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Expected at 1:00 p.m., CDT

Friday,

April 14, 2000

GAO/T-NSIAD-00-140

CONTRACT

MANAGEMENT

DOD’s Anthrax Vaccine

Manufacturer Will

Continue to Need Financial

Assistance

Statement of David E. Cooper, Associate Director

Defense Acquisition Issues

National Security and International Affairs Division

Testimony

Before the Subcommittee on Personnel, Committee on

Armed Services, U.S. Senate

United States General Accounting Office

GAO
Page 1 GAO/T-NSIAD-00-140

Mr. Chairman and Members of the Committee and Subcommittee:

It is a pleasure to be here today to discuss the contractual relationship

between the Department of Defense (DOD) and BioPort Corporation for

the production of anthrax vaccine. DOD regards the use of anthrax by an

enemy as the single greatest biological threat to U.S. military forces.

BioPort, the only company licensed by the Food and Drug Administration

(FDA) to produce the anthrax vaccine in the United States, has

experienced financial difficulties that have jeopardized DOD’s anthrax

vaccination program. In response to the company’s problems, DOD has

provided BioPort financial assistance. I will discuss (1) the “extraordinary

contractual relief” DOD provided BioPort in 1999 and (2) additional

financial assistance DOD is providing BioPort in 2000.1

We have issued a number of products on DOD’s anthrax vaccination

program and the larger issue of biological terrorism. A list of these

products is at attached to this statement.

Last year, DOD provided BioPort extraordinary contractual relief so that

the company would have sufficient operating capital to preclude

disrupting, and possibly ending, the anthrax vaccine program. Among

other things, DOD substantially increased the original contract price and

provided an interest-free advance payment to BioPort of $18.7 million. In

providing the relief, DOD assumed FDA would approve the company’s

vaccine production processes in its renovated facilities by the end of 1999.

However, in November 1999, FDA reviewed the company’s manufacturing

processes and identified numerous deficiencies. According to DOD

officials, BioPort is now not expected to obtain FDA’s approval until the

end of this year. The delay in obtaining FDA approval has caused BioPort

to experience continuing financial problems.

Recognizing the company’s current financial difficulties, DOD has taken a

number of additional actions to help improve BioPort’s financial situation.

In February 2000, DOD modified BioPort’s contract to provide an

additional $13 million to, in part hire technical assistance in obtaining FDA

approval of BioPort’s production processes. DOD also extended the

schedule for BioPort to repay its interest-free advance and returned

$7.4 million that the company had repaid for the $18.7 million in advance it

had received from DOD.

1 The provision of “extraordinary contractual relief” was provided under Public Law 85-804.

Summary
Page 2 GAO/T-NSIAD-00-140

In March 2000, DOD notified BioPort that it wants BioPort to stop anthrax

vaccine production for now. This action reduces DOD’s risk of paying for

vaccine that the FDA may ultimately not approve and also allows BioPort

to focus on obtaining FDA approval. However, the company’s financial

condition is worsened because BioPort will no longer receive revenues

from producing the vaccine. To mitigate the consequences of its action,

DOD intends to provide additional financial assistance to BioPort to

sustain the production line.

From the 1970s until 1998, DOD procured anthrax vaccine from a facility

owned by the state of Michigan. The facility, first known as the Biologic

Products Division of the Michigan Department of Public Health and later

as the Michigan Biologic Products Institute, was the only facility in the

country licensed by the FDA to produce the vaccine. In 1997, FDA

identified numerous manufacturing problems that threatened revocation

of the facility’s license. In response to concerns about the potential loss of

anthrax vaccine production, DOD began funding renovation efforts.

Production was shut down in early 1998. Later, in the summer of 1998,

Michigan sold the facility to the BioPort Corporation for $25 million. The

company paid $3.25 million in cash, $12.15 million secured in notes

payable to Michigan, and agreed to pay $9.6 million based on other

obligations, including a percentage of future sales. The contracts DOD had

with the Michigan facility were transferred to BioPort.

In June 1999, we testified that over the previous 11 years, DOD had

provided about $112 million in contracts, including options, to procure the

anthrax vaccine and help ensure the viability of the facility.2 After, BioPort

took over the facility, it experienced delays in completing renovation

efforts, and production of the vaccine was 5 months behind schedule

when it resumed production in May 1999. As a result of these delays, the

company did not receive the revenues it expected and faced a serious cash

flow problem, which raised significant doubt as to whether BioPort could

to meet contract obligations. We attributed the company’s cash flow

problem to its failure to achieve an overly optimistic business plan. The

company’s business plan, in addition to meeting DOD’s requirements,

provided for the sale of anthrax vaccine to other customers. At that time,

BioPort proposed several actions to resolve its financial problems,

including asking DOD for advance payments and increasing contract

prices.

2 Contract Management: Observations on DOD’s Financial Relationship with the Anthrax Vaccine

Manufacturer (GAO/T-NSIAD-99-214, June 30, 1999).

Background
Page 3 GAO/T-NSIAD-00-140

On August 4, 1999, DOD provided BioPort extraordinary contractual relief

to help the company with its cash flow problems and ensure continued

production of the anthrax vaccine. The relief included:

• increasing the contract $24.1 million by raising the price of each dose of

the vaccine to $10.64, up from the $4.36 and $2.26 prices originally

negotiated;

• providing BioPort with an interest-free advance payment of $18.7 million;

• decreasing the quantity of vaccine to be delivered under the contract from

7.9 million does to 4.6 million doses; and

• allowing BioPort to retain a portion of vaccine production for commercial

sales provided it first meets the government’s requirements.

As security for the $18.7 million advance payment, BioPort granted the

government a paramount lien on virtually all of its assets. For example,

BioPort mortgaged its real property, equipment, product inventory,

accounts receivable, and licenses to the government. BioPort also agreed

to request FDA approval to transfer its license to produce biological

products to the government if it defaults under the terms of the contract

modification. In addition, BioPort agreed to establish a cost accounting

system that can be used to determine the cost of producing anthrax

vaccine.

BioPort continues to experience serious cash flow problems as of April

2000.3 The company’s cash flow problems stem primarily from its inability

to obtain FDA’s approval of its anthrax production processes in the

renovated manufacturing facilities. BioPort has also stopped producing

plasma products and rabies vaccine at the government’s request. And, with

the DOD’s plans to stop anthrax production for now, the company finds

itself without any sources of revenue. BioPort is not expected to obtain

FDA approval of its vaccine production processes in its renovated

facilities by the end of 1999.

BioPort has evaluated alternative sources of capital but has been unable to

secure additional financing or capital sufficient to meet operating

3 BioPort considers its projected operating loss to be proprietary information and, therefore, it is not

included in this statement.

DOD’s 1999 Efforts to

Improve BioPort’s

Cash Flow Problem

DOD Continues to

Provide BioPort

Financial Assistance
Page 4 GAO/T-NSIAD-00-140

expenses. As a result, DOD has taken a number of actions in the short

term to keep the company operating and help deal with issues that must

be resolved before the company can obtain FDA approval. In February

2000, DOD modified its contract with BioPort to provide, at least, an

additional $13 million to (1) hire consultants to assist in obtaining FDA’s

approval of BioPort production processes and (2) obtain subcontractor

support to test the anthrax vaccine. Additional funds, yet to be

determined, will be provided to BioPort for it to establish a redundant

capability to package, fill, and store the vaccine.

In February 2000, DOD also agreed to return about $7.4 million of the

advance payment that the company had repaid under the terms of the

extraordinary contractual relief provided in 1999. While this action did not

increase the cost of the contract, it did extend the schedule under which

BioPort is to repay the $18.7 million advance payment. In exchange for the

extension, BioPort agreed to stop producing its plasma products and

suspend production of the rabies vaccine so that the company could focus

its attention on obtaining FDA approval.

In March 2000, DOD notified BioPort that it intends to stop the company’s

anthrax production operations for now. FDA indicated that current

production operations might result in potentially unusable vaccine

because it has yet to approve the manufacturing process. This production

stoppage reduces DOD’s risk of paying for vaccine that the FDA may

ultimately not approve and allows BioPort to focus on obtaining FDA

approval. However, since payment under the contract is largely based on

vaccine production rather than on FDA approval for release, the stop in

production will worsen BioPort’s financial condition. To mitigate the

consequences of stopping production, DOD intends to provide additional

financial assistance to BioPort to sustain its production line. The amount

of additional assistance has not been determined.

Mr. Chairman, Members of the Committee and Subcommittee, that

concludes my prepared remarks. We would be happy to answer any

questions you have at this time.

For future questions regarding this testimony, please contact David E.

Cooper at (202) 512 –4125. Individuals making key contributions to this

testimony were Johana R. Ayers, Ralph Dawn, and Paul M. Greeley.

Contact and

Acknowledgment
Page 5 GAO/T-NSIAD-00-140

Medical Readiness: DOD Continues to Face Challenges in Implementing

Its Anthrax Vaccine Immunization Program (GAO/T-NSIAD-00-157, Apr.

13, 2000).

Combating Terrorism: Chemical and Biological Supplies Are Poorly

Managed (GAO/T-HEHS-AIMD-00-59, Mar. 8, 2000).

Combating Terrorism: Chemical and Biological Supplies Are Poorly

Managed (GAO/HEHS/AIMD-00-36, Oct. 29, 1999).

Medical Readiness: DOD Faces Challenges in Implementing Its Anthrax

Vaccine Immunization Program (GAO/NSIAD-00-36, Oct. 22, 1999).

Contract Management: Observations on DOD’s Financial Relationship with

the Anthrax Vaccine Manufacturer (GAO/T-NSIAD-99-214, June 30, 1999).

Combating Terrorism: Observations on Growth in Federal Programs

(GAO/T-NSIAD-99-181, June 9, 1999).

Medical Readiness: Safety and Efficacy of the Anthrax Vaccine (GAO/TNSIAD-99-148, Apr. 29, 1999).

Gulf War Illnesses: Questions About the Presence of Squalene Antibodies

in Veterans Can Be Resolved (GAO/NSIAD-99-5, Mar. 29, 1999).

Combating Terrorism: Observations on Biological Terrorism and Public

Health Initiatives (GAO/T-NSIAD-99-112, Mar. 16, 1999).

Combating Terrorism: Observations on Federal Spending to Combat

Terrorism (GAO/T-NSIAD/GGD-99-107, Mar. 11, 1999).

Combating Terrorism: Efforts to Protect U.S. Forces in Turkey and the

Middle East (GAO/T-NSIAD-98-44, Oct. 28, 1997).

Combating Terrorism: Status of DOD Efforts to Protect Its Forces

Overseas (GAO/NSIAD-97-207, July 21, 1997).

(707504)

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