U.S. GOVERNMENT PRINTING OFFICE

60–212 CC WASHINGTON : 1999

DEPARTMENT OF DEFENSE’S SOLE-SOURCE

ANTHRAX VACCINE PROCUREMENT

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY,

VETERANS AFFAIRS, AND INTERNATIONAL

RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JUNE 30, 1999

Serial No. 106–36

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON NATIONAL SECURITY, VETERANS AFFAIRS, AND INTERNATIONAL

RELATIONS

CHRISTOPHER SHAYS, Connecticut, Chairman

MARK E. SOUDER, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

DAVID M. MCINTOSH, Indiana

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

HELEN CHENOWETH, Idaho

ROD R. BLAGOJEVICH, Illinois

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

JOHN F. TIERNEY, Massachusetts

THOMAS H. ALLEN, Maine

EDOLPHUS TOWNS, New York

BERNARD SANDERS, Vermont

(Independent)

JANICE D. SCHAKOWSKY, Illinois

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

LAWRENCE J. HALLORAN, Staff Director and Counsel

ROBERT NEWMAN, Professional Staff Member

JASON CHUNG, Clerk

DAVID RAPALLO, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on June 30, 1999 ............................................................................... 1

Statement of:

Oliver, David R., Jr., Principal Deputy Under Secretary of Defense for

Acquisition Technology, U.S. Department of Defense; General Ronald

B. Blanck, Surgeon General, U.S. Army; Fuad El-Hibri, chief executive

officer, BioPort Corp., Lansing, MI; and Robert C. Myers, chief operating officer, BioPort Corp., Lansing, MI .................................................... 25

Rodrigues, Louis J., Director, Defense Acquisitions Issues, National Security and International Affairs Division, U.S. General Accounting Office,

accompanied by Ralph Dawn, Assistant Director, Defense Acquisitions

Issues, National Security and International Affairs Division, U.S. General Accounting Office .................................................................................. 3

Letters, statements, etc., submitted for the record by:

Blanck, General Ronald B., Surgeon General, U.S. Army, information

concerning phase two .................................................................................... 64

El-Hibri, Fuad, chief executive officer, BioPort Corp., Lansing, MI, prepared statement of ........................................................................................ 40

Oliver, David R., Jr., Principal Deputy Under Secretary of Defense for

Acquisition Technology, U.S. Department of Defense, prepared statement of ........................................................................................................... 29

Rodrigues, Louis J., Director, Defense Acquisitions Issues, National Security and International Affairs Division, U.S. General Accounting Office,

prepared statement of ................................................................................... 5

(1)

DEPARTMENT OF DEFENSE’S SOLE-SOURCE

ANTHRAX VACCINE PROCUREMENT

WEDNESDAY, JUNE 30, 1999

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON NATIONAL SECURITY, VETERANS

AFFAIRS, AND INTERNATIONAL RELATIONS,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room

2154, Rayburn House Office Building, Hon. Christopher Shays

(chairman of the subcommittee) presiding.

Present: Representatives Shays, Terry, Tierney, and

Schakowsky.

Staff present: Lawrence J. Halloran, staff director and counsel;

Robert Newman, professional staff member; Jason Chung, clerk;

David Rapallo, minority counsel; and Jean Gosa, minority staff assistant.

Mr. SHAYS. I would like to call this hearing to order.

In the 1998 Defense authorization bill, Congress conditioned

funding for the new Joint Strike Fighter aircraft on the availability

of two jet engine manufacturers. Why? Because the development of

critical weapons systems demands competitive innovation and a robust industrial base. But the Department of Defense [DOD], has

been unable to bring the same competition and additional production capacity to the acquisition of what has been called a critical

force protection system: the anthrax vaccine.

Why more vigorous procurement standards for jet engines than

anthrax injections? To meet the requirements of the mandatory,

force-wide Anthrax Vaccine Immunization Program, referred to as

AVIP, DOD today finds itself captive to the demands of the solesource provider. With no emergency production facility for the current vaccine and no alternative vaccine ready for use, the Pentagon

is locked in a dependent relationship with BioPort Corp., the newly

privatized, apparently under-capitalized anthrax vaccine manufacturer.

To those who see the need for the AVIP, the current procurement

strategy should raise grave concerns about the security of the sole

production facility and the predictability of vaccine supply. To

those who question the safety or efficacy of the mandatory program, BioPort’s financial troubles engender fears that cost cutting

will affect vaccine quality.

Just 9 months ago, the Department of Defense awarded a $29

million contract to BioPort based on the company’s business plan,

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optimistic cash-flow projections, and promises to fix longstanding

quality problems at the production facility.

Today, the plant remains closed, costs far exceed estimates, and

revenues are below expectations. Facing a financial crisis, the company has requested extraordinary relief from DOD in the form of

a $10 million advance to pay off creditors, a substantial per-dose

price increase, and the right to sell up to 20 percent of vaccine production on the private market. In short, in order to maintain any

production capability for its own needs, DOD must pay more money

for less vaccine, while BioPort sells more vaccine to get more

money.

What happened? How did DOD so misjudge the capacity of the

sole vaccine provider to perform essential contractual obligations?

How did BioPort so miscalculate the time and cost to bring a Staterun facility into the notoriously difficult world of commercial vaccine production?

To help address these questions, the subcommittee asked the

General Accounting Office [GAO], to review the anthrax vaccine

contracts. The GAO findings, as well as observations by DOD’s own

internal auditors, raise serious doubts BioPort can meet current

contract commitments. They also conclude BioPort inherited an accounting system incapable of allocating costs as required by Government contracts, and has not made promised improvements to

account for costs.

That finding raises more troubling questions about the extent to

which BioPort knew, or should have known, the proposed contract

prices were unrealistic; and about the extent to which DOD knew,

or should have known, that BioPort would be unable to perform

under the contract.

A mandatory, force-wide immunization program to address the

preeminent biological warfare threat ought to be based on more

than an optimistic business plan and speculative private vaccine

sales. Resting on so weak a foundation, can the anthrax vaccine

program be sustained in its current form?

We asked our witnesses to address these important questions

this morning and look forward to their participation.

And what we will do is we will jump right into it. I will introduce

our first panel. Our first panel is comprised of Louis Rodrigues,

who is Director, Defense Acquisition Issues, National Security and

International Affairs Division, U.S. General Accounting Office. And

he is accompanied by Ralph Dawn, who is the Assistant Director

of this division. And it is my understanding, Mr. Rodrigues, you

will be making the statement and then both will be responsive to

questions. Is there anyone else that you think you may need to

have put under oath that might answer questions so we could have

them stand?

Mr. RODRIGUES. No, Mr. Chairman.

Mr. SHAYS. OK, it will be the two of you?

Mr. RODRIGUES. Yes.

Mr. SHAYS. And if I could ask you to stand and raise your right

hands?

[Witnesses sworn.]

Mr. SHAYS. And note for the record that our witnesses have responded in the affirmative.

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Before beginning, let me just say that I have read the testimony

of the three witnesses. I think this is a very difficult issue, and I

in no way want to conclude that there is an easy answer. And so

I am very interested in this hearing and will be interested in the

responses to questions.

Thank you.

STATEMENT OF LOUIS J. RODRIGUES, DIRECTOR, DEFENSE

ACQUISITIONS ISSUES, NATIONAL SECURITY AND INTERNATIONAL AFFAIRS DIVISION, U.S. GENERAL ACCOUNTING

OFFICE, ACCOMPANIED BY RALPH DAWN, ASSISTANT DIRECTOR, DEFENSE ACQUISITIONS ISSUES, NATIONAL SECURITY

AND INTERNATIONAL AFFAIRS DIVISION, U.S. GENERAL ACCOUNTING OFFICE

Mr. RODRIGUES. Thank you, Mr. Chairman. If I could, I would

like my full statement submitted for the record?

Mr. SHAYS. Sure.

Mr. RODRIGUES. And I will proceed with a shorter oral version.

Mr. Chairman, it is a pleasure to be here this morning to discuss

the contractual relationships between the Department of Defense

and BioPort Corp. for production of the anthrax vaccine. Until

1998, DOD had been procuring the anthrax vaccine from a biological facility owned by the State of Michigan. The facility is the only

biological facility in the country licensed by the Food and Drug Administration to produce the vaccine.

In 1997, the Food and Drug Administration 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

BioPort Corp. for $25 million. Also, the contracts DOD had with

the State of Michigan facility were transferred to BioPort.

DOD has made a significant investment in renovating BioPort’s

biological facility to meet the military’s requirement for anthrax

vaccine. However, BioPort has experienced delays in completing

the 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 to the Department. In

addition, the company has proposed several actions to resolve its

financial problems, including asking DOD for advance payments

and to increase contract prices. DOD officials are considering what

actions, if any, should be taken to resolve BioPort’s cash-flow problem.

BioPort projects a significant operating loss for the year ending

December 1999. In fact, those losses are greater than those during

the fiscal years 1993 through 1996 when the State of Michigan

owned and operated the biological facility. During those years,

4

losses increased from about $1 million in 1993 to $6.6 million in

1996.

In June 1999, the Defense Contract Audit Agency [DCAA] completed an audit of BioPort’s financial condition. According to this

report, there is substantial doubt that BioPort will be able to continue performing its contracts, and the company needs additional

cash to meet ongoing expenses and debt commitments.

According to BioPort officials, the company is proposing significant price increases because (1) the 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’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 the Department’s immunization policy.

According to DCAA, the company’s proposed increased 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 a price increase be reviewed to ensure the accuracy before any contract price is re-negotiated.

Mr. Chairman, that concludes my remarks, and I will be happy

to answer any questions.

[The prepared statement of Mr. Rodrigues follows:]

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Mr. SHAYS. Thank you very much. Based on your experience reviewing DOD procurement, are the terms that were originally set

out generous, and are the terms now overly generous?

Mr. RODRIGUES. Let me try to answer that more in terms of

other kinds of contracts that we have looked at, sole-source contracts.

Mr. SHAYS. And you can define generous if you want.

Mr. RODRIGUES. OK. Let me try to deal with this in terms of

comparing this to other types of sole-source contracts that we have

looked at. It is rather unusual, this was rather unusual to end up

with a situation where you have a company whose cost controls are

so unreliable that there is no way at all that we could negotiate

based on cost. We end up negotiating based on theoretically a price

analysis. Yet, when you look at all the details involving this negotiation, it really looks more like a cost-base activity. The cost system, when DCAA looked at it, had been invalidated as appropriate

for use in negotiations. Normally, you may be able to go price-base,

but you would also have the option of falling back to cost-base pricing if you needed to.

In a high-risk type of endeavor like this, I say it is high-risk from

an investment standpoint on our part simply because you had a

company that financially wasn’t as stable as you might like to

have, didn’t have a lot of financial resources to carry itself through

in the event of any problems occurring. At the time we signed the

contract, the plant was closed down. It was being renovated, and

had a projected date for re-opening. Some very optimistic kinds of

things that needed to happen in order for their financial plans to

come through. The company where they are relying on us basically

as their only source of funds for the time being and, yet, didn’t

have the cash reserves to encounter any kinds of problems that ultimately have occurred and affected the delay. This 5 month delay

in re-opening the production facility, created a real problem in

terms of their ability to sustain themselves. They only put in $3.25

million in cash in the acquisition, didn’t have a great deal of funds

available.

So this kind of a situation where you have a company who is relying basically solely on this product for its future viability and,

yet, we are sitting there with only projections to deal with in terms

of when it would be able to reopen, when you would have sales,

when you would be able to generate the cash to cover yourself in

terms of any unforeseen problems. All of those things would be

rather unusual.

Mr. SHAYS. Let me try to put it in a context that I can understand. The DOD determined that its force protection would be—

that we would go the route of vaccines and the first vaccine that

we would seek to do, concern about use by another country or by

terrorists, would be the anthrax vaccine. We make a determination

that we are going to make this a mandatory program for all our

military and that this is not just one shot, this is up to six shots

or more.

Now we have made that determination, we, DOD, and now we

go and see who can provide this program to us. Now during the

war in the Gulf, we did not have it mandatory I don’t think for all

of our military personnel but a good number were required to take

15

the anthrax vaccine. And so we had negotiated an agreement with

this plant that was in Michigan and it was owned by the public

sector, the State of Michigan. So we had some relationship there.

But in the end, DOD decided to have this program and it went

out in a bid process and only one manufacturer responded is my

understanding, and that was the State of Michigan. Is that correct

so far?

Mr. RODRIGUES. Yes, sir.

Mr. SHAYS. Now then there was concern that the State might not

want to hold on to this plant. So there was interaction with the

Governor, Mr. Engler, in Michigan to keep this plant running and

ultimately that took place. Then it was sold by the State, I think

for about $25 million. And then it was obviously generous terms in

terms of financing. But they were going to shut it down, and I don’t

know what the value of the plant would have been if they had shut

it down, and these are questions that I would love to know.

But the bottom line is that the DOD decided this program was

so important that they were going to go with this manufacturer.

And it was sold. It then became a private investment. And DOD

has set certain terms what they would do to the plant and also

what they would pay per vaccine. And so there was this agreement

established.

Now what I guess I want to know is in a circumstance like that

where there is really I think one manufacturer in the country, I

don’t think there was another manufacturer. What options are

really available to the military that they can go with that one provider or they can do what?

Mr. RODRIGUES. In this case, because they had an immediate

need, and there is only one licensed provider, you really don’t have

an option. But it becomes a matter of what is your strategy for the

future? Do you lock yourself into a single provider and stay with

that or do you look to try to establish a second source for—it could

be any number of reasons? The problem here is the volume probably doesn’t justify, at this point, a second source from an economic

standpoint. But if we are relying upon this vaccine as part of the

backbone of our defensive biological program, the question of vulnerability to a single site becomes an issue. If you made a decision

with respect to that vulnerability that led you to want to have an

alternative site, then we probably should be looking at establishing

a second source. But it is not going to be cheaper.

Mr. SHAYS. Now one thing DOD could have done, couldn’t they,

is just simply delayed the decision until they had better options?

In other words, they could have decided to begin—they could have

even have gone into a contractual arrangement but just not determined to begin the mandatory program as early as they did, correct?

Mr. RODRIGUES. I am not in a position to address that. That has

to do with a policy level decision on deciding to vaccinate——

Mr. SHAYS. No, but that clearly is an option?

Mr. RODRIGUES. Well, sure, it would be an option but it would

be a policy decision.

Mr. SHAYS. In the cases that you are aware of where there is

only one provider, what is usually the options available again? Mr.

Dawn, do you want to——

16

Mr. RODRIGUES. Usually when you have one provider, that one

provider in a sole-source environment isn’t so dependent on that

single product for its financial viability. They usually have other

product lines that are generating income and if they run into a

problem on this one line, it won’t put them out of business. In this

case, problems with this vaccine, with the production and delivery

of this vaccine to the Department of Defense puts this corporation

in an extremely bad financial position. And that is rather unusual.

Mr. SHAYS. I am going to ask you a few more questions about

the contract and also in regards to the 70 doses and then I will

yield, or not yield, but recognize Ms. Schakowsky, who I welcome.

So let me just ask you, what particularly do you find overly optimistic, those were the terms you used, ‘‘overly optimistic’’ about

BioPort’s business plan upon which DOD based its contract?

Mr. RODRIGUES. Yes, in terms of the optimism, the fact that they

had very little cash on hand to be able to sustain themselves in the

event of any of their projections—where their income was going to

come from and when their source of income was going to come back

on line. So they didn’t have a lot of cash available to carry themselves in case of unforeseen delay against their plan.

The other thing was the production activity was scheduled to

come up in January 1999. If it didn’t come up in January 1999,

given their limited cash reserves, what were they going to do about

that? They were projecting what was going to occur and if it didn’t,

we were going to start to have problems.

They were projecting sales to others, both of the vaccine itself

and of other products that weren’t occurring because the plant was

shutdown.

And those kinds of things. They were all projections on hopeful

sales, hopeful re-start of the line. There is no income coming in, the

plant is closed. And if those things don’t occur, how do you get

through the period where you are not able to deliver products and

therefore receive money?

Mr. SHAYS. One of the challenges was they had a best case scenario and you are not aware that they had fall back plans, and you

have already stated they weren’t capitalized in a way that would

enable them to draw on their own—so this is basically, we were

rolling the dice and expecting that it had to come out really great

and if it didn’t, we had a big problem?

Mr. RODRIGUES. Exactly.

Mr. SHAYS. And that is what has happened.

Mr. RODRIGUES. Exactly, Mr. Chairman. And the other part of it

was, of course, that they were locked in an agreement with the

State of Michigan to continue to employ that full work force for 1

year after the initiation of the contract. So they couldn’t deal with

downsizing that work force during the period either.

Mr. SHAYS. But the State of Michigan was going to shut down

the plant and put everyone out of work, but they have a contract

with us, the U.S. Government, that we have to keep them employed and they sold the plant for $25 million?

Mr. RODRIGUES. No, they don’t have a contract with us. The

agreement between BioPort and Michigan was that they had to

continue to employ those people.

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Mr. SHAYS. I would love to know what they would have gotten

if they shut the plant down. In place of a firm fixed price contract,

what would you have recommended as a more workable and appropriate form of procurement?

Mr. RODRIGUES. Clearly, in this type of a situation, a firm fixed

price contract isn’t the appropriate contract vehicle, some type of

cost contract is. But the problem we had was the cost systems at

BioPort wouldn’t support a cost-based contract. On the other hand,

we did nothing to force BioPort’s hand and make them come up

with a cost control system, not a cost accounting standard kind of

compliance system. But at least a cost control system that would

allow us to determine allocability and allowability of cost so that

it could properly price the product that we are buying. We just deferred to a firm fixed price contract, based on theoretical price

analysis. Although when you really look at the record, it really all

ties back to cost analysis. And, yet, we know the cost data are no

good.

Mr. SHAYS. Basically, part of your testimony is that we really

had no factual information on which to base our reimbursement,

isn’t that correct?

Mr. RODRIGUES. Correct.

Mr. SHAYS. How much was our investment in the renovation?

Mr. RODRIGUES. To date, we have obligated $11.3 million in renovation expansion and another $7.1 million in Government-furnished equipment and direct buy of some equipment by the corporation.

Mr. SHAYS. It is $11 million plus what? I’m sorry.

Mr. RODRIGUES. $7.1 million—$6.8 million in Government-furnished equipment and another $250,000 that we gave to BioPort or

provided to BioPort on the contract to buy some holding tanks.

Mr. SHAYS. And that was in the original contract?

Mr. RODRIGUES. Everything but the holding tanks and I believe

there was another $191,000——

Mr. SHAYS. Let me just say this, I would prefer if Mr. Dawn has

a closer expertise in this to just respond.

Mr. DAWN. Yes. [Laughter.]

Mr. SHAYS. See, I just wanted a simple answer.

Mr. DAWN. As Lou said, most of the money for renovation and

the equipment was in the 1991 contract. There were modifications

to the 1991 contract, although there was a small piece that was included in the 1998 contract.

Mr. SHAYS. You mean the 1991 and the 1998 contract are interrelated?

Mr. DAWN. Interrelated, yes. The 1991 contract was transferred

from the State of Michigan to BioPort.

Mr. RODRIGUES. If I could, Mr. Chairman?

Mr. SHAYS. Sure.

Mr. RODRIGUES. Virtually all of the money was provided as modifications to the original 1991 contract with the State of Michigan.

Since BioPort took over, there were two minor modifications, one

to move a generator, another one for some electrical changes. Those

two totaled $193,000. And then in addition, we provided for equipment—$250,000 for two holding tanks. That was provided under

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the 1998 contract to BioPort. Everything else came over with the

renovated contracts from the Michigan facility.

Mr. SHAYS. What was the exact arrangement between DOD and

BioPort with regard to the sale of the 70,000 dosages? What was

the arrangement that was made?

Mr. RODRIGUES. The arrangement was they approved the sale of

the 70,000 doses, or they authorized the sale, and they have since

approved the sale of 30,000 of those to Canadian forces. The arrangement is BioPort gets the money.

Mr. SHAYS. But they are able to make the sale before they meet

their contractual obligations to DOD?

Mr. RODRIGUES. Yes, Mr. Chairman.

Mr. SHAYS. Before means they would still supply to DOD and at

the same time supply—or all 70,000 come first?

Mr. RODRIGUES. The 70,000 actually exist. And we had a difficult

time figuring out where that 70,000 comes from. But as best we

can tell, at the time that BioPort bought the facility, with the facility came, at least 860,000 doses, 790,000 of those were delivered

under the base-year contract of the Department of Defense. And,

as we understand it, although we are not clear, there must have

been an additional 70,000 doses that were available. BioPort

claimed that those were unexpected excess production, but there

hasn’t been any production going on since BioPort—— Mr. SHAYS. Yes, which is going to be my last question. How can

we determine that the 70,000 doses makes sense and that they are

in excess of what DOD requires? And I am making an assumption

right now, since we don’t have production, we need it.

Mr. RODRIGUES. It is my understanding that the Department,

with the stocks on hand, has enough to carry them through and

that the approval of the 70,000 doses was, in effect, to provide

some financial relief of the corporation, allow them to sell it. Does

the Department still have a requirement for that dosage? Yes. Do

you need it today in order to do the vaccination program? I believe

the answer is no.

Mr. SHAYS. So your testimony is that the program is operating

without interruption, that we are keeping up to exactly the plan

that we intended to?

Mr. RODRIGUES. That is my understanding right now.

Mr. SHAYS. Well, that raises the question to me then that if the

production isn’t—I thought that one of the problems that BioPort

has said is that they don’t have production, therefore, they don’t

have income. But they do have income. They have this backlog of

vaccines, dosages, that they are able to sell, correct?

Mr. RODRIGUES. Well, yes, the 70,000.

Mr. SHAYS. They had 800,000-plus?

Mr. RODRIGUES. Right, and they have delivered that and been

paid for it and those funds are gone too. And that you could have

seen in the projections that are coming as well. Their cash reserves

plus assets on hand with the sale prices that they had, if you ran

into problems, you still had this potential financial problem that

they are having to deal with right now.

Mr. SHAYS. Let me recognize Ms. Schakowsky. But, first, let me

ask unanimous consent that all members of the subcommittee be

permitted to place an opening statement in the record and that

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record remain open for 3 days for that purpose. And without objection, so ordered. And I ask further unanimous consent that all witnesses be permitted to include their written statement in the

record. And without objection, so ordered. You are on.

Ms. SCHAKOWSKY. Thank you. I find this whole situation quite disturbing that since 1988, the DOD has provided about $112 million to help ensure the viability of the BioPort facility. I am talking

about funds to produce the vaccine, renovate and expand the facility, provide support services, purchase equipment to enhance production capability. And I know we will get into this more later, but

DOD has also indemnified BioPort against product liability claims

and, yet, they are in a cash-flow crisis right now, in part because

are all the lines shut down? Are they producing at all?

Mr. RODRIGUES. They are back up right now. But they were 5

months behind where they should have been.

Ms. SCHAKOWSKY. Right. And even though the procurement contract between DOD and BioPort is only 9 months old, I know that

the GAO has reported that BioPort already has requested modifications to the arrangement. First they asked to be permitted to

charge DOD more than originally negotiated in the contract and

this proposal is designed to address, I am sure at least in part, the

cash-flow problems that BioPort has experienced. It justifies this

increase on lower than expected production capacity, increased

costs, and the failure of sales to other customers to materialize as

planned.

I wanted to ask you, you stated that BioPort is also proposing

to reduce the number of doses it is required to provide DOD under

the contract by $3 million. Will these doses be provided at a later

date?

Mr. RODRIGUES. I would assume the Department would want

those at a later date. You are going to have to ask the Department’s representatives. And, once again, the Department of Defense, to my knowledge, has not agreed to any of these proposals

at this point.

Ms. SCHAKOWSKY. You mean any of the modifications of the contract?

Mr. RODRIGUES. These are BioPort proposals.

Ms. SCHAKOWSKY. Right.

Mr. RODRIGUES. And they are, as I understand, in discussion

with the Department on these issues now.

Ms. SCHAKOWSKY. So all of the questions I was going to ask regarding price increases because essentially we do see the number

of doses as essentially a price increase, are these better directed

where?

Mr. RODRIGUES. Certainly, you can ask the Department. Let me

talk to that a little bit. One of the problems that you have is the

quantities that were in that contract, it was 2.5 million doses for

option year one, which is the current year 1999, and 5.4 million

doses for option year two, which is year 2000. Those quantities

were based on all production being deliverable. And what we find

is that usually at the outside, 80 percent of the product produced

would actually be deliverable. So the estimates were already high

to start with and BioPort saying, ‘‘Well, we can’t produce at those

rates, can’t deliver at those rates,’’ whether you can produce is a

20

different issue. So they are looking for relief from the quantities.

And their position is it wouldn’t affect the Department’s inoculation

program plan. So I think the Department would be better able to

answer that. It does appear that they could make adjustments if

they chose possibly, but you are better off asking them.

But the fact of the matter is it was rather optimistic in terms of

getting the quantity specified under the contract actually delivered

out of that facility.

Ms. SCHAKOWSKY. But essentially we are talking about a third

fewer—— Mr. RODRIGUES. Yes.

Ms. SCHAKOWSKY [continuing]. Being made available. So how can

we possibly even think about achieving the same goals with a third

fewer doses?

Mr. RODRIGUES. If you are talking goals in terms of price?

Ms. SCHAKOWSKY. In terms of serving DOD’s needs?

Mr. RODRIGUES. Right.

Ms. SCHAKOWSKY. And price?

Mr. RODRIGUES. On the price side, you do have fewer doses but

what they wanted to do is substantially increase their sales to

other customers with a lot of the cost being shifted to the commercial sale side of the house. Clearly, with lower production, you are

going to end up with higher unit prices. But they were going to increase their sales to their other customers, which should allow us

to keep some kind of control on the price increases.

Ms. SCHAKOWSKY. Has anyone at GAO compared the original

contract terms with the terms that BioPort is now proposing? In

other words, how much did DOD originally agree to pay for 8.8 million doses, including renovations and equipment and all other DOD

funding?

Mr. RODRIGUES. Yes, ma’am. As I said, the prices that are being

proposed are substantially higher. The data we have has been

marked proprietary by the company, so I can’t give you the exact

numbers. But they are a great deal higher than the prices that

have been negotiated in the contract.

Ms. SCHAKOWSKY. So if DOD accepts all of BioPort’s proposals for

decreased supply and increased price and advanced payment, how

much will we be paying for 5.8 million doses?

Mr. DAWN. Well, we can say that it will be several times more

than we are paying now.

Ms. SCHAKOWSKY. Several times more than we are paying, two,

three? Three is usually several.

Mr. RODRIGUES. Several. It is more than two.

Ms. SCHAKOWSKY. More than two. Less than four?

Mr. RODRIGUES. The problem is if I give you the exact multiplier,

than I am going to be giving you the price and we are getting into

this issue of proprietary data at this point.

Ms. SCHAKOWSKY. Thank you.

Mr. SHAYS. Let me just ask one or two other questions. The bottom line is we have a program that our DOD has determined is

necessary to protect our soldiers. And we are going to require 2.4

to 2.7 million men and women to take a vaccine some of them don’t

want to take. In Great Britain, it is voluntary and in France, they

are not touching it. They are going more toward protection with

21

protective gear. The negative of that is that some biological agents

you don’t detect until they have already killed you or have caused

serious injury. The plus is that the protective gear can protect you

from more than one form of attack. So we have variations here.

The DOD has determined they want this program and they want

it so bad that they have agreed to a sole-source provider who is

under-capitalized, using what is old technology, in the sense—excuse me, an old licensed product that could be made better but that

takes time. Rather than waiting to have this product improved and

to have more options, they decided to jump right in. We have a situation now where BioPort, under-capitalized, is not able to meet

the requirements.

What options, as you look on the outside are available to DOD

because from my standpoint it seems to me BioPort basically can

say, ‘‘You don’t like it, then that’s the breaks.’’ And DOD is faced

with well, we think it is an important program. We better meet

their demand or we are going to have to go somewhere else and

they have nowhere else to go. So tell me under those circumstances

what options are available?

Mr. RODRIGUES. First of all, I wouldn’t want to leave you with

the impression that only BioPort has all the cards to play. The fact

of the matter is if we don’t buy that vaccine from them, they don’t

have a customer to keep them in business.

Mr. SHAYS. Right.

Mr. RODRIGUES. It is a mutual dependency at this point. So the

Department has quite a bit of leverage, I think. Now how they use

it, that’s a different issue and you can certainly address that with

the people who will follow us here at the platform. But it isn’t

BioPort that has us over a barrel and we have no leverage with it

to use. We do. The company, if it wants to continue, needs the Department at this point for sales.

The other thing is this is a licensed item which requires approval

by the Department of Defense. They are also manufacturing it off

of equipment rent-free so they have to have approval from the Department of Defense. So we do have quite a bit of leverage on the

Department side too in dealing with this issue.

Mr. SHAYS. So if you were advising the military, they should—

I am being somewhat facetious, but, frankly, the more important

they say this program is, the more they are basically saying we are

going to make a deal? I mean the bottom line is we are saying it

is an essential program. It is so essential, we are willing to have

good men and women resign from the force because they refuse to

take it. And we feel so strongly evidently that it is worse losing

good men and women, who out of conscience don’t want to take

this, and that says, if I am BioPort, that I have a very willing

buyer. But your point is if they back off, BioPort goes out of business and they lose their relatively small investment given the

amount of production costs and so on. It is a very small investment

for them.

Mr. RODRIGUES. Yes, it is.

Mr. SHAYS. The other thing that BioPort got though was they got

indemnification, correct?

Mr. RODRIGUES. Yes.

22

Mr. SHAYS. Have you been able to ascertain what the value of

that was?

Mr. DAWN. There wasn’t a cost assigned to the indemnification

clause, no.

Mr. SHAYS. So we don’t know technically what our liability is?

Mr. DAWN. No, not technically.

Mr. SHAYS. It could potentially be billions or millions or hundreds of thousands, depending on what effects happen in the years

to come. So the only risk that BioPort has basically now is their

initial investment?

Mr. RODRIGUES. Yes.

Mr. SHAYS. OK. Do we know how much more money they have

put into the program?

Mr. DAWN. They have put in a little over $1 million in owner’s

financing.

Mr. SHAYS. In addition to the $3.5 million?

Mr. DAWN. In addition to the $3.25 million.

Mr. SHAYS. And we still do not have clear accounting records to

justify—— Mr. DAWN. Any cost increase or price increase.

Mr. SHAYS. Correct?

Mr. DAWN. That is correct, yes.

Mr. SHAYS. Is it GAO’s recommendation that we absolutely get

that first before we make any agreement?

Mr. RODRIGUES. I think, in whatever negotiations go on, that we

need to hold the line on the company establishing the cost controls

that we will need to properly price this in the future. I am not sure

if you can say—it depends on the Department’s needs and that is

rather unclear to me. But if you have an absolute need—or the

other part is the financial viability of the company, they have a

need to sell this product in order to remain financially available.

It is in the Department’s interest to keep them going in order to

support their program, then you would have to continue on in some

kind of contractual relationship. But we should be using whatever

opportunities we have to get the company to establish the proper

cost controls so that we would then be on a basis to better deal

with the pricing of this product.

Mr. SHAYS. I would be happy to recognize Ms. Schakowsky?

Ms. SCHAKOWSKY. Thank you. I wanted to followup a bit on this

liability question. First of all, I wanted to ask you if it is a typical

arrangement for the Department to indemnify a contractor, a vendor against liability claims?

Mr. RODRIGUES. It isn’t unusual on this type of a product.

Ms. SCHAKOWSKY. It is not unusual?

Mr. RODRIGUES. Not unusual.

Ms. SCHAKOWSKY. Well, then so what measures accountability

for quality control, particularly given the history, very recent history of this company on vaccine stockpiles and newly produced anthrax vaccine exists, what kind of accountability would exist? It

would seem to me that given the relatively small investment on

their part, a large investment on our part and their history, that

we are at risk here?

Mr. RODRIGUES. The controls are mostly in the form of the FDA

approval process, the process itself to make sure that the outputs

23

are appropriate, that the vaccine is a good vaccine, and then the

testing of the deliverable items to make sure that it meets the

standard. The indemnification isn’t really directly related to that.

You would still want to make sure that even if they were getting

insurance to indemnify themselves that the product was a good

product.

Ms. SCHAKOWSKY. There was a story today in the Hartford Courant, concern over anthrax where it says, it quotes Army Secretary

Louis Caldera to the Michigan-based manufacturer of anthrax vaccines, that says as a result of ‘‘the unusually hazardous risks associated with the potential for adverse reactions in some recipients,

that DOD would take responsibility for indemnifying the product.’’ Can you give us any other examples of situations where the Department in situations like this has indemnified against liability,

another company?

Mr. RODRIGUES. I am sure I could provide some for the record.

I don’t have them off-hand. But I think if you would look at this

type of activity in general, commercial vaccines, there is a cost

built into the item, into the charge for the item itself, that goes into

an indemnification fund. The problem with the indemnification

issue, as we are looking at, it is one where you do not want to have

yourself subject to a lot of lawsuits, not whether you lose them or

whether you would actually be found guilty, but whether you would

find yourself in court all the time because people have adverse reactions to vaccines. And so there is this whole thing with vaccination programs and indemnification that is an issue for any kind of

vaccination program.

In this case, the Department, virtually the only buyer, would

have a choice, it would seem to me, of either paying 100 percent

of the cost of the indemnification or self-indemnifying. And you certainly can ask them about their decision but indemnification has

to occur somehow, either in the form of having some kind of insurance or paying an additional cost to cover that.

Ms. SCHAKOWSKY. But the question is who takes the risk? And

in this case, it seems that at every stage along the route in terms

of money that had to be laid out, risks that had to be taken, that

it was the taxpayers that are paying out?

Mr. RODRIGUES. And I think any time you find yourself as virtually the sole buyer of an item, you are going to incur the costs.

It isn’t as though at this point in time, or the point in time the Department entered these contractual relationships, that there are a

whole bunch of people lined up with contracts to buy this so that

they are selling large volumes to other people. We were virtually

the market. And when you are the market, you incur the costs.

There is no sharing, there is no pooling. It is not like a warranty

on your car where you are buying one of several million cars and

the warranty costs are pooled.

Ms. SCHAKOWSKY. Did the GAO look at or were there ever any

situations where since we take all the risks, put in much of the investment, that the DOD would just own and run the company so

that we could impose our own controls and do it our own way? Was

that ever considered?

Mr. RODRIGUES. Yes, there are Government-owned contractor-operated facilities. Could you do that? Yes. I don’t know what the DeVerDate 11-MAY-2000 08:22 Feb 28, 2001 Jkt 066350 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HEARINGS\60212 pfrm02 PsN: 60212
24

partment’s position is on that. I think Mr. Oliver would be in a

much better position to address that.

Ms. SCHAKOWSKY. Thank you.

Mr. SHAYS. Let me just end by talking about that memorandum

of decision that was signed by the Secretary, Louis Caldera, on

September 3, 1998. And he talks about the obligation assumed by

MBPI, which is the Michigan Biologic Products Institute, which

was the predecessor to BioTech—BioPort rather. And it says, ‘‘The

obligation assumed by MBPI under this contract involves unusual

hazardous risks associated with the potential for adverse reactions

in some recipients and the possibility that the desired

immunological effect will not be obtained by all recipients.’’ So basically you can sue if you have bad effects and you can sue if it

doesn’t protect you.

And then I am looking at a document from the Department of

Army dated earlier, April 7th, and it talks about the cost of insurance. This is a memorandum that was, its subject is addendum to

the contract officer’s request for authorization for indemnification

under the authority of public law, so on. But it was dated April

7th. And it says, ‘‘Cost of insurance: The maximum amount of insurance MBPI has been able to identify to date is $35 million with

premiums at $446,820 a year.’’ Now $35 million is just a drop in

the bucket and yet it would have cost them close to a half a million

dollars a year. But then I make the same assumption that we have

put ourselves at risk and multiply the number by 10 just to even

have a protection of $350 million, which in this kind of area—that

would probably be a small amount. And even there it would cost

us like $4.4 million.

So it is fair to say that DOD wants this and they could withdraw

it and BioPort is left out in the cold. But in this case, the argument

before is that BioPort has made an investment. The investment has

not turned out right and they are asking the Federal Government

to bail them out. And you are telling me that we have the ability

to—that we have options. It doesn’t strike me that we have much

option unless we decide to postpone this program until we get it

right, until we know we have a product that we are more comfortable with and until we know it is the right policy. And even if

we think it is the right policy, it may be the right policy but maybe

now isn’t the time because we don’t have a producer who can provide the product we want at a price we think is right. And I guess

these are the questions that we will need to address to our next

two witnesses. And you have obviously provided us a wonderful introduction to this issue.

Mr. RODRIGUES. Thank you, Mr. Chairman.

Mr. SHAYS. Is there anything, Mr. Dawn, anything you would

like to say? I felt like some of these questions, you wanted to jump

in?

Mr. DAWN. No, sir.

Mr. SHAYS. You are all set? OK, I don’t want to hear later that

we should have asked you a question. Is there any question that

we should have asked you, Mr. Rodrigues, that you feel needs to

be on the record? You can ask the question and answer it. What

question would you ask yourself?

25

Mr. RODRIGUES. I was just thinking through on your last statement. In dealing in the issue of not going forward with anything

with BioPort, once again, the problem the Department would face

then is that this company is dependent upon the Department for

its future. It will not exist, financially, it doesn’t look as though it

could exist, if the Department chose to no longer buy any anthrax

vaccine, if that is what they choose to do. If that is true, while you

search for other options, and if the other options take an extreme

amount of time, you now have lost your only source. And I think

that’s the dilemma the Department is faced with and you may

want to address that with the witnesses that follow.

Mr. SHAYS. Thank you very much. We will go to our next panel

and invite David Oliver, Jr., Principal Deputy Under Secretary of

Defense for Acquisition Technology, U.S. Department of Defense,

accompanied by General Ronald Blanck, Surgeon General, U.S.

Army. And testimony by Fuad El-Hibri, chief executive officer,

BioPort Corp. And that is in Lansing, MI, accompanied by Robert

Myers, chief operating officer, BioPort Corp.

We will have testimony from both the DOD and BioPort and invite the others to participate as well.

I will ask you to remain standing and I will swear you all in.

If you would raise your right hands, please?

[Witnesses sworn.]

STATEMENTS OF DAVID R. OLIVER, JR., PRINCIPAL DEPUTY

UNDER SECRETARY OF DEFENSE FOR ACQUISITION TECHNOLOGY, U.S. DEPARTMENT OF DEFENSE; GENERAL

RONALD B. BLANCK, SURGEON GENERAL, U.S. ARMY; FUAD

EL-HIBRI, CHIEF EXECUTIVE OFFICER, BIOPORT CORP.,

LANSING, MI; AND ROBERT C. MYERS, CHIEF OPERATING OFFICER, BIOPORT CORP., LANSING, MI

Mr. SHAYS. Mr. Oliver, it is my understanding you will give the

testimony and General Blanck will participate in responding to

questions?

Mr. OLIVER. Yes, sir.

Mr. SHAYS. And, Mr. El-Hibri, my understanding is you will have

testimony and that Dr. Myers will respond to questions, as well.

One of the things I would just suggest is that I think you have

a sense of the questions we have, and happy to have you give your

testimony, but if you can also respond to some of those questions,

that will also probably be helpful.

Mr. El-Hibri, I think your written testimony was quite good, but

it was somewhat lengthy because you responded and made some

general comments and then you responded to each question. And

we would want to keep you within 10 minutes. We will take 5 and

then we will rollover. So I will let you figure out how you want to

divide up your testimony, but it was very helpful and it is all on

the record.

Mr. Oliver, we will start with you.

Mr. OLIVER. Yes, sir. I have submitted my written testimony, Mr.

Chairman. The substance of the issue from the Department of Defense’s point of view is there is a threat, which the Joint Chiefs of

Staff have identified to the Secretary and asked the Secretary to

26

address. We have a safe vaccine to solve that threat. And that vaccine is also effective.

I am comfortable with the facility that produces that vaccine. I

think the program is on solid ground, and I am anxious to address

many of the questions you asked the previous witness because I am

the source to whom those should be addressed.

And I am ready to answer any of your questions, sir.

Mr. SHAYS. Is that the extent of your testimony?

Mr. OLIVER. Sir, you have my testimony.

Mr. SHAYS. Right, but do you want to orally——

Mr. OLIVER. My testimony essentially answers your questions. It

says that I saw no problem in the buying. Essentially, what we had

was the State of Michigan for 70 years has owned a facility that

produced the vaccine and for good reasons because they started it

when they found out that their children were not being vaccinated.

And they kept it, and this is an important issue because it goes to

indemnification, is that particularly during the late 1970’s, early

1980’s when the drug companies in this country plummeted because of suits against the drug companies and then the Congress

stepped in and passed indemnification for all the commercial drug

companies, which was a wise thing to do because otherwise they

wouldn’t exist. And at that time, during that time, the State of

Michigan, as you may recall, saw even more reason to have this because they had found out they could not buy any protection for the

children. And so they kept that on-line.

Subsequently, when they looked at it, and I think the Governor

was very wise because he looked at this as Government-operated

and Government-owned issue, and he decided he was losing money,

let us say on the order of $5 million a year. And he is absolutely

right because every time you have a Government-owned, Government-operated facility, there are all sorts of indirect and backdoor

methods by which money goes into it, so you have no idea what the

bottom line is. The good thing about industry, a couple of good

things, is, one, there is a bottom line; and, two, they know what

their costs are and they end up finding out what their costs are

and that is important, which you frequently do not in Governmentowned operations.

If you look at the history, in fact, the State of Michigan has been

funding the U.S. Defense Department for several years and that is

not right. The State of Michigan has been providing funds for the

U.S. military indirectly through the fact that BioPort was running

a loss. I do not think anyone knew how much. And then we were

buying equipment at below market rates. So the Governor decided

to get rid of that, and I think that was a wise thing. He established

a commission. I talked to the head of the commission. I reviewed

all the records of all of their findings. I think they conducted a good

sale. They ended up with two people who bid approximately the

same amount within a couple of hundred thousand dollars. And

they decided to sell to one.

Now I have determined from looking at the records and talking

to people, and the General Accounting Office says the same, that

there is no indication that the Defense Department was involved

in that sale inappropriately, other than the fact on a couple of

27

things, which are included in my testimony, we provided encouragement to the Governor, et cetera and said we are interested.

There is no indication that the State intended to close that down.

The State intended to sell it because they decided they no longer

had a need. The State was last in the country in a number of immunizations for children. It was costing them more to have it done

by BioPort than it could be done by the rest of industry. And, in

fact, Michigan was the only State that had its only facility producing immunizations. So they made a very wise decision. But they

intended to sell it. They had two willing bidders. Both of them offered the same amount approximately. The State decided to sell it.

We stayed hands off of that because that was the decision between

the State and a private investor.

And then after that, we needed to resolve whether or not the

price is right. I went out there, I was sworn in on June 1 of last

year. I was in BioPort within a month because I wanted to look at

it. I was comfortable with the situation. I was impressed with the

gentleman who was running it, Mr. Bob Myers. I thought the security was—which had just been checked on several world-class inspections. I thought the way the anthrax serum or vaccine was

stored was safe. I looked at the facility. There were some things I

wanted to change because I believe if you are not improving, you

are not staying the same. And we proceeded on and we are paying

attention to that.

I went back about 6 months later, and I forget why, but for some

reason I was there, and at the time, I became concerned that I was

not sure—they had done some good things. They hired some good

people. I am really impressed. The situation is better now with a

private company running it than it was with the State of Michigan.

And that’s obvious. And that is because the State of Michigan was

not interested in investing more money in an area in which they

decided was not in their best interest. The company has invested

more money. And, more importantly, they have hired some good

people. They have hired good people. They now have good people,

in my opinion, better people doing quality control, better people

doing their processes. I talked to those people. I am comfortable

with those people. I think they are on their way to significant improvement. I looked at the new facility. I like the new facility. I

like the fact that the gauges are calibrated properly. I like the type

of equipment they put in. That is working.

But at the same time, I was concerned that I did not think we

had written a good contract with them with respect to price and

you spent a great deal upon that in the earlier conversation. I am

convinced—I went back and talked to various people, I am convinced that neither BioPort, now this is a company that operated

for 7 years with the State government and, if my hypothesis is correct, what I am telling you is they don’t tend to know what the

stuff costs. And you only know that when you sever it and cut everything off and make it a private company. BioPort did not know

what their product cost and the people who negotiated the contract

did not know what the contract cost. The contract is in the order

of over the life of the contract, something like roughly $3.50 a dose.

I have two references. One was a study done a year and a half

ago for me or my office about a year ago that said that they

28

thought the price of that would be $12, in excess of $12 with 1 percent profit for the company. And at the time this was done, the

contract was written, there was independent Government cost estimates that each dose should cost $7.50 a piece. If it is costing you

$7.50 and you are getting paid $3.50, it is tough to make up that

difference on volume.

Now the problem is I don’t think BioPort knew what it was costing and I don’t think the Government—the person who did the contract knew what he was doing. He was just trying to do the best

thing for the Government without paying attention to the fact that

if he drove this company out of business or caused them to fire

some of those good people that we have met, that I have met up

there, then the product quality would decrease.

So I am not uncomfortable with—I don’t know what is going to

happen with the change of price. I know that BioPort has come in

with a request. I personally did not read that, but passed it to my

staff who are looking at it because I have two hats, one of which

is I am going to provide what the Secretary of Defense and the

chairman of the Joint Chiefs of Staff think is necessary for the

troops on one hand. On the second hand, I have the responsibility

to make sure that the taxpayers are not charged extra and the

Government has the right deal. Have a group of people working,

as I told you, staff. They are working on it. They are going to come

up with options. I do not know what those options are. They will

come forward to me. And what I can assure you, Mr. Chairman,

is that whatever decision we make will be made in the best interest

of the U.S. taxpayers and the U.S. Government, including the Department of Defense but I have no idea what those are.

[The prepared statement of Mr. Oliver follows:]

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34

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Mr. SHAYS. Thank you, Mr. Oliver. Just to comment before I recognize Mr. El-Hibri, You have outlined clearly you think there is

a threat and you think it is a safe vaccine. And then you said the

program is on solid ground. The one thing we all know is the program isn’t on solid ground. We have big problems. And if you even

look strangely at my making that statement raises big concerns. If

you had said to me, ‘‘I think there is a threat. I think the vaccine

is safe, but we have got problems with the program,’’ I would say, well, that is a fair analysis. So I take strong issue

with your saying the program is on solid ground. The program isn’t

on solid ground. We don’t have the production at the level it is supposed to. We agreed on a price. They have come in for more.

And then when you say the private sector knows the bottom line

and knows it costs, that’s true. And if they don’t recognize their

bottom line, they are out of business. In this case, they didn’t know

what their bottom line was and they didn’t know what the cost

was. And the Government is trying to sort this all out.

So, no, this isn’t a program on solid ground. There are big problems with the program. And the one thing I have to be careful of

is, in the process of not liking and having questions about this program, that I don’t advocate that my colleagues go in a direction

that might not be wise. And so it is an open question on whether

we should have this program, whether it should be mandatory or

voluntary or whether if it is mandatory, it should be only for those

who are really in the theater.

Mr. OLIVER. Mr. Chairman, may I respond? By solid ground,

what I mean is this, there is enough vaccine in existence that if

the company does not get up and produce before about August of

next year, there is still enough vaccine to provide the doses to the

soldiers, sailors, and airmen to protect them through that period

without interruption if the company doesn’t produce anything.

That’s one.

Second, the company is producing the product right now. Now

when we get through, and essentially I have got people there

checking, looking at the thing for quality, and shortly, I am going

to put somebody there from the Defense Contract Audit Agency to

try to work on their recordkeeping and also somebody from the

Joint Program Office who is going to supervise and be concerned

about the quality control because I do not want to tell you that this

is operating as effectively as General Electric right now because of

the money.

Mr. SHAYS. No, but that is an understatement. It is not operating

well.

Mr. OLIVER. I am just trying to give you why I said that I was

comfortable with it.

Mr. SHAYS. OK, we just have a different terminology on solid

ground. It is not on solid ground. You want it to get on solid

ground. But we will talk about that.

Mr. OLIVER. OK.

Mr. SHAYS. Let me just have Mr. El-Hibri. Am I pronouncing

your name correctly?

Mr. EL-HIBRI. Yes, you are.

Mr. SHAYS. It is nice to have you here and thank you for coming.

Mr. EL-HIBRI. Mr. Chairman——

37

Mr. SHAYS. I need you to put the microphone a little closer.

Thank you.

Mr. EL-HIBRI. OK. Mr. Chairman and distinguished members of

the subcommittee—— Mr. SHAYS. Just turn the microphone a little toward you. Yes,

thank you, sir. Can you still see your statement?

Mr. EL-HIBRI. Yes, I can, thank you.

My name is Fuad El-Hibri and I am the chief executive officer

of BioPort Corp., a bio-pharmaceutical company headquartered in

Lansing, MI.

I have been asked to discuss, from BioPort’s point of view, the

procurement activities related to the purchase of anthrax vaccine

by DOD. Joining me is Dr. Bob Myers, our chief operating officer.

BioPort purchased the lab from the State of Michigan on September 5, 1998. For 30 years, the State of Michigan had been the

sole provider of anthrax vaccine to DOD. Several years ago, the

State expressed its intentions to sell the lab, and planned to close

the facility if it did not find a suitable buyer.

BioPort bought the facility with the firm conviction that we

would operate it as a viable commercial entity. We knew that privatization of a State-owned facility would involve certain vagaries

and risks. However, over the last 9 months, we have encountered

more difficulties than we initially anticipated. Despite our efforts

and prior due diligence, certain problems have arisen that would

make it difficult for us, and we believe for any company, to operate

with the existing DOD contracts. We are in the process of discussing changes to these contracts that will enable us to operate

on a viable basis in the future and continue to produce a safe, pure,

and effective vaccine.

By way of corporate background, BioPort’s primary mission is to

meet the needs of the Anthrax Vaccine Immunization Program.

BioPort has only one key customer, DOD, and one key product, anthrax vaccine. We manufacturer two other biologic products, rabies

vaccine and plasma derivatives, but sales of these products are limited and insignificant.

We employ more than 200 people who are committed to providing

the highest quality product to protect against bio-warfare and bioterrorism. BioPort makes the only FDA-licensed bio-defense vaccine

in the country today.

By way of personal background, I have been involved for the past

10 years in the business aspects of the bio-tech industry, in particular, the field of bio-defense. Previously, I was a director with

Porton Products, a bio-tech company based in England. During my

association with Porton, I participated in the marketing and distribution of substantial quantities of Porton’s UK-licensed anthrax

vaccine.

When I learned that the sale of the Michigan lab was going forward, I joined forces with Dr. Myers and his team. I invited Admiral William Crowe to join the group, since he has been a friend of

my family for many years and has a deep concern for the protection

of the men and women who serve our Nation.

In May of last year, we formed BioPort, which is largely an employee-owned company with a stock option program that allows

every employee to participate in the ownership of the company. The

38

sales process, which took almost 2 years, was public, open, and

competitive.

At the time of the acquisition, we were aware that we were taking over an unprofitable venture with an aging physical plant that

had never before been operated in a commercial environment. As

it turns out, we have encountered problems that are substantially

beyond what we had anticipated.

The major problems encountered can be summarized in five

areas.

First, identifying and tracking costs. Under the State, there was

no effective system for tracking costs. There appears to have been

no clear relationship between the lab’s cost of producing anthrax

vaccine and the prices paid by DOD.

Second, overcoming delays in renovation. At the time of acquisition, the anthrax facility was under renovation with an aggressive

schedule. Unforeseen delays of almost 5 months in completing the

renovation have deferred revenues and increased costs.

Third, improving regulatory compliance and relationships with

FDA. The labs regulatory problems with the FDA required more

time and money than anticipated. We have expended considerable

resources in developing an enhanced relationship with the FDA.

Fourth, dealing with uncertain commercial sales of anthrax vaccine. Traditionally, and this is very important, vaccine manufacturers have been able to offer lower prices to the Government by covering a substantial portion of their costs through commercial sales.

Without a commercial market, the Government cannot expect the

rock bottom pricing that would otherwise be available.

Fifth, changing the organizational culture. The culture was that

of a State bureaucracy where no effective performance standards

existed to ensure accountability throughout the organization.

Changing that culture has been a difficult and costly endeavor.

Indeed, the problems we have experienced are not unique to us.

It appears that every major pharmaceutical company in this country has avoided getting into the defense vaccine business. A vaccine

manufacturer must face an environment involving high capital

costs, limited market potential, significant regulatory hurdles, costly liability issues, and other technical complexities. These factors

may explain why most U.S. pharmaceutical companies abandoned

the vaccine business during the 1970’s. It is no accident that today

the U.S. vaccine industry is dominated by only four large companies.

Notwithstanding these continuing challenges, BioPort has taken

important steps toward improving the viability of the company.

These steps can be summarized in five areas.

First, introducing critically needed business systems. We are now

implementing business systems, such as cost accounting, inventory

control, management information, and material requirements planning to better manage and control the organization.

Second, we are re-starting the manufacturing of the anthrax vaccine in the renovated facility. In May of this year, BioPort resumed

production of the anthrax vaccine. The delivery of the product remains subject to approval of the renovated facility and final release

by FDA.

39

Third, improving regulatory compliance. Since privatization,

BioPort has neared completion of the implementation of its strategic plan for compliance. A mutually agreed upon plan by which

the FDA can monitor our compliance progress.

Fourth, changing the culture of the organization. We have developed a corporate mission, corporate values, and are finalizing major

responsibilities and performance standards for each one of our employees. We have augmented the staff with 56 people who have experience in the commercial industry.

Fifth, implementing measures to minimize losses. We have maintained salaries that are on average, below the industry norm, especially at management level. We have temporarily suspended performance-based bonuses and have implemented policies for expense

control and accountability.

Notwithstanding these measures, however, the current pricing

structure is unrealistic and unsustainable given the total costs of

manufacturing the anthrax vaccine. BioPort is currently in the

process of restructuring our production contract with DOD. The

two main terms under review are: (1) the price per dose; and, (2)

the production level. The proposed average price per dose will compare favorably with prices many other vaccines—sorry, favorably

with prices of many other vaccines purchased by the Government.

The proposed production levels can comfortably meet the anticipated requirements of the Anthrax Vaccine Immunization Program. BioPort believes that a fair and equitable adjustment to the

contract can be achieved within the timeframe needed.

In conclusion, let me simply state that all of us at BioPort remain committed to providing a safe, pure, and effective vaccine

that meets the requirements of DOD, our key customer.

Thank you.

[The prepared statement of Mr. El-Hibri follows:]

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Mr. SHAYS. Thank you very much. I appreciate all of you being

here and we will try to nail down where we have our differences

and where we have our agreements and where we just simply don’t

understand and are happy to be enlightened.

Ms. Schakowsky, do you want to start?

Ms. SCHAKOWSKY. Secretary Oliver, despite your rather ringing

endorsement of the value of this private sector venture, the good

thing about industry, they know what their costs are, in fact, it

sounds like the new contract talks about costs that are about three

times as high. It sounds to me like the investment that the taxpayers have made in this plant since its purchase, and I am looking at renovation and Government equipment, is maybe six times

more than this private company has invested, about $18 million,

$11.8 for renovation?

Mr. OLIVER. The renovation was planned before they were

bought, ma’am. And essentially I think the GAO testified, the GAO

and I talked Monday because my staff tells me we have added

something like $130,000, $30 odd thousand to the contract since

they were bought. And GAO thinks it is somewhere in the order

of $250,000. And I didn’t bother to track down the difference in

numbers.

Ms. SCHAKOWSKY. The cost estimates for product, we are talking

about——

Mr. OLIVER. That’s an important issue.

Ms. SCHAKOWSKY [continuing]. Three times as much.

Mr. SHAYS. Would the gentle lady yield to me?

Ms. SCHAKOWSKY. Sure.

Mr. SHAYS. I just want to be clear on this, just so we are not

talking two different directions here. How much has the Government put into this plant? And I am happy to have you say what

was before BioPort and what was after?

Mr. OLIVER. Let me give you an answer and also take it for the

record, somewhere between, the Government has put into this

plant somewhere between $11 and $19 million, I mean Government

furnished equipment. It falls in that range, and I don’t remember

where.

Mr. SHAYS. So her question was not an unreasonable question.

Mr. OLIVER. No, when the State of Michigan had it is my point.

Mr. SHAYS. OK.

Mr. OLIVER. My point was, I don’t want——

Mr. SHAYS. Now this renovation that is going on now is being

paid for by BioPort?

Mr. OLIVER. No—yes, it is but what the point of it—we will eventually pay for it in price because we are their customer. What I am

saying is that renovation was planned before the plant was sold.

All I am trying to do is to say this is not a sweetheart deal.

Mr. SHAYS. No, I know, all I am trying to do—well, we didn’t say

it was a sweetheart deal. I haven’t said it. Did you say it was a

sweetheart deal? We are just trying to understand the specifics.

Mr. OLIVER. Right.

Mr. SHAYS. I am not trying to be cute with you.

Mr. OLIVER. No, I understand, sir.

53

Mr. SHAYS. You have a concern that you want us to know that

we got a value and so on, but let’s be more specific. Let’s not say

between $11 and $19, let’s nail this down.

Mr. OLIVER. No, I said I would take it for the record, sir.

Mr. SHAYS. Pardon me?

Mr. OLIVER. I will take it for the record. I don’t recall the number at the moment. I will ask my staff to produce it. They will undoubtedly hand me a paper in 2 seconds.

Mr. SHAYS. Are you saying to us that the investment that has

taken place, the shutdown of the plant and all the renovation is

being paid for out of BioPort’s investment or is the Government

paying for this investment?

Mr. OLIVER. The agreement was that BioPort would pay for the

renovation.

Mr. SHAYS. OK.

Mr. OLIVER. Can I talk about something else——

Mr. SHAYS. Sure.

Mr. OLIVER [continuing]. On the——

Mr. SHAYS. No, no, finish your sentence.

Mr. OLIVER. Period. [Laughter.]

Mr. SHAYS. So this investment that is taking place now is not

Federal dollars? Now they may recapture it obviously in the sale

of a product, but you are saying that all this investment now is not

the Government investment?

Mr. OLIVER. Yes, there is an exception—what I am saying there

is an exception for something like, somewhere between $193,000

and $250,000.

Mr. SHAYS. So all the investment that has taken place, this $11

to $19, and you are going to nail down the number, that was DOD

funding from the old contract with the State of Michigan?

Mr. OLIVER. Yes, sir.

Mr. SHAYS. Do you mind just 1 second?

Ms. SCHAKOWSKY. No, sure, not at all.

Mr. SHAYS. No, just before we leave this, but in the process of

acquisition, then what did we get when this—how much of the sale

did the United States get for a product? Do we own the production

facility that is in this plant? It is our dollars?

Mr. OLIVER. No, sir, we have a certain amount of Governmentfurnished equipment, which I am told is $7 million of Governmentfurnished equipment. And, as the Congresswoman said, we have

put in $111 million in renovation since 1991, or excuse me, $11

million, close.

Mr. SHAYS. OK, now so we have put in $11 million, who owns

that $11 million?

Mr. OLIVER. We own the Government-furnished equipment.

Mr. SHAYS. No, I didn’t ask the $7 million, I didn’t ask about the

$7 million. Does BioPort own it or does the U.S. Government own

it?

Mr. OLIVER. BioPort owns it. We own the Government-furnished

equipment.

Mr. SHAYS. And we are going to just stick with this a little

longer? Do you mind?

Ms. SCHAKOWSKY. Not at all.

54

Mr. SHAYS. We put in $11 million before this plant was owned

by BioPort, and I am going to come to BioPort and ask you your

understanding of this. And this was investment in a plant owned

by the State of Michigan?

Mr. OLIVER. Yes, sir.

Mr. SHAYS. OK. Did we give it to the State of Michigan, was it

an outright gift? Did we ask that we be reimbursed when this plant

was sold for the money we put in? They got $25 million. If you

don’t know, just say you don’t know.

Mr. OLIVER. No, I will find out. I will find out, Congressman. Let

me take it for the record, please. I will find out.

Mr. SHAYS. But I want you to tell me you either know or you

don’t know?

Mr. OLIVER. Oh, I do not know, sir.

Mr. SHAYS. OK, fair enough. So one question on the table is what

happened to this original investment of the Federal Government.

And what you are saying—and I thank you for yielding—what you are saying is that presently in the plan is about $7 million of Government-owned equipment?

Mr. OLIVER. Government-furnished equipment, yes, sir.

Mr. SHAYS. Is it Government-owned?

Mr. OLIVER. It is Government-owned.

Mr. SHAYS. It was furnished by the Government, we still own it?

Mr. OLIVER. Yes, sir.

Mr. SHAYS. OK. And it has some depreciation to it, but obviously

it is our equipment. Yes, fair enough. Thank you.

Ms. SCHAKOWSKY. This is a very unusual private sector venture that has $11 million of previous taxpayer investment, that has $7

million of equipment and is now going to re-negotiate a previously

agreed to contract for three times or whatever, we don’t know, the

amount of the original contract. And what I wanted to ask Mr. ElHibri, am I doing that right? OK. Was this issue of unforeseen

problems.

Mr. OLIVER. Ma’am, before you do, can I address the part, there

are lots of companies that we have Government-furnished equipment to, private companies in excess of that amount of money in

which we have contracts and re-negotiate, so that is actually pretty

normal. OK, we frequently are furnishing Government-furnished

equipment to private companies.

Ms. SCHAKOWSKY. And is it also pretty normal, because I also

wanted to remind myself, as well as the GAO, to grant immunity

from liability to companies?

Mr. OLIVER. This is precisely what you do in this area of the

drug world and it is where I talked to you about the late 1970’s,

early 1980’s where we were in this company, the lawsuits almost

drove the cost of child DPT-type immunizations through the roof,

the reason this body passed a law providing indemnification for

those drug companies was because of the same reason the Department of Defense indemnified BioPort.

Ms. SCHAKOWSKY. Let me ask you this before I get your response

then, what is the total U.S. investment in BioPort exactly?

Mr. OLIVER. If my note is correct, then it is the $7 million of GFE and $11 million for previous renovation, for a total of about $18

million.

55

Ms. SCHAKOWSKY. OK, thank you. The issue now of these unforeseen problems that you saw, if, as you have stated, that a tracking

system is an essential component of this type of company, you must

have known that whatever they call it, the Michigan owned company, did not have that. Did you examine the question before you

purchased the company?

Mr. EL-HIBRI. Oh, absolutely. We were fully aware that no cost

accounting system was available, nor that there was a general accounting system, financial accounting system in place that would

be compliant with normal GAAP principles. So what we did was

make our own projections at the time we took over the facility,

based on estimates in the future, and used those projections in arriving at a price, together with the DOD.

Ms. SCHAKOWSKY. Well, another unforeseen problem that you

mentioned in your testimony is the delay in renovations. You stated that MBPI was in the midst of renovating the facility with, in

retrospect, an unrealistic timetable. And, again, I would think that

most purchasers would carefully examine that. Did you do that

kind of analysis and how come you weren’t able to determine that

the timetable was not realistic?

Mr. EL-HIBRI. We understood very well that with renovations, especially in a highly regulated environment such as biologics, delays

might occur because we are concerned about safety and compliance.

And, certainly, certain expectations were there. But it wasn’t really

only up to us to decide. We were in negotiations with the contracting office. The contracting office explained to us: ‘‘this is our

Government equipment and by building in unreasonable delays, we

don’t want to pay for it. We believe that the State had submitted

a plan where the facility could be up and running by January of

this year.’’ And we need 2.5 million doses by September of this

year. Our proposal, incidentally at the time, was significantly less,

actually more in line with what we are proposing now. At the time

when we negotiated with the contracting office, we had limited information and both sides in good faith tried——

Ms. SCHAKOWSKY. Excuse me, let me jump in here, then it wasn’t

unforeseen. You originally stated that you could not produce at the

levels that ended up in the contract?

Mr. EL-HIBRI. The delay was unforeseen. However, you build into

pricing allowances for delays, which were not accepted. Normally,

I would say, look, if the price of this product is, let’s say $10 per dose, I would allow for another $2 or $3 per dose for potential

delays.

Ms. SCHAKOWSKY. But at the time that what you had recommended was not accepted——

Mr. EL-HIBRI. That’s right.

Ms. SCHAKOWSKY [continuing]. But now you are renegotiating

about three times the cost. You said that the Department said we

don’t want to pay for it. In fact, don’t we, and ‘‘we’’ is really the

taxpayers—— Mr. EL-HIBRI. Right.

Ms. SCHAKOWSKY [continuing]. Will pay for it then in a——

Mr. EL-HIBRI. If you will allow me, please, to clarify the situation. If you look at most of the vaccines that are purchased today

by the Government, the average price, at least based on the inforVerDate 11-MAY-2000 08:22 Feb 28, 2001 Jkt 066350 PO 00000 Frm 00059 Fmt 6602 Sfmt 6602 E:\HEARINGS\60212 pfrm02 PsN: 60212
56

mation that is available to us, is about $10 to $12 per dose. The

reason why you have been receiving doses substantially below that

price in the past is because the State of Michigan was unable to

track their costs. So when we have an average price of $3 built into

the contract today and want to increase that to about $10 per dose

on average, although it is three times as much, the end price is

still within the norm. And we are competing against other manufacturers who have a private sales market where they can distribute their costs, not solely to the Government, but across several

clients.

Ms. SCHAKOWSKY. It seems to me that given the fact that your

company now does employ—Mr. Oliver, you said there were a number of new people and you are trying to change the culture, but,

in fact, you do employ many of the same people that were there.

I am still trying to pin down this notion of unforeseen when it

seems to me that you had the actual individuals who had been

there, you supposedly had expertise, and it sounds as if some of

these things were not, in fact, unforeseen, that you actually mentioned them in trying to negotiate an original contract. So I am

confused about how we ended up at three times as much now?

Mr. EL-HIBRI. OK, I will try to shed some more light on that. The

reason why we ended up with three times—we didn’t end up yet,

this is simply a proposal and it is subject to DOD’s approval.

Ms. SCHAKOWSKY. Your proposal is three times as high—— Mr. EL-HIBRI. Yes, our proposal is three times—— Ms. SCHAKOWSKY [continuing]. Let me clarify that.

Mr. EL-HIBRI [continuing]. As much simply to bring our price per

dose, which is still at low volumes compared to other manufacturers, in line with what other manufacturers would charge the Government. And, incidentally, with $10 per dose, we can barely cover

our costs. It is not that we are trying to generate extraordinary

profits or somehow use those funds in any other way. It is to cover

expenses, and expenses that we are controlling. And, incidentally,

I take issue with that matter. We do have a financial system in

place that tracks total expenses very accurately. We have audited

financial reports. The thing we don’t have yet is a cost accounting

system in place. That will come in the next few months. We are

working on it. It takes time. We only 2 to 3 months ago found a

CFO who was interested in joining us.

Ms. SCHAKOWSKY. OK, Dr. Myers you introduced is next to you.

Is one of those individuals who was director of MBPI before you

purchased, I mean it would seem to me then that in terms of the

information that you needed to avoid unforeseen situations in the

person of Dr. Myers is right here. He is now, what is his role now

in the company?

Mr. EL-HIBRI. Chief operating officer.

Ms. SCHAKOWSKY. Chief operating officer of the company was director of the company that you say was essentially without controls?

Mr. EL-HIBRI. That is correct.

Ms. SCHAKOWSKY. Could you explain that to me?

Mr. EL-HIBRI. It simply was without controls. Dr. Myers, as I understand it, used to report to the State. The financial decisions

were not in his hands. And maybe he can comment more approVerDate 11-MAY-2000 08:22 Feb 28, 2001 Jkt 066350 PO 00000 Frm 00060 Fmt 6602 Sfmt 6602 E:\HEARINGS\60212 pfrm02 PsN: 60212
57

priately to this, but when we, BioPort, took over the lab, there were

no financial systems in place.

Ms. SCHAKOWSKY. And the director of—I would like to ask Dr.

Myers, if you don’t mind?

Dr. Myers, we are faced with what in part were unforeseen, although I know that the chairman, we want to talk a little bit more

about what was actually foreseen and not unforeseen situations

that have resulted in a re-negotiation of the contract. You were

there at MBPI. Could you not as director, and now as chief operating officer, couldn’t you have been more helpful in pointing out

what the situations might have been so that we could have a reasonable contract originally?

Mr. MYERS. Yes, let me respond to that and thank you for asking

me to respond. I have to tell you first that the Michigan Department of Public Health was an organization of about 1,500 employees, of which there were 75 to 125, through most of the last 15

years, who worked in an in-line division within a bureau within

that major department within the State of Michigan. And I know

you grapple with these issues everyday at the Federal level, but

you can imagine how the support services for 75 people were not

in the 75 peoples’ hands. That includes personnel, that includes financial administration, that includes budgeting, that includes procurement, sales, and other administrative issues. And it is notable

that the FDA, quite wisely, recognized that several years ago and

observed in a written observation that the control of the facility

was not in the hands of the head of the facility, me.

So the fact that there were no cost accounting systems or tracking systems in place, the fact that the janitorial services were hired

by an agency downtown, now we are into the 60,000 people who

are State employees in Government. It was not uncommon at all,

I don’t believe in any State’s government. It was not uncommon for

us. We simply didn’t have a hold of it. We submitted a management plan every year. That management plan was filtered at the

bureau level. It was filtered at the Department level. It made its

way down to the State capitol in the appropriations process. We

were given an appropriation that had from 2 to 10 lines. And we

spent in accordance with the appropriation.

Ms. SCHAKOWSKY. Right, but you did make requests that you

thought were in line with what your needs were?

Mr. MYERS. We certainly did.

Ms. SCHAKOWSKY. OK, so you knew what those costs were, is

that true? If you, to the best of your ability, estimated those costs

that were then by the bureaucrats whittled down, then you should

have known?

Mr. MYERS. Well, certainly we were asked and we complied with

the same sorts of budgeting processes that I expect people need to

comply with at the Federal level. That is, give us 100 percent of

last year, give us 95 percent of last year, give us 90 percent of last

year, and give us 105 percent of last year. That is what I inherited,

and that is how we were asked to manage our program budget, and

that is how we managed it.

Ms. SCHAKOWSKY. Well, let me ask you this, are we in a similar

situation? Mr. El-Hibri, I’m sorry, you said that you had made estimates that in fact were more accurate to begin with?

58

Mr. EL-HIBRI. Estimates on the number of doses that we submitted in the middle of last year, just before the privatization.

Ms. SCHAKOWSKY. So how did you end up signing on to an original contract that was out of whack to begin with and you knew

that?

Mr. EL-HIBRI. Well, I didn’t know that it would be out of whack.

All I knew, was that it did not have any room for contingencies.

Ms. SCHAKOWSKY. By a lot, by a third.

Mr. EL-HIBRI. By a lot, absolutely. And this is what I explained

to the contracting office, that we are dealing with a company that

produces biologic products and there needs to be contingencies built

in. But the approach was a cost-plus-type approach where they

looked at our costs, allocated certain costs to the production of anthrax vaccine and did not allow for any contingencies. We were

under a time constraint. We wanted to meet the DOD requirements, that the program was to continue and in good faith, we

tried to meet those demands. And at that time, I would have felt

a little uncomfortable adding significant contingencies to the price,

which I couldn’t defend other than to say that this is standard in

the biologics industry.

Ms. SCHAKOWSKY. Thank you.

Mr. SHAYS. One of the advantages of just listening to my colleague ask questions is I am also hearing the questions that she

is formulated her next question, and I am left with a very uneasy

feeling because I am either to believe, Mr. El-Hibri, that you are

a very capable and knowledgeable person who knows your business. And, Dr. Myers, you have already appeared before us. I know

you are very knowledgeable. And I can believe that. And if I believe

that, then there is no way I can understand how you could have

agreed to a contract that didn’t look at the best and worse case scenarios and sought to have something at least in the middle. You

are either very knowledgeable and capable or we are just not getting the story as it truly is. And the response that Ms. Schakowsky

asked you, you did know what you thought the costs were and you

did request it and you didn’t get the agreement from DOD.

And, Mr. Oliver, as I am hearing you, you have come in after the

fact, correct? And you have looked at this agreement and you think

that DOD pressed too hard and didn’t have an agreement that

would be fair to both sides?

Mr. OLIVER. That’s correct, sir.

Mr. SHAYS. Well, that is the way you view it. And, Mr. El-Hibri,

I think the answer to the question would be more accurate that you

had a sense of what this would take and you all agreed to something less and is that a fact?

Mr. EL-HIBRI. That’s a fact.

Mr. SHAYS. OK. So the words of unanticipated and so on, I think

are a little disingenuous.

Mr. EL-HIBRI. Specific things that happened were unanticipated.

Generally speaking, you allow for contingencies and imponderables

that may be of any nature.

Mr. SHAYS. You have got a little wiggle room, but not much.

Mr. EL-HIBRI. Sorry?

59

Mr. SHAYS. You have got a little wiggle room but not much. The

bottom line is you had a sense of what this operation would cost.

You knew what you wanted to be—— Mr. EL-HIBRI. No, I did not have a sense, I am sorry, because I

did not know this facility.

Mr. SHAYS. Let me ask you something.

Mr. EL-HIBRI. OK.

Mr. SHAYS. I want you to be—because this will be the first of

many hearings if we don’t satisfy some basic information. And I am

pretty fair to witnesses that come before us. And whatever I feel

about the mandatory nature of this program is not going to color

what I think about this. These are two somewhat related but not— if this program makes sense, we should do it. If it doesn’t make

sense, we shouldn’t. I am talking about the viability of the protection and so on. What I want to do is hopefully not have two or

three hearings. I have really tried to be a good listener here.

What I am hearing is that you all wanted a contract. You had

a sense of what the cost would be and you had the sense that you

needed this to cover costs. And that any businessman who makes

an investment is not going to—well, some do, but they sometimes

regret it, they bet the shop on it and then everything has to turn

out just perfectly. But most people who get into this kind of arrangement have to establish contingency plans. So you anticipated

the best case scenario. And so if you can say, ‘‘Well, we didn’t anticipate the best case scenario,’’ that is where I am thinking you

are being a little disingenuous.

The bottom line is, you knew, you had a sense, isn’t it correct,

you had a sense of what it would take to run this plant. And you

signed a best case scenario with the DOD, that if everything turned

out perfectly, you would do all right. And if it didn’t, you would

have some problems. Isn’t that a more accurate description?

Mr. EL-HIBRI. May I use my own words, Mr. Chairman?

Mr. SHAYS. Sure, I would prefer that.

Mr. EL-HIBRI. At the time we took over the facility, we had very

limited data and information. We tried to the best of our ability to

project forward what would be reasonable costs. The contract we

ended up signing was below what we thought would be reasonable

costs, OK. The reason we did that, and maybe it was poor judgment, but we needed to continue keeping our people employed,

meeting the DOD requirements, and moving forward. If we would

have taken 3, 4, 5, 6 months to negotiate the contract, we might

have ended up in a disastrous situation. At the end of the day, I

felt I was compelled to act quickly because I was dealing with Government-furnished equipment that doesn’t belong to us and that we

needed to meet a very important program, as we understand it, by

the Government.

Mr. SHAYS. OK, I appreciate your candor. But when you purchased this plant, you purchased this plant with the understanding

that you would have a buyer of your product?

Mr. EL-HIBRI. Yes.

Mr. SHAYS. So what kind of dialog took place between you and

the Government. In other words, I can say $3.5 million is not a big

investment, for me it is big, but for an investor——

Mr. EL-HIBRI. For us it is big too.

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Mr. SHAYS [continuing]. Well, but that is unsettling. But I will

accept the fact that for you it is.

Mr. EL-HIBRI. And when I say we, ‘‘we’’ include managers who

have put up personal funds as part of our equity and that is what

I meant by saying to us too.

Mr. SHAYS. OK, but how did you determine the price of $25 million? On what basis would you determine a price like that?

Mr. EL-HIBRI. Well, really the price of $25 million has been—I’m

not saying is an incorrect price, but let us take a moment to really

understand what it represents. It represents a $3.25 million down

payment that was made at the time of closing. It represents $4.5

million of a deferred purchase note, which is payable over 5 years,

one-half a million the first year and then $1 million the subsequent

4 years. The rest was just an ability for us to receive working capital. For example, we took another note from the State of $3.15 million for inventory. And we sold that inventory and we received that

money. So that was to be used for working capital. There were receivables of $4.5 million. We also collected those receivables. But

we agreed after a year to pay that back to the State, again, having

not only the $3.1 million, but also the $4.5 million as working capital.

So going into this deal, we had brought forward $3.25 million in cash and would have roughly $8 million of working capital, which

we believed was enough to keep this—— Mr. SHAYS. It was about $8 what, I’m sorry?

Mr. EL-HIBRI. $8 million, if you add the—— Mr. SHAYS. I understand.

Mr. EL-HIBRI [continuing]. $4.5 million plus $3.1—— Mr. SHAYS. The inventory and accounts receivable?

Mr. EL-HIBRI. Sorry?

Mr. SHAYS. The inventory plus accounts receivable?

Mr. EL-HIBRI. Yes, that is correct.

Mr. SHAYS. Now you are not going to get all your accounts receivable, but——

Mr. EL-HIBRI. But we did get them all. They were DOD receivables.

Mr. SHAYS. OK, you are going to get them?

Mr. EL-HIBRI. Yes, and we got them all.

Mr. SHAYS. OK.

Mr. EL-HIBRI. So the inventory was to be under contract with the

Government, so really we thought there was little risk and the receivables were from the Government.

Mr. SHAYS. But what is your total obligation to the State of

Michigan?

Mr. EL-HIBRI. The total obligation remains to be these two notes,

which add up to $7.65 million and royalties. We pay them between

3 to 5 percent of our sales in royalties over the next 5 years. And

product donations. They were interested in receiving some of our

products for free. But they are really insignificant in the larger picture.

Mr. SHAYS. OK. And that is capped over a certain period of time?

Mr. EL-HIBRI. Over 5 years. Everything is over 5 years except for

the inventory and receivable notes that are due within a year, from

when we took over.

61

Mr. SHAYS. The bottom line, you have your purchase note and

your inventory and your receivables that you have obligations to

make payment on?

Mr. EL-HIBRI. That is correct.

Mr. SHAYS. What was the obligation about the 200 employees?

Mr. EL-HIBRI. I believe it was written in the legislation that the

buyer was to take over all employees or provide an opportunity for

each employee to remain employed for 1 year, and we complied

with that.

Mr. SHAYS. So now your only obligation is to keep those employees who truly you need?

Mr. EL-HIBRI. We still are obligated until September.

Mr. SHAYS. Oh, September, I’m sorry.

Mr. EL-HIBRI. Yes, because we only took over September 5th, so

the full year would be over this coming September.

Mr. SHAYS. Mr. Oliver, I am going under an assumption that if

you hear any information that is inaccurate or anyone else who is

with you today, that you would correct the record. Otherwise, I am

going to assume that DOD concurs with what is being said. If you

don’t have knowledge, then I want to know that. But do these numbers strike you as what you understand them to be?

Mr. OLIVER. Yes, sir, and besides that I am working up the courage to correct the record, and I am just sort of waiting for a lull

when you appear to be—— Mr. SHAYS. OK, I am in a very kind mood.

Mr. OLIVER. Are you? [Laughter.]

Mr. SHAYS. Yes.

Mr. OLIVER. This is the right time then?

Mr. SHAYS. Right time.

Mr. OLIVER. What I want to point out is I mis-spoke earlier when

I talked about who was going to fund the restoration. We funded

that at $4.7 million. It was planned and programmed before the

sale, but DOD funded it.

Mr. SHAYS. OK, so some of the renovation now is being funded

by DOD?

Mr. OLIVER. Yes, sir.

Mr. SHAYS. Right, agreed to under the previous owners?

Mr. OLIVER. Yes, sir, $4.7 million.

Mr. SHAYS. Thank you. I am very happy you corrected the record.

It was my understanding that the DOD did have some problem, so

it would have been something we clearly would have checked.

Thank you for correcting the record now and not later. Thank you.

So the way I see things as they stand now, the bottom line, Mr.

El-Hibri, is that you agreed to a contract which you prayed would

work out in the end with the best case scenario happening. It

didn’t happen that way and you are back attempting to get a contract you think is workable with DOD.

And, Mr. Oliver, what I am hear you say is that you looked at

the contract, and coming after it had been negotiated, you don’t feel

the contract was a plausible one?

Mr. OLIVER. Mr. Chairman, people are human and everybody has

their own responsibility in my organization. I am not sure the contracting officer recognized that we were not buying toy wagons

from BioPort. I mean if you are buying toy wagons, you can just

62

negotiate whatever cut-throat price you want. And, as the General

Accounting Office talked about earlier, the Government really has

a great deal of power in this situation because they are buying a

product, because we have some equipment, and we are the only

buyer, and you have contracting officers who are very good and do

an excellent job of getting the taxpayers money. But I am not sure

they recognized that what we were providing, in my view, is an entitlement.

And when the Secretary of Defense decided, bravely in my view,

that we were going to address the issues of the new world and not

worry about the old world and barbed wire so much as the new

problems in bio-medicine and made that decision, we essentially

said to the mothers and fathers across the country, we are going

to protect your sons and daughters that we send into combat and

into dangerous areas from anthrax. And so, therefore, we made it

an entitlement. And, in my view, that shifts the importance of this

contract significantly, and I’m not sure my people all recognized it.

Now it is my job to make sure they do and to recognize those

things from a bigger perspective. It is the reason I have gone there

twice. It is the reason I personally have started taking the anthrax

vaccine and have taken the shots. And it is not because I expect

that we are going to get attacked over at the Pentagon, although

we might, but it is because I wanted to demonstrate that I am comfortable with the quality control. I am with comfortable with what

BioPort is doing. And so I am willing to put it in my body, which

is final. But the crux of this is I am not sure people recognize that

work for me that things were shifting, that we had shifted from a

toy wagon program to an entitlement program in which we were

going to have to respond to all the mothers and fathers across the

country as to how we were protecting their sons and daughters.

Mr. SHAYS. I appreciate that response but it really does beg another response from one aspect. You are calling it an entitlement

but there are some people who don’t want to be entitled?

Mr. OLIVER. There are some people who don’t want to be entitled

to Social Security. There are some people who don’t want to be entitled to everything.

Mr. SHAYS. And they have the ability to turn it back. You made

that point that you are thinking about them, so I am just going to

give you a different view for the record.

Mr. OLIVER. Yes, sir.

Mr. SHAYS. The different view is that while you are willing to put

this in your body, some don’t. And yet some still want to serve the

country and they have served it gallantly in the past and want to

continue to. And you have—your Department has made a determination that whether or not they want it, they take it. And they

even take it if they are not in a zone that may demand that they

be protected from it. And that is the craziness of this.

And one of the things, and it does raise a point, my understanding is one of the issues is that DOD is determined to buy 3

million less doses, is that correct?

Mr. OLIVER. Sir?

Mr. SHAYS. Purchase 3 million less dosages of the anthrax, that

is not correct?

63

Mr. OLIVER. No, let me be completely careful. As I said to you,

my staff is evaluating BioPort’s proposal. I have not looked at it.

I would have, in fact, I would have liked to before the hearing——

Mr. SHAYS. Let me clarify this, BioPort is suggesting that you all

buy 3 million less?

Mr. EL-HIBRI. May I clarify?

Mr. SHAYS. Yes, I just want to understand the facts.

Mr. EL-HIBRI. Yes, it is important that we understand the facts.

For the contract year one or option year one and two, there were

2.5 million doses negotiated back in September. Those numbers

were derived from, as I understand it, the theoretical capacity of

what we believed the new renovated facility that hadn’t been completed by then would deliver.

Now, in our proposal, we had significantly lower doses, in line

with about 1.5 million, I believe, and 3.4 million for the next year.

Mr. SHAYS. This is production capacity?

Mr. EL-HIBRI. Right. Because in our proposal, we allowed a little

bit for private sales and we allowed a little bit for contingencies because you never really can operate at full capacity.

Mr. SHAYS. Right.

Mr. EL-HIBRI. But since it wasn’t our equipment and since we

were told we have to deliver everything to the Government, we

were possibly not as insistent about our potential inability to deliver those quantities. Now it turns out that these numbers were

derived more from capacity and not really from the actual requirements of the AVA program. When we then studied the AVA program, as we understand it, we realized that the AVA program does

not require 2.5 million doses this year and 5.4 million does next

year. Actually, to our understanding, we don’t know what they

would do with those doses. So we revised our proposal based on the

more realistic production levels, while allowing us also to allocate

a few doses for private sales.

Mr. SHAYS. OK, let me, but you are also doing it based on what

you think the DOD needs?

Mr. OLIVER. Yes, sir.

Mr. SHAYS. And, General Blanck, maybe you could respond to

this. What are the DOD requirements for vaccine doses this year?

General BLANCK. This year just under 1 million doses.

Mr. SHAYS. And next year?

General BLANCK. Next year it depends if we go from phase one,

which we are currently in and which the vaccine is required for

those who are in or would deploy to high-threat areas. And so the

requirement would be approximately the same, even slightly less if

we remain at phase one next year. If we go to phase two,

which——

Mr. SHAYS. I’m sorry, if you stay in phase one, it is about a million more next year?

General BLANCK. Perhaps a little less.

Mr. SHAYS. And if you go to phase two?

General BLANCK. If we go to phase two, then that is the followon forces, so it would be approximately three times that. And I

don’t have the exact figure. I can get that for the record.

[The information referred to follows:]

64

Mr. Shays, during our June 30th testimony, you asked for the DOD requirements

for vaccine doses to proceed into Phase 2. We completed this analysis and anticipate

the following requirements through 2002:

Phase 2:

2000 2.924 Million Doses

2001 3.655 Million Doses

2002 4.225 Million Doses

Mr. SHAYS. 2001?

General BLANCK. 2001 remains the same. It doesn’t increase substantially until about—— Mr. SHAYS. Be the same as whatever next year is?

General BLANCK. Yes, sir.

Mr. SHAYS. OK. I guess one of the things that I want to be certain of is DOD has a concern that their sole provider is able to

meet its needs. BioPort would obviously have a concern that you

could be asking for more or less and they have got to be able to

operate and make their capital costs and also their employee costs

have some stability. And what I want to be certain is that you don’t

decide to base, go into phase two based on the needs of BioPort?

Mr. OLIVER. Absolutely, we are not going to. In fact, I really

wanted to point out whatever he may think is DOD’s needs, it is

not his responsibility. That is our responsibility to determine.

Mr. SHAYS. Right.

Mr. OLIVER. And it has nothing to do with what he thinks is best

for him and is not going to have anything to do with it. That is

what I started to say when you called on the General. We are going

to determine—first of all, we are not going to go to phase two until

this production line that he has in has been approved by the FDA

and by the people who work for me and who work for the General,

the Secretary is not going to consider going to phase two until we

have assured production line. That is to start with.

Second, I like some of the people up in Lansing, MI, but we are

not going to run the Defense Department based on what is best for

their business. That is one reason we wanted to cut it off because

it is a lot easier to deal with a private company, which is harder

for them, but a lot easier for us. It is not going to be policy.

Can I talk about two other things, Mr. Chairman?

Mr. SHAYS. Sure.

Mr. SHAYS. I wanted to talk about when we go from phase one

to phase two—— Mr. SHAYS. Right.

Mr. OLIVER. I mean that is going to be dependent upon an assured production line that is in existence. As I told you, we have

enough right now, we can make it through August. In the event we

have problems, which I think allows us significant months to fix

any problems that come up. And, second, it is not BioPort’s—I am

not terribly interested in what is in BioPort’s best interest in this

area. This is what the Secretary of Defense and the Joint Chiefs

of Staff said.

I would just like to return, because I don’t want it on the record,

the discussion you had with the General Accounting Office on this

70,000 doses, 30,000 doses. The question is what did we sell to

Canada. Right? What did I approve to sell to Canada? First of all,

let’s talk about the process. The process is the people who did the

contract originally, although I don’t think either side understood

65

the costs for the reasons I’ve talked about. They don’t understand

the costs until they got actually divorced from the State of Michigan and subsequently got rid of all those little arteries that were

pumping in money that were not known. So I don’t think the people on either side understood the costs.

But they did what I think is a good contract in that they specified that BioPort was permitted to use the Government-furnished

equipment to produce 200,000 doses a year in excess of what the

Government needed for private sales. And that is a good idea because it induces BioPort to use more effective processes, to make

sure they don’t have wastage through poor quality control. And it

introduces some capitalistic drivers in it. And so I think it was a

really good idea.

What we added to that, and it is not in the contract, what we

added to it is though that they can’t sell that to anybody. There

are various end-users that the Department of Defense is not interested in them selling to. So what we did is we put it under what

is called the International Trade and Arms Regulation restrictions.

BioPort is not interested in us doing this, but that is the breaks.

And what happens with ITAR, as you know, it is the same thing

you use whether you are going to sell a tank or anything else, it

needs the Department of Defense to review this process and needs

the State Department to review the process. In other words, is this

in our best interest? Does it cause problems in the world, et cetera?

So they cannot just go out on the street and sell this stuff. They

have to go through a lengthy process.

My staff proposed to me that we permit BioPort to sell a number

of dosages from what BioPort owned, not from what the Government had bought, but from what BioPort had separately. OK, so it

wasn’t Government property.

Mr. SHAYS. And this is previous?

Mr. OLIVER. Yes, sir, previously manufactured——

Mr. SHAYS. OK.

Mr. OLIVER [continuing]. Lot—in 44. And so Canada had come in

with a request and Canada came in with a request and said we

would like to have some anthrax vaccine for those soldiers that we

have with you that are poised, that are monitoring Israel and monitoring the Middle East, that are up in Saudi Arabia ready to go

in the Gulf and that are operating with your Naval forces in the

Gulf. And we would like to have some vaccine to do that. And here

is Canada, one of our very best allies, and no one that I ever think

is going to turn against us, and they would like to be protected the

same way our soldiers and sailors are protected, and I think that

is a tough thing to turn down.

Mr. SHAYS. I am just going to qualify. They want the soldiers

who are in deployed areas to have the vaccine?

Mr. OLIVER. Same as ours, same as our 10 areas, our phase one.

Mr. SHAYS. Right, yes.

Mr. OLIVER. And so they asked to do that and that ends up being

5,000 or 6,000 doses a year over 5 years. And so we approved that

through the process in the Department of Defense. And, in fact,

and then it went over to the State Department, and I think a couple of weeks ago, the State Department finally issued a license to

BioPort to issue 3,000 doses or some number. And that went

66

through and that was sold directly—BioPort sold that directly to

the Canadian Government instead of washing it through us, which

is the way we are doing lots and lots of contracts right now.

Mr. SHAYS. OK, let me ask you. At a higher price or cheaper

price?

Mr. OLIVER. At a higher price, I understand.

Mr. SHAYS. No, Mr. El-Hibri?

Mr. EL-HIBRI. At $40 a dose.

Mr. SHAYS. As opposed to?

Mr. EL-HIBRI. Sorry?

Mr. SHAYS. $40 a dose as opposed to what?

Mr. EL-HIBRI. As opposed to $3 per dose that DOD pays.

Mr. SHAYS. You are saying $40 per dose?

Mr. EL-HIBRI. That’s right.

Mr. SHAYS. I think you made the contract with the wrong country. [Laughter.]

Mr. EL-HIBRI. Yes, sir.

Mr. OLIVER. There are some interesting issues in that which is

with respect to whether or not we want to have our stuff subsidized, shifted from the State of Maryland—or State of Michigan

to the Canadian Government, but, as you may understand. But

nevertheless, it was a sum of money that we approved the sale. It

was not Government product. Mr. Chairman, at no time at which

I was there would we sell what the Government owns, would permit them to sell to somebody else.

Mr. SHAYS. This isn’t a trick question though but did you indemnify them for the sale in Canada?

Mr. EL-HIBRI. No.

Mr. SHAYS. There is no indemnification?

Mr. EL-HIBRI. No, we had to sign a waiver.

Mr. OLIVER. There is no indemnification. And the other part you

have to understand is no indemnification for negligence either.

Mr. SHAYS. Right.

Mr. OLIVER. That is a key part.

Mr. SHAYS. But if you had a contract for $40 a dose, you would

probably be willing to indemnify yourself?

Mr. EL-HIBRI. Sorry?

Mr. SHAYS. If you had a contract with the U.S. Government for $40 a dose, you would probably be willing to take the risk?

Mr. EL-HIBRI. That’s correct.

Mr. OLIVER. I am not willing to approve—I do not know what we

are going to do, but I want to assure you, Mr. Chairman, $40 is

not within the bargaining range that I am looking at. [Laughter.]

Mr. EL-HIBRI. Mr. Chairman, what we are talking about is to

bringing it up to a level of approximately $10 per does, consistent

with what the Government pays other pharmaceutical companies

on average for other vaccines that they purchase out on the market.

Mr. SHAYS. Are you all set?

Mr. OLIVER. No, that was it. I just wanted to talk about the sale

and make sure we had on the record what truly happened and also

make sure you understood that there were safeguards in place as

to end users and also safeguards in place so that we had a Government position on each sale.

67

Mr. SHAYS. OK. Well, let me just tell you what I think is on the

table right now and if you want to correct the record, I want the

record corrected. What I think is on the table right now is that we

have a program that is still mandatory, that you haven’t decided

when you are going to go from phase one to phase two. Is it a question of whether you ever will or is it a question you intend to, you

just don’t know when? I saw a nodding head but that doesn’t get

recorded.

General BLANCK. Yes, the intention is to go to phase two at a

time that we have assured production of the new vaccine, the vaccine that will come off the new production line.

Mr. SHAYS. It is your testimony that a decision to go to phase

two will not be based on your keeping up some production level?

General BLANCK. That’s correct.

Mr. SHAYS. OK. So there is still an opportunity for others to convince you that maybe that is the wrong way to go?

General BLANCK. Convince the Secretary of Defense.

Mr. SHAYS. Right. But we have a mandatory program in which

you intend to go ultimately and cover all military personnel with

the anthrax vaccine?

General BLANCK. Yes, the decision is to cover the entire force,

total force, active and reserves.

Mr. SHAYS. Whether or not they are in a theater of danger?

General BLANCK. Yes, sir.

Mr. OLIVER. Well, did you say whether or not they are in a

threat?

Mr. SHAYS. In a theater of danger?

Mr. OLIVER. Yes, sir, but I——

Mr. SHAYS. So ultimately someone who is based in—a person

based in St. Louis will have this anthrax vaccine?

Mr. OLIVER. Yes, sir.

Mr. SHAYS. Whether or not they want it?

Mr. OLIVER. But, Mr. Chairman, I lived in Connecticut for 5

years, the longest place I ever lived in my life and a gorgeous area,

I would like to point out. And one might not think that you are not

threatened there and how do you know, how does the Secretary

know that we are not going to be threatened by a terrorist or that

he is not going to ask someone who is currently stationed someplace, whose talents are needed in a threat area, not to go? And

not to be part of the military.

Mr. SHAYS. In this day and age, I think we are going to have to

figure those things out, honestly. And I think that a one-size-fitsall, of all the things that I come down to in all these hearings is

that there has got to be not one-size-fits-all mentality here. And I

have been persuaded by some military people that my view that it

should be voluntary presents some real morale problems, et cetera.

So I am less inclined to advocate that, but I am certainly inclined

to say that where they are not under real threat, that there has

got to be some evaluation of that. And I think most members in

the military would concur with that.

Mr. OLIVER. Mr. Chairman, let me record my personal disagreement with that, but return to my professional thing and talk about

how comfortable I am with the current condition of BioPort.

68

Mr. SHAYS. Well, the only thing I have really agreed with you so

far today is that Connecticut is a great place to live. [Laughter.]

Mr. OLIVER. I knew that would come.

Mr. SHAYS. No, I have agreed with other points. But, I’m sorry,

let me get to this point. What did you want to say and then we

will——

Mr. OLIVER. No, sir.

Mr. SHAYS. The bottom line to my finishing though, this is a

mandatory program. It is still going from phase one to phase two,

as you all see it. And that you have an agreement with BioPort

that it is your sense, Mr. Oliver, it is not a realistic agreement and

you are re-appraising this agreement.

From BioPort’s point of view, you all made a purchase, somewhat

rolling the dice, frankly, that the contract, that there wouldn’t be

a Congress that would all of a sudden pull this program out from

under, that you would have a good case scenario and be able to

meet your needs feeling somewhat under pressure from the Government to agree to their—what they were willing to pay since

they are the only buyer you got. And things didn’t work out as you

hoped, but you are not surprised that you are in this circumstance.

And you are asking the Government to re-appraise this agreement

and that you can’t meet the agreement as you originally signed on

without literally going belly up?

Mr. EL-HIBRI. It would be difficult to sustain ourselves much

longer. Currently, we are not in default but if you were to ask me

how much longer we can sustain ourselves given the current contract value, it would be difficult to give assurances that we could

meet our obligations throughout the rest of the contract.

Mr. SHAYS. OK, well, then let me just finish up with this line of

questioning. What alternatives does DOD have in the short-run

and the long-run as it relates to the buying of anthrax vaccine?

Mr. OLIVER. There are no alternatives in the short-run. In the

long-run, as you know, Mr. Chairman, we are in the process of

evaluating the budget for next year, the one after you are working

on right now. In that process, in which I am personally involved,

we are evaluating a couple of different options. And one option

would be whether or not we had BioPort establish a separate facility physically remote, physically distant. Whether or not we paid

to startup a new company because we find no commercial interest

and locate it at either in the same State or distance. And the problem with that is, the first one we think takes 3 to 5 years. The second one my staff tells me takes 4 to 7 years. Actually, they tell me

8, but leadership will make that improve a year. And the other option is a new type of technology and to get another drug company

to try a new type of technology. We think that also is about 5 to

8 years away.

The problem, of course, and let me discuss this is you have a vaccine for anthrax—you know anthrax is a threat because you know

that Iraq has weaponized it, you know that Russia worked on it,

you know several other people. So you have a threat. You have

something that is safe and effective for the existing problem. And

that takes care of anthrax. Let us assume that you have several

other things, which your intelligence people tell you that somebody

69

in the world is working on and trying to weaponize and they may

spring on your troops, and you don’t have anything against those.

So the question we are going to wrestle with this summer while

we are looking at the budget is do I take a chunk of money, several

tens of millions of dollars, and I put it against developing a second

source to BioPort or developing a different type of approach to solve

the anthrax problem and don’t take that money and put it against

solving another bio-threat or do I accept where BioPort—and instead manage it as effectively as I can to make sure (1) they are

not going to rip off the Government; and (2) the quality control

stays good, and I am comfortable with their product and the people

they have in charge.

All those are issues that we are going to review in the summer

and I think that that shows the range of it. And we are not there

yet. We do not have consensus, but those are the issues we are

looking at, Mr. Chairman.

Mr. SHAYS. Thank you. I think that is a helpful response and not

easy answers to those questions. Well, maybe they are easy in one

sense. But is there anything else any of you want to say? Dr.

Myers, you have been uncharacteristically silent. Do you have any

comment you want to make? [Laughter.]

Mr. MYERS. No, other than to say I gained further insight into

the issues as you see them today, as I mostly listened to today’s

proceedings and they were very helpful as an individual to me. And

I would hope that I could speak with staff in the future and gain

even further insight into your concerns.

Mr. SHAYS. OK. Mr. El-Hibri, any comment?

Mr. EL-HIBRI. Yes, if you allow me, I would like, Mr. Chairman,

just to clarify the issue a little bit. I might still be—or at least—

I was confused about the amount the Government has invested

over the last several years in the Michigan facility. Our records

show it is $6.9 million in Government-furnished equipment and

about $5 million in renovations. If I am not mistaken, it is a total

of $11 million, it is not $11 million plus $7 million, but it is a total

of $11.

Again, we inherited State records so I can’t tell you with any precision whether that is correct or not. But even if whether it is $11

million or $18 million, if you look back 10 years and ask what it

would have taken to establish a new vaccine, new facility, you

would see that it would have costed hundreds of millions of dollars

to do so. And, incidentally, in the chart of the GAO’s statement, I

saw that approximately $100 million was spent on product. Well,

but that is not an investment. You received product in exchange for

it. And what you received was a very cheap product at an average

price of about $6 to $7. So that you can’t really call that an investment. Sure, it came out of DOD’s pocket, but you received product

in exchange, just like you buy any vaccine from another manufacturer. And it was the State government that really subsidized that

price.

So really what is the DOD’s or the Government’s exposure? Be

it $11 or $18 million for receiving millions of doses of vaccine per

year. I think if you put it in that context, those numbers aren’t

that large.

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Mr. SHAYS. Originally, this plant was set up to provide vaccines

for veterinarians and so on, people who worked around animals,

correct? What was the original purpose? It wasn’t to protect our

troops against terrorists?

Mr. MYERS. Well, let me—— Mr. SHAYS. I want the short answer. You have done so well.

Mr. MYERS. Very short. It is always called a plant. I just want

to make sure everybody understands. It is one floor of a two floor

building of 20 buildings.

Mr. SHAYS. But you heard my—my question is, let me just tell

you why I am asking. What I am wondering is if anthrax was needed and necessary and it was developed, and I realize there is only

one producer, and that was the State of Michigan, there must have

been veterinarians and others around the country who wanted this

vaccine. But it was what? Like only about 3,000 people a year who

were drawing on this?

Mr. MYERS. I think you have the facts pretty well. Let’s remember the driving force was laboratory workers.

Mr. SHAYS. Right.

Mr. MYERS. Quite honestly, at the time, that included laboratory

workers who were involved in an offensive bio-warfare program, including in this country down the road at Fort Detrick.

Mr. SHAYS. OK.

Mr. MYERS. As well, though, the textile workers—— Mr. SHAYS. Got you.

Mr. MYERS [continuing]. Who were at serious risk of dying.

Mr. SHAYS. But now textile workers—and I guess this is an

aside; it is kind of off here, but I have just been curious during this

whole hearing—is there not a need today, lab people, people who

work with wools, veterinarians, they don’t need this vaccine anymore?

Mr. MYERS. The same people who have been served through this

vaccine through the last 30 years continue to receive vaccines

today. And that is still in the amount of—— Mr. SHAYS. Of the small doses?

Mr. MYERS. Yes, sir.

Mr. SHAYS. OK, and they are still buying from your plant?

Mr. MYERS. They are still obtaining the vaccine from us. That is

correct.

Mr. SHAYS. And one last question for you, General Blanck, was

also on my list. When this continues, the program continues, after

you have gone, if you to phase two with everyone, then what will

be the maintenance each year? Will it still continue to be about a

million people then because how many people new people do we

have, how many leave?

General BLANCK. Well, it will actually be substantially more

than that because the current dose schedule requires yearly boosters plus those who will begin their series. And that is the zero to

4 week, 6 month, and so forth. So the need at that point, when we

are in phase three, which is scheduled now to be in 2003, will be

well in excess of a million.

Mr. SHAYS. I hope whatever contract is ultimately agreed to, if

it is re-negotiated and there is a new agreement, that it will not

be, that production levels will not be a requirement for BioPort to

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continue to function unless you just literally throw away the production because I have this concern that you will end up, whether

you stay in this or not, that there will be this great temptation to

make sure that you have a certain production level to justify——

Mr. OLIVER. Mr. Chairman, let me assure you, that happens to

be my problem is I don’t think people—I was concerned that some

of my people did not recognize that what I was interested in—I am

interested in making sure the Government gets the best interest.

I am also interested in ensuring they keep the overhead people

that do quality control and process control, no matter what their

level of production is. I don’t want them to be encouraged to let go

of the very people that I am relying upon to keep the dosages safe

that I am putting in my body. So I will assure you that I will do

that.

Can I correct the record for something?

Mr. SHAYS. Yes, but before you do, just let me ask this other

question. Realistically, Mr. El-Hibri, when do you anticipate being

back in production? I am also tempted to have you write this down

on a paper silently and have you put this down in paper silently,

Mr. Oliver, and have you both respond. Mr. Oliver——

Mr. OLIVER. I won’t listen.

Mr. SHAYS. No, I just want you to write down a number on a

page. Write down when you think it is going to be? Thank you, Mr.

El-Hibri.

Mr. EL-HIBRI. We have been back in production since May.

[Laughter.]

Mr. SHAYS. No, no, no, you are not playing fair here. This plant

is not fully operating. It is not——

Mr. OLIVER. It is not approved, the product is not approved.

Mr. EL-HIBRI. Can I just, I was about to continue.

Mr. SHAYS. OK.

Mr. EL-HIBRI. We are talking about anthrax vaccine production,

I believe?

Mr. SHAYS. Right.

Mr. EL-HIBRI. The facility that has been renovated, started producing lots—doses of vaccine in May. We are in the process of completing all the documentation necessary to submit to the FDA in

order to approve the renovation. That takes about 6 months or so

on average. It is very difficult to—there could be some time slippage there. But only after the FDA has approved our facility, can

those doses be made available to the Government.

Mr. SHAYS. Are you at 60 percent of production level or at 10

percent?

Mr. EL-HIBRI. We are right now operating at six sub-lots a week,

which translates roughly to a level of about 3 to 3.5 million doses

a year.

Mr. SHAYS. So is that the production level you anticipate being

at?

Mr. EL-HIBRI. We believe that we can crank the production level

up to about 4 to 4.5 million a year.

Mr. SHAYS. OK. By when?

Mr. EL-HIBRI. By next year.

Mr. SHAYS. OK.

72

Mr. EL-HIBRI. So there will be a slow ramp up. Again, since we

are producing three times as much as we have ever done in the

past, there is a great burden on our—— Mr. SHAYS. I understand.

Mr. EL-HIBRI [continuing]. Laboratory technicians. We just want

to make sure that we continue producing at the rate that is comfortable for our people and that the addition of additional staff is

done in a realistic manner.

Mr. SHAYS. OK. We just keep thinking, and my staff keeps thinking of questions that, and I do want to draw this to a conclusion,

but technically you are at risk in your production now until they

approve? In other words, they could decide that what you have produced for 5 months is not going to be approved?

Mr. EL-HIBRI. That is correct. Is at risk, but we do receive some

progress payments from the Government. So we share risks.

Mr. SHAYS. Fair enough. Mr. Oliver, what did you write down?

Mr. OLIVER. February 2000 because although he is correct as to

the normal time, 6 months, which would be late December, early

January, my experience is that we always experience some delays

in there.

Mr. EL-HIBRI. That’s correct.

Mr. OLIVER. So I am going to lean on my people to maintain the

right schedule, et cetera, which is January. But I always like to be

right rather than—— Mr. SHAYS. Good, OK.

Mr. OLIVER. And so I think it is February, that is what I think.

Can I correct one thing that he said, sir?

Mr. SHAYS. Yes, you can correct.

Mr. OLIVER. I am not sure, you were interested in Governmentfurnished equipment and renovations and I am not sure they are

counting all the money since 1991. I am not even sure you would

know what it is. And if you count all the money since 1991, our

records show that the renovations have been $11.3 million and the

Government-furnished equipment is $6.9 million.

Mr. SHAYS. That is what we are going with.

Mr. OLIVER. Sir?

Mr. SHAYS. That is what we are going with.

Mr. OLIVER. I just wanted to correct that.

Mr. SHAYS. That’s fine.

Mr. EL-HIBRI. And as to production, I didn’t mean to answer

your question incorrectly. We are actually producing, but it doesn’t

mean that we have a product that we can sell.

Mr. SHAYS. I understand that and I think your answer was valid

based on your response. You are producing now, it just hasn’t been

FDA approved. But those lots that you are producing now, more

than likely will be approved. You can’t be certain of it. And you and

the Government are sharing the risks.

Mr. EL-HIBRI. That’s right, and for the record, we believe it is

probably going to be February. [Laughter.]

Mr. SHAYS. OK. I will say this though, the unhealthy part of this

is that you are a private sector operation which is forcing the Government to share in your risks. And that is evident from this. The

bottom line is this is so important to us that we are going to want

this plant to operate. And that is why it is important, Mr. Oliver,

73

that your people do tremendous oversight. It is a monopoly that we

need to operate if you continue with the program as you intend.

Mr. OLIVER. Yes, sir, I appreciate that. As I told you, I have had

people out there—— Mr. SHAYS. I hear you.

Mr. OLIVER. I have had lots of people out there.

Mr. SHAYS. I just want you to know that I feel that way on the

record.

General Blanck, any closing comments?

General BLANCK. Nothing to add, thank you.

Mr. SHAYS. OK. Anybody else want to make some—yes, sir?

Mr. EL-HIBRI. Yes, please. I would just like to address the issue

of sharing risks.

Mr. SHAYS. Are you sure you want to?

Mr. EL-HIBRI. I do.

Mr. SHAYS. OK, well, it is going to open up—fair enough, OK.

Mr. EL-HIBRI. OK, we risked moneys when we took this thing

over. We did an evaluation of the risk and return potential.

Mr. SHAYS. Can I say something to you, I don’t know if you want

to go down this door.

Mr. EL-HIBRI. OK.

Mr. SHAYS. I am going to tell you what your options are first.

Mr. EL-HIBRI. All right. Fine, I take your advice, Mr. Chairman.

Mr. SHAYS. We are going to get into a whole big discussion about

really what kind of risks. And we will be here for a lot longer. I

will accept the fact that you think you have taken a risk, and we

will leave that on the record. And you can accept my feeling that

it is a risk with many qualifications. And so it is quite a different

risk. It is a shared risk.

All right, folks, thank you very much. I am going to close.

Mr. EL-HIBRI. Thank you.

Mr. OLIVER. Thanks, Mr. Chairman.

[Whereupon, at 12:35 p.m., the subcommittee was adjourned.]

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