumptions and estimates were to be used.
Identified Intangible Assets
Acquisition-related intangibles include acquired technology, customer
contracts, grants and covenants not to compete, and are amortized on a straight
line basis over periods ranging from 3.5-4 years.
19
In accordance with Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
the Company performs a review of its identified intangible assets to determine
if facts and circumstances exist which indicate that the useful life is shorter
than originally estimated or that the carrying amount of assets may not be
recoverable. If such facts and circumstances do exist, the Company assesses the
recoverability of identified intangible assets by comparing the projected
undiscounted net cash flows associated with the related asset or group of assets
over their remaining lives against their respective carrying amounts.
Impairment, if any, is based on the excess of the carrying amount over the fair
value of those assets.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment."
SFAS No. 123R requires employee stock options and rights to purchase shares
under stock participation plans to be accounted for under the fair value method,
and eliminates the ability to account for these instruments under the intrinsic
value method prescribed by APB Opinion No. 25, and allowed under the original
provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing
model for estimating fair value, which is amortized to expense over the service
periods. The requirements of SFAS No. 123R are effective for fiscal periods
beginning after June 15, 2005. SFAS No. 123R allows for either prospective
recognition of compensation expense or retrospective recognition, which may be
back to the original issuance of SFAS No. 123 or only to interim periods in the
year of adoption. The Company is currently evaluating these transition methods.
In March 2004, the Emerging Issues Task Force issued EITF 03-06,
"Participating Securities and the Two-Class Method under FASB Statement No.
128". This statement provides additional guidance on the calculation and
disclosure requirements for earnings per share. The FASB concluded in EITF 03-06
that companies with multiple classes of common stock or participating
securities, as defined by SFAS No. 128, calculate and disclose earnings per
share based on the two-class method. The adoption of this statement did not have
an impact to our financial statements presentation as the Company is in a loss
position.
Results of Operations
The following table sets forth certain consolidated statements of income
data as a percentage of net revenue for the periods indicated:
2004 2003 2002
---------- ---------- ----------
Revenue 100% 100% 100%
---------- ---------- ----------
Selling, general and administrative 220% 362% 534%
Research and development 227% 402% 513%
Patent preparation fees 21% 41% 31%
In-process research and development 31% 0% 0%
Impairment of intangible assets 115% 19% 0%
---------- ---------- ----------
Operating loss 514% 723% 978%
Years ended December 31, 2004, 2003 and 2002
Revenues from grants and research and development contracts approximated
$1,839,200 for the year ended December 31, 2004 compared to $731,700 for the
year ended December 31, 2003. The approximate 151% increase is the result of the
award of two Phase I and two Phase II SBIR grants by the NIH during the third
quarter of 2004. The Phase II grants are for a two year period ending in the
third quarter of 2006. The total grant award was for approximately $12.1
million. For the year ended December 31, 2004 we recorded revenue of $1,049,600
from these grants. We also received a one year SBIR grant from the NIH for
$252,000 in August 2004 to support our Strep vaccine program. For the year ended
December 31, 2004 we recorded revenue of $85,600 from this grant. Revenue from
our contract with the U.S. Army was $425,100 for 2004; compared to $315,300 for
the year ended December 31, 2003. The approximate 35% increase was due to the
higher budget for work performed in 2004. For the year ended December 31, 2004
we received revenue of $254,800 from an SBIR grant for our DegP anti infective
that we
20
completed in the second quarter of 2004. For the year ended December 31, 2003 we
received $387,800 from this grant.
Revenue of $731,700 for the year ended December 31, 2003 was approximately
112% higher than revenue of $344,450 for the year ended December 31, 2002. The
increase for the year ended December 31, 2003 from the prior year reflects
$290,000 in revenue from the first year of our $1.6 million contract with the
U.S. Army for our work on the development of a Smallpox drug. Revenue from our
Phase II Small Business Innovation Research (SBIR) grant also increased. Revenue
from the SBIR grant for the year ended December 31, 2003 was approximately
$388,000, an approximate 44% increase over the year ended December 31, 2002. The
SBIR grant, which was a two year grant for a total of $865,000, ended on May 31,
2004.
Selling, general and administrative expenses for the year ended December
31, 2004 were $4,042,000 compared to expenses of $2,646,600 for the year ended
December 31, 2003. The increase of $1,395,400, or approximately 53%, was
primarily due to an increase of $628,000 in payroll expense, and a $693,000
increase in legal expenses. Payroll expenses increased by approximately 128%
primarily due to the addition of a Chief Executive Officer and a Vice President
- - Business Development, bonuses paid to employees, and the costs associated with
the termination of the Employment Agreement with our former President. The
increase in legal expenses of 272% from 2003 was the result of the costs
incurred to review and amend our corporate governance policies and procedures to
ensure compliance with the regulations promulgated under the Sarbanes Oxley Act
of 2002, as well as the NASDAQ stock market. Also contributing to the increase
in legal expenses were the costs incurred in connection with a potential
business combination, the sale of certain non-core vaccine assets, the hiring of
our new CEO, a legal action that we initiated against a former founder and the
work performed relative to the acquisition of certain assets and grants from
ViroPharma. Increases in travel expense, rent, amortization and filing fees were
offset by decreases in depreciation, insurance and miscellaneous expenses.
The $2,646,600 of selling, general and administrative expenses incurred
for the year ended December 31, 2003 represented an increase of approximately
44% from an expense of $1,838,500 for the year ended December 31, 2002. Of the
$808,100 increase, approximately $553,000 was the result of higher consulting
expenses associated with our marketing program to find additional sources of
government grant and contract funding and increased investor relations efforts.
Approximately $184,000 of the increase was the result of increased payroll
expense reflecting the administrative employees who were added in connection
with the acquisition of substantially all the assets of Plexus. In addition, the
year ended December 31, 2003 included non-cash expenses of approximately
$123,000 associated with the amortization of certain intangible assets acquired
in the Plexus transaction. These increases were partially offset by lower legal
and accounting fees. For the year ended December 31, 2002 legal and accounting
fees were approximately $176,000 higher than the expenses incurred in 2003 as
the result of work done in 2002 on a proposed merger.
Research and development expenses were $4,165,800 for the year ended
December 31, 2004; an increase of approximately 42% from the $2,942,800 of
expenses incurred for the year ended December 31, 2003. Amortization expense of
$635,900 represented approximately 35% of the increase. These expenses were the
result of the acquisition of certain assets from Plexus in 2003 and ViroPharma
in 2004. Payroll expenses increased approximately 28% to $1,654,000 for 2004
from $1,289,700 incurred in 2003. The increase was the result of the expansion
of staff to service the grants acquired from ViroPharma and bonuses paid to
employees. Sponsored research increased by approximately 117% in 2004 to
$486,000 from $223,500 in 2003. The increase was the result of payments made to
a Danish university for former Plexus programs, a payment made to TransTech
Pharma for work performed on an SBIR grant that was completed in the second
quarter and payments to Oregon State University for work on the strep grant
received in 2004. Expenses for lab supplies increased approximately 16% to
$472,890 from $407,076 as a result of accelerated development of our lead
product programs.
For the year ended December 31, 2003 research and development expenses
increased approximately 67% to $2,942,800 from $1,766,400 for the same period in
2002. Approximately $504,000 of the increase was the result of 64% higher
payroll expense caused by the addition of Plexus R&D personnel as well as
additional staffing for our ongoing Smallpox and anti-infectives programs. For
the year ended December 31, 2003 we recognized non-cash charges of approximately
$262,000 for the amortization of certain intangible assets acquired from Plexus;
no similar charges were recognized in the prior year. In addition, lab supply
expenses were approximately $400,000, an increase of approximately 83% in the
year ended December 31, 2003 from the prior year spending level of
21
approximately $219,000. The increase reflects increased activity on our Smallpox
and DegP programs. Sponsored research increased to approximately $315,000, an
82% increase from the prior year. The increase was due to payment for work being
performed on former Plexus programs at a Danish University.
All of our product programs are in the early stage of development. At this
stage of development, we cannot make estimates of the potential cost for any
program to be completed or the time it will take to complete the project. There
is a high risk of non-completion of any program because of the lead time to
program completion and uncertainty of the costs. Net cash inflows from any
products developed from these programs is at least one 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 cannot be
certain if they will ever occur.
The risk of failure to complete any program is high, as each is in the
relatively early stage of development. Products for the biological warfare
defense market, such as the Smallpox anti-viral, could be available for sale in
one to three years. We believe the products directed toward this market are on
schedule. We expect the future research and development cost of this program to
increase as the potential products enter animal studies and safety testing.
Funds for future development will be partially paid for by NIH SBIR grants, the
contract we have with the U.S. Army, additional government funding and from
future financing. If we are unable to obtain additional federal grants and
contracts or funding in the required amounts, the development timeline for these
products would slow or possibly be suspended. The clinical trials for our Strep
vaccine through Phase II would be funded under an agreement with the NIH. The
time to market for this product should be several years from now because of the
nature of the FDA requirements for approval of a pediatric vaccine. We expect to
fund the development of the Strep vaccine beyond the Phase II clinical trials
through a corporate collaboration or from additional funding from debt or equity
financings. We do not yet have a corporate partner for this product and there is
no assurance that we will ever have one or that we will be able to raise the
funds needed to go forward. If the funding is not available or the clinical
trials are not successful, the program could be delayed or cancelled. We believe
this product program is on schedule. Delay or suspension of any of our programs
could have an adverse impact on our ability to raise funds in the future, enter
into collaborations with corporate partners or obtain additional federal funding
from contracts or grants.
Patent preparation expenses for the year ended December 31, 2004 were
$393,100 an approximate 31% increase from expenses of $300,500 incurred in 2003.
The increase was the result of increased costs arising from the Plexus and
ViroPharma asset acquisitions. The $300,500 of expense incurred in 2003 was an
approximate 187% increase over the $104,700 expense incurred in 2002, the result
of increased costs of patent work required on the intellectual property acquired
in the Plexus transaction, including foreign patent filings.
For the year ended December 31, 2004, as a result of the acquisition of
certain government grants and two early stage antiviral programs, Smallpox and
Arenavirus, targeting certain agents of biological warfare, from ViroPharma,
$568,329 was immediately expensed as purchased in-process research and
development ("IPRD"). The amount expensed as IPRD was attributed to technology
that has not reached technological feasibility and has no alternate future use.
The value allocated to IPRD was determined using the income approach that
included an excess earnings analysis reflecting the appropriate costs of capital
for the purchase. Estimates of future cash flows related to the IPRD were made
for both the Smallpox and Arenavirus programs. The aggregate discount rate of
approximately 55% utilized to discount the programs' cash flows were based on
consideration of the Company's weighted average cost of capital, as well as
other factors, including the stage of completion and the uncertainty of
technology advances for these programs. If the programs are not successful or
completed in a timely manner, the Company's product pricing and growth rates may
not be achieved and the Company may not realize the financial benefits expected
from the programs.
For the year ended December 31, 2004 we recorded a $2,118,200 non-cash
loss on impairment of assets. In December 2004, upon completion of the
ViroPharma transaction, integration of the related acquired programs into the
Company's operations, and the demonstrated antiviral activity of the Company's
lead smallpox compound against several mouse models of poxvirus disease, we
commenced an application process for additional government grants to support our
continued efforts under the Smallpox and Arenavirus antiviral programs. We
determined that significant efforts and resources will be necessary to
successfully continue the development efforts under these programs and decided
to allocate the necessary resources to support its commitment. As a result,
limited resources will be available for the development of future product
candidates that utilize the technology acquired from Plexus
22
in May 2003. These factors resulted in a significant reduction in forecasted
revenues related to that technology and a reduction in the future remaining
useful life, and triggered the related intangible asset impairment. The amount
of impairment recorded by us in December 2004 was determined using the two-step
process impairment review as required by SFAS 144. In the first step, we
compared the projected undiscounted net cash flows associated with the
technology acquired from Plexus over its remaining life against its carrying
amount. We determined that the carrying amount of the technology acquired from
Plexus exceeded its projected undiscounted cash flows. In the second step, we
estimated the fair value of the technology using the income method of valuation,
which included the use of estimated discounted cash flows. Based on our
assessment, we recorded a non-cash impairment charge of approximately $1.5
million in December 2004, which was included as a component of our operating
loss. In May 2004, we performed an impairment review of our intangible assets in
accordance with SFAS 144 in connection with the sale of certain intangible
assets from our immunological bioinformatics technology and certain non-core
vaccine development to a privately-held company, Pecos Labs, Inc. ("Pecos"). We
recorded an impairment charge of $307,000 to the grants transferred to Pecos and
$303,000 to the covenant not to compete with our President who was terminated
during the current year period.
For the year ended December 31, 2003, we incurred a loss on impairment of
assets as a result of taking a non-cash charge of $137,000 to the intangible
assets acquired in the Plexus transaction to reflect the termination of a
research agreement. No similar charge was incurred in 2002.
Total operating loss for the year ended December 31, 2004 was $9,448,300
compared to a loss of $5,294,900 for 2003. Of the current loss, $2,686,500 was
the result of non-cash charges incurred for the impairment of assets and
recognition of in-process research and development expense. Excluding these
expenses, the current year loss was approximately 28% higher than the prior
year. The increase in the loss was due to higher selling, general and
administrative expenses, higher research and development expenses and higher
patent costs as described in detail above. These increases were partially offset
by increased revenue.
Total operating loss for the year ended December 31, 2003 was $5,294,900,
an approximate 57% increase from the $3,365,100 loss incurred for the year ended
December 31, 2002. The increase in the loss is the result of higher selling,
general and administration expenses and research and development expenses as
described above, partially offset by higher revenues. Approximately 27% of the
increase in the net loss was the result of non-cash charges incurred in the year
ended December 31, 2003.
Other income was $75,000 in the year ended December 31, 2004 an increase
of approximately 311% from the $18,300 for the year ended December 31, 2003. The
increase was mainly due to interest income related to higher cash balances
during 2004 compared to 2003. In 2004 we also received other income of $15,000
as the result of the settlement of a legal action with a former founder.
Other income of $18,300 for the year ended December 31, 2003 was
approximately 46% lower than the $34,100 recognized for the year ended December
31, 2002 and reflected a reduction in interest income due to lower cash balances
and interest yields in the year ended December 31, 2003 compared to prior year.
Liquidity and Capital Resources
As of December 31, 2004 we had $2,020,938 in cash and cash equivalents. We
believe that these funds and our projected cash flows are sufficient to support
our operations beyond December 31, 2005, and that sufficient cash flows will be
available to meet our business objectives.
In August 2004, we acquired certain government grants and two early stage
antiviral programs, Smallpox and Arenavirus, targeting certain agents of
biological warfare from ViroPharma for a purchase price of $1,000,000 in cash
and 1,000,000 shares of our common stock. As part of the closing, we were
awarded Phase I and II SBIR grants from the NIH totaling approximately $12.1
million, which will be received over the next two years, for the development of
drugs for the treatment of Smallpox and Arenavirus as noted above.
In May 2004, we sold intangible assets from our immunological
bioinformatics technology and certain non-core vaccine development assets to a
privately-held company, Pecos Labs, Inc. ("Pecos") in exchange for 150,000
shares of Pecos common stock. As a result of this transaction, we performed an
impairment review of the intangible
23
assets and concluded that the carrying amount of certain transferred intangible
assets of $307,063 would not be recoverable. In addition, we terminated our
employment agreement with our President. We paid approximately $270,000 in
severance to our former President as well as accelerated vesting on 100,000
stock options that were due to vest in May 2004. No compensation charge was
recorded as the exercise price of the options was above the fair value market
price on the date of termination. In addition, we reduced the covenant not to
compete with our former President to one year from the date of termination. We
recognized $303,000 of impairment to the unamortized covenant not to compete
with our former President due to the reduction of the covenant to one year from
the date of termination.
In August 2003, we entered into an agreement with MacAndrews & Forbes
Holdings Inc. ("MacAndrews & Forbes"), a holding company of which the Company's
Chairman of the Board of Directors is Vice Chairman and a director. Upon
consummation of the agreement, MacAndrews & Forbes and its permitted assignees
invested an initial $1,000,000 in SIGA in exchange for 694,444 shares of our
common stock at a price of $1.44 per share and warrants to purchase 347,222
shares of common stock at an initial exercise price of $2.00 per share.
MacAndrews & Forbes and its permitted assignees also received an option,
exercisable through October 13, 2003, to invest up to an additional $9,000,000
in SIGA on the same terms. Upon exercise of the option in October 2003, we
received gross proceeds of $2,159,405 in exchange for 1,499,587 shares of common
stock at a price of $1.44 per share and warrants to purchase 749,794 shares of
common stock at an initial exercise price of $2.00 per share. In January 2004,
upon approval of the Company's shareholders, MacAndrews & Forbes and its
permitted assignees invested the remaining $6,840,595 in exchange for 4,750,413
shares of common stock and warrants to purchase 2,375,206 shares of common stock
at an exercise price of $2.00 per share. All warrants issued under the agreement
have a term of seven years.
In June 2003, the Company raised gross proceeds of $1.5 million in a
private offering of 1,250,000 shares of common stock. In connection with the
offering, the Company issued warrants to purchase 625,000 shares of the
Company's common stock to placement agents. The warrants are exercisable at a
price of $2.00 per share and have a term of five years.
In May 2003, we acquired substantially all of the assets of Plexus in
exchange for 1,950,000 shares of our common stock and the assumption of certain
liabilities, including promissory notes for loans we previously made to Plexus
for $50,000 and $20,000.
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.
We anticipate that our current resources will be sufficient to finance our
currently anticipated needs for operating and capital expenditures approximately
beyond December 31, 2005. 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.
24
Contractual Obligations, Commercial Commitments and Purchase Obligations
As of December 31, 2004, our purchase obligations are not material. We
lease certain facilities and office space under operating leases. Minimum future
rental commitments under operating leases having non-cancelable lease terms in
excess of one year are as follows:
Year ended December 31,
2005 $ 239,700
2006 255,400
2007 261,800
2008 133,200
2009 135,900
2010 22,700
-----------
Total $ 1,048,700
===========
Off-Balance Sheet Arrangements
SIGA does not have any off-balance sheet arrangements.
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 approximately $9.4 million,