Biological Defense: Additional Information That Congress May Find Useful as It Considers DOD's Advanced Development and Manufacturing Capability
Published: 2017-07-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOD has long expressed concerns about its ability to acquire and maintain the capability to research, develop, and manufacture medical countermeasures (e.g., vaccines) against biological warfare threat agents, toxins, and endemic diseases. In 2013, DOD partnered with a private-sector biopharmaceutical company to develop an ADM facility with the capability to use disposable equipment enabling timely changes in a production line for medical countermeasures. The facility was fully operational in March 2017, and DOD can now renew its contract for 2-year periods through 2024.
Congress included a provision in the National Defense Authorization Act for Fiscal Year 2016 that DOD, among other things, submit a report to Congress addressing six required elements regarding DOD's ADM facility. DOD submitted its report in October 2016. The act also contained a provision that GAO review the report. GAO describes (1) the information that DOD included in its report to address the six required elements and (2) presents additional information related to the elements that may be useful to Congress in its oversight role. GAO compared DOD's report and cost-benefit analysis with the legislatively required elements and analyzed documents from DOD, HHS, and their private-sector partners. This is a public version of a sensitive report issued in May 2017. Information DOD and HHS deemed sensitive has been omitted.
section_title: What GAO Found
paragraphs: The Department of Defense (DOD) included in its October 2016 report to Congress information that addressed each of the six required elements regarding the department's public-private partnership to construct a facility with an advanced development and manufacturing (ADM) capability. In its report to Congress, DOD addressed the six elements that included, among other things: (1) a description of the ADM facility and its capabilities and an explanation of the origin of the ADM capability requirement; (2) information on some of the program goals, high-level performance metrics, and estimated completion costs along with a statement that DOD is not requesting procurement or operations and maintenance funds in the future years defense program for the ADM facility and that sustainment costs will come from existing medical countermeasure programs; (3) a copy of a 2009 analysis of alternatives conducted for the Secretaries of Defense and Health and Human Services (HHS) that DOD stated justifies the ADM capability; (4) and (5) combined, an independent analysis of the incremental cost and benefits, schedule, and performance of continued DOD investment in its ADM facility; and (6) the department's medical countermeasures production plans for the ADM facility.
GAO identified additional information related to these elements that may be useful for congressional oversight. This information may be particularly useful as DOD decides whether and how to renew its contract for 2-year option periods with the contractor that constructed the ADM facility. First, DOD's sustainment payments for priority access to the ADM capability will be budgeted as a cost of developing medical countermeasures (e.g., vaccines), a funding structure similar to the model used with DOD-owned laboratories, according to DOD officials. Second, discussions with officials indicate that the total costs to the ADM capability contractor to operate and maintain the ADM facility, which are separate from and in addition to the costs in the initial contract with DOD for building the facility, were not fully known at the time of DOD's report and are not fully covered by the DOD-provided sustainment payments. However, GAO learned that the contractor and DOD have taken some initial steps toward bringing additional funded work to the DOD ADM capability, which may help to reduce DOD's sustainment payments under the contract options. Third, the three HHS facilities were not analyzed as alternatives to the DOD ADM facility, although HHS officials said that DOD could separately contract for medical countermeasures with any of HHS's facilities, either independently or through existing HHS contracts. Officials from DOD's ADM program office stated that the HHS facilities are not appropriate for DOD's needs—because they are large dedicated facilities designed primarily to address pandemic influenza threats. However, an official from one of the three HHS facilities informed us that they currently produce medical countermeasures for DOD. An official with the ADM program office said that DOD is represented on the governing board for the HHS Centers for Innovation in Advanced Development and Manufacturing and is aware of what HHS is doing there, so this information can be taken into consideration along with ADM performance and utilization metrics as DOD considers future contract extensions for the ADM capability.
section_title: What GAO Recommends
paragraphs: GAO is not making recommendations in this report. GAO incorporated agency technical comments, as appropriate.

section_title: Letter
paragraphs: The Department of Defense (DOD) has long expressed concerns about  its ability to acquire and maintain the capability to research, develop, and  manufacture medical countermeasures—vaccines, drugs, and  diagnostics—against biological warfare threat agents, toxins, and  endemic diseases in areas where warfighters are deployed. These  concerns stem from the challenges associated with attracting large and  experienced private-sector pharmaceutical manufacturers to produce  DOD-specific medical countermeasures. These challenges include, but  are not limited to, overcoming the manufacturers’ concerns about low  profitability, intellectual property rights, the lack of a long-term  commitment from DOD, complying with the Federal Acquisition  Regulation, and restrictions on exporting medical countermeasures.  Specifically, a recent study conducted for DOD said that DOD medical  countermeasures have little or no commercial market, and DOD will not  buy sufficient quantities at high enough prices to justify the opportunity  cost to large pharmaceutical manufacturers. Even during a crisis, large,  dedicated production lines from these private-sector manufacturers would  not be readily convertible to produce DOD medical countermeasures.  Small biopharmaceutical companies often originate the innovations  needed for DOD medical countermeasures, but lack the experience and  capability to develop the production processes beyond laboratory scale  and also do not conduct the clinical trials required for licensure by the  Food and Drug Administration. As a result, according to DOD’s Joint  Program Executive Office for Chemical and Biological Defense, DOD’s  reliance on small innovator biopharmaceutical companies resulted in a  lack of Food and Drug Administration regulatory and manufacturing  experience, schedule slips, increased costs, and a lack of access to  manufacturing infrastructure.
In 2014, we reported that DOD had started planning to develop an  advanced development and manufacturing (ADM) facility in 2012 with the  capability to produce medical countermeasures such as vaccines and  other therapeutics using “flexible technologies.” DOD formally contracted  for a public-private partnership with a private-sector biopharmaceutical  company in March 2013 to construct the ADM facility. We noted in the  2014 report that the Department of Health and Human Services (HHS)  also had contracted for three facilities—Centers for Innovation in  Advanced Development and Manufacturing (CIADM)—with the capability  to produce medical countermeasures using flexible technologies.  According to officials with DOD’s Chemical and Biological Defense  Program, DOD’s ADM facility became fully operational in March 2017.  According to HHS’s Office of the Assistant Secretary for Preparedness  and Response, as of April 2017, it was yet to be determined when the  three CIADMs would be fully operational, as this includes establishing  their pandemic flu surge capacity. HHS officials said that all three  CIADMs have been capable of responding to core services task orders  since early 2014. In our 2014 report, we reported that DOD and HHS had  established a memorandum of understanding to facilitate collaboration at  their facilities for advanced development and manufacturing and  recommended, among other things, that DOD develop and implement a  process to update and validate DOD’s list of biological threats. DOD  concurred with the recommendation but had not fully implemented it at  the time of our review.
Because of cost and schedule overruns and the apparent overlap of DOD  and HHS efforts to establish ADM capabilities, Congress included a  provision in the National Defense Authorization Act for Fiscal Year 2016  that DOD conduct an independent cost-benefit analysis of DOD’s ADM  facility and report the results, among other things, before all authorized  fiscal year 2016 research, development, test, and evaluation funds for this  facility could be released to the department.
DOD submitted its report, Department of Defense Advanced  Development and Manufacturing Capability Report, to Congress on  October 17, 2016. The act also contained a provision that we review  DOD’s report. In our report we (1) describe the information that DOD  included in its report to address the six elements required by the National  Defense Authorization Act for Fiscal Year 2016 and (2) present additional  information related to each element that may be useful to Congress in its  oversight role regarding DOD’s ADM capability.
This report is a public version of a sensitive report that we issued in May  2017. DOD and HHS deemed some of the information in our May report  to be sensitive, which must be protected from public disclosure.  Therefore, this report omits sensitive information about DOD’s ADM  facility and HHS’s three CIADM facilities from the appendices. Although  the information provided in this report is more limited, the report  addresses the same objectives as the sensitive report and uses the same  methodology.
To address our objectives, we compared the six elements required by the  National Defense Authorization Act for Fiscal Year 2016 with the report  DOD provided to Congress to meet the congressional mandate and with  the cost-benefit analysis included in the 2016 DOD-commissioned  Institute for Defense Analyses report that DOD also submitted to  Congress. We obtained documents from and conducted interviews with  analysts from the Institute for Defense Analyses to corroborate our  understanding of their DOD-commissioned study. Additionally, we  obtained documents from and conducted interviews with officials from  DOD, HHS, and the ADM and CIADM contractors regarding the  information that DOD had provided in its report and to determine what, if  any, other information related to the six required elements might be useful  to Congress. Finally, we conducted site visits at the following facilities to  compare the capabilities of the DOD ADM facility with the capabilities of  the three HHS CIADM facilities: (1) DOD’s ADM facility operated by  Nanotherapeutics, Inc. in Alachua, Florida; (2) HHS’s CIADM facility  operated by the Texas A&M University System in College Station, Texas;  and (3) HHS’s CIADM facility operated by Emergent BioSolutions, Inc., in  Baltimore, Maryland. Due to ongoing sensitive contract negotiations  during our audit work, we were unable to visit or meet with officials from  HHS’s third CIADM facility, which at the time was contracted to Novartis  Aktiengesellschaft (AG) in Holly Springs, North Carolina. In lieu of a site  visit to that facility, we met with senior officials in HHS’s Office of the  Assistant Secretary for Preparedness and Response to discuss the North  Carolina CIADM facility. In December 2016, HHS informed us that  bioCSL/Seqirus was now recognized by the U.S. government as the  owner and operator of the HHS CIADM facility in Holly Springs, North  Carolina. See appendix I for a more comprehensive description of our  scope and methodology.
The performance audit upon which this report is based was conducted  from June 2016 to May 2017 in accordance with generally accepted  government auditing standards. Those standards require that we plan  and perform the audit to obtain sufficient, appropriate evidence to provide  a reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives. We  subsequently worked with DOD and HHS in June 2017 to prepare this  unclassified version of the original sensitive report for public release. This  public version also was prepared in accordance with these standards.
subsections: section_title: Background
subsections: section_title: Manufacturing Biologic Medical Countermeasures
paragraphs: DOD’s ADM facility is to specialize in manufacturing biologics, with a  focus on producing antibodies and vaccines. Until recently, the  manufacture of biologic medical countermeasures has required a single  facility to produce a single product (e.g., a vaccine), and extensive  cleaning and sterilization of equipment was required to switch from  manufacturing one product to another. However, recent technological  advancements have made “flexible manufacturing” possible. These  technologies include the use of disposable equipment, such as equipment  for growing cell cultures in disposable plastic material systems rather than  in stainless steel tanks that require more time to clean and sterilize prior  to the next use, and the use of modular sterile rooms to allow for the  manufacture of multiple products simultaneously within a given facility. In  the advanced research and development stage, potential medical  countermeasures are further evaluated to demonstrate their safety and  efficacy for preventing, diagnosing, or treating disease. Successful  products are then available for final development and procurement.
section_title: DOD and HHS Coordination in Producing Medical Countermeasures
paragraphs: As we reported in 2014, DOD is one of several agencies, along with HHS,  involved in addressing and countering biological threat agents. As  illustrated in figure 1, both DOD and HHS have specific biological medical  countermeasure needs, some of which are shared.
According to officials with HHS’s Office of the Assistant Secretary for  Preparedness and Response and DOD’s Joint Program Executive Office  for Chemical Biological Defense (hereafter referred to as DOD’s ADM  program office), a driving factor for the establishment of the HHS CIADMs  was the H1N1 influenza pandemic of 2009 and the difficulty HHS had  ensuring that the United States had an adequate supply of pandemic  influenza vaccine as well as other medical countermeasures for emerging  infectious diseases that are necessary to protect the public’s health.  Driving factors for DOD’s establishment of DOD’s ADM facility were the  difficulties experienced in attracting large, experienced pharmaceutical  manufacturers to develop and manufacture needed biologic medical  countermeasures to mitigate the health effects of biological agents and  naturally occurring diseases on armed forces personnel.
DOD and HHS commissioned a joint analysis of alternatives for the  development of emergency medical countermeasures that was published  in June 2009 (hereinafter referred to as the 2009 analysis of  alternatives). This analysis was followed by the January 27, 2010, State  of the Union Address, in which the President announced the Reinventing  the Medical Countermeasure Enterprise Initiative “that will give us the  capacity to respond faster and more effectively to bioterrorism or an  infectious disease.” The National Security Staff then conducted an  interagency strategy and policy review and, in December 2010, The  White House called for the Secretary of Defense to, among other things,  “establish agile and flexible advanced development and manufacturing  capabilities to support the development, licensure, and production of  medical countermeasures.” Part of DOD’s strategy to address emerging  and genetically modified biological threats was to establish a new  capability for advanced development and manufacturing of DOD-unique  medical countermeasures, which included the construction of an ADM  facility in Alachua, Florida. At about the same time, HHS began to  establish its three CIADM capabilities. In figure 2, we provide a timeline of  efforts that led to the development of DOD’s and HHS’s respective ADM  capabilities.
According to officials with DOD’s ADM program office and ADM  contractor, the ADM capability comprises more than the physical facility in  Alachua, Florida—including, for example, other sites around the  continental United States, such as fill and finish facilities, and the ADM  contractor’s network of 35 different partner companies that provide  services in various areas such as testing and cell or virus banking.
Officials from both DOD and HHS said that their departments have  coordinated to develop their ADM and CIADM facilities, with agency  officials serving on one another’s contract evaluation panels and  governance boards. For example, according to the advisory board charter  for DOD’s ADM capability, the board consists of officials from several  DOD agencies as well as HHS’s Biomedical Advanced Research and  Development Authority. DOD officials also noted that they serve on the  HHS CIADM steering committee and the Public Health Emergency  Medical Countermeasures Enterprise, which have an oversight role for  HHS’s CIADMs. DOD officials further noted that the two departments  had considered the idea of a joint contract bid until HHS issued its  solicitation about 6 months earlier than DOD, since HHS was  concentrating on pandemic influenza requirements while DOD was  looking for a capability to address a wider range of chemical and  biological threats to members of the armed services.
section_title: DOD Included Information in Its Report on the ADM Facility That Addressed the Six Required Elements Congress Requested
paragraphs: DOD addressed each of the required six elements in its October 2016  report to Congress on the department’s ADM facility. Table 1 outlines the  information DOD provided.
section_title: Additional Information on DOD’s ADM Capability That May Be Useful for Congressional Oversight
paragraphs: We identified additional information regarding DOD’s ADM capability that  may be useful to Congress in its oversight of the program. Moreover, this  additional information may be particularly useful as DOD makes decisions  on whether and how to renew its contract for 2-year option periods with  the private-sector biopharmaceutical company that constructed the ADM  facility. DOD stated in its report that it will determine whether to exercise  future contract option periods that extend the existing contract for the  ADM capability by examining factors including, but not limited to,  contractor performance, facility utilization, and urgent and/or emerging  requirements. Table 2 summarizes the elements required in the National  Defense Authorization Act for Fiscal Year 2016 and the additional  information that we analyzed from DOD, HHS, and their contractors  regarding information that may be useful to Congress.
The following is information that we identified in addition to the  information that DOD provided to address each required element.
subsections: section_title: Clarification about the Potential for Expanding the Capabilities of the ADM Facility and the Requirements for the ADM Capability
subsections: section_title: Supplementary Description of the ADM Capability
paragraphs: DOD’s report noted, among other things, that the facility is 180,000  square feet and capable of producing up to 1.5 million doses of medical  countermeasures within 3 months of a federal government request, with a  surge capacity of up to 12 million doses. DOD’s report also stated that the  facility produces at a scale that is suitable for DOD’s needs, is capable of  complying with Current Good Manufacturing Practices manufacturing at  biological safety level (BSL) 3-capable containment, offers surge  capability, and has additional room for expansion on site. DOD reported  that the ADM facility currently consists of two manufacturing suites with  the capability to support up to four production lines, with options for  adding up to three additional manufacturing suites. DOD also reported  some information about the modular, single-use type of equipment found  in the facility. Additionally, DOD’s report stated that the ADM facility  contractor, per its contract with DOD, provides additional capability and  services through a network of industry partners and through contractor  staff not located at the facility in Alachua, Florida.
During our review, we identified additional information that serves to  clarify the potential for expanding the capabilities and capacity of DOD’s  ADM capability. For example, the DOD ADM facility is located on 29  acres of land within a secured perimeter and protected by motion- activated infrared cameras. In discussions with DOD program officials  and with the ADM contractor, we learned that two of the additional three  manufacturing suites (i.e., suites three and four) could be developed  within the current structure of the building at the discretion of DOD, while  a fifth manufacturing suite could eventually be built by expanding the  building’s perimeter, if needed. According to DOD officials, these  additional suites, as well as the existing two manufacturing suites, are  compliant with Current Good Manufacturing Practices. The facility  currently uses DOD-purchased bioreactors with capacity for up to 500  liters each, although ADM contractor officials informed us that there is  enough space in some manufacturing areas for bioreactors with capacity  for up to 2,000 liters. A more detailed description of the facility and its  DOD-purchased equipment—including photographs of the equipment— can be found in appendix II.
section_title: Additional Information Regarding the ADM Requirements
paragraphs: Regarding DOD’s inclusion of validated requirements in its report to  Congress, DOD reported that the requirement for the ADM capability  originated from a memorandum in December 2010 from The White House  to the Secretary of Defense. According to DOD officials with the Joint  Requirements Office and the Chemical Biological Defense Program,  although the requirement for the ADM capability was somewhat unique in  its origins, infrastructure projects are normally not validated through the  department’s Joint Capabilities Integration and Development System.  According to DOD officials, the specific medical countermeasures (e.g.,  vaccines) produced by the ADM capability are to have a validated  requirement through the department’s Joint Capabilities Integration and  Development System, while the means of production—such as an ADM  capability—will be determined by the program office that manages the  acquisition of products to serve as medical countermeasures.
Throughout the course of our review, we identified additional information  about the requirements process for the ADM capability. DOD officials with  the ADM program office told us that the requirement for the ADM  capability was validated by the direction of the Secretary of Defense to  create such a capability, or was what a DOD official called a “directed  requirement.” Upon receipt of the memorandum from The White House,  the Deputy Secretary of Defense responded that DOD would align its  medical countermeasure efforts with The White House vision for  strengthening protection against infections disease, in part by  recommending funding starting in fiscal year 2012 to support rapid  advanced development of medical countermeasures. According to ADM  program officials, this direction was then disseminated through the Office  of the Secretary of Defense until it reached DOD’s ADM program office.  Direction for creating the ADM capability also is captured in the following  documents referring to DOD’s Chemical and Biological Defense Program:  DOD Chemical and Biological Defense Program Fiscal Year 2012-2017  Program Strategy Guidance Implementation Plan and the Fiscal Year  2014-2018 Program Strategy Guidance Implementation Plan.
section_title: Program Goals, Metrics, and Costs
subsections: section_title: Additional Information Regarding DOD’s Stated Goals and Metrics
paragraphs: DOD included in its report to Congress the program goals and  performance metrics articulated in presidential memorandums to  establish “agile and flexible advanced development and manufacturing  capabilities to support the development, licensure, and production of  Medical Countermeasures that address the needs of our military and the  Nation.” With respect to performance metrics, DOD has established  metrics in the contract for the ADM facility that it monitors periodically in  conjunction with the contractor. DOD stated in its report that it will determine whether to exercise future contract option periods that extend  the existing contract for the ADM capability by examining factors  including, but not limited to, contractor performance, facility utilization,  and urgent and/or emerging requirements. The report further states that  the performance of the ADM contractor during the facility’s operations will  be measured based on its performance against the metrics of individual  product (e.g., vaccine) contracts.
During our review, we identified additional information regarding DOD’s  goals and metrics. For example, in the Acquisition Strategy and Plan for  the Advanced Development and Manufacturing Prototype Capability for  Medical Countermeasures and the ADM contract’s statement of  objectives, we identified program objectives that collectively clarified  DOD’s overall program goal for the ADM facility: allowing third parties to mature and provide products to the  government by leveraging the ADM capability while ensuring  protection of intellectual property; providing streamlined capability that reduces cost and schedule risk; providing capabilities to rapidly respond to chemical, biological,  radiological, and nuclear events, as well as emerging and genetically  modified infectious diseases, by producing Food and Drug  Administration-approved products or the expanded production of  existing products; providing strategies for supporting and facilitating the transition of  processes and technologies from DOD-affiliated science and  technology organizations; and providing assistance and training in drug development and  manufacturing.
Other information we reviewed addressed the evaluation of the contractor  during the “base period” (i.e., the period in which the facility will be built by  the contractor and accepted by DOD) and may be useful in demonstrating  to Congress that oversight and accountability have been built into this  public-private partnership contract. DOD’s ADM contract and discussions  with DOD’s ADM program officials indicate that there are multiple metrics  by which DOD assesses the performance of the contractor during the  construction of the facility. For example, the contract requires the tracking  of metrics such as technical performance, work product quality, contract  management, and earned value management system data as part of a  quality assurance surveillance plan. The ADM contract also requires the  contractor to provide a number of reports to DOD on a monthly basis. For  example, the contract data requirements list requires the ADM contractor  to provide, among other things, a contract work breakdown structure that  discusses the elements for which the contractor is responsible and a  master government property list, which provides information on  government property such as the cost of an item. Additionally, according  to the contract, within 30 days following completion of facility validation,  an ADM Final Technical Closeout Report must be completed to document  the completion of the base period, including the achievement of all  milestones and requirements. According to DOD officials, milestones for  completion of the ADM facility include: (1) completion of construction  activities; (2) installation of equipment in laboratory and clean room  spaces; and (3) completion of all commissioning, qualification, and  validation activities.
section_title: Supplementary Information on ADM Costs
paragraphs: With respect to operations and maintenance costs, we identified  additional information during our review that may be of use to Congress in  its oversight of the program. DOD noted in its report to Congress that the  ADM contract at completion is approximately $205 million and that there  was neither dedicated funding in fiscal years 2015 and 2016, nor a  request for fiscal year 2017 funding for the ADM capability. This contract  completion cost includes an initial, fixed fee of approximately $18 million  to the contractor, as well as costs associated with planning, architectural  design, and the purchase of manufacturing equipment (for a more  detailed discussion of items paid for by DOD, see app II). DOD’s report to  Congress noted that there are no procurement or operations and  maintenance budget line item costs directly associated with the facility in  upcoming DOD budget requests and included a discussion of future  sustainment payments for the ADM capability. Specifically, DOD’s report  acknowledged that under contract options, should DOD exercise them,  DOD would provide a sustainment payment to the ADM contractor to  ensure that the contractor provides DOD with priority access to the ADM  facility. Each contract option is to be for 2 years, with the last contract  option available from 2022 through 2024. The sustainment payment for  the first contract option period, which began on April 1, 2017, was  originally negotiated for approximately $18 million each year, but DOD  said in its report to Congress that it was actively renegotiating the terms  and amount of the sustainment option before awarding the option to the  ADM contractor and anticipated that the payments would be less than the  original amount. DOD’s report said that the department will pay  sustainment costs for the ADM capability from medical countermeasures  programs requiring manufacturing and development activities in the year  of budget execution.
section_title: Supplementary Information on the Appropriateness of DOD’s Approach for Funding Sustainment Costs
paragraphs: We reviewed additional information that clarifies the relationship between  the annual sustainment payment identified in the ADM contract options  and the operations and maintenance costs of the ADM capability, as well  as DOD’s budgeting for the sustainment payments. DOD’s sustainment  payments for priority access to the ADM capability will be budgeted for as  a cost of developing medical countermeasures (e.g., vaccines), according  to officials from DOD’s ADM program office, a funding structure similar to  the model used with DOD-owned laboratories. For example, DOD’s ADM  program officials said that within the Chemical Biological Defense  Program, of which they are a part, core DOD laboratories that provide  critical infrastructure capabilities supporting the program sustain their  capabilities by applying an indirect fee to Chemical Biological Defense  Program-resourced projects. ADM program officials further stated that the  annual sustainment payments will be used to retain trained personnel and  maintain the equipment and systems in a ready state to support medical  countermeasures development when program lines are ready to use the  capabilities.
Based on our discussions with DOD and ADM contractor officials, the  total costs to ADM capability contractor Nanotherapeutics, Inc.,  hereinafter referred to as Nanotherapeutics, to operate and maintain the  ADM facility—which are separate from and in addition to the costs in the  initial contract with DOD for building the facility—were not fully known at  the time of this report and were not fully covered by the DOD-provided  sustainment payments. The contractor’s executives told us that they were  learning more about the costs of operating the facility as it becomes  operational, and believe that overhead costs, such as personnel, may not  be as significant as they first believed. According to the ADM contractor’s  executives, DOD’s sustainment payments should represent  approximately 25 percent of this overhead cost for operating the ADM  facility. As noted earlier, DOD is working to renegotiate the amount of the  sustainment payments based upon several changes, such as changes in  facility size, the number of employees in the facility, and the sale of the  contractor’s building and the land for the ADM facility. Further, as the  cost-benefit analysis portion of the DOD report noted, the sustainment  payments are not fixed at the amount negotiated by DOD and the  contractor, but may be reduced through funded work. As the DOD report  states, there is some uncertainty about the amount each dollar of funded  work will offset a dollar of overhead cost (i.e., the costs covered in part by  DOD’s sustainment payments). Nanotherapeutics executives noted, for  example, that there can be great variations in the cost of labor and  materials for some contracts, although other cost elements remain more  fixed.
During our review, we learned that the contractor and DOD have taken  some initial steps toward bringing additional funded work to support the  DOD ADM capability, which may help to reduce DOD’s sustainment  payments under the contract options. First, executives from the ADM  contractor stated that they were actively seeking additional work from  both the federal government and the private sector, and had recently  been awarded new contract work through HHS’s National Institute of  Allergy and Infectious Diseases. Second, included within the  noncompetitive contracting mechanisms discussed in the cost-benefit  analysis portion of the DOD report to Congress was Other Transaction  Authority. DOD’s ADM program officials informed us that DOD used this  authority in April 2016 to establish a consortium through which the  department may be able to award some DOD medical countermeasures  efforts to the ADM facility while retaining some of the benefits of  competition, since the ADM contractor is a member of the consortium.  DOD officials explained that because this consortium operates under  Other Transaction Authority, it provides DOD with more flexibility to  negotiate with contractors and to arrange for some subcontracted work to  go through the ADM facility, as well as provide access to industry  expertise and collaboration, among other things. DOD officials also  expect the consortium to provide its members with a flexible contracting  vehicle capable of multiple taskings with a single set of terms and  conditions. DOD officials informed us that the ADM capability is likely to  receive additional DOD work through the use of the Other Transaction  Authority consortium. According to the cost-benefit analysis conducted by  the Institute for Defense Analyses, additional DOD work would reduce  annual sustainment payments, while increasing time saved by DOD.
section_title: DOD’s Analysis of Alternatives and Additional Information on ADM Alternatives
paragraphs: In its report to Congress, DOD included results from the 2009 analysis of  alternatives for the Secretaries of Defense and the Department of Health  and Human Services, which informed the federal government’s decision  to create both DOD’s ADM capability and HHS’s CIADM capabilities. As  summarized in DOD’s report, the 2009 analysis of alternatives attempted  to address a gap in the production and manufacturing of medical  countermeasures against weapons of mass destruction. In the analysis,  The Quantic Group, Ltd., and Tufts Center for the Study of Drug Development focused on three alternative methods of producing medical  countermeasures: (1) continuing to contract with private-sector  pharmaceutical companies for the production of medical  countermeasures, (2) continuing existing methods while strengthening  regulatory and sourcing capabilities and gaining enhanced access to  development and manufacturing, and (3) building government facilities for  the purpose of producing all medical countermeasures.
We identified additional information regarding HHS’s CIADM capabilities  as an alternative to the DOD ADM capability. As noted earlier, the 2009  analysis of alternatives jointly supported the DOD ADM and the HHS  CIADM capabilities. However, since neither the DOD nor HHS capabilities  existed at the time of the 2009 analysis (the contracts were signed in  2013 and 2012, respectively), the analysis did not consider HHS’s  CIADMs as alternatives for DOD or DOD’s ADM capability as an  alternative for HHS. HHS issued a request for contract proposals for the  CIADMs in March 2011, 5 months before DOD issued its request for  contract proposals for the DOD ADM. However, even though the HHS  CIADMs were not analyzed as alternatives to the DOD ADM capability,  HHS officials said that DOD could separately contract for medical  countermeasures with any of HHS’s CIADMs either independently or  through existing HHS CIADM contracts. Additionally, a senior official with  DOD’s ADM program office informed us that the program office constantly  assesses its portfolio, and maintains awareness of the HHS CIADMs  through DOD’s participation in HHS’s Public Health Emergency Medical  Countermeasures Enterprise—an interagency body—and the CIADM  governing board.
Although officials from DOD’s ADM program office stated that the HHS  CIADMs are not appropriate for DOD’s needs—with one official noting  that they are large dedicated facilities designed primarily to address  pandemic influenza threats—the cost-benefit analysis for DOD’s ADM  capability conducted by the Institute for Defense Analyses, as well as our  own observations, suggest otherwise. Based on discussions with CIADM  and HHS officials and some CIADM contractor documents, all three of the  HHS CIADMs plan to use flexible manufacturing technologies in at least a  portion of their facilities and may be capable of addressing DOD’s flexible  manufacturing needs. At least one CIADM official has testified about this  capability at a CIADM facility upon completion, as at least 50 percent of  the CIADM capabilities will be available for non-HHS projects. Officials  from two of the CIADMs informed us that they could potentially address  some of DOD’s medical countermeasure manufacturing needs, to include  potentially providing priority access to the CIADM capabilities under a  contract. In addition, an official from one CIADM informed us that the  CIADM’s contractor currently is producing medical countermeasures for  DOD. An official with the ADM program office said that DOD is  represented on the governing board for the CIADMs and is aware of what  HHS is doing there, so CIADM information can be taken into  consideration along with ADM performance and utilization metrics as  DOD considers future contract extensions for the ADM capability. See  appendix III for more information on the HHS CIADM capabilities.
section_title: Additional Information to Clarify DOD’s Cost-Benefit Analysis
paragraphs: In DOD’s report to Congress, the department presented the results of a  2016 independent, DOD-commissioned cost-benefit analysis conducted  by the Institute for Defense Analyses. During our review, we identified  additional information that may add clarity to various aspects of the cost- benefit analysis. DOD’s contracted analysis compared the cost and  benefits, schedule, and performance of continued DOD investment in the  DOD-dedicated ADM capability with a set of available alternatives. The  cost-benefit analysis also reviewed the results of a study conducted by  Tufts University in 2015 to determine whether the “sunk” costs (i.e., costs  incurred in the past that will not be affected by any present or future  decision) of constructing the DOD ADM facility were of an appropriate  magnitude.
DOD reported that, per the results of the Institute for Defense Analyses- conducted cost-benefit analysis, with the exception of certain potential  benefits that are hard to quantify, the benefit of having a DOD-dedicated  ADM capability was largely focused on the priority access to the  manufacture of biologic medical countermeasures guaranteed to DOD  through the sustainment payments. The cost-benefit analysis quantified  this benefit as potentially saving 13 to 28 months of production time over  the future years defense program—which captures and summarizes  forces, resources, and programs associated with all DOD operations  approved by the Secretary of Defense—and 23 to 50 months of  production time over the course of current manufacturing production  projections for medical countermeasures. The cost-benefit analysis also  concluded that this priority access could come at a cost of between   $55 million and $76 million over the future years defense program (and  between $93 million and $136 million over the course of current  manufacturing production projections). The cost-benefit analysis noted  that DOD could offset some or all of this cost if the DOD-dedicated ADM  facility received sufficient DOD and non-DOD funded work to offset  DOD’s annual sustainment payments to the contractor.
Our review of the cost-benefit analysis suggests that it can help inform  decision makers about the potential economic effects of DOD’s  investment. We also identified additional information that would be useful  for Congress in evaluating or interpreting the results of the DOD- commissioned cost-benefit analysis. Specifically, we reviewed the ADM  cost-benefit analysis using selected key elements, based on economic  guidance from the Office of Management and Budget and other sources,  to determine whether the cost-benefit analysis provided evidence to  decision makers of the potential economic effect of DOD’s continued  investment in the ADM capability. Based on this review, we identified  the following regarding the cost-benefit analysis:
The cost-benefit analysis did not estimate the monetary value of the  potential benefits of the DOD-dedicated ADM capability, such as  those associated with priority access, making it unclear whether  DOD’s continued investment in the ADM capability is economically  justified (e.g., whether the benefits exceed the costs).
Future costs were not discounted.
The analysis did not clearly discuss the baseline that was used to  estimate incremental costs and benefits (i.e., Institute for Defense  Analyses officials explained to us that the ADM capability was  evaluated against a baseline that was not a single facility, but rather a  combination of the HHS CIADMs and other similar facilities owned by  private contract manufacturing organizations).
The analysis assumed that development and manufacturing costs of  the DOD-dedicated ADM capability and the alternatives would be  roughly comparable, but did not assess some plausible adjustments  to this assumption in a sensitivity analysis.
According to the Institute for Defense Analyses official overseeing the  analysis, data used to develop the estimate of time savings—the  primary benefit of having a DOD-dedicated ADM capability, according  to the analysis—were anecdotal and were not assessed for reliability  due to time constraints; additionally, industry changes limit the  usefulness of retrospective studies. where i is the  interest rate and t is the number of years from the date of initiation for the program or  policy until the given future year. See Office of Management and Budget, Circular A-94  (Oct. 29, 1992). use has only recently become common place. As a result, these changes  in the industry would limit the usefulness of retrospective studies because  older data and practices are not comparable to current data and  practices.
Additionally, the Institute for Defense Analyses’ cost-benefit analysis  reviewed a study previously conducted by Tufts University in 2015 to  determine whether the ADM capability’s sunk costs were of an  appropriate magnitude. In its review, the Institute for Defense Analyses  concluded that the Tufts University assessment was reasonable, and  provided a brief explanation of the Tufts University sunk-cost analysis,  stating that the 2015 Tufts University assessment demonstrated that the  costs of building the facility were within the expected bounds for the  project. The 2015 Tufts University sunk-cost analysis may provide  additional information in understanding the degree to which “the  manufacturing and privately financed construction” of the DOD ADM  facility is justified.
section_title: Agency Comments
paragraphs: We are not making any recommendations in this report. DOD and HHS  reviewed a draft of this report and provided us with technical comments,  which we incorporated where appropriate.
We are sending copies of this report to the appropriate congressional  committees, Secretaries of Defense and Health and Human Services; the  Under Secretary of Defense for Acquisition, Technology, and Logistics;  the Assistant Secretary of Defense for Nuclear, Chemical, and Biological  Defense Programs; the Deputy Assistant Secretary of Defense for  Chemical and Biological Defense; the Chairman of the Joint Chiefs of  Staff; the Secretary of the Army; and the Directors, Institute for Defense  Analyses and Office of Management and Budget.
If you or your staff have any questions concerning this report, please  contact Joseph W. Kirschbaum at (202) 512-9971 or  KirschbaumJ@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff who made key contributions to this report are listed in appendix  IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report is a public version of a sensitive report that we issued in May  2017. The Departments of Defense (DOD) and Health and Human  Services (HHS) deemed some of the information in our May report to be  sensitive, which must be protected from public disclosure. Therefore, this  report omits sensitive information about DOD’s advanced development  and manufacturing (ADM) facility and HHS’s three Centers for Innovation  in Advanced Development and Manufacturing (CIADM) facilities.  Although the information provided in this report is more limited, the report  addresses the same objectives as the sensitive report and uses the same  methodology.
In this report, we (1) describe the information that DOD included in its  report to address the six elements required by the National Defense  Authorization Act for Fiscal Year 2016, and (2) present additional  information related to each element that may be useful to Congress in its  oversight role regarding DOD’s ADM capability.
To address our objectives, we compared the six elements required by the  National Defense Authorization Act for Fiscal Year 2016 with DOD’s  report to Congress to meet the congressional mandate and with the cost- benefit analysis included in the 2016 DOD-commissioned Institute for  Defense Analyses report to DOD that was also submitted to Congress.  We reviewed DOD’s report, the cost-benefit analysis conducted for DOD  by the Institute for Defense Analyses and incorporated into DOD’s report,  and documents from the Institute for Defense Analyses that supported its  study. Additionally, we interviewed and obtained documentation from  officials from relevant organizations within both DOD and HHS as follows:
Office of the Under Secretary of Defense for Acquisition, Technology,
Office of the Assistant Secretary of Defense for Nuclear,  Chemical, and Biological Defense Programs
Office of the Deputy Assistant Secretary of Defense for  Chemical and Biological Defense/Chemical and Biological  Defense Program  Joint Science and Technology Office for Chemical and Biological  Defense  Joint Requirements Office for Chemical and Biological Defense
Office of the Assistant Secretary for Acquisition, Logistics, and
Office of the Deputy Chief of Staff for Programming (G-8)
Joint Program Executive Office for Chemical and Biological  Defense
Medical Countermeasure Systems Joint Project Manager  Federally Funded Research and Development Center: Department of Health and Human Services:
Office of the Assistant Secretary for Preparedness and Response
Biomedical Advanced Research and Development Authority
Public Health Emergency Medical Countermeasures Enterprise  Additionally, we conducted site visits to compare the DOD ADM facility  with the HHS CIADM facilities. Specifically, we visited the DOD ADM  facility operated by Nanotherapeutics in Alachua, Florida, and two of  HHS’s three CIADM facilities—the CIADMs operated by Texas A&M  University System in College Station, Texas, and by Emergent  BioSolutions, Inc., in Baltimore, Maryland. We also obtained relevant  documentation regarding all three contract organizations, about their  facilities, relevant technologies, and their contracts with DOD and HHS.  Due to the sensitive nature of the contract negotiations underway at the  time of our audit work, we were unable to visit or otherwise meet with  officials from HHS’s third CIADM facility in Holly Springs, North Carolina,  which at the time was contracted to Novartis Aktiengesellschaft. In lieu of  this site visit, we met with senior officials from HHS’s Office of the  Assistant Secretary for Preparedness and Response to discuss the North  Carolina CIADM facility. In late December 2016, HHS informed us that  bioCSL/Seqirus had become recognized by the federal government as  the owner and operator of the HHS CIADM facility in Holly Springs, North  Carolina. We compared the information we obtained through these visits  with information from DOD’s October 2016 report to Congress with the  initial criteria laid out in the National Defense Authorization Act for Fiscal  Year 2016.
To further assess the extent to which DOD had conducted an  independent cost-benefit analysis of the ADM facility, we reviewed the  cost-benefit analysis conducted for DOD by the Institute for Defense  Analyses using key characteristics of an economic analysis based on  principles and guidance from the Office of Management and Budget (e.g.,  Circular A-94) and other sources. Such key characteristics include:   (1) objective and scope, (2) alternatives, (3) analysis of effects,   (4) sensitivity analysis, and (5) documentation. For example, for the  objective and scope element, we examined the extent to which the  analysis clearly stated its objective and the question that it intended to  address. For the alternatives characteristic, we examined the extent to  which the analysis considered all relevant alternatives, including, that of  no action. For the analysis of effects characteristic, we examined the  extent to which analysis quantified and assigned a monetary value to the  benefits and costs using the concept of opportunity cost. For the  sensitivity analysis characteristic, we examined the extent to which the  analysis explicitly addressed how plausible adjustments to each important  analytical choice and assumption affected the estimates of benefits and  costs. Finally, for the documentation characteristic, we examined the  extent to which the analysis was clearly written, with a plain language  summary and transparent tables that describe the data used and the  results, and a conclusion that is consistent with the results. In addition, we  interviewed DOD and Institute for Defense Analyses officials to obtain  information about the analysis. Further, we interviewed officials from  DOD, HHS, the DOD ADM facility, and two of the three HHS CIADMs to  obtain information about medical countermeasures manufacturing  facilities.
The performance audit upon which this report is based was conducted  from June 2016 to May 2017 in accordance with generally accepted  government auditing standards. Those standards require that we plan  and perform the audit to obtain sufficient, appropriate evidence to provide  a reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and concluding observations based on our audit  objectives. We subsequently worked with DOD and HHS in June 2017 to  prepare this unclassified version of the original sensitive report for public  release. This public version was also prepared in accordance with these  standards.
section_title: Appendix II: The Department of Defense’s Advanced Development and Manufacturing Facility, a Public-Private Partnership
paragraphs: The Department of Defense (DOD) advanced development and  manufacturing (ADM) facility is a 180,000 square-foot biologics ADM  facility located in Alachua, Florida. It was created in 2013 through a  public-private partnership between DOD and Nanotherapeutics, Inc., a  private-sector biopharmaceutical company hereinafter referred to as  Nanotherapeutics. According to ADM program office and contractor  officials, Nanotherapeutics, paid for the construction of the building and  DOD paid for the design and equipment. Upon completion of the base  period (i.e., the period in which the facility will be built by the contractor  and accepted by DOD) for DOD’s contract with Nanotherapeutics, DOD is  to have priority access to the facility in exchange for an annual  sustainment payment (paid monthly, according to ADM contractor  officials) if the department chooses to exercise the optional contract  periods. Figure 3 shows an external view of DOD’s ADM facility.
The facility has two biological safety level (BSL)-3 manufacturing suites  compliant with Current Good Manufacturing Practices, with a total of four  production lines. It sits within a secured perimeter monitored by motion- activated infrared cameras. Some initial capabilities came online in  August 2016, and DOD officials said that the facility became fully  operational in March 2017.
The facility was constructed with potential expansion in mind. The facility  includes an unfinished space where—according to ADM program office  and contractor officials—two additional manufacturing suites can be built  with DOD’s permission. Further, the facility sits on an approximately   29-acre site that provides room for the expansion of the building, a portion  of which may be used for an additional manufacturing suite, according to  an ADM program official. According to the contractor, expansion into the  unfinished interior space is solely at the discretion of DOD, which owns  the space, while Nanotherapeutics has the right to choose to expand the  building at its own initiative, without DOD approval. Two images of DOD’s  ADM facility were redacted because DOD deemed the images to be  sensitive and for official use only.
According to representatives from Nanotherapeutics, the facility has two  separate outside electricity feeds for redundancy, and has a backup  generator that can meet the facility’s electricity needs for up to 4 days  (see fig. 4). The BSL-3 area has its own independent, high-efficiency  particulate air-filtered, air-handling systems.
The facility has a chilled water generator, as well as water purifying  systems that include a system to provide purified water and another  system to provide and dispense water for injection, used in the  manufacturing of drug products and, according to Nanotherapeutics  officials, DOD owns the manufacturing equipment (see fig. 5) as well as  some building infrastructure, such as the facility’s heating, ventilation, and  air conditioning systems.
The facility employs single-use technology, in the form of the GE  Healthcare LifeSciences’ FlexFactory biomanufacturing platform, to  provide more flexible manufacturing that reduces downtime between  production runs. The facility can support manufacturing from 4.5 liters to  multiple 1,000-liter production lines and uses 50- to 500-liter bioreactors.  Nanotherapeutics officials told us that, although the facility is advertised  to handle up to 1,000-liter bioreactors, the manufacturing space can  handle 2,000-liter bioreactors in certain areas with taller ceiling spaces.  Figure 6 shows a bioreactor (bottom right), a device in which living cells  synthesize useful substances; a fermentor (left), used in the production of  biologics to cultivate microorganisms, such as bacteria; and an autoclave  (top right) for steam sterilization through the exposure of items to a  certain temperature or pressure for a specified period of time. The  autoclave shown below is used to minimize cross-contamination in quality  control testing.
In March 2016, Nanotherapeutics sold the property associated with the  ADM facility to a real estate investment trust, renting the property back  from the trust under a 15-year lease. The sales agreement does not  include DOD-owned property at the location, which—according to ADM  contractor officials—includes the building’s heating, ventilation, and air  conditioning systems. According to Nanotherapeutics executives, this  sale-and-leaseback was executed to reduce the financial costs to the  contractor resulting from the debt associated with building the facility.
section_title: Appendix III: Department of Health and Human Services’ Center for Innovation in Advanced Development and Manufacturing Facilities, Public-Private Partnerships
paragraphs: The Department of Health and Human Services (HHS) has three Centers  for Innovation in Advanced Development and Manufacturing (CIADM)  facilities located in Texas, Maryland, and North Carolina. The CIADMs  are intended to support HHS’s flexible manufacturing of medical  countermeasures by providing: (1) surge capacity for manufacturing the  pandemic influenza vaccine; (2) core services for the development of  chemical, biological, radiological, and nuclear medical countermeasures;  and (3) workforce training. The three HHS CIADMs are public-private  partnerships between the federal government and contractors, with  contracts that involve cost sharing between HHS and each contractor  during each contract’s initial phase, or “base period” (i.e., the period in  which the facility will be built by the contractor and accepted by HHS).  According to HHS officials, though there are commonalities, HHS  negotiated each CIADM contract separately, and so each has different  terms.
The HHS CIADMs may serve as alternatives for the Department of  Defense (DOD) advanced development and manufacturing (ADM)  capability once the CIADMs achieve readiness, according to DOD and  HHS officials. The following is contractor and cost information for HHS’s  three CIADMs in Texas, Maryland, and North Carolina. Some details  about the three CIADMs were redacted because HHS deemed the  information to be sensitive and for official use only.
Location:  Contractor:  Cost to HHS:  Cost to Contractor:  Base period ends: College Station, Texas  Texas A&M University System  $176.7 million  $108.9 million  December 31, 2017  See figure 7 for a photograph of the Texas A&M facilities.
Location:  Contractor  Cost to HHS:  Cost to Contractor:  Base period ends: Baltimore, Maryland  Emergent BioSolutions, Inc.  $163.2 million  $58.6 million  June 14, 2020  Figure 8 shows the Emergent CIADM as it should look upon its  completion in 2017.
Emergent informed us that the company is interested in DOD medical  countermeasures contracts. An Emergent official noted that the company  already produces an auto-injector and several other products for DOD.  Emergent also informed us that the company has interest in providing  priority access to DOD, though Emergent officials told us that this interest  would depend on the specifics of DOD’s needs, and the compensation  DOD is willing to provide in exchange for that priority access.
Cost to HHS:  Cost to Contractor:  Base period ends:  Holly Springs, North Carolina  Originally Novartis AG, as of December 2016,  bioCSL/Seqirus  $59.8 million  $26.3 million  December 31, 2016  The North Carolina CIADM was created out of a partnership between  HHS and Novartis AG (hereafter referred to as Novartis), an international  pharmaceutical manufacturer headquartered in Switzerland. Costs and  ownership were shared between HHS and Novartis; HHS officials  informed us that the government has a 40-percent stake in the facility.  During our review, we were informed by HHS officials that HHS was  involved in sensitive contract negotiations involving the CIADM following  the sale of Novartis’ influenza vaccine business to CSL Limited, an  Australian pharmaceutical manufacturer. As such, we discussed this  facility only with HHS officials rather than speaking with officials from—or  visiting—the North Carolina CIADM facility. In December 2016, HHS  officials informed us that HHS had resolved its CIADM contract  negotiations with Novartis AG and bioCSL/Seqirus. Seqirus is now  recognized by the federal government as the owner and operator of the  HHS CIADM facility in Holly Springs, North Carolina.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, GAO staff who made key  contributions on this report include Mark A. Pross, Assistant Director;  Michele Fejfar; Ashley Grant; Timothy Guinane; Mae Jones; Amie Lesser;  Bethann E. Ritter Snyder; Sabrina Streagle; Paola Tena; and Edwin  Yuen.