Tuesday, September 30, 2008

Clear and Present Danger

Governments around the world have taken action over the last several years to shore up protection against bioterrorism with new surveillance and detection systems as well as vaccines and treatments for specific toxins. Around ten to twelve states are believed to maintain an offensive biological weapons program, a number that has remained relatively stable over the last two decades. There has been a series of incidents and threats involving various toxins such as anthrax, demonstrating that the threat of bioterrorism is not simply a recent and perhaps fleeting phenomenon.

No other country has approached the threat of bioterrorism and biowarfare more vigorously and with a larger budget than the United States, making U.S. public agencies like the Department of Health and Human Services the most prominent partners and customers for developers of biodefense products and services. Countries around the world are expected to follow on the U.S. efforts to development effective countermeasures. A very large market opportunity has mushroomed to an estimated $50 billion worldwide, creating an emerging biodefense sector and attracting dozens of contenders.

Among the expanding group of aspirants, PharmAthene, Inc. (PIP: AMEX) is distinguished as a commercially oriented biopharmaceutical company singularly focused on the development and production of anti-infectives for biodefense applications. The Company was founded in early 2001 by a group of scientists from Harvard University and the Salk Institute who had been collaborating on anthrax-related research even before the terrorism events that triggered public action later in that year.

PharmAthene has built a portfolio of five primary vaccine and therapeutic candidates through a combination of scientific findings by its founders and acquisitions. Protexia, intended for treatment of nerve agent poisoning, is under development contract valued at $106 million (including options) by the U.S. Department of Defense. The Company’s SparVax second-generation anthrax vaccine for the national stockpile of vaccines and anti-infectives recently cleared an important hurdle for acceptance by the U.S. Department of Health and Human Services. PharmAthene also recently won an award valued at $83.9 million for a development of its yet unnamed third-generation anthrax vaccine.

Crystal Equity Research recently initiated coverage of PIP shares with a Speculative Buy rating and a $5.35 price target based on the Company’s reputation and the attractiveness of the Company’s process knowledge and trade secrets as a platform for biodefense development assignments by public health agencies.

The investment thesis is based on the view that the current price level does not fully consider the long-term value of the Company’s intellectual property. In 2006, PharmAthene was tapped by the U.S. Department of Defense for development of the bubonic plague treatment Protexia, with an option to deliver 90,000 doses of the drug beginning sometime in 2014. Considering only existing contracts, Protexia would be the first production deliveries for the Company.

Importantly, PharmAthene is also in the running for a significant development and procurement contract for anthrax vaccine that is currently scheduled to be awarded by December 2008. If awarded, the contract would immediately propel PharmAthene into commercial phase for its leading anthrax vaccine, SparVax, and could contribute an estimated $350 million to $600 million to PharmAthene’s top-line over the next several years.

With the credit crisis of 2008 and a recession looming in 2009, investors should be wary of taking long positions, particularly in stocks that are experiencing erosion in demand. PharmAthene management steps to a different drummer as long term development and procurement contracts feed revenue for two to three years at a time.


Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has published research on PIP shares with a Speculative Buy rating. A full copy of the report along with important disclosures and disclaimers is available at www.crystalequityresearch.com.

1 comment:

Tony Nazzal said...
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