[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




    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

                                 ______

                   U.S. GOVERNMENT PRINTING OFFICE
69-533                     WASHINGTON : 1999



                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH, Idaho                   (Independent)
DAVID VITTER, Louisiana


                      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              ROD R. BLAGOJEVICH, Illinois
ILEANA ROS-LEHTINEN, Florida         TOM LANTOS, California
JOHN M. McHUGH, New York             ROBERT E. WISE, Jr., West Virginia
JOHN L. MICA, Florida                JOHN F. TIERNEY, Massachusetts
DAVID M. McINTOSH, Indiana           THOMAS H. ALLEN, Maine
MARSHALL ``MARK'' SANFORD, South     EDOLPHUS TOWNS, New York
    Carolina                         BERNARD SANDERS, Vermont 
LEE TERRY, Nebraska                      (Independent)
JUDY BIGGERT, Illinois               JANICE D. SCHAKOWSKY, Illinois
HELEN CHENOWETH, Idaho

                               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


                            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

 
    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 sole-source 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, 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 State-run 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.
    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, 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 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----
    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.
    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 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 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 
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 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.
    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 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 Department'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?
    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 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 Government-owned 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 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 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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    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----
    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 bio-terrorism. 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 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.
    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.
    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 
Government-furnished equipment, which I am told is $7 million 
of Government-furnished 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.
    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. El-Hibri, 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.
    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 information 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 
appropriately 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?
    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?
    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.
    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.
    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 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?
    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 
follow-on 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:]

    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 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 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.
    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-fits-all, 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.
    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 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.
    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 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.
    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 
Government-furnished 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, 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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