Steel City Capital LP, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A net return of 7.6% was delivered by the fund for the Q1 of 2021, above the S&P 500 and MSCI All World Index that delivered a 5.8% and 4.8% returns respectively, but below its Russell 2000 benchmark, that had a 12.9% gain for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Steel City Capital, in their Q1 2021 investor letter, mentioned SIGA Technologies, Inc. (NASDAQ: SIGA), and shared their insights on the company. SIGA Technologies, Inc. is a US-based pharmaceutical company that currently has a $545.3 million market capitalization. Since the beginning of the year, SIGA delivered a -1.38% return, while its 12-month gains are up by 22.56%. As of April 30, 2021, the stock closed at $7.17 per share.
Here is what Steel City Capital has to say about SIGA Technologies, Inc. in their Q1 2021 investor letter:
“Next up is SIGA Technologies, Inc. While there are stark differences between SIGA and NWSA (line of business, size), there are some striking similarities as well (messy accounting and the presence of a controlling shareholder). SIGA is a commercial stage pharmaceutical company whose sole product, TPOXX, is an antiviral drug approved by the FDA for the treatment of smallpox. Smallpox is an incredibly deadly disease. The virus has a 1-to-2 week incubation period, meaning that “hosts” can carry and spread the virus asymptomatically for up to 14 days; it is highly transmissible (an average of 5 people infected by each sick person); and its historical mortality rate is ~30%. A smallpox outbreak would make the COVID19 pandemic look like a walk in the park. Hold up a second. You’re probably asking yourself, “wasn’t smallpox eradicated?” The answer is yes. The last natural outbreak of smallpox in the United States occurred in 1949. In 1980, the World Health Assembly declared smallpox eradicated. No cases of naturally occurring smallpox have occurred since. (PSA: Vaccines are safe and effective.) What, then, is the purpose of a company that produces an antiviral for a virus that hasn’t been naturally contracted in 70 years? While the prospect of contracting the virus naturally is effectively nil, smallpox is a widely recognized bioterrorism threat. From SIGA’s investor presentation:
- “Somebody would reconstruct, say, a smallpox virus and have that spread, and that would not only kill millions, it could potentially kill billions.” – Bill Gates on bioterrorism in 2017
- “In 2014, the NIH discovered live stocks in a storage room on its campus in Bethesda, Maryland. If the venerable and highly regulated NIH could lose track of smallpox, other institutions could have forgotten some vials as well.” – Nature, August 20184
- “North Korea is far more likely to use biological weapons than nuclear ones. The program is advanced, underestimated and highly lethal.” – Andrew Weber, Pentagon official in charge of nuclear, chemical and biological defense programs under President Obama in 2019.
The idea that an extremely deadly pathogen could be weaponized by an adversarial regime or other non-state actor was a primary focus in the years following September 11th and the 2001 anthrax attacks. The U.S. government has taken a multi-pronged approach to protect against the threat, including stockpiling enough vaccine for the entire population. However, a vaccine-only approach isn’t sufficient for a variety of reasons: a portion of the population is contraindicated for the vaccine (it won’t work or can’t be taken); vaccine hesitancy persists; and the vaccine ceases to be effective at a certain point after infection. It’s the latter situation where TPOXX is currently indicated. In the event of a smallpox outbreak, TPOXX can be prescribed to individuals who are exhibiting symptoms, which generally occurs 2-weeks after infection.
In 2011, SIGA signed an initial procurement contract with Biomedical Advanced Research and Development Authority (BARDA) and ultimately delivered 1.7 million courses of TPOXX to the Strategic National Stockpile (SNS) between 2013 and 2017. The drug has an FDA-approved shelf life of 7 years and in 2018 SIGA signed a new contract with BARDA with the explicit purpose of maintaining the government’s current 1.7 million course stockpile. The first deliveries under the maintenance contract, which is valued in excess of $600 million, began in 2020, coinciding with the 7-year expiration of the 2013 product deliveries. Annual deliveries should continue through 20245. Additionally, TPOXX has sufficient patent protection to support one more replenishment contract cycle that would begin in 2027.
…Purchasing a commercially approved drug with a visible multi-year revenue stream backed by the US Government at a mid-single-digit earnings multiple is attractive to me on a standalone basis. But what makes the investment even more attractive is a list of “free options” embedded in the stock. These include:
1. Stockpile expansion: 1.7 million courses of TPOXX is an extremely small stockpile when considering the high transmissibility and mortality rates of the virus. As of late April 2021, there have been more than 32 million confirmed cases of COVID-19 and nearly 600,000 deaths in the U.S since the start of the pandemic. Seeing as smallpox is more infectious and deadly than COVID-19, it would make sense that the government would want to have more than just 1.7 million courses available. I expect preparing for and protecting against future pandemics will be a bipartisan focus in the years to come, creating an opening for SIGA to increase the value of its contract. This is a medium-term opportunity for the company (several years out) as near-term government efforts remain focused on COVID and there is an ongoing transition of key decisionmakers within the government.
2. Post-Exposure Prophylaxis (PEP): SIGA is pursuing a label expansion for the purpose of Post-Exposure Prophylaxis. As it stands today, the course of treatment for smallpox exposure contains a wide “health security gap” as indicated in the image on Page 6 above. Vaccines are only effective if administered either1) before exposure or 2) within ~4 days of infection. TPOXX is only indicated for symptomatic cases, with symptoms typically presenting ~14 days after infection. This means there is a roughly 10-day window where an exposed individual wouldn’t benefit from a vaccine but technically isn’t eligible for TPOXX. From a practical perspective, PEP is very important because in the face of a potential outbreak, health professionals won’t want to be waiting around to prescribe TPOXX to individuals when they present with symptoms. Instead, they’ll want to be proactive and dose everyone who has been within spitting distance (literally) of an individual with a diagnosed case –symptoms or not.
PEP would fill this health security gap, and for the company, also provide a meaningful increase in sales. PEP is a 28-day course vs. the 14-day course currently approved for symptomatic disease. This means that if approved for PEP, the government’s 1.7 million course stockpile would effectively be cut in half, requiring a doubling of the contract just to maintain the current inventory.
3. International Sales: Biodefense isn’t solely an American concern and the company is actively pursuing international sales. Earlier this year SIGA announced a deal with the Public Health Agency of Canada (valued at $33 million) and has foreshadowed one more contract announcement in the coming year. Again, this is probably a medium-term opportunity given the time required to achieve regulatory approvals and sign contracts, not to mention the limited bandwidth of key decisionmakers amidst the ongoing response to COVID.
So why are SIGA shares cheap? Like NWSA, the accounting, at least historically, has been messy. SIGA began fulfilling its obligations under the 2011 contract before TPOXX received FDA approval, and there was a clause in that contract that would have required the company to replace previously delivered doses to the extent the approved drug formulation was different than the one it had delivered. Because of this key regulatory contingency, accounting rules required the company to initially record cash receipts as deferred revenue, bypassing the P&L, resulting in a long string of net losses until 2018 when the company finally recorded $477 million of revenue in one fell swoop in connection with final FDA approval of the drug. As a result, the company has rarely screened well on historical metrics (although this is now changing as it makes deliveries under the maintenance contract), and continues to screen poorly on the basis of forward-looking estimates as a result of the absence of sell-side coverage. The other potential reason for SIGA’s cheapness is the overhang caused by the concentrated ownership by Ron Perelman’s MacAndrews & Forbes, which holds ~30% of shares outstanding. MacAndrews and Forbes has reportedly suffered under the weight of its debt load, whose collateral included the firm’s publicly traded stakes in several firms.”
Our calculations show that SIGA Technologies, Inc. (NASDAQ: SIGA) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, SIGA Technologies, Inc. was in 10 hedge fund portfolios, compared to 16 funds in the third quarter. SIGA delivered a 10.99% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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Disclosure: None. This article is originally published at Insider Monkey.
