Trading blame: Bioshield dispute underscores problems with defense program

SAN FRANCISCO -- By now, millions of anthrax vaccine shots developed through cutting-edge genetic engineering were supposed to be filling a new national stockpile of biodefense drugs.

Instead, five years after anthrax attacks left five dead, sickened 17 and panicked the country, the nearly $1 billion contract awarded by the U.S. Department of Health and Human Services to a tiny and struggling San Francisco Bay Area biotechnology company is plagued with misfortune and delays.

Delivery has been put off until at least 2008 -- and maybe later -- while the government and VaxGen Inc. trade barbs over who is at fault. The dispute has further tarnished Project Bioshield, a government program that has alienated many potential biodefense contractors.

"We have all come to understand that there is more complexity than it originally appeared," said Thomas Inglesby, deputy director of the University of Pittsburgh's Center for Biosecurity.

The anthrax attacks of 2001 prompted passage of Project Bioshield, which promised to build national drug stockpiles to be used in case of a bioterror attack.

The project was supposed to jump start a national security renaissance among drug makers by guaranteeing contracts to develop drugs for combatting potential bioweapons. But it has been greeted with skepticism by many in the industry.

The anthrax project, the first and largest Bioshield contract, was to be the crown jewel.

In November 2004, the $877.5 million contract was awarded to VaxGen to genetically engineer a replacement for the current anthrax vaccine, which requires six shots to be administered over 18 months. VaxGen's is expected to require no more than three shots.

Since winning the contract, however, VaxGen has repeatedly stumbled, starting with its disclosure it would miss the original deadline of November 2005 by a year.

AIDS vaccine flopped

Even before winning the contract, the Brisbane-based company had a checkered past highlighted by the 2003 flop of its experimental AIDS vaccine, which failed to protect inoculated volunteers from getting infected.

Since then, it was dropped from the Nasdaq Stock Market for failing to file financial reports, its chief scientific officer left the company in July, and its stock price hovers near $4.40 -- at the low end of its 52-week range -- as VaxGen and the government try to work out their differences.

Then, in March, the government said it wouldn't pay VaxGen until the company completed a costly and time-consuming human test to ensure the vaccine was safe. The new requirement forced the company to sell its stake in another biotechnology company for $79 million to stay afloat and finance the new test.

"We don't get paid until we deliver product and we have to shoulder the carrying cost," said VaxGen spokesman Lance Ignon. "The burden it puts on our company is abundantly clear to Wall Street as shown by our stock price."

For its part, VaxGen blames the government for the latest delays.

"The heart of the problem right now is the government's willingness to change the goal line," Ignon said. "The government unilaterally, and without compensation to VaxGen, changed the contract."

The government counters that the safety data was always required and that it made minor changes that allowed VaxGen to deliver the vaccine later than it had initially promised.

Last month, Sens. Joe Lieberman and Susan Collins called for a congressional investigation of the VaxGen contract.

VaxGen's difficulties underscore the industry's disappointment with Bioshield, which has done little but generate indifference among the big pharmaceutical companies the government hoped to woo. Instead, drug makers are snubbing the program because of liability and intellectual property issues and confusion over what the government wants.

New legislation that would address many of the critics' concerns -- such as protecting drug makers from liability lawsuits -- has been bottled up in Congress for months and the prospect of a bill passing this year are dimming.

Big pharmaceutical companies, which can spend upward of $1 billion developing a single drug that can earn billions annually, are also turned off by the relatively paltry $5.6 billion available under Bioshield, analysts said.

Pharmaceutical Research and Manufacturers of America, the Washington-based trade group that represents drug makers, wouldn't comment on why its members have shunned Project Bioshield but said it supports the program.

"PhRMA continues to work closely with the Congress and the Administration to help ensure that America has the necessary tools to help prepare for and respond to a possible bioterror attack," Ken Johnson, the group's senior vice president, said in a statement.

Producing defensive measures has been largely left to small, financially struggling companies such as the oft-troubled VaxGen.

Despite its laundry list of failures, HHS has defended VaxGen's qualifications.

"The incentive is not there for the large pharmaceutical companies," said Noreen Hynes, director of research and development coordination in the HHS office responsible for biodefense. "Biotech companies, for the most part, are more inexperienced."

Since awarding the contract to VaxGen, HHS has doled out another $1 billion in contracts, including two this year worth a combined $505 million to the Canadian company Cangene Corp. for another anthrax treatment, as well as a drug to treat botulism.

None of the other drug developers have stumbled as spectacularly as VaxGen.

"The fact that a company doesn't deliver is always disappointing," Hynes said. But in vaccine and biological development, "delays are more the rule than the exception."