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Fight against anthrax is in trouble

By Steve Johnson
San Jose Mercury News

SAN JOSE, Calif. - Almost five years after a deadly series of mailed anthrax attacks prompted warnings that a new anthrax vaccine was "urgently needed," the nation's nearly $1 billion effort to develop the drug is in trouble.

The company, VaxGen, is about a year behind schedule on its latest contract, the first and biggest under the federal anti-terror program Project BioShield. And the delay could grow by at least another year because of a dispute with the government over how the vaccine should be tested.

Although federal officials consider VaxGen's vaccine promising, critics have questioned why the small Brisbane, Calif., company won the contract. It has no commercial products, flopped at making an AIDS vaccine and has been delisted from the Nasdaq Stock Market since 2004 because of its fouled-up financial records. Yet the government had little choice, because major vaccine manufacturers declined to bid.

VaxGen blames much of the criticism it has received on a campaign orchestrated by its business competitor, and it claims it is making progress on the drug. But if it can't deliver the vaccine to federal specifications, the country will have to rely on the existing vaccine - one that some soldiers have refused to take because of its side effects, and that needs improvement, according to health experts.

Some people also fear VaxGen's contract flap could discourage the biotech industry - already wary of doing government business - from participating in future anti-terror efforts.

"An unresolved dispute here will not only leave the nation without a much-needed, next-generation anthrax vaccine," Rep. Tom Lantos, D-Calif., wrote federal health officials in June, "but will also undermine the development of a vibrant bio-defense industry."

Terrorism specialists long have considered anthrax the biological weapon of choice for extremists. It is relatively easy to obtain, can be dispersed over a wide area and secretes proteins that become highly toxic when they come in contact with human cells.

But the concerns were heightened dramatically in the weeks after the Sept. 11, 2001, attacks, when anthrax-contaminated mail sent to U.S. Senate offices and the media killed five people and sickened at least 17 others.

The United States already has an anthrax vaccine, AVA. Developed in the 1950s, it has been used to inoculate 1.3 million military personnel. But AVA has been linked to six deaths and unpleasant side effects, from fever to body aches. Hundreds of soldiers have refused to take it.

AVA also must be given in a series of six shots over an 18-month period, which health officials consider complicated. And because of the way AVA is made, the amount of its protective antigen varies from one production lot to another.

The National Academies' Institute of Medicine concluded in a March 2002 report that even though AVA is generally safe and effective, "a new vaccine, developed by more modern principles of vaccinology, is urgently needed."

So the government sought one that, among other things, could be genetically engineered with a more consistent amount of protection and require only three doses.

Armed with Project BioShield's $5.6 billion to combat terrorism over 10 years, federal officials in March 2004 offered $877.5 million to any company that could provide 75 million doses of a new vaccine. The drug would be set aside for civilians in the Strategic National Stockpile, a government storehouse of medicines for public emergencies.

Federal officials won't disclose the bidders. But VaxGen executives say they know of three other firms that responded: DynPort Vaccine of Maryland, Avecia of England and Panacea Biotec of India. Like VaxGen, all were relatively small.

Why didn't major drug companies, especially those familiar with vaccines, bid?

"We were pretty busy developing our own vaccines," said Janet Skidmore of New Jersey-based Merck.

Experts said firms feared they might be sued if the vaccine proved unsafe, saw little commercial potential for the drug and disliked the red tape involved in government contracts.

"They don't want the government stirring in their stuff," said Phillip Russell, former director of the Office of Research and Development Coordination for the U.S. Department of Health and Human Services, which oversees the anthrax vaccine contract. "It's painful."

Executives at VaxGen - which has about 300 employees and was founded in 1995 as a spinoff of biotech giant Genentech - say they deserved the contract.

Before joining VaxGen as its chief executive in 2001, Lance Gordon invented a federally approved infant-meningitis vaccine and produced a smallpox vaccine for the government. VaxGen also had licensed a military-developed anthrax vaccine. And it already had gotten federal contracts in 2002 and 2003 totaling $101.2 million to refine that anthrax vaccine to replace AVA.

After VaxGen won the BioShield anthrax contract on Nov. 4, 2004, however, concerns were raised in the media and elsewhere about the company's past.

VaxGen was created with the mission of developing an AIDS vaccine. But after spending years trying, the company concluded in 2003 that its vaccine was generally ineffective.

VaxGen executives also disclosed in 2004 that they had been incorrectly understating their government contract revenue, based on the advice of their former accountants. And the executives concluded in July 2005 that they hadn't properly accounted for VaxGen's 2002 investment in a company called Celltrion.

Because it has been conducting an ongoing review of its books to correct the problems, VaxGen executives say, the company hasn't filed financial reports with the U.S. Securities and Exchange Commission for the past two years.

Three months after the BioShield contract was awarded, Sen. Charles Grassley, R-Iowa, wrote the Department of Health and Human Services that "questions have been raised as to whether HHS acted prematurely and relied on insufficient data to support the VaxGen contract."

VaxGen blames such grumbling mostly on its main competitor, Emergent BioSolutions of Maryland, which makes the existing anthrax vaccine, AVA.

Emergent has spent about $1.6 million lobbying Congress and other federal officials since 2003, four times as much as VaxGen, according to U.S. Senate records. Emergent also has been deft at luring influential directors, including former Health and Human Services Secretary Louis Sullivan, who joined Emergent's board in June, and Adm. William Crowe, former chairman of the Joint Chiefs of Staff, who was on the board until last year.

Emergent spokeswoman Kim Brennen Root acknowledged her firm lobbied Grassley and others. She said it was partly to convince them AVA was at least as good as VaxGen's vaccine and that the government should buy AVA for civilians, not just for the military.

The lobbying seems to have paid off. Since last year, Emergent has gotten contracts totaling $242.7 million to provide 10 million doses of AVA for the civilian Strategic National Stockpile.

So VaxGen has fought back. Testifying in Congress in July last year, VaxGen's CEO Gordon blasted Emergent for having "misstated facts" about his company.

Under its BioShield contract, VaxGen gets paid only when it begins delivering the vaccine to the government, which the company initially said would happen early this year. But VaxGen says a glitch in the drug's formulation forced it to put off deliveries until later this year or early 2007.

Problems also have arisen with the Department of Health and Human Services. VaxGen has had mixed results with two studies of the vaccine in people, which were intended to check how safe it is and what sort of immune response it generates. But it claims the agency is demanding a contract modification that would force the company to do more costly tests, not originally required.

One additional test, VaxGen executives say, would be in people. The other test, they say, would evaluate how well its final formulation protects animals from anthrax, since that can't be tested in humans.

The changes will slow the vaccine's development, possibly delaying the start of deliveries and VaxGen's payment until late 2008, the company's executives claim.

Dr. Noreen Hynes, who now directs the agency's Office of Research and Development Coordination, wouldn't discuss the vaccine contract in detail, saying its terms are confidential. But she disputed VaxGen's claim about having to do more work.

"There are no new requirements," she said.

VaxGen estimates it will have spent $150 million of its own money on the vaccine by the end of this year, besides the $101 million it has received so far from the government.

Vaxgen's contract for the vaccine is the largest of eight issued so far by Project BioShield totaling $1.7 billion. But even with BioShield's overall budget for $5.6 billion, much more money will be needed to counter terrorism and make the program attractive to business, said Brad Smith of the University of Pittsburgh's Center for Biosecurity.

He also favors bills pending in Congress that would make it easier for VaxGen and other BioShield contractors to get some payment before they deliver their products.

"BioShield is an important first step," Smith said, but he added, "it clearly needs more work."

Convincing businesses to participate in Project BioShield could get even harder because of VaxGen's contract dispute with the government. If the government's disagreement with VaxGen can't be resolved, said Lance Ignon, VaxGen's vice president of corporate affairs, "we are going to preserve our right to litigate."

That could be a big red flag to other companies.

"This is the first major contract," said Chris Colwell, a regulatory specialist with the Biotechnology Industry Organization. "Many people are watching this."



The challenge: In March 2004, the government offers $877.5 million to any company that could provide 75 million doses of a new anthrax vaccine.

The bidding: With major drug companies passing, VaxGen wins the bid in November 2004. First delivery expected in early 2006.

Sign of trouble: In March 2005, VaxGen reports that two studies of the vaccine in people return only mixed results and says the first delivery would be delayed.

First results: Two studies of the vaccine in people return only mixed results.

Big dispute: VaxGen says the government wants more, costly testing. The government disputes that claim.

What now: Best-case scenario is first vaccine delivery later this year, but fight over testing could delay it until 2008.



VaxGen hasn't said publicly when it expects to finish delivering all 75 million doses of its anthrax vaccine under its Project BioShield contract. But it has warned it could be delayed by more than three years, because of a problem with the vaccine's formulation and what the company claims are additional study requirements imposed by the government. According to VaxGen, here are the delivery dates under the initial contract and under a government contract modification in May:

Under original 2004 contract:

Early 2006: Begin delivering vaccine to government.

November 2006: Complete delivery of 25 million doses.

May 2007: Complete delivery of 50 million doses.

December 2007: Complete delivery of 75 million doses.

Under contract modification:

Late 2007 or sometime in 2008: Begin deliveries.

Oct. 25, 2009: Complete delivery of 25 million doses.

June 27, 2010: Complete delivery of 50 million doses.

Feb. 7, 2011: Complete delivery of 75 million doses.