Remember Anthrax?
While the government goes into high alert over bird flu, an old plan to develop an anthrax vaccine remains unfinished.

By Michael Isikoff and Mark Hosenball
Updated: 6:27 p.m. ET Nov. 2, 2005

Nov. 2, 2005 - Just as President George W. Bush is launching an ambitious plan to guard against an avian flu pandemic, an administration program to prepare for a potential anthrax attack is running into new and unexpected hurdles. VaxGen Inc., a California biotech firm that last year was awarded an $877.5 million contract to supply a newly invented, and so far unlicensed, anthrax vaccine, acknowledged this week that it won't begin to start deliveries to the federal government until the latter part of next year—six months later than it originally intended.

The company blames regulatory questions and production issues. But the production delay, along with apparent accounting difficulties and unanswered questions about the safety and effectiveness of the company's product, is likely to attract new attention on Capitol Hill. For months, investigators on both sides of the aisle have expressed concerns that the administration may have invested too big a chunk of the nation's biodefenses in one obscure and relatively untested company.

The need to build up the country's anthrax defenses first gained urgency four years ago following the mysterious mailings of anthrax powder to congressional offices and news organizations—an attack that killed five people and has yet to be solved by the FBI. The case prompted officials of the Department of Health and Human Services to begin searching for a reliable supplier of large quantities of anthrax vaccine that could be stockpiled and then distributed to the public in the event of another attack. The government has already stockpiled antibiotics that can be used to treat millions of people in the event of anthrax exposure, according to an HHS spokesman. But an anthrax vaccine would be an important second line of defense. “Vaccine can be given with antibiotics to potentially shorten the duration of post-exposure prophylaxis,” the spokesman said.

But last year's decision by HHS to award the contract to the little-known VaxGen is being scrutinized by at least two congressional committees over issues such as VaxGen’s repeated delays in filing timely financial reports with the Securities and Exchange Commission—a problem that last year caused the firm to be "delisted" from Nasdaq. In addition, VaxGen was hit with lawsuits claiming the firm misinformed investors about an AIDS vaccine it was heavily promoting that later turned out to be ineffective. The HHS spokesperson said, “Delays in these aggressive and accelerated development programs are not unexpected or unprecedented,” adding that the government’s eventually successful efforts to create a smallpox vaccine also took longer than originally expected.

This week’s announcement from VaxGen, ironically, came the same day that President Bush unveiled a $7.1 billion program to step up preparations for protecting the U.S. population against a possible catastrophic bird flu pandemic. The president's plan, which involves stepping up research and stockpiling vaccines and antiviral drugs, was announced in the wake of criticism from Congress and the media that the administration responses to recent natural disasters, particularly Hurricane Katrina, were so inadequate that they raised questions about the extent to which the United States is prepared for either natural disasters or man-made catastrophes like terrorist attacks. The newly revealed delay in anthrax-vaccine deliveries is likely to spur further complaints among Democrats and other Bush critics that the administration is still not effectively managing emergency preparedness programs.

In a telephone interview this week with NEWSWEEK, Lance Gordon, VaxGen's chief executive officer, stoutly defended the company's performance, maintaining that the newly announced delays in financial reporting and vaccine delivery are attributable to developments that ultimately will produce benefits both for investors in his company and for taxpayers who are funding the government’s purchase of his company's so-far unproven anthrax vaccine. Gordon said that one of the reasons the company decided to announce a delay in its plans for delivering the first of 75 million doses of anthrax vaccine was to ensure that new quality-control procedures are fully installed and tested before the company starts full-scale production.

In a press release issued earlier this week, VaxGen attributed the delay to “evolving regulatory requirements and product enhancements.” Gordon and another company spokesman acknowledged, however, that at present, VaxGen’s anthrax vaccine, which it is making using ultramodern recombinant DNA technology originally invented by the U.S. Army, has so far been tested only on rabbits, monkeys and healthy human volunteers. According to company officials, the animal tests indicate that the new vaccine is effective when combined with antibiotics in curing anthrax in rabbits and rhesus monkeys, while the tests on healthy people show that the vaccine produces anthrax antibodies in humans and does not make test subjects gravely ill with side effects.

But the company's product will have to pass more large-scale tests proving its safety and effectiveness on people before it is fully licensed by the Food and Drug Administration for use on humans, and company officials say they do not expect it to be fully licensed at least until 2007. However, according to Gordon, under emergency "bioshield" legislation approved by Congress in the wake of the 9/11 and postal anthrax attacks of 2001, the government can buy and stockpile all 75 million doses of VaxGen's anthrax vaccine before the product is fully licensed and tested. Company officials also say that in an emergency—an anthrax attack by terrorists for example—the bioshield legislation allows the government to administer the not-fully-licensed vaccine to people who might be attack victims. But the product cannot otherwise be administered to members of the public until it is fully tested and licensed.

Publicly traded VaxGen also says that the company plans to file updated and current financial statements with the Securities and Exchange Commission by the second quarter of 2006. According to a press release issued by the company last year, Nasdaq delisted its stock after VaxGen failed to file two scheduled quarterly financial reports in 2004. The company’s stock is currently traded via a penny-stock listings service known as the "pink sheets."

In this week’s press release, the company said that it currently was behind in filing its annual reports for 2003 and 2004, and quarterly reports for 2004 and 2005. Gordon said that VaxGen on three occasions had issued new projections for when its financial statements, which are being restated for 2001, 2002 and 2003, as well, would be brought up to date. In a conference call with securities analysts earlier this year, a company official said the reason the company fell behind in producing financial information is “because VaxGen refused to cut corners with its accounting.” Gordon told NEWSWEEK that on the recommendation of its auditors, the company initially decided it had to review financial statements for several years because of questions over whether it had "underreported" revenues it got from government contracts it received for researching and developing its vaccine. Later, when accountants had sorted out that issue, Gordon said, they found other questions about possible underreporting of the value of an investment VaxGen had made in a drug production facility in South Korea.

Even before the company announced the latest delays, VaxGen’s anthrax deal with the government was attracting critical attention on Capitol Hill. In a letter to HHS Secretary Mike Leavitt in January, Senate Finance Committee Chairman Chuck Grassley noted that VaxGen’s vaccine “has not been proven in people.” Grassley’s letter asserted that the administration’s decision to procure a vaccine from a “single manufacturer”—VaxGen—was “highly suspect.” Last April, Grassley sent a second letter to Leavitt, questioning why, in a March 2004 press release, HHS had asserted that the new vaccine that VaxGen was developing had “already been stronger and more effective” than an older vaccine made by BioPort, a Michigan company that is VaxGen’s rival and competitor. Grassley noted that the HHS press release’s assertion about the VaxGen drug “appears to have no basis in fact.”

HHS later informed Grassley that it had withdrawn the press release, according to an aide to Grassley. VaxGen officials said they had nothing to do with the issuing of the government press release. An HHS spokesman said, “VaxGen met strict U.S. government requirements, particularly technical ones, to be considered for this contract. … The U.S. government is aggressively managing this program and monitoring performance. We are in active discussion with the company and are reviewing their development plans and timelines in order to determine the appropriate path forward. We remain committed to the goal of meeting the U.S. government requirement for 75 million doses of the next-generation anthrax vaccine.”

VaxGen’s government contracts totaling nearly $1 billion have been the subject of intermittent controversy over the last two years both because of the company’s troubles with its financial statements and because of questions surrounding the government's handling of the contract. In addition to the $887 million anthrax contract, the firm received $100 million from the National Institutes of Health to research and develop the vaccine. (VaxGen won’t actually receive any of the $887 million until it actually begins to deliver vaccine doses to the government.)

A New York Times report last December noted that in addition to its problems in producing financial statements, the company had faced lawsuits filed by investors who claimed VaxGen misinformed them about an AIDS vaccine that the company had heavily promoted but which later failed to work. At least one such lawsuit was dismissed and another was settled.

A Forbes article last June also noted that VaxGen CEO Gordon was a “long time acquaintance” with a former research official from the U.S. Army bioweapons research agency based at the Pentagon and Fort Detrick, Md., that gave VaxGen a license to make its anthrax vaccine using technology developed by the Army. The former Army scientist later became a top contracting official at HHS. Gordon said that while he served on the board of a nonprofit medical foundation with the former Army official, during the period VaxGen was negotiating its main contract with the government, he and the official never met unless government lawyers were present. Gordon added that although the delay in producing financial statements may make it difficult for investors to gauge the company's financial health, government auditors have carefully monitored the company on a monthly basis and are fully aware of its financial condition.

Government and industry experts have defended the basic notion of the government giving vaccine development and supply contracts to companies like VaxGen without extensive track records by arguing that major drug firms have shied away from vaccine research and production because it carries too many legal and financial risks. Administration critics suggest this policy of throwing money at the problem was a product of post-9/11 hysteria about terrorism in general and biological terrorism in particular. These critics say the Hurricane Katrina experience has now raised big questions about government spending on bioterrorism and a whole range of other emergency-management priorities that were rushed to the top of the national agenda after September 11, 2001.

© 2005 Newsweek, Inc.