Washington Editor

VaxGen Inc. is facing additional costs to deliver 75 million anthrax vaccine doses to the federal government, which has unilaterally modified their agreement.

The Department of Health and Human Services is requiring extra studies, clinical and nonclinical, before allowing the vaccine to be delivered to the Strategic National Stockpile. But the government has extended deadlines for VaxGen to complete various milestones and has pushed back the delivery date to November 2008 in order to allow for the additional studies.

Investors reacted negatively, with shares in the biopharmaceutical company (Pink Sheets:VXGN) on Wednesday falling $2.96, or 37.2 percent, to $4.99. There is speculation that the government could void the contract completely.

VaxGen, of Brisbane, Calif., had been planning to begin deliveries late this year or early next year. In a conference call, company officials discussed their needs in light of the new contract.

"We can succeed," President and CEO Lance Gordon said, "if HHS provides appropriate compensation for the additional work."

Without extra funding, the company would ask HHS to accept deliveries of the recombinant vaccine according to the contract's original terms, and in parallel, VaxGen is pursuing legal avenues that could result in a more equitable price for the vaccine.

"Fortunately, we think there's a lot we can do to remedy this," said James Panek, the company's vice president of manufacturing operations and the anthrax program's project director. Later, he added that VaxGen's relationship with government officials continued to be "very healthy," contrary to reports suggesting otherwise.

Financial terms of the original contract, worth $877.5 million, remain unchanged. It was awarded a year and a half ago. (See BioWorld Today, Nov. 8, 2004.)

The government's requirements include a Phase II safety and immunogenicity study, in addition to an already-planned Phase II trial scheduled to begin later this year to select the vaccine's final formulation. The newly required study would test a validated final drug product, whereas under the original contract, VaxGen was to generate such clinical data through a Phase III expanded safety and immunogenicity study after vaccine deliveries had begun. HHS also is demanding that the company demonstrate efficacy in nonclinical models after exposure to inhalational anthrax, using vaccine that meets the standard of an FDA-approved product.

For VaxGen, Panek said any new studies "should be conducted in parallel" with product delivery, later adding that such trials would "not change the way the vaccine works or how we make it."

The new requirements follow VaxGen's previous admissions that an unexpected interaction between recombinant protective antigen (rPA) and the vaccine's adjuvant, aluminum hydroxide, would lead to a delivery delay. But Gordon, who said that the company thinks it has "determined the root cause of the problem," said that the added studies weren't justified, because the company had been diligent in addressing the program's slowdown. He called the product "consistent, well characterized and highly purified."

Panek, who said the matter was "primarily a contract dispute," added that the new directives are "at odds" with the government's goal to quickly shore up the nation's biodefense preparedness. In a further twist, he predicted that the HHS decision, which was made without any formal negotiations with VaxGen, would have a "detrimental impact" on Project BioShield by giving pause to potential industry participants. "There is no reason why it couldn't be done again" to other biotech firms, he cautioned.

That prediction paralleled a report issued this week by the Government Accountability Office. "The rest of the biotechnology sector will be watching to see whether the industry and the U.S. government can make this partnership work," it said, noting that contract issues "might have an effect beyond just the individual vaccine procurement. They could have an impact on how the biotechnology industry responds to government overtures in the future."

To date, VaxGen has completed several nonclinical studies and two clinical studies, developed improved assays and improved the product for further clinical study. The company has completed 23 full-scale manufacturing runs of the vaccine candidate's bulk protein, rPA, in its dedicated facility, and the manufacturing process for bulk rPA is expected to undergo validation later this year.