Siga files bankruptcy, citing $232 million judgment owed to PharmAthene

The biological warfare defense firm that makes the only treatment for smallpox in the U.S. government’s strategic drug stockpile filed for bankruptcy, claiming a victory by an Annapolis-based rival in a contract dispute is endangering its ability to produce the medicine.

Court protection will allow Siga Technologies Inc. to put off posting a court bond on a potential $232 million damages award to competitor PharmAthene Inc. while it attempts to lower the penalty on appeal and continue operations, the company said in a Chapter 11 petition Tuesday in Manhattan bankruptcy court.

Enforcement of the expected judgment in favor of PharmAthene “would threaten Siga’s viability, its ability to produce and deliver our smallpox drug,” Siga Chief Executive Officer Eric Rose said in a statement. “We remain committed to performing under Siga’s contract.”

Smallpox, an airborne virus that’s as infectious as the common flu, kills as many as 60 percent of patients, and Siga’s drug is the only known viable treatment, the company said.

The antiviral drug, called Tecovirimat, is intended for use during a possible biological terrorist attack. New York-based Siga won the contract through a unit of the U.S. Department of Health and Human Services, which was authorized by Congress under the Project BioShield Act of 2004 to acquire drugs in the national interest, even if they haven’t been approved by regulators, according to Siga’s court filing.

Siga has already provided the U.S. with 1.3 million doses of Tecovirimat, also known as ST-246, and is poised to deliver about 700,000 more, according to Siga’s filing. The U.S. Food and Drug Administration gave Tecovirimat “fast-track” status for possible approval, Rose said.

The company listed assets of $209.5 million and debt of $197.9 million in its bankruptcy papers. It has about 35 employees and consultants and has a research facility in Corvallis, Oregon, according to court filings.

Siga fell 13 percent to about $1.26 at 11:08 a.m. in New York. PharmAthene dropped 18 percent.

PharmAthene, a developer of biological and chemical defense products, sued Siga in 2006, arguing it should share in as much as $5 billion in potential sales, mostly from government contracts for ST-246.

PharmAthene argued that it had a claim to ST-246’s profits because it helped fund the drug’s development and Siga reneged on promises to grant a licensing agreement. PharmAthene loaned Siga $3 million to keep the drug’s development going while the two companies negotiated, according to court testimony.

Delaware’s highest court last year upheld a judge’s 2011 finding that Siga was liable for violating promises to negotiate in good faith over a license for Tecovirimat when it was being developed.

Siga executives’ bad-faith negotiations were prompted by “seller’s remorse” over giving up control of “what was looking more and more like a multibillion-dollar drug,” Chief Justice Myron Steele wrote in a 42-page ruling at the time.

The appeals court also ordered the lower-court judge to reconsider the amount of damages PharmAthene can recover, leading to an Aug. 8 preliminary ruling in Delaware Chancery Court that included a method for setting a lump-sum award.

PharmAthene didn’t immediately respond to messages seeking comment on Siga’s bankruptcy.

Rose, who has led the company since 2007, said in court filings that Siga can get the damages cut on appeal in the 8-year-old litigation by challenging the way they are calculated by the judge.

The bankruptcy will allow Siga to appeal the calculation without posting a required bond for the damages, which would exceed the $198 million the company has received so far from the government, Rose said in court papers Tuesday.

The company is being represented by attorney Harvey Miller, the Weil Gotshal & Manges LLP partner who led the bankruptcy of Lehman Brothers Holdings Inc.

Smallpox killed as many as 500 million people worldwide during the 20th century, and routine vaccinations in the U.S. ended in 1972, according to the filing. The last case of smallpox in the U.S. was in 1949, and the last naturally occurring case was in Somalia in 1977, according to the Centers for Disease Control.

“A smallpox release likely would result in a high infection rate and rapid spread of the disease among the general population,” Rose said.

The total value of the U.S. contract is about $463 million, Rose said, including $88.5 million for future deliveries and a bonus payment of more than $100 million if the drug wins approval from the FDA.

If the contract were extended, the value of the government deal could amount to billions of dollars, according to testimony in the case.

The case is Siga Technologies Inc., 14-12623, U.S. Bankruptcy Court for the Southern District of New York (Manhattan).