Contract Management: DOD's Anthrax Vaccine Manufacturer Will Continue to
Need Financial Assistance (Testimony, 04/14/2000, GAO/T-NSIAD-00-140).

Pursuant to a congressional request, GAO discussed the contractual
relationship between the Department of Defense (DOD) and BioPort
Corporation for production of the anthrax vaccine, focusing on: (1) the
financial assistance DOD provided BioPort in 1999; and (2) additional
financial assistance DOD is providing BioPort in 2000.

GAO noted that: (1) last year, DOD provided BioPort financial assistance
so that the company would have sufficient operating capital to preclude
disrupting, and possibly ending, the anthrax vaccine program; (2) among
other things, DOD substantially increased the original contract price
and provided an interest-free advance payment to BioPort of $18.7
million; (3) in providing the assistance, DOD believed the Food and Drug
Administration (FDA) would approve the company's vaccine production
processes in its renovated facilities by the end of 1999; (4) however,
in November 1999, FDA reviewed the company's manufacturing processes and
identified numerous deficiencies; (5) according to DOD officials,
BioPort is now not expected to obtain FDA approval until the end of year
2000; (6) the delay in obtaining FDA approval has caused BioPort to
experience continuing financial problems; (7) recognizing the company's
financial difficulties, DOD has taken a number of additional actions to
help improve BioPort's financial situation; (8) in February 2000, DOD
modified BioPort's contract to provide an additional amount of almost
$12 million to, in part, hire technical assistance for obtaining FDA
approval; (9) DOD also extended the schedule for BioPort to repay the
interest-free advance payment and returned about $7.4 million that the
company had repaid; (10) in March 2000, DOD notified BioPort that it
wants BioPort to stop anthrax vaccine production for now; (11) this
action reduces DOD's risk of paying for vaccine that the FDA may
ultimately not approve and also allows BioPort to focus on obtaining FDA
approval; (12) however, the company's financial condition is worsened
because BioPort will no longer receive revenues from producing the
vaccine; and (13) to mitigate the consequences of its actions, DOD
intends to provide additional financial assistance to BioPort to sustain
the production line.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-NSIAD-00-140
     TITLE:  Contract Management: DOD's Anthrax Vaccine Manufacturer
	     Will Continue to Need Financial Assistance
      DATE:  04/14/2000
   SUBJECT:  Biological warfare
	     Immunization services
	     Immunization programs
	     Advance payments
	     Department of Defense contractors
	     Defense procurement
	     Contract modifications
	     Contract performance
	     Contract terms
	     Financial analysis
IDENTIFIER:  DOD Anthrax Immunization Program

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Friday,

April 14, 2000

GAO/T-NSIAD-00-140

contract management

DOD's Anthrax Vaccine Manufacturer Will Continue to Need Financial
Assistance

        Statement of David E. Cooper, Associate Director

Defense Acquisition Issues

National Security and International Affairs Division

Testimony

Before the Subcommittee on Personnel, Committee on Armed Services, U.S.
Senate

United States General Accounting Office

GAO

Mr. Chairman and Members of the Committee and Subcommittee:

It is a pleasure to be here today to discuss the contractual relationship
between the Department of Defense (DOD) and BioPort Corporation for the
production of anthrax vaccine. DOD regards the use of anthrax by an enemy as
the single greatest biological threat to U.S. military forces. BioPort, the
only company licensed by the Food and Drug Administration (FDA) to produce
the anthrax vaccine in the United States, has experienced financial
difficulties that have jeopardized DOD's anthrax vaccination program. In
response to the company's problems, DOD has provided BioPort financial
assistance. I will discuss (1) the "extraordinary contractual relief" DOD
provided BioPort in 1999 and (2) additional financial assistance DOD is
providing BioPort in 2000.

We have issued a number of products on DOD's anthrax vaccination program and
the larger issue of biological terrorism. A list of these products is at
attached to this statement.

Summary

Recognizing the company's current financial difficulties, DOD has taken a
number of additional actions to help improve BioPort's financial situation.
In February 2000, DOD modified BioPort's contract to provide an additional
$13 million to, in part hire technical assistance in obtaining FDA approval
of BioPort's production processes. DOD also extended the schedule for
BioPort to repay its interest-free advance and returned
$7.4 million that the company had repaid for the $18.7 million in advance it
had received from DOD.

In March 2000, DOD notified BioPort that it wants BioPort to stop anthrax
vaccine production for now. This action reduces DOD's risk of paying for
vaccine that the FDA may ultimately not approve and also allows BioPort to
focus on obtaining FDA approval. However, the company's financial condition
is worsened because BioPort will no longer receive revenues from producing
the vaccine. To mitigate the consequences of its action, DOD intends to
provide additional financial assistance to BioPort to sustain the production
line.

Background

In June 1999, we testified that over the previous 11 years, DOD had provided
about $112 million in contracts, including options, to procure the anthrax
vaccine and help ensure the viability of the facility. After, BioPort took
over the facility, it experienced delays in completing renovation efforts,
and production of the vaccine was 5 months behind schedule when it resumed
production in May 1999. As a result of these delays, the company did not
receive the revenues it expected and faced a serious cash flow problem,
which raised significant doubt as to whether BioPort could to meet contract
obligations. We attributed the company's cash flow problem to its failure to
achieve an overly optimistic business plan. The company's business plan, in
addition to meeting DOD's requirements, provided for the sale of anthrax
vaccine to other customers. At that time, BioPort proposed several actions
to resolve its financial problems, including asking DOD for advance payments
and increasing contract prices.

DOD's 1999 Efforts to Improve BioPort's Cash Flow Problem

   * increasing the contract $24.1 million by raising the price of each dose
     of the vaccine to $10.64, up from the $4.36 and $2.26 prices originally
     negotiated;
   * providing BioPort with an interest-free advance payment of $18.7
     million;
   * decreasing the quantity of vaccine to be delivered under the contract
     from 7.9 million does to 4.6 million doses; and
   * allowing BioPort to retain a portion of vaccine production for
     commercial sales provided it first meets the government's requirements.

As security for the $18.7 million advance payment, BioPort granted the
government a paramount lien on virtually all of its assets. For example,
BioPort mortgaged its real property, equipment, product inventory, accounts
receivable, and licenses to the government. BioPort also agreed to request
FDA approval to transfer its license to produce biological products to the
government if it defaults under the terms of the contract modification. In
addition, BioPort agreed to establish a cost accounting system that can be
used to determine the cost of producing anthrax vaccine.

DOD Continues to Provide BioPort Financial Assistance

BioPort has evaluated alternative sources of capital but has been unable to
secure additional financing or capital sufficient to meet operating
expenses. As a result, DOD has taken a number of actions in the short term
to keep the company operating and help deal with issues that must be
resolved before the company can obtain FDA approval. In February 2000, DOD
modified its contract with BioPort to provide, at least, an additional $13
million to (1) hire consultants to assist in obtaining FDA's approval of
BioPort production processes and (2) obtain subcontractor support to test
the anthrax vaccine. Additional funds, yet to be determined, will be
provided to BioPort for it to establish a redundant capability to package,
fill, and store the vaccine.

In February 2000, DOD also agreed to return about $7.4 million of the
advance payment that the company had repaid under the terms of the
extraordinary contractual relief provided in 1999. While this action did not
increase the cost of the contract, it did extend the schedule under which
BioPort is to repay the $18.7 million advance payment. In exchange for the
extension, BioPort agreed to stop producing its plasma products and suspend
production of the rabies vaccine so that the company could focus its
attention on obtaining FDA approval.

In March 2000, DOD notified BioPort that it intends to stop the company's
anthrax production operations for now. FDA indicated that current production
operations might result in potentially unusable vaccine because it has yet
to approve the manufacturing process. This production stoppage reduces DOD's
risk of paying for vaccine that the FDA may ultimately not approve and
allows BioPort to focus on obtaining FDA approval. However, since payment
under the contract is largely based on vaccine production rather than on FDA
approval for release, the stop in production will worsen BioPort's financial
condition. To mitigate the consequences of stopping production, DOD intends
to provide additional financial assistance to BioPort to sustain its
production line. The amount of additional assistance has not been
determined.

Contact and Acknowledgment

Attachment

Related GAO Products

Medical Readiness: DOD Continues to Face Challenges in Implementing Its
Anthrax Vaccine Immunization Program (GAO/T-NSIAD-00-157, Apr. 13, 2000).

Combating Terrorism: Chemical and Biological Supplies Are Poorly Managed
(GAO/T-HEHS-AIMD-00-59, Mar. 8, 2000).

Combating Terrorism: Chemical and Biological Supplies Are Poorly Managed
(GAO/HEHS/AIMD-00-36, Oct. 29, 1999).

Medical Readiness: DOD Faces Challenges in Implementing Its Anthrax Vaccine
Immunization Program (GAO/NSIAD-00-36, Oct. 22, 1999).

Contract Management: Observations on DOD's Financial Relationship with the
Anthrax Vaccine Manufacturer (GAO/T-NSIAD-99-214, June 30, 1999).

Combating Terrorism: Observations on Growth in Federal Programs
(GAO/T-NSIAD-99-181, June 9, 1999).

Medical Readiness: Safety and Efficacy of the Anthrax Vaccine
(GAO/T-NSIAD-99-148, Apr. 29, 1999).

Gulf War Illnesses: Questions About the Presence of Squalene Antibodies in
Veterans Can Be Resolved (GAO/NSIAD-99-5, Mar. 29, 1999).

Combating Terrorism: Observations on Biological Terrorism and Public Health
Initiatives (GAO/T-NSIAD-99-112, Mar. 16, 1999).

Combating Terrorism: Observations on Federal Spending to Combat Terrorism
(GAO/T-NSIAD/GGD-99-107, Mar. 11, 1999).

Combating Terrorism: Efforts to Protect U.S. Forces in Turkey and the Middle
East (GAO/T-NSIAD-98-44, Oct. 28, 1997).

Combating Terrorism: Status of DOD Efforts to Protect Its Forces Overseas
(GAO/NSIAD-97-207, July 21, 1997).

(707504)

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