GAO

United States General Accounting Office

Testimony

Before the Subcommittee on National Security, Veterans

Affairs, and International Relations, Committee on

Government Reform, House of Representatives

For Release on Delivery

Expected at 

10:00 a.m., EDT

Wednesday,

June 30, 1999

CONTRACT 

MANAGEMENT

Observations on DOD’s 

Financial Relationship 

With the Anthrax Vaccine 

Manufacturer

Statement of Louis J. Rodrigues, Director, Defense 

Acquisitions Issues, National Security and International 

Affairs Division

GAO/T-NSIAD-99-214

Page 1 GAO/T-NSIAD-99-214

Mr. Chairman and Members of the Subcommittee:

It is a pleasure to be here this morning to discuss the contractual 

relationship between the Department of Defense (DOD) and BioPort 

Corporation for production of the anthrax vaccine. I will discuss (1) DOD’s 

investment in BioPort’s biologic facility and contracts to produce the 

vaccine, (2) BioPort’s current cash flow situation, and (3) proposals to 

improve the company’s financial health.

We have studied and reported on a number of issues concerning biological 

terrorism for this Subcommittee and others. A list of related GAO reports 

and testimonies is in appendix I to this statement.

Background From the 1970s until 1998, DOD had been procuring the anthrax vaccine 

from a biologic 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, is the 

only biologic facility in the country licensed by the Food and Drug 

Administration (FDA) to produce the vaccine. In 1997, FDA identified 

numerous manufacturing problems that could have led to the revocation of 

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

anthrax vaccine production, DOD began funding renovation efforts. 

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

1998, the State of Michigan sold the facility to the BioPort Corporation for 

$25 million. The company paid $3.25 million in cash, securing $12.15 million 

in notes payable to the State of Michigan, and agreeing to pay $9.6 million 

based on other obligations, including a percentage of future sales. The 

contracts DOD had with the State of Michigan facility were transferred to 

BioPort.

Results in Brief DOD has made a significant investment in renovating BioPort’s biologic 

facility to meet the military’s requirements for anthrax vaccine. However, 

BioPort has experienced delays in completing its renovation efforts, and, as 

a result, production of the vaccine is about 5 months behind schedule.

Because of the delays, the company has not received the revenues it 

expected and now faces a serious cash flow problem. The cash flow 

problem, we believe, is due to the company’s inability to achieve its overly 

optimistic business plan. In response to its cash flow problem, BioPort 

requested—and DOD has authorized—the sale of 70,000 doses to other 

customers before meeting its contractual requirements with DOD. In 

Letr
Page 2 GAO/T-NSIAD-99-214

addition, the company has proposed several actions to resolve its financial 

problems, including asking DOD for advance payments and increasing 

contract prices. DOD officials are considering what actions, if any, should 

be taken to resolve BioPort’s cash flow problem.

DOD Investment in 

BioPort’s Biologic 

Facilities

Since 1988, DOD has provided about $112 million in contracts, including 

options, to help ensure the viability of the anthrax vaccine biologic 

facility. As shown in figure 1, DOD’s contracts provided monies to (1) 

produce the vaccine, (2) renovate and expand the production 

facility, (3) provide various support services, and (4) purchase equipment 

to enhance production capacity.

Figure 1: Value of Contracts for the Anthrax Vaccine Biologic Facility

Source: GAO analysis of DOD contracts.

DOD has also provided contract terms and conditions to help ensure the 

success of the anthrax vaccine program. For example, under Public 

Law 85-804, which allows for government indemnification of contractors 

for unusually hazardous risks, DOD indemnified BioPort against product 

liability. In addition, DOD agreed to allow the company to sell up to 200,000 

doses of anthrax vaccine to others, using government-furnished equipment 

rent-free, after DOD’s requirements are met.

0

20

40

60

80

100

120

Vaccine

Renovation/Expansion

Support services

Equipment

Total

Dollars in millions

Awarded

Option

Letr
Page 3 GAO/T-NSIAD-99-214

BioPort’s Cash Flow 

Problems

BioPort’s renovation efforts have taken longer than expected and delayed 

production about 5 months. As a result, the revenues the company 

expected to receive have not materialized. The company has continued to 

accumulate costs, including significant payroll costs. According to BioPort 

officials, the company does not have sufficient cash reserves or the ability 

to obtain commercial financing at reasonable rates to cover its operating 

expenses.

BioPort projects a significant operating loss for the year ending December 

1999.1 In fact, the losses are greater than those during fiscal years 1993-96 

when the State of Michigan owned and operated the biologic facility 

(see fig. 2).2

Figure 2: Biologic Facility Operating Losses in Fiscal Years 1993-96

Source: Independent accountants’ reports.

1BioPort considers its projected operating loss for the year ending December 31, 1999, proprietary 

information and, therefore, it is not included in this statement. 

2Data regarding the State of Michigan’s operating losses were available only for fiscal years 1993-96.

-7

-6

-5

-4

-3

-2

-1

0

Fiscal Year

Losses in millions of dollars -0.9 -2.6 -6.5 -6.6

1993 1994 1995 1996
Page 4 GAO/T-NSIAD-99-214

In June 1999, the Defense Contract Audit Agency (DCAA) completed an 

audit of BioPort’s financial condition to determine if the contractor has 

adequate financial resources to perform its DOD contracts. According to 

this report, there is substantial doubt that BioPort will be able to continue 

performing its contracts. The company needs additional cash to meet 

ongoing expenses and debt commitments. For example, under the terms of 

its purchase agreement, BioPort must pay $8.8 million of its debt to the 

State of Michigan on September 4, 1999.

We believe BioPort’s cash flow problem is due to its inability to achieve its 

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. Because renovation efforts are taking longer than 

expected, vaccine production for DOD as well as other customers has been 

delayed about 5 months, and expected revenues have not materialized.

Efforts to Improve 

BioPort’s Financial 

Health

BioPort recently requested and received DOD’s authorization to sell 

70,000 doses of anthrax vaccine to other customers. DOD has approved the 

sale of 30,000 doses to the Canadian Armed Forces, in part so the company 

can generate revenues to help cover operating expenses. BioPort intends to 

sell the remaining 40,000 doses to other potential customers; these sales 

would also require approval under export control regulations. DOD gave its 

approval even though BioPort was not fully meeting its contractual delivery 

requirements. BioPort officials indicated that the sale of the 70,000 doses is 

expected to generate several million dollars of revenue.

In addition to this short-term action, BioPort has requested that DOD 

modify its contract to provide for, among other things, advance payments 

and significantly higher contract prices. DOD and BioPort are now 

discussing these modifications.

According to BioPort officials, the company is proposing significant price 

increases because (1) production capacity is less than it was planned to be, 

(2) costs have increased, and (3) sales to other customers have not 

materialized as planned. BioPort has informed DOD that it will not be able 

to produce all of the 2.5 million doses or all of the 5.4 million doses 

contractually required to be produced in option years one and two, 

respectively. As shown in figure 3, the contractual price per dose was 

expected to decrease as production quantities increased.
Page 5 GAO/T-NSIAD-99-214

Figure 3: Contract Prices and Production Requirements

Source: GAO analysis of DOD contracts.

BioPort’s proposed prices are several times higher than current contract 

prices. Moreover, BioPort is proposing to provide DOD about 3 million 

fewer doses than contractually required to better reflect its production 

capabilities and its desire to increase its private sales. According to BioPort 

officials, the reduced doses will be sufficient to support DOD’s 

immunization policy.

According to DCAA, the company’s proposed price for the 2.5 million doses 

currently under contract is overstated. In addition, the agency found that 

BioPort’s accounting system was inadequate and recommended that any 

company data submitted in support of the price increase be reviewed to 

ensure accuracy before any contract price is renegotiated.

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

concludes my prepared remarks. For the record, major contributors to the 

testimony were Johana R. Ayers, Ralph C. Dawn, Christopher P. Galvin, and 

Paul M. Greeley. I would be happy to answer any questions you may have.

0

1

2

3

4

5

6

7

8

Base Year Option I Option II

Price per dose

Quantity of doses to be produced

5

6

8

7

4

3

2

0

1
Page 6 GAO/T-NSIAD-99-214
Page 7 GAO/T-NSIAD-99-214
Page 8 GAO/T-NSIAD-99-214

Appendix I

Related GAO Products ApenIdxi

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/T-NSIAD-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).

(707423)
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the 

following address, accompanied by a check or money order made 

out to the Superintendent of Documents, when necessary, VISA and 

MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are 

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and 

testimony. To receive facsimile copies of the daily list or any list 

from the past 30 days, please call (202) 512-6000 using a touchtone 

phone. A recorded menu will provide information on how to obtain 

these lists.

For information on how to access GAO reports on the INTERNET, 

send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at: 

http://www.gao.gov
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Mail

Postage & Fees Paid

GAO

Permit No. GI00