| SIGA TECHNOLOGIES INC Item 1A Risk Factors That May Affect Results of Operations and Financial Condition |
| 11 Item 1A Risk Factors 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 dlra2dtta3 million, dlra9dtta4 million, and dlra5dtta3 million for the years ended December 31, 2005, 2004, and 2003, respectively |
| As of December 31, 2005, 2004 and 2003, our accumulated deficit was approximately dlra46dtta5 million, dlra44dtta2 million and dlra34dtta8 million, respectively |
| We expect to continue to incur significant operating expenditures |
| We will need to generate significant revenues to achieve and maintain profitability |
| We cannot guarantee that we will achieve sufficient revenues for profitability |
| Even if we do achieve profitability, we cannot guarantee that we can sustain or increase profitability on a quarterly or annual basis in the future |
| If revenues grow slower than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, then our business, results of operations, financial condition and cash flows will be materially and adversely affected |
| Because our strategy might include acquisitions of other businesses, acquisition expenses and any cash used to make these acquisitions will reduce our available cash |
| 11 Our business will suffer if we are unable to raise additional equity funding |
| We continue to be dependent on our ability to raise money in the equity markets |
| There is no guarantee that we will continue to be successful in raising such funds |
| If we are unable to raise additional equity funds, we may be forced to discontinue or cease certain operations |
| We currently have sufficient operating capital to finance our operations beyond March 31, 2007 |
| Our annual operating needs vary from year to year depending upon the amount of revenue generated through grants and licenses and the amount of projects we undertake, as well as the amount of resources we expend, in connection with acquisitions all of which may materially differ from year to year and may adversely affect our business |
| Our stock price is, and we expect it to remain, volatile, which could limit investors &apos ability to sell stock at a profit |
| The volatile price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance |
| A variety of factors may affect the market price of our common stock |
| These include, but are not limited to: o publicity regarding actual or potential clinical results relating to products under development by our competitors or us; o delay or failure in initiating, completing or analyzing pre-clinical or clinical trials or the unsatisfactory design or results of these trials; o achievement or rejection of regulatory approvals by our competitors or us; o announcements of technological innovations or new commercial products by our competitors or us; o developments concerning proprietary rights, including patents; o developments concerning our collaborations; o regulatory developments in the United States and foreign countries; o economic or other crises and other external factors; o period-to-period fluctuations in our revenues and other results of operations; o changes in financial estimates by securities analysts; and o sales and short selling activity of our common stock |
| Additionally, because there is not a high volume of trading in our stock, any information about SIGA in the media may result in significant volatility in our stock price |
| We will not be able to control many of these factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance |
| In addition, the stock market in general, and the market for biotechnology companies in particular, has experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of individual companies |
| These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance |
| We are in various stages of product development and there can be no assurance of successful commercialization |
| In general, our research and development programs are at an early stage of development |
| To obtain FDA approval for our biological warfare defense products we will be required to perform two animal models and provide animal and human safety data |
| Our other products will be subject to the approval guidelines under FDA regulatory requirements which include a number of phases of testing in humans |
| 12 The FDA has not approved any of our biopharmaceutical product candidates |
| Any drug candidates developed by us will require significant additional research and development efforts, including extensive pre-clinical and clinical testing and regulatory approval, prior to commercial sale |
| We cannot be sure our approach to drug discovery will be effective or will result in the development of any drug |
| We cannot expect that any drugs resulting from our research and development efforts will be commercially available for many years, if at all |
| We have limited experience in conducting pre-clinical testing and clinical trials |
| Even if we receive initially positive pre-clinical or clinical results, such results do not mean that similar results will be obtained in the later stages of drug development, such as additional pre-clinical testing or human clinical trials |
| All of our potential drug candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that none of our drug candidates will or can: o be safe, non-toxic and effective; o otherwise meet applicable regulatory standards; o receive the necessary regulatory approvals; o develop into commercially viable drugs; o be manufactured or produced economically and on a large scale; o be successfully marketed; o be reimbursed by government and private insurers; and o achieve customer acceptance |
| In addition, third parties may preclude us from marketing our drugs through enforcement of their proprietary rights that we are not aware of, or third parties may succeed in marketing equivalent or superior drug products |
| Our failure to develop safe, commercially viable drugs would have a material adverse effect on our business, financial condition and results of operations |
| Most of our immediately foreseeable future revenues are contingent upon grants and contracts from the United States government and collaborative and license agreements and we may not achieve sufficient revenues from these agreements to attain profitability |
| Until and unless we successfully make a product, our ability to generate revenues will largely depend on our ability to enter into additional collaborative agreements, strategic alliances, research grants, contracts and license agreements with third parties and maintain the agreements we currently have in place |
| Substantially all of our revenues for the years ended December 31, 2005, 2004 and 2003, respectively, were derived from revenues related to grants, contracts and license agreements |
| Our current revenue is derived from contract work being performed for the NIH under two major grants which are scheduled to expire in September 2006 and contracts with the US Army which expire in September 2006 and December 2007 |
| These agreements are for specific work to be performed under the agreements and could only be canceled by the other party thereto for non-performance |
| We may not earn significant milestone payments under our existing collaborative agreements until our collaborators have advanced products into clinical testing, which may not occur for many years, if at all |
| We have material agreements with the following collaborators: o National Institutes of Health |
| Under our collaborative agreement with the NIH we have received SBIR Grants totaling approximately dlra11dtta1 million in 2004 |
| The term of these grants expire in September 2006 |
| We are paid as the work is performed and the agreement can be cancelled for non-performance |
| We also have an agreement whereby the NIH is required to conduct and pay for the clinical trials of our strep vaccine product through phase II human trials |
| We are current in all our obligations under our agreements |
| 13 o United States Army Medical Research and Material Command |
| In September 2005 we entered into a dlra3dtta2 million, one year contract with the USAMRMC The agreement, for the rapid identification and treatment of anti-viral diseases, is funded through the USAF It is anticipated that our efforts will aid the USAF Special Operations Command in its use of computational biology to design and develop specific countermeasures against biological threat agents Smallpox and Adenovirus |
| We are current in all our obligations under our agreement |
| On September 1, 2005, we entered into an agreement with Saint Louis University for the continued development of one of our Smallpox drugs |
| The agreement is funded through the NIH Under the agreement, SIGA will receive approximately dlra1dtta0 million during the term of September 1, 2005 to February 28, 2006 |
| We are current in all our obligations under our agreement |
| In December 2002, we entered into a four year contract with USAMRAA to develop a drug to treat Smallpox |
| We are current in all our obligations under our agreement |
| The term of our agreement with Rockefeller 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 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 current in all obligations under the contract |
| OSU is a signatory of our agreement with Rockefeller |
| The term of this agreement 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 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 current in all obligations under the contract |
| We have also entered into a subcontract agreement with OSU for us to perform work under a grant OSU has from the NIH The subcontract agreement was renewable annually and the current terms expired on August 31, 2003 |
| Work on this agreement was completed in 2003 |
| We have licensed certain technology from Washington under a non-exclusive license agreement |
| The term of our agreement with Washington 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 |
| o Regents of the University of California |
| We have licensed certain technology from Regents under an exclusive license agreement |
| We are required to pay minimum royalties under this agreement |
| We have currently met all our obligations under this agreement |
| Under our collaborative agreement with TransTech Pharma, a related party, TransTech Pharma is collaborating with us on the discovery, optimization and development of lead compounds to certain therapeutic agents |
| We and TransTech Pharma have agreed to share the costs of development and revenues generated from licensing and profits from any commercialized products 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 |
| We are current in all obligations under this agreement |
| The biopharmaceutical market in which we compete and will compete is highly competitive |
| The biopharmaceutical industry is characterized by rapid and significant technological change |
| Our success will depend on our ability to develop and apply our technologies in the design and development of our product 14 candidates and to establish and maintain a market for our product candidates |
| There also are many companies, both public and private, including major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions engaged in developing pharmaceutical and biotechnology products |
| Many of these companies have substantially greater financial, technical, research and development, and human resources than us |
| Competitors may develop products or other technologies that are more effective than any that are being developed by us or may obtain FDA approval for products more rapidly than us |
| If we commence commercial sales of products, we still must compete in the manufacturing and marketing of such products, areas in which we have no experience |
| Many of these companies also have manufacturing facilities and established marketing capabilities that would enable such companies to market competing products through existing channels of distribution |
| Two companies with similar profiles are VaxGen, Inc, which is developing vaccines against anthrax, Smallpox and HIV/AIDS; and Avant Immunotherapeutics, Inc, which has vaccine programs for agents of biological warfare |
| Because we must obtain regulatory clearance to test and market our products in the United States, we cannot predict whether or when we will be permitted to commercialize our products |
| A pharmaceutical product cannot be marketed in the US until it has completed rigorous pre-clinical testing and clinical trials and an extensive regulatory clearance process implemented by the FDA Pharmaceutical products typically take many years to satisfy regulatory requirements and require the expenditure of substantial resources depending on the type, complexity and novelty of the product |
| Before commencing clinical trials in humans, we must submit and receive clearance from the FDA by means of an IND application |
| Institutional review boards and the FDA oversee clinical trials and such trials: o must be conducted in conformance with the FDAapstas good laboratory practice regulations; o must meet requirements for institutional review board oversight; o must meet requirements for informed consent; o must meet requirements for good clinical and manufacturing practices; o are subject to continuing FDA oversight; o may require large numbers of test subjects; and o may be suspended by us or the FDA at any time if it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or if the FDA finds deficiencies in the IND application or the conduct of these trials |
| Before receiving FDA clearance to market a product, we must demonstrate that the product is safe and effective on the patient population that will be treated |
| Data we obtain from preclinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory clearances |
| Additionally, we have limited experience in conducting and managing the clinical trials and manufacturing processes necessary to obtain regulatory clearance |
| If regulatory clearance of a product is granted, this clearance will be limited only to those states and conditions for which the product is demonstrated through clinical trials to be safe and efficacious |
| We cannot ensure that any compound developed by us, alone or with others, will prove to be safe and efficacious in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing clearance |
| If our technologies or those of our collaborators are alleged or found to infringe the patents or proprietary rights of others, we may be sued or have to license those rights from others on unfavorable terms |
| Our commercial success will depend significantly on our ability to operate without infringing the patents and proprietary rights of third parties |
| Our technologies, along with our licensors &apos and our collaborators &apos technologies, may infringe the patents or proprietary rights of others |
| If there is an adverse outcome in litigation or an interference to determine priority or other proceeding in a court or patent office, then we, or our collaborators and licensors, could be subjected to significant liabilities, required to license disputed rights from or to other parties 15 and/or required to cease using a technology necessary to carry out research, development and commercialization |
| At present we are unaware of any or potential infringement claims against our patent portfolio |
| The costs to establish the validity of patents, to defend against patent infringement claims of others and to assert infringement claims against others can be expensive and time consuming, even if the outcome is favorable |
| An outcome of any patent prosecution or litigation that is unfavorable to us or one of our licensors or collaborators may have a material adverse effect on us |
| We could incur substantial costs if we are required to defend ourselves in patent suits brought by third parties, if we participate in patent suits brought against or initiated by our licensors or collaborators or if we initiate such suits |
| We may not have sufficient funds or resources in the event of litigation |
| Additionally, we may not prevail in any such action |
| Any conflicts resulting from third-party patent applications and patents could significantly reduce the coverage of the patents owned, optioned by or licensed to us or our collaborators and limit our ability or that of our collaborators to obtain meaningful patent protection |
| If patents are issued to third parties that contain competitive or conflicting claims, we, our licensors or our collaborators may be legally prohibited from researching, developing or commercializing of potential products or be required to obtain licenses to these patents or to develop or obtain alternative technology |
| We, our licensors and/or our collaborators may be legally prohibited from using patented technology, may not be able to obtain any license to the patents and technologies of third parties on acceptable terms, if at all, or may not be able to obtain or develop alternative technologies |
| In addition, like many biopharmaceutical companies, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities conducted by us |
| We and/or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations |
| Our ability to compete may decrease if we do not adequately protect our intellectual property rights |
| Our commercial success will depend in part on our and our collaborators &apos 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 US 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 US and one application in Europe relating to this technology |
| We are joint owner with Washington University of seven issued patents in the US and one in Europe |
| In addition, there are four co-owned US patent applications |
| These patents are for the technology used for the Gram-negative product opportunities |
| We are also exclusive owner of one US patent and three US patent applications |
| One of these US patent applications relates to our DegP product opportunities |
| We included a summary of out patent positions as of December 31, 2005 in Part I, Item 1 of this document |
| We also rely on copyright protection, trade secrets, know-how, continuing technological innovation and licensing opportunities |
| In an effort to maintain the confidentiality and ownership of trade secrets and proprietary information, we require our employees, consultants and some collaborators to execute confidentiality and invention assignment agreements upon commencement of a relationship with us |
| These agreements may not provide meaningful protection for our trade secrets, confidential information or inventions in the event of unauthorized use or disclosure of such information, and adequate remedies may not exist in the event of such unauthorized use or disclosure |
| 16 We may have difficulty managing our growth |
| We expect to experience growth in the number of our employees and the scope of our operations |
| This future growth could place a significant strain on our management and operations |
| Our ability to manage this growth will depend upon our ability to broaden our management team and our ability to attract, hire and retain skilled employees |
| Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems and to hire, train and manage our employees |
| Our activities involve hazardous materials and may subject us to environmental regulatory liabilities |
| Our biopharmaceutical research and development involves the controlled use of hazardous and radioactive materials and biological waste |
| We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and certain waste products |
| Although we believe that our safety procedures for handling and disposing of these materials comply with legally prescribed standards, the risk of accidental contamination or injury from these materials cannot be completely eliminated |
| In the event of an accident, we could be held liable for damages, and this liability could exceed our resources |
| The research and development activities of our company do not produce any unusual hazardous products |
| We do use small amounts of 32P, 35S and 3H, which are stored, used and disposed of in accordance with Nuclear Regulatory Commission ( "e NRC "e ) regulations |
| We maintain liability insurance in the amount of approximately dlra5cmam000cmam000 and we believe this should be sufficient to cover any contingent losses |
| We believe that we are in compliance in all material respects with applicable environmental laws and regulations and currently do not expect to make material additional capital expenditures for environmental control facilities in the near term |
| However, we may have to incur significant costs to comply with current or future environmental laws and regulations |
| Our potential products may not be acceptable in the market or eligible for third party reimbursement resulting in a negative impact on our future financial results |
| Any products successfully developed by us or our collaborative partners may not achieve market acceptance |
| The antibiotic products which we are attempting to develop will compete with a number of well-established traditional antibiotic drugs manufactured and marketed by major pharmaceutical companies |
| The degree of market acceptance of any of our products will depend on a number of factors, including: o the establishment and demonstration in the medical community of the clinical efficacy and safety of such products, o the potential advantage of such products over existing treatment methods, and o reimbursement policies of government and third-party payors |
| Physicians, patients or the medical community in general may not accept or utilize any products that we or our collaborative partners may develop |
| Our ability to receive revenues and income with respect to drugs, if any, developed through the use of our technology will depend, in part, upon the extent to which reimbursement for the cost of such drugs will be available from third-party payors, such as government health administration authorities, private health care insurers, health maintenance organizations, pharmacy benefits management companies and other organizations |
| Third-party payors are increasingly disputing the prices charged for pharmaceutical products |
| If third-party reimbursement was not available or sufficient to allow profitable price levels to be maintained for drugs developed by us or our collaborative partners, it could adversely affect our business |
| If our products harm people, we may experience product liability claims that may not be covered by insurance |
| We face an inherent business risk of exposure to potential product liability claims in the event that drugs we develop are alleged to cause adverse effects on patients |
| Such risk exists for products being tested in human clinical trials, as well as products that receive regulatory approval for commercial sale |
| We may seek to obtain product liability insurance with respect to drugs we and/or or our collaborative partners develop |
| However, we may 17 not be able to obtain such insurance |
| Even if such insurance is obtainable, it may not be available at a reasonable cost or in a sufficient amount to protect us against liability |
| We may be required to perform additional clinical trials or change the labeling of our products if we or others identify side effects after our products are on the market, which could harm sales of the affected products |
| If we or others identify side effects after any of our products on the market, or if manufacturing problems occur: o regulatory approval may be withdrawn; o reformulation of our products, additional clinical trials, changes in labeling of our products may be required; o changes to or re-approvals of our manufacturing facilities may be required; o sales of the affected products may drop significantly; o our reputation in the marketplace may suffer; and o lawsuits, including class action suits, may be brought against us |
| Any of the above occurrences could harm or prevent sales of the affected products or could increase the costs and expenses of commercializing and marketing these products |
| The manufacture of biotechnology products can be a time-consuming and complex process which may delay or prevent commercialization of our products, or may prevent our ability to produce an adequate volume for the successful commercialization of our products |
| Our management believes that we have the ability to acquire or produce quantities of products sufficient to support our present needs for research and our projected needs for our initial clinical development programs |
| The manufacture of all of our products will be subject to current Good Manufacturing Practices (GMP) requirements prescribed by the FDA or other standards prescribed by the appropriate regulatory agency in the country of use |
| There can be no assurance that we will be able to manufacture products, or have products manufactured for us, in a timely fashion at acceptable quality and prices, that we or third party manufacturers can comply with GMP, or that we or third party manufacturers will be able to manufacture an adequate supply of product |
| Healthcare reform and controls on healthcare spending may limit the price we charge for any products and the amounts thereof that we can sell |
| The US federal government and private insurers have considered ways to change, and have changed, the manner in which healthcare services are provided in the US Potential approaches and changes in recent years include controls on healthcare spending and the creation of large purchasing groups |
| In the future, the US government may institute further controls and limits on Medicare and Medicaid spending |
| These controls and limits might affect the payments we could collect from sales of any products |
| Uncertainties regarding future healthcare reform and private market practices could adversely affect our ability to sell any products profitably in the US At present, we do not foresee any changes in FDA regulatory policies that would adversely affect our development programs |
| The future issuance of preferred stock may adversely affect the rights of the holders of our common stock |
| Our certificate of incorporation allows our Board of Directors to issue up to 10cmam000cmam000 shares of preferred stock and to fix the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of these shares without any further vote or action by the stockholders |
| The rights of the holders of common stock will be subject to, and could be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future |
| The issuance of preferred stock, while providing desirable flexibility in connection with possible 18 acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control |
| Concentration of ownership of our capital stock could delay or prevent change of control |
| Our directors, executive officers and principal stockholders beneficially own a significant percentage of our common stock and preferred stock |
| They also have, through the exercise or conversion of certain securities, the right to acquire additional common stock |
| As a result, these stockholders, if acting together, have the ability to significantly influence the outcome of corporate actions requiring shareholder approval |
| Additionally, this concentration of ownership may have the effect of delaying or preventing a change in control of SIGA At December 31, 2005, Directors, Officers and principal stockholders beneficially owned approximately 46dtta0prca of our stock |