What demise of anthrax vaccine contract means for VaxGen, U.S.

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What demise of anthrax vaccine contract means for VaxGen, U.S. By Steve

http://www.mercurynews.com/mld/mercurynews/news/16285098.htm Mercury News The

termination of VaxGen's $877.5 million contract for an improved anthrax vaccine

may force the company to severely cut costs and leaves the government's ability

to develop the vaccine in the near future uncertain, several industry experts

said Wednesday.

The most immediate impact of the U.S. Department of Health and Human

Services's decision Tuesday to cancel the contract -- the biggest yet under

President Bush's Project BioShield anti-terror effort -- will be felt by

Brisbane-based VaxGen.

VaxGen's stock price rose 2 cents to $1.47 at the close of trading Wednesday

on the Pink Sheets, a private listing service. But the company's future

prospects appear troubled in light of the canceled contract, which called for it

to deliver 75 million doses of the vaccine.

Although VaxGen spokesman Lance Ignon declined to comment on how VaxGen plans

to respond to the government's action, one option would be to exercise its right

to appeal the contract termination. However, based on his experience helping

companies with federal contracts, ``I think the probability is low of a

successful appeal,'' said Hoffmeister, a partner with law firm

Sonsini Goodrich & ti.

Most likely, VaxGen will have to dramatically cut costs and consider a merger

or other partnership with another firm to raise cash, according to Sharon

Seiler, an analyst with investment bank Punk, Ziegel, who owns VaxGen stock.

``With the contract gone, we expect VaxGen to downsize,'' Seiler concluded in

a note to her clients. That might include selling some of VaxGen's assets,

including its vaccine manufacturing plant in South San Francisco, she said.

The contract was canceled because federal officials said VaxGen failed to meet

a deadline Monday to begin a test of the vaccine in people. The company had been

prevented from starting the test by the U.S. Food and Drug Administration, which

feared the vaccine was not sufficiently stable to get usable results from the

test.

Because the $877.5 million was to be paid only after VaxGen delivered 75

million doses of the vaccines, the company has been surviving on its own money

and on previous government grants to begin developing the vaccine. It currently

has about $50 million in cash, Seiler estimated, and the government has

threatened to make it pay a penalty for not delivering the vaccine it promised.

Department of Health and Human Services spokesman Marc Wolfson said his

agency's ability to collect such penalties is common under federal contracts.

``If we go out and buy the same product that we were going to buy from VaxGen

and it comes in at a higher cost, the company that is terminated is liable for

that excess cost,'' Wolfson said.

Several companies -- including Dynavax Technologies of Berkeley and Avecia of

England -- have gotten much smaller federal grants to begin developing

next-generation anthrax vaccines. However, it remains to be seen whether any of

them could take over where VaxGen left off.

Officials with Avecia, which had bid unsuccessfully on the contract VaxGen

won, could not be reached for comment Wednesday. But Van Nest, Dynavax's

vice president of preclinical research, said it was unlikely his company could

take on the contract.

``Obviously, we're going to be talking to the government to see what's the

opportunity,'' he said. However, he added, ``there is no way in the short term

we could do 75 million doses.''

In her note to her clients, Seiler doubted whether any other company could

deliver that many doses in the near future.

``We don't think that's going to happen any time in the next several years, if

ever,'' she said.

Convincing companies to even bid on a reopened vaccine contract could prove

tough, others said. Many biotech firms dislike the federal government's myriad

rules and have shied away from such contracts in the past because they can't

afford waiting to get paid until they have delivered their drugs.

On Tuesday, Bush signed into law the Pandemic and All-Hazards Preparedness

Act, favored by many biotech executives, which will make it easier for companies

to get partial payments while they are still developing their drugs.

But given VaxGen's experience, it's unclear if that law can overcome the

reluctance many businesses have toward getting involved with the government,

said Brad , at the University of Pittsburgh's Center for Biosecurity.

``The question is, are they going to look at what happened here as simply,

`Well, you know, VaxGen didn't work out?' Or are they going to look at it and

say, `This is just a broken process, government is not a reliable partner and I

don't want to touch this.' ''

Randi J. Airola, © 517-819-5926

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