$433-million Smallpox Drug Deal Questioned

November 14, 2011

13 Nov | WASHINGTON –  Over the last year, the Obama administration has aggressively pushed a $433-million plan to buy an experimental smallpox drug, despite uncertainty over whether it is needed or will work.  Senior officials have taken unusual steps to secure the contract for New York-based Siga Technologies Inc., whose controlling shareholder is billionaire Ronald O. Perelman, one of the world’s richest men and a longtime Democratic Party donor.

by David Willman
Los Angeles Times

When Siga complained that contracting specialists at the Department of Health and Human Services were resisting the company’s financial demands, senior officials replaced the government’s lead negotiator for the deal, interviews and documents show.

When Siga was in danger of losing its grip on the contract a year ago, the officials blocked other firms from competing.

Siga was awarded the final contract in May through a “sole-source” procurement in which it was the only company asked to submit a proposal. The contract calls for Siga to deliver 1.7 million doses of the drug for the nation’s biodefense stockpile. The price of approximately $255 per dose is well above what the government’s specialists had earlier said was reasonable, according to internal documents and interviews.

Once feared for its grotesque pustules and 30% death rate, smallpox was eradicated worldwide as of 1978 and is known to exist only in the locked freezers of a Russian scientific institute and the U.S. government. There is no credible evidence that any other country or a terrorist group possesses smallpox.

If there were an attack, the government could draw on $1 billion worth of smallpox vaccine it already owns to inoculate the entire U.S. population and quickly treat people exposed to the virus. The vaccine, which costs the government $3 per dose, can reliably prevent death when given within four days of exposure.

Siga’s drug, an antiviral pill called ST-246, would be used to treat people who were diagnosed with smallpox too late for the vaccine to help. Yet the new drug cannot be tested for effectiveness in people because of ethical constraints — and no one knows whether animal testing could prove it would work in humans.

The government’s pursuit of Siga’s product raises the question: Should the U.S. buy an unproven drug for such a nebulous threat?

“We’ve got a vaccine that I hope we never have to use — how much more do we need?” said Dr. Donald A. “D.A.” Henderson, the epidemiologist who led the global eradication of smallpox for the World Health Organization and later helped organize U.S. biodefense efforts under President George W. Bush. “The bottom line is, we’ve got a limited amount of money.”

Dr. Thomas M. Mack, an epidemiologist at USC‘s Keck School of Medicine, battled smallpox outbreaks in Pakistan and has advised the Food and Drug Administration on the virus.  He called the plan to stockpile Siga’s drug “a waste of time and a waste of money.”

The Obama administration official who has overseen the buying of Siga’s drug says she is trying to strengthen the nation’s preparedness. Dr. Nicole Lurie, a presidential appointee who heads biodefense planning at Health and Human Services, cited a 2004 finding by the Bush administration that there was a “material threat” smallpox could be used as a biological weapon.

Smallpox is one of 12 pathogens for which such determinations have been made.

“I don’t put probabilities around anything in terms of imminent or not,” said Lurie, a physician whose experience in public health includes government service and work with the Rand Corp. “Because what I can tell you is, in the two-plus years I’ve been in this job, it’s the unexpected that always happens.”

Negotiations over the price of the drug and Siga’s profit margin were contentious. In an internal memo in March, Dr. Richard J. Hatchett, chief medical officer for HHS‘ biodefense preparedness unit, said Siga’s projected profit at that point was 180%, which he called “outrageous.”

In an email earlier the same day, a department colleague told Hatchett that no government contracting officer “would sign a 3 digit profit percentage.”

In April, after Siga’s chief executive, Dr. Eric A. Rose, complained in writing about the department’s “approach to profit,” Lurie assured him that the “most senior procurement official” would be taking over the negotiations.

“I trust this will be satisfactory to you,” Lurie wrote Rose in a letter.

In an interview, Lurie said the contract was awarded strictly on merit. She said she had discussed buying a smallpox antiviral for the nation’s emergency stockpile with White House officials and with HHS Secretary Kathleen Sebelius, but that the conversations focused on policy, not the manufacturer.

“We discussed the need for the product, and a need for a product to be stockpiled,” Lurie said. “And we discussed an impending procurement.”

Lurie denied that she had spoken with or written to Rose regarding the contract, saying such contact would have been inappropriate.

But in a subsequent statement, an HHS spokeswoman acknowledged Lurie’s letter to Rose, saying it “reflects the critical importance of the potential procurement to national security.”

Representatives of Siga, speaking on the condition they not be identified, said the new drug has been effective in animal testing and that the company is being paid a price commensurate with its value.

Neither the HHS spokeswoman nor the Siga representatives would disclose the agreed-upon profit margin or the per-treatment price. Siga has cited terms of the contract in its public financial statements — but without those financial details.

Worst-case scenarios

Worrying about worst-case scenarios is what biodefense planners do. In the case of smallpox, millions of Americans have no immunity because the vaccination of civilians ended in 1972. And there is no way to guarantee that a rogue regime such as North Korea is not holding smallpox.

Nonetheless, no such threat has been verified. The Bush administration suspected Saddam Hussein of possessing smallpox and other biological weapons, but inspectors did not find any after the U.S. invaded Iraq in 2003.

Still, pressure to move quickly and spend more has helped shape U.S. biodefense policy since the Sept. 11, 2001, terrorist attacks and the anthrax mailings that fall.

Investors such as Perelman saw opportunity. In 2003, Perelman, through his holding company MacAndrews & Forbes Holdings Inc., invested heavily in Siga and installed a team of executives to run it.

The move seemed prescient when Bush, in June 2004, signed Project BioShield, a 10-year, $5.6-billion initiative to fund the development and stockpiling of medications to counter bioterrorism.

Two months later, Siga purchased the rights to what became known as ST-246 and other assets from a Pennsylvania company, ViroPharma Inc., for $1 million in cash and 1 million shares of Siga’s common stock. Over the next three years, the National Institute of Allergy and Infectious Diseases awarded Siga two research grants and a related contract, worth a total of $23.5 million, to develop the new drug.

From the outset, there was only one potential customer: the U.S. government.

For Siga, the stakes were high. ST-246 was its most promising experimental compound.

From 2005 through September, the company has paid three lobbying firms $800,000 to represent its interests in Washington, public records show. Disclosures filed by the lobbyists said they focused on Project BioShield and “issues related to homeland security and HHS,” along with “government procurement of vaccines.”

Siga representatives told The Times that the company had lobbied only “generally” for biodefense spending, adding: “Neither Siga nor anyone else on Siga’s behalf ever lobbied anyone to get this contract.”

Perelman and others at Siga’s affiliate, MacAndrews & Forbes, have long been major political donors. They gave a total of $607,550 to federal campaigns for the 2008 and 2010 elections, according to records compiled by the Center for Responsive Politics. About 65% of that money went to Democrats. Perelman donated an additional $50,000 to President Obama‘s inauguration.

A spokeswoman for Perelman said his contributions reflected nothing more than “his right as a citizen to support candidates he believes in.”

From December 2007 to January of this year, Rose, Siga’s chief executive, served on the U.S. National Biodefense Science Board, which has advised Lurie on how to respond to biological terrorism and other potential health emergencies. (Rose was appointed during the Bush administration.)

In June 2010, Siga further heightened its presence in Washington by naming to its board Andrew Stern, former head of the Service Employees International Union and a frequent visitor to the Obama White House. The union is a wellspring of campaign money and volunteers for Democratic candidates.

On Oct. 13, 2010, Siga announced that the government intended to award it a contract for ST-246 worth as much as $2.8 billion. Within days, Siga’s stock price soared. In its year-end financial statement, the company said:

“Our ability to generate near-term revenue is particularly dependent on the success of our smallpox antiviral drug candidate.”

But the federal contract required that the winning bidder be a small business, with no more than 500 employees. Chimerix Inc., a North Carolina company that had competed for the contract, protested, saying Siga was too big.

Officials at the Small Business Administration investigated and quickly agreed, finding that Siga’s affiliation with MacAndrews & Forbes disqualified it.

The Obama administration could have awarded the contract to Chimerix as the only eligible small-business applicant. Or it could have reopened the competition to companies of any size.

Instead, the administration moved to block all companies — except Siga — from bidding on a second offering of the contract.

In early December, officials completed a required “justification for other than full and open competition,” which said an antiviral against smallpox was needed within five years and Siga was the only company able to meet that timetable.

The rationale was questioned by some in HHS, including contracting officer Brian K. Goodger, who in an internal email called it “a stretch.”

On Feb. 18, HHS terminated the original contract and requested a proposal from Siga.

Siga and government officials soon began tangling over the price the company would be paid. Because the contract was no longer to be awarded based on competition and because the only customer was the government, officials sought to assess whether the company’s proposed price was “fair and reasonable,” as required by federal law.

In so doing, officials looked at how much government money had already gone into developing ST-246. Public records show $115 million in federal support, not including the stockpile contract.

After reviewing Siga’s costs and the prices of other drugs produced in low volumes compared with commercial products, the HHS negotiators wanted to pay about $170 for each treatment. The company argued for more based on ST-246’s potential value to the nation.

“Siga did not derive its price based on any cost information, and, from Siga’s viewpoint, such information is not relevant to determination of an appropriate price,” the company’s chief financial officer, Daniel J. Luckshire, wrote to Lurie’s office and others on March 4.

“Siga has created extremely valuable intellectual property, embodied in ST-246, and Siga has priced ST-246 based on the value of that intellectual property,” Luckshire added.

A senior HHS official described negotiations as going “extremely badly… They are intransigent on price.”

After the two sides had conferred and again aired their differences, a senior HHS official, Michael A. Balady, told a colleague in an email April 4 that the negotiations “went extremely badly.… They are intransigent on price.”

On April 6, Rose emailed the government’s chief negotiator, D. Andre Early, saying the two sides were “at impasse.” Rose said “any further negotiation should occur with a more senior official [with] the authority to take into account the important policy issues that surround this procurement.”

Two days later, Lurie wrote her conciliatory letter to Rose, pledging to install a new lead negotiator. Her top subordinate, Balady, followed through by naming Goodger to replace Early, who continued to work on the contract but not as lead negotiator.

A financial analyst for RBC Capital Markets reported to investors in May that the agreed-upon price per dose appeared to be $255. He arrived at that estimate by dividing the $433-million contract by the 1.7 million doses to be delivered. Siga told The Times that this would give a rough approximation of the per-treatment price.

On May 13, HHS announced what amounted to the second awarding of the contract, worth between $433 million and $2.8 billion, depending on whether the government exercised options to buy more of the drug in future years. Siga hailed it as a “historic event for the biodefense industry.”

FDA skepticism

Throughout the negotiations over price and profit, a separate issue loomed: uncertainty over whether the Food and Drug Administration would approve ST-246 for use in humans.

For more than a year, the enthusiasm of HHS officials for stockpiling the drug has stood in contrast to the skepticism of the FDA. The agency’s stance is important because the contract requires Siga to develop its drug “for ultimate approval by the FDA.”

In a June 2010 email, Gary Disbrow, a virologist in HHS’ biomedical unit, shared with colleagues his assessment of where the FDA stood on the smallpox drugs being developed by Siga and Chimerix, the North Carolina company: “My interpretation of their current position is that there is NO foreseeable path to licensure.”

The problem was the inherent limits of animal testing in determining whether the drugs would be safe and effective in fighting smallpox in humans. Researchers are prohibited from infecting humans with the virus.

In May of this year, Robert G. Kosko Jr., a manager in the FDA’s antiviral-products division, wrote that there was “no clear regulatory path” for approving antiviral drugs for smallpox — again because of the uncertainty surrounding proof of effectiveness.

The FDA has scheduled a public meeting in December to discuss Siga’s and Chimerix’s drugs. Siga’s contract requires it to conduct additional studies to seek the agency’s approval.

Lurie said she hoped the FDA would ultimately approve ST-246. “We would not have gone ahead with a procurement unless we thought there was a pathway,” she said.

Short shelf life

Unlike the smallpox vaccine, which remains potent for decades, Siga’s drug is guaranteed for only 38 months.

The administration had intended to award Siga the exclusive option to replenish or expand the stockpile, but officials relented after Chimerix formally protested. In June, the government settled the dispute by dropping the exclusivity provision. That limited the value of Siga’s contract to $433 million and meant that other companies could compete to fill future orders for the drug.

“Though unhappy about it, Eric [Rose of Siga] would rather remove the options than take the chance of possibly losing the protest and thus the entire contract,” Goodger wrote to his superiors on June 11.

HHS officials, however, were concerned about how Siga might react. Goodger reassured his higher-ups that despite its disappointment, the company would not seek “any negative publicity.”

(Forbes weighs in…)

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