Plenty of small companies are developing therapeutics – mostly vaccines – for treating and/or preventing infections by a horrible assortment of deadly agents that may be used by terrorists – including anthrax, smallpox, the plague and Ebola virus. The U.S. government has passed new legislation that will help pay for these efforts, too. But the funding forthcoming under Project BioShield – which is earmarked for building the nation’s biodefense stockpiles -- is not nearly enough to pay for them all. So how do these companies find the money to support their R&D? And how do they keep a business alive while working on products that not only may never be used but also will have only one buyer – the U.S. government – if they are needed? To answer those questions, we’ve examined the strategies of four biotechs involved in this effort – VaxGen, AVANT Immunotherapeutics, Acambis and Chimerix.
Scientists striving to create effective drugs to protect the nation’s populace from bioterror attacks had an extra reason to celebrate on July 4, for on that day they learned that the three-dimensional structure of the anthrax toxin complex has been solved.
The experiments, which were published in the online version of the journal Nature, were conducted by the Burnham Institute’s Robert Liddington and his colleagues. They mapped the atomic coordinates of one of the anthrax toxin’s proteins – protective antigen – docked to CMG2, one of two human anthrax toxin receptors. This protective antigen is what allows the toxin to enter human or animal cells, so having a precise idea of how it interacts with its receptor gives researchers new leads to follow in the hunt for drugs that will interfere with this process.
Not that they’ve been sitting on their hands waiting for the toxin complex’ 3-D structure. Au contraire: There are so many anthrax drug programs underway at the moment that it’s difficult to track them all. And that’s just one bioterror agent. Researchers are also hard at work on drugs and vaccines for preventing or combating the plague, smallpox, Dengue fever, Marburg and Ebola viruses and other potentially lethal bugs.
And they’re making substantial progress. In May 2004, for instance, a third-generation vaccine against smallpox provided by Bavarian Nordic A/S started human trials at St. Louis University.
In November 2003, the National Institute of Allergy and Infectious Diseases (NIAID) started human safety trials on the first experimental vaccine against the Ebola virus. The vaccine, made by Vical Inc. and containing gene sequences the company licensed from the NIH, has already completely protected monkeys from infection.
Vical is also developing a DNA vaccine for anthrax. It had intended to start human testing of the product by the end of last year, but had to put off its plans until it received a commitment for additional government funding to support the studies. That money, the company said, directly depends on the priorities and appropriations for biodefense research and Project BioShield.
Under Project BioShield, the government has appropriated $5.6 billion over 10 years to pay for the stockpiling of vaccines and antidotes for bioterror agents. The House approved a bill in July 2003; and the Senate approved its version in May 2004, but the two sides of Congress still have to concur on the final terms before President Bush -- who first mentioned the legislation in his 2003 state of the union address -- signs it into law. When that will occur is a matter of intense speculation, but the best guess is for sometime this summer.
BioShield has many goals, and is intended to provide the sorts of incentives that biotech companies need in order to move forward – not only funding through NIH, but also measures to speed up relevant R&D and accelerate critical product approvals. Plus, the bill would allow the government to distribute some products before they are approved – if there’s an emergency situation that requires such action. Importantly, Project BioShield also guarantees that the government will buy these products.
But, as we’ve seen, BioShield is still not a law – although Congress has already earmarked some of the funds (up to $890 million for fiscal year 2004) so that the government can start buying new vaccines and other drugs to start building the nation’s stockpiles.
Many biotechs, however, feel that BioShield falls short of the goal. For one, there is clearly not enough money to support the research expenditures incurred by companies striving to develop new vaccines and antidotes for the government. For another, there’s the lurking threat of product liability for firms whose products are used before they’ve been approved by the FDA. The government has pledged to indemnify manufacturers if something goes wrong with unapproved products that are given to the general population in an emergency situation, but what if there’s a serious problem during clinical trials?
And it’s not clear whether the government will honor companies’ intellectual property if push comes to shove. (Remember the pressure that the government put on Bayer AG to cut the price of its antibiotic Cipro following the anthrax attacks in 2001? Congress actually threatened to suspend Bayer’s patent if it didn’t acquiesce.)
Senators Joe Lieberman and Orrin Hatch have already begun to craft BioShield II, a bill intended to address at least some of these issues – but how long will it take before that bill gets signed into law? And will it look anything like the original version by the time it does?
Meanwhile, money is available from a number of government sources – including the Defense Advanced Research Projects Agency (DARPA, the central R&D organization for the Department of Defense), SBIR grants and the NIAID, among others. And plenty of companies are tapping into these sources. But first they have to apply, and it takes time.
For instance, Vical did get a commitment from the NIAID at the beginning of June to support a Phase I trial of its anthrax vaccine – but its dilemma typifies the situation faced by nearly every biotech firm involved in biodefense efforts: Without government funding of some sort (and not necessarily from Project BioShield), promising drug candidates have to sit on the shelf. It’s a frustrating situation: This nation’s government is pushing for new drugs, and companies are devoting considerable time and effort to oblige. The clock is ticking -- yet, actual financial backing is slow to come.
Indeed, the drug development path for anti-bioterror agents has a unique set of challenges that set it apart from the route that biotech firms generally follow. So many, in fact, that it’s not clear whether a company can actually build a business around biodefense per se.
There are many obstacles, explained Stephen Sammut, a venture partner with Burrill & Co. “Federal grants are insufficient. Human trials are problematic. The market size is unpredictable. Reimbursement is unclear. Intellectual property (IP) rights are at risk. And liability exposure is indeterminant.”
As if that list weren’t enough to quell the enthusiasm of a budding biotech firm, the defense contractor business model – by which companies competitively apply for government contracts for specific purposes – is a different sort of beast than the usual biotech business model. Defense equity differences allow for a much lower rate of return: “Defense contractors in the aerospace industry, for instance, have profit margins that are only one-third of those in pharma and biotech,” Sammut explained. Biotech products for use in biodefense efforts “will not enjoy the same margins they’re used to (28-31 percent),” he added. Therefore, companies will have to rely less on cash flow and sales of these products than they would for those that have a commercial impact.
No wonder, then, that VCs and other investors don’t find the defense contractor model especially compelling. “In most instances, it’s difficult to build a business with the government as the sole customer,” Sammut said. “A company needs a hybrid strategy,” developing technology that has significant civilian applications as well as those directly related to biodefense. Moreover, the government contracts must support the firm’s R&D and infrastructure. “The technology should have some utility in other things the company is doing,” he said. In this way, a company “gets the synergy of a strategic partnership to fund a platform with dual applications.” In this case, the partner is the government, of course, but the strategy “is not so different than that used by the first biotechs when they partnered with pharmaceutical companies.”
Indeed, many biotechs active in the biodefense arena use just this sort of hybrid business strategy to support their product development programs. Take AVANT Immunotherapeutics Inc., for instance. The company, which specializes in vaccines and immunotherapeutics, devotes some of its efforts to biodefense, but also has active programs in other bacterial and viral diseases, cardiovascular diseases and food safety. It has six products in the clinic, with the most advanced being Rotarix, an oral vaccine against rotavirus (which causes severe diarrhea and dehydration in infants and small children) that is partnered with GlaxoSmithKline plc.
AVANT’s also in humans with its next-generation injectable vaccine against anthrax in partnership with the Department of Defense (DoD) and Dynport Vaccine Company LLC, the DoD’s prime contractor. This vaccine, which Dynport took into Phase I trials in October 2002, includes a highly purified version of the anthrax bacterium’s protective antigen. Not only does AVANT receive fees and milestone payments from Dynport for the use of its technology, but also Dynport awarded a $344,000 subcontract to AVANT in June 2003 that covers stability testing of the vaccine.
But even newer versions of an anthrax vaccine are sorely needed. The product now in use, mainly to protect military personnel, is made from a cell-free filtrate of cultured, attenuated anthrax bacteria. And it has some significant drawbacks – including the fact that it requires six shots over 18 months, plus an annual booster, and it causes a number of side effects. It’s just not suited to emergency situations, and that’s why an oral vaccine that can be easily administered and induce rapid immunity would be a real step forward.
Thus, AVANT is also working on two oral vaccines – an anthrax/plague combination vaccine and a single-dose vaccine against anthrax. The firm uses attenuated live bacteria, engineered to contain key disease antigens, as vectors to deliver these antigens to the immune system. Here again, the biotech company is paid for its work through grants and subcontracts.
For instance, AVANT received a 12-month, $125,000 Phase I SBIR grant from NIAID in July 2002 to support the development of its single oral-dose bacterial vectors as vaccines for anthrax. And in January 2003, the company was awarded a $2.5 million subcontract by Dynport to develop the combination anthrax/plague vaccine. In June 2003, that initial subcontract was followed by a $1.3 million subcontract to support preclinical animal testing of the oral combination vaccine. Then in April 2004 AVANT received a third subcontract, worth $3 million, to support the human clinical testing of the plague vaccine component of the combination product, which it expects to take into trials this year.
Very importantly, because AVANT has been able to secure the SBIR grant and the subcontracts, the firm doesn’t spend its own money for its biodefense research. As well, the government funding also goes a long way to support the company’s development of its vaccine technology for commercial purposes.
But the manner in which AVANT gets paid for its work varies according to the specific program. “We have three biodefense programs,” explained president and CEO Una Ryan. “In each case the funding is different.” For the recombinant protective antigen program (the injectable anthrax vaccine), “we licensed our technology to DoD, which is responsible for development. We get milestones and a fixed price per dose if the vaccine ever gets used,” she said. The upside is the fact that the company isn’t out of pocket; the downside is the fact that “we don’t get to control the speed of development.”
Under the SBIR grant from NIAID on the oral anthrax vaccine candidate, AVANT received a “modest” amount of money and ended up doing “a lot of grant writing” to get it.
The model that “works best for us,” Ryan said, centers on the contracts with DoD, through Dynport, on the combination vaccine for plague and anthrax. Payments here are received on a time and materials basis. “We’ve received $8 million just for preclinical development.” And, she explained, “We report monthly and get paid monthly in arrears.”
In order to get that money, AVANT comes up with a plan for the next year or two and tells the government “what we are going to do in very precise detail,” Ryan said. This includes “what each person [working on the project] will do on a weekly basis.” Plus, “we have to do all the accounting as DoD wants it,” which differs from the SEC’s requirements.
That’s a lot of very time-consuming work, but Ryan says it’s worth it. For instance, the DoD funding is non-dilutive. As well, the company doesn’t have to give up its rights to commercial applications of its technology. And, the money “underwrites four business areas, which allows us to make progress on our entire platform technology.”
Government contracts even allow the company to make a small profit, she added (a 10 percent margin on a defense contract versus the standard pharmaceutical margin of 30 percent). “Would I build a company to go for these kinds of margins?” Ryan queried. “No. But AVANT already had the technology and manufacturing capability in place. It’s an incredibly sensible way for us to get money now.”
For fledgling biotech firm Chimerix Inc., government work turned out to be a fantastic way to raise cash. The two-year-old firm, located in La Jolla, was awarded a 4.5 year, $36.1 million grant from the NIAID in September 2003 to develop its oral antiviral drug for treating smallpox infections and complications resulting from smallpox vaccination. (That $36.1 million has since been increased to $37.1 million to adjust the indirect cost rate.)
That huge sum must have impressed Chimerix’ founding venture investors, for they simultaneously bought $3.1 million in preferred stock to help the company’s other research programs in drug-resistant HIV and viral hepatitis.
Interestingly, Chimerix’ drug candidate is a new version of Gilead Sciences Inc.’s nucleotide analog Vistide (cidofovir), which the FDA approved in June 1996 for treating cytomegalovirus infection in AIDS patients. Chimerix used its lipid conjugate technology to covalently modify cidofovir into an orally available product that is more potent and less toxic than the original. Days after the firm announced its NIAID grant, it licensed the rights to develop this compound from Gilead.
Chimerix has already demonstrated that its drug, CMX-001, is fully effective in preventing mortality in mouse models of poxvirus infection, and now it’s gearing up to test the product in humans for safety and cynomolgus monkeys for efficacy. If the monkey studies pan out, they will provide the data necessary for an FDA approval.
According to president and CEO George Painter, “quite a lot of money [for biodefense] has already been allocated this fiscal year.” The question is how to get one’s hands on it. “Step One in BioShield is R&D funding,” he said. “Chimerix is beginning now. We are developing countermeasures for a high consequence threat. The government has already said it will purchase products, so we know the government has intent.” And, he added, “Now we have $37.1 million from NIAID.”
“The NIAID agreement is structured differently than the type that VCs like,” Painter continued. “It involves a non-competitive renewal. If Chimerix meets the goals for year one, we get a sum of money allocated for that year. Some of that is for direct costs, the expenses incurred for development. We send a purchase order to NIAID and they wire the money to our bank.” As well, he continued, there are indirect costs, which are slightly less than half of the direct costs. “We apply for this [reimbursement] at our discretion, quarterly or so.”
“These indirect costs keep our operation going. They are tied to the direct costs, which are tied to the rate we carry out the development program.” That means the company has to execute some “careful planning for cash flow,” Painter said. And that’s “one interesting outcome from doing business this way: We run our programs with a lot more fiscal discipline to justify the cash flow against the programs we already have put in place.”
While Chimerix is just about to get started on testing its smallpox drug candidate in humans and monkeys, VaxGen Inc. has its hands on a smallpox vaccine that’s already been approved for use in humans. The vaccine, dubbed LC16m8, is a next-generation, live attenuated vaccine that has been licensed for use in Japan since 1980 and forms the basis of that country’s smallpox vaccine stockpile.
VaxGen licensed the U.S. commercial rights to this product from Japan’s Chemo-Sero-Therapeutic Research Institute (Kaketsuken) in December 2003 – although the parties had been collaborating on it since November 2002.
In May 2004, VaxGen presented efficacy data from two animal studies – in mice and rabbits – and demonstrated that a single dose of LC16m8 was able to protect all animals against a lethal poxvirus challenge. It was also as efficacious as the currently licensed vaccine, Wyeth’s Dryvax, which has significant drawbacks: It can’t be given to pregnant women, cancer patients, infants, individuals who have the skin disease eczema, or people with AIDS. Later this year, the company plans to begin a Phase I/II trial in humans.
VaxGen is hoping that it can sell its smallpox vaccine to the U.S. government, which expects to spend $1.9 billion on an attenuated vaccine over a 10-year period, which started in October 2003. Of this amount, it will use about $900 million to buy 60 million doses during the first three years.
Meanwhile, the company is working under an $80.3 million cost-reimbursement plus fixed fee contract from the NIAID, awarded in September 2003, to bring forward its anthrax vaccine candidate rPA102 (recombinant protective antigen), which was originally developed by the U.S. Army Medical Research Institute of Infectious Diseases (USAMRIID). This rich deal – which is intended to fund most of the work required to file a BLA -- followed on the heels of the firm’s September 2002 anthrax contract with NIAID, an earlier-stage agreement originally valued at $13.6 million but later amended to a total of $20.9 million.
That earlier money has enabled VaxGen to conduct Phase I dose ranging human safety trials – which confirmed that the vaccine candidate elicited an immune response comparable to AVA, the currently licensed product – and to prepare for Phase IIs, the first of which began in mid-April.
But the company believes that even $80 million won’t be enough to cover a large-scale safety study and additional clinical trials (which may or may not be necessary). So, in response to a request for proposals issued by the government in March 2004, it put in a bid for another contract to supply a stockpile of up to 75 million doses of rPA anthrax vaccine – “full, licensable product to be delivered with 24 months,” president and CEO Lance Gordon explained. The U.S. Department of Health and Human Services (HHS) has said that it will award a purchase contract to one or more companies on or about August 9, 2004.
“It’s not business as usual, for us or for the government,” he added. “We have conference calls with the NIH every week and with the FDA every other week. We also report to contingency groups. This is a high-profile program that’s closely monitored.”
That goes for the actual costs incurred, as well. “Each task is mapped out,” Gordon said. That includes the amount of time it will take, the number of staff required, the resources needed, and development budgets. “We are reimbursed for direct costs and there is a rate allocation for overhead. We are paid on a monthly basis.”
However, he said, “The fees are different in the two [NIAID] contracts. The first is pro rata and the second is paid by contract line items or milestones.” As well, “the new contract we are now negotiating is a firm fixed price procurement contract, which will be paid by the HHS. We will be paid for inventory as it is released into government control.” That means “there will be a time when the company will be covering the cost of the product,” Gordon added.
VaxGen, best-known for its failed AIDS vaccine candidate, has capitalized on the expertise and infrastructure it developed for that product in order to refocus its energies on biodefense vaccines and large-scale manufacturing operations. But has it put all its eggs in one basket? Not according to Gordon. When he came on board three years ago, he said, “I was serious about broadening the company,” including building a manufacturing capacity for biopharmaceuticals. “I joined the company three days before 9/11,” but after that horrific day, biodefense became a priority.
However, Gordon said that he will not limit VaxGen’s scope to biodefense projects alone. “We are not a biodefense company. We are looking for new product opportunities. We’ve demonstrated a track record for accelerated product development as well as large scale and really large scale manufacturing” – the company has already produced a kilogram or more of rPA for its anthrax vaccine and can make 100 million doses per year, a process that is easily scalable. “Other than the time scales for the anthrax vaccine, which are compressed, there is not much difference from normal vaccine development,” he said.
While VaxGen was compelled to jump into the biodefense arena by the terrorist attacks in the U.S., Acambis plc was already there. A year earlier, in September 2000, the British company was awarded a $343 million, 20-year contract from the Centers for Disease Control and Prevention (CDC) to develop, manufacture and supply for stockpiling a new smallpox vaccine based on the same vaccinia virus strain used for Dryvax. Under the terms of the contract, Acambis was to produce 40 million doses initially, with delivery scheduled for mid-2004. Following the events of 9/11, this supply contract was amended to bring forward production of 54 million doses of vaccine in 2002 and to accelerate the clinical development plan.
This first contract was a “defense-style, cost-plus contract,” explained Nick Higgins, Acambis’ chief business officer. “We gave our budget to the government and then invoiced it monthly for actual costs and an agreed fee. This is a very risk-free situation for the company. There are no cash flow issues,” he said, but on the other hand, “you can’t make very much money this way. A 10-12 percent margin is typical for a cost-plus contract. It’s not bad, but in our industry it’s not great.”
In November 2001, Acambis won a second smallpox vaccine contract from the CDC – this time for making 155 million doses of smallpox vaccine in 12 months. (Acambis actually completed this order in February 2004, but only because the delivery date was rescheduled from December 2003.) To meet this timeline, Acambis joined forces with Baxter BioScience, which added extra manufacturing capacity and also employed the use of Baxter’s serum-free cell culture technology to produce the vaccine candidate ACAM 2000. (The two contracts have now been consolidated into one.)
In the second contract, which Acambis bid for, “the government asked for a fixed price” for the vaccine doses. Thus, in this situation, “all the risk was with the company,” Higgins said. “We bid $428 million as a firm fixed price for 155 million doses.”
Of that $428 million, $125 million was for R&D, to be paid by the government monthly over a 22-month period, he explained. “This helped our cash flow considerably. A month after the contract was awarded, we got our first monthly fee.” And the company gets paid $2 per dose of vaccine on delivery. “We made a margin of about 40 percent on this contract,” Higgins added.
ACAM 2000 is currently in Phase III clinical trials in the U.S. – although those trials are now on hold. It turns out that three of the trial subjects, all of whom were vaccine-naïve, developed myopericarditis – an inflammation of the heart and surrounding tissue. This occurred in those who were receiving the comparator vaccine Dryvax as well as those injected with Acambis’ candidate. It did not occur in subjects who had been previously vaccinated during the smallpox eradication program in the 1970s. Myopericarditis is a known side effect of Dryvax, however, and the aim of the trial is to show that ACAM 2000 is not inferior to the licensed vaccine. “The general feeling is that this side effect is transient,” Higgins said, but the company and the FDA want to determine if there are any longer-term consequences before proceeding.
Acambis is also developing a third-generation smallpox vaccine – MVA (modified vaccinia Ankara, a weakened form of the current vaccine) on which it is close to starting Phase I trials. The company intends to develop this vaccine through a series of government contracts: It received the first, worth $9.2 million, from the NIAID in February 2003. Under this contract, which is structured on a cost plus fixed fee basis, Acambis is to develop the vaccine, deliver 5,000 doses to NIAID, and conduct a Phase I clinical trial.
The NIAID recently requested proposals for a second stage contract to manufacture three million doses of MVA and to continue clinical trials. Acambis submitted its proposal in February 2004 and is now waiting to hear whether it will be chosen. As well, the company intends to submit a proposal for a third contract – focused on providing a 30-60 million dose stockpile to the U.S. government – sometime next year.
Acambis is developing a number of other products, and even sells one (an oral typhoid vaccine) but “the majority of our revenue comes from biodefense,” Higgins said. “This is good for us. It enabled us to go profitable in 2003.” But biodefense is not the firm’s long-term business plan. “It will be useful over the next five years,” he said, by which time Acambis anticipates some of its other products – including a vaccine for West Nile virus – will be on the market.
Despite its strong points, Project BioShield does have some worrisome ones. For instance, not everyone believes that the government will actually end up spending anywhere near $5.6 billion to buy vaccines and antidotes. History has proven too often that the government is capable of reneging on its promises. And investors need reassurances.
“Our current investors are enthused about biodefense,” Chimerix’ Painter said. “They are comfortable with Chimerix getting money from NIAID in yearly tranches.” But, of course, not all VCs like the model. “Others are extremely dubious, reflecting skepticism about the staying power of government. BioShield is trying to provide a guarantee to get rid of that skepticism.”
“It’s wonderful to have Project BioShield, even though it’s not perfect,” said AVANT’s Ryan. “But there are two big issues.” First of all, “indemnification is one of the biggest issues for a small company like mine,” she explained. “There is a Safety Act that would cover us during a terrorism emergency, but we have to put the vaccine into humans during clinical trials.” That situation is not an emergency and it’s not covered. “We either need a blanket indemnification or [an extension of] the Safety Act to include clinical trials.”
Ryan, who spends a considerable amount of time in D.C. lobbying for the biotech industry, said, “This is the case I make to Congress. Even the threat of litigation means that investment in a company will dry up.”
Acambis’ Higgins added: “The government will have to find a way to get indemnification.” But it’s a complicated issue. “There is concern in D.C. that this indemnity would spread to all pharmaceuticals.”
The second sticking point, Ryan said, is money. Biotech companies “will need more money for a longer period of time. It takes $1 billion and 10-15 years to develop a vaccine. [BioShield] may help us stockpile existing vaccines, but we need next-generation funding to develop new vaccines… We need committed funds.” And, as she pointed out, government contracts “are the only way to get programs like these funded.”
Without them, companies have little incentive to devote their often-limited resources to developing new vaccines and drugs for combating bioterrorism.
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