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Business Context and Reporting Period

Company: PharmAthene, Inc. (formerly Healthcare Acquisition Corp.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: PharmAthene is a biodefense company developing medical countermeasures against biological and chemical weapons. Its primary product candidates are Valortim (a monoclonal antibody for anthrax) and Protexia (a bioscavenger for nerve agent poisoning). The company operates primarily through government contracts and grants, with no commercial product sales to date.

Key Financial Metrics

Note: Revenue consists primarily of contract funding from the US Department of Defense for Protexia development. The company reported a net loss attributable to common shareholders of $(17.7) million for 2007.

Material Changes vs. Prior Period

• Merger Completion: On August 3, 2007, the company consummated a reverse merger with Healthcare Acquisition Corp. (HAQ), resulting in $57.9 million in cash proceeds and a significant increase in liquidity.
• Revenue Surge: Revenue increased 759% year-over-year, driven by the recognition of $14.6 million under a multi-year DoD contract for Protexia development.
• Expense Growth: R&D expenses more than doubled ($9.3 million increase) due to increased process development and manufacturing activities. G&A expenses rose $5.4 million due to employee costs, stock compensation, and facility expansion.
• Debt Restructuring: Existing bridge notes were exchanged for $12.3 million in 8% convertible notes. A new $10 million credit facility was established, increasing total debt obligations.
• Stockholder Equity: The merger converted all preferred stock to common stock, eliminating the preferred stock deficit and resulting in positive stockholders' equity of $40.6 million at year-end.

Guidance, Outlook, and Risks

Outlook and Recent Events:

• Avecia Acquisition: On March 20, 2008, the company entered an agreement to acquire Avecia's vaccines business (anthrax and plague vaccines) for an initial $10 million plus potential milestones totaling up to $20 million in cash and royalties. Closing was anticipated in early April 2008.
• Product Pipeline: Valortim has received FDA Fast Track and Orphan Drug status. Protexia development is funded by a DoD contract with potential total funding up to $219 million if milestones and procurement options are exercised.
• Capital Needs: Management expects to incur substantial losses for the foreseeable future. While current cash ($40.6 million) and DoD funding support operations, the company may need additional financing within 12 months of the Avecia acquisition closing.

Risks and Contingencies:

• Government Dependence: Substantially all revenue is derived from US government contracts, which are subject to cancellation, budget changes, and competitive bidding.
• Regulatory Uncertainty: Products rely on the FDA "Animal Rule" for approval as human efficacy trials are not ethical. There is no assurance of approval.
• Liquidity: The company has an accumulated deficit of $87.4 million and requires significant capital to fund R&D and the Avecia acquisition.
• Intellectual Property: Risks exist regarding patent validity and potential infringement claims from third parties.

Investor Verification Checklist

• Contractual Obligations: Verify the status of the $10 million credit facility covenants and the $12.3 million convertible notes (maturity August 2009).
• Avecia Acquisition Status: Confirm the closing of the Avecia deal and the impact of the DoD decision not to fund the plague vaccine candidate on the purchase agreement terms.
• Government Funding: Monitor the execution of the DoD contract for Protexia and the $13.9 million NIAID/BARDA contract for Valortim.
• Cash Burn Rate: Assess whether the $40.6 million cash balance is sufficient to fund operations and the Avecia acquisition without immediate dilutive financing.
• Regulatory Milestones: Track progress on the Phase I clinical trials for Valortim and the IND filing for Protexia scheduled for 2008.