A nurse administers an investigative smallpox vaccine.

On June 7, representatives of US President Bush's administration were on hand in San Francisco, at the annual Biotechnology Industry Organization conference, to announce that the government is poised to dispense new contracts for stockpiling a vaccine and an antidote for anthrax. A bit earlier, on May 19, the US Senate passed by a vote of 99–0 the mothballed Bioshield bill, which, if it becomes law, would provide $5.6 billion over 10 years for such biodefense-related programs. It is a start, but the Federal government will need to spend a lot more money and erect market incentives to spur industry development of products that will truly help protect US citizens from chemical or biological attacks.

In the weeks after 9/11 and during the anthrax attacks of 2001, administration officials and Congress promised pharma and biotech executives that the USgovernment would spare no expense and leave no obstacle in place to protect the nation against bioterrorism. In January 2003, Bush unveiled the biodefenses research and development program in his State of Union speech. The proposal didn't get very far in Congress, however, in part because it was long on hope but short on specifics.

Shortly after terrorist bombings in Madrid last March, however, the bill received a bit of tweaking. With the House promising swift passage of Bioshield, and Bush keen to sign the bill into law before elections this November, a goodly lot of government money should soon be flowing for biodefense-related diagnostics, vaccines and therapeutics development.

“Everybody knows that we can't build the vaccines, therapeutics and diagnostics for biodefenses without industry,” says Frank Rapoport, a managing partner at the Washington law firm, McKenna Long & Aldridge, which helps companies secure government contracts. “I get the sense that [Congress] is very serious about engaging industry on this bioterrorism issue.”

This attitude from Congress is essential, because many of the fledgling firms that flocked to biodefense contracts in the past few years have been forced to lower their expectations for what these deals would bring. Although none will speak on the record, industry sources say many are frustrated. One Capitol Hill staffer acknowledged: “Nobody wants to be unpatriotic about this, so they're keeping quiet. But I can tell you biodefense hasn't worked out for [companies] as planned.”

Many aspects of the bidding process have dismayed industry. Take, for example, the $428 million contract to manufacture 155 million doses of smallpox vaccine awarded to Acambis in November 2001. In granting the contract, the government passed over four of the world's most experienced vaccine makers—despite the fact that the British firm had never developed a drug. In April, the firm stopped the clinical trials because of adverse effects, bringing into question the expertise of those granting contracts.

Biodefense is unappealing because it has only one custimer (the US government), low profit margins, political vulnerability and uncertain patent protection. Extracted from a report from the National Venture Capital Association, Arlington, Virginia

Wall Street has lowered its expectations, too. Over the past several months, investors have tired of once-hot biodefense contractors like Acambis and Avant Immunotherapeutics, whose share prices over the past year to June 14 have stayed even and dropped 17%, respectively. There are many theories to explain this lackluster reception.

“There is a perception that the government could step in and limit a firm's ability to develop something commercially that was originally part of a biodefense project,” says Garry Menzel, head of global biotechnology investment banking at Goldman Sachs, referring to provisions in Bioshield against so-called dual-use research. “Whether that's right or not, I do think investors and CEOs [who got] caught up in the initial wave of enthusiasm over biodefense are back now to focusing most of their attention on their core business opportunities where the market, not the government, sets the prices—and where there are no questions about restrictions on patents.”

Stephen Sudovar, CEO of EluSys, a company in Pine Brook, New Jersey, that has a contract with the US Department of Defense to develop a monoclonal antibody therapeutic for anthrax, says higher up on his list of concerns are the capital needs of developing biodefenses, which are far larger than government officials appreciate. On top of that, winning a government contract and getting a check can be 6–12 months apart. Sudovar says that EluSys still has not received the $3.5 million it was promised last November.

A recent report from the Arlington, Virginia-based National Venture Capital Association, “Government market enigma causes industry to stick with what they know,” sums up the problem nicely. The report's authors conclude that biodefense is unappealing because it has only one customer (the US government), low profit margins, political vulnerability, and uncertain liability and patent protection.

But there is still hope in the form of S.666, a bill originally cosponsored by Senators Joseph Lieberman and Orrin Hatch in 2001, which is currently being resurrected to address these and other industry concerns. Neither the drug development industry nor its investors will chase biodefense until the rewards greatly increase and the risk is significantly lower than it is now. Only then will the United States be able to develop a true “bioshield.”