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Tough medicine: Court rules firm may get $100M

Annapolis-based PharmAthene Inc. may be entitled to at least $100 million in damages after the Delaware Supreme Court held that Siga Technologies Inc. acted in bad faith in backing out of a proposed licensing agreement for its smallpox treatment medication to be used in response to a biochemical attack.

The Delaware court held Friday that PharmAthene, a biodefense company, can be awarded “expectation damages” arising from the collapse of its proposed agreement to help New York-based Siga develop and market its Arestvyr medicine.

The court remanded the case to a chancery court vice chancellor, or judge, with instructions to calculate PharmAthene’s damages based on what the company could have expected to earn had Siga acted in good faith and the proposed licensing agreement been reached.

PharmAthene had estimated damages of at least $100 million based on its proposed 50 percent share with Siga and an existing sales contract of $433 million, less marketing and production costs. That $100 million figure would increase if Siga’s sales of Arestvyr improve, as expectation damages rise with future sales.

“Our interests are aligned” with Siga’s, PharmAthene General Counsel Jordan Karp said Wednesday. “We want sales of Arestvyr to be successful.”

Karp, however, said the ultimate award of damages will be up to a vice chancellor of the Delaware Court of Chancery.

“I believe and continue to believe that the judge will award us a meaningful remedy to compensate us for our loss,” Karp said.

But Siga’s general counsel said in a statement that the Delaware Supreme Court’s decision permits PharmAthene to obtain expectation damages only if it can prove them “with reasonable certainty,” which is difficult to do based on a contract that was never consummated.

“We intend to establish to the Chancery Court, consistent with that court’s earlier conclusions, that PharmAthene’s evidence of expectancy damages is speculative and too uncertain, contingent and conjectural to permit an award,” William J. Haynes II said.

The legal dispute between PharmAthene and Siga grew from the concern of the United States and its allies after Sept. 11, 2001, that terrorists might revive the smallpox virus — which the World Health Organization declared eradicated in 1979 — as a chemical weapon. To combat this threat, the U.S government sought a treatment for smallpox.

Siga has been the most successful developer of such a drug and won a $433 million contract to deliver 2 million doses of Arestvyr to the federal government’s Biomedical Advanced Research and Development Authority within the U.S. Department of Health and Human Services. On Wednesday, Siga announced it had completed its second in a series of deliveries to BARDA as the company seeks to complete the contract.

Siga’s success, however, came only after it endured financial hardship and turned to PharmAthene for help.

In 2004, Siga’s smallpox medication was under development, but by late 2005 the initial tests were not going well and the company was losing money. Siga’s largest investor, MacAndrews & Forbes, refused to invest more money, according to the high court’s opinion.

Siga, estimating it needed $16 million to complete development, proposed that PharmAthene buy the company. The two companies agreed that if merger talks failed, they would negotiate in good faith toward reaching a licensing agreement for the drug.

The talks went well and the companies signed a merger agreement on June 8, 2006, with a closing date of Sept. 30, 2006.

But Siga got what the high court called “seller’s remorse” when, shortly before the closing date, the National Institutes of Health awarded the company $16.5 million to develop the drug.

Siga’s board of directors decided to terminate the merger agreement, and PharmAthene pressed ahead with negotiations for a licensing agreement. That accord was to be based on a licensing agreement term sheet the companies had drafted in the event a merger fell through.

The LATS provided that PharmAthene would pay $6 million for a worldwide exclusive license to the drug. PharmAthene would also pay $10 million to Siga as milestones related to sales targets and regulatory approvals were achieved.

In addition, PharmAthene would make annual royalty payments of 8 percent on annual sales of less than $250 million, 10 percent on sales greater than $250 million and 12 percent on sales greater than $1 billion.

The licensing agreement talks collapsed, however, and PharmAthene sued Siga in the Chancery Court of Delaware, alleging the company had negotiated in bad faith.

The Chancery Court’s vice chancellor found Siga liable for having violated its agreement to negotiate in good faith and said PharmAthene was entitled to damages.

On appeal, the Delaware Supreme Court agreed that Siga had violated its contractual obligation to negotiate in good faith.

“The record supports the vice chancellor’s finding that ‘SIGA disregarded [the LATS’] terms and attempted to negotiate a definitive license agreement that contained economic and other terms drastically different and significantly more favorable to SIGA than those in the LATS,” the high court stated. “Evidence that ‘SIGA began experiencing seller’s remorse during the merger negotiations for having given up control of what was looking more and more like a multibillion-dollar drug’ bolsters the vice chancellor’s finding that SIGA failed to negotiate in good faith for a definitive license agreement in accordance with the terms of the LATS.”

The high court then instructed the vice chancellor on compensation for PharmAthene.

“We now hold that where the parties have a … preliminary agreement to negotiate in good faith, and the trial judge makes a factual finding, supported by the record, that the parties would have reached an agreement but for the defendant’s bad faith negotiations, the plaintiff is entitled to recover contract expectation damages,” the court held.