Just a few days after the re-election of President Bush, the U.S. government awarded VaxGen Inc. an $877.5 million contract to supply anthrax vaccine for civilian defense.

The contract is the first of its kind under the Project BioShield Act of 2004, and should supply vaccinations for 25 million Americans in a three-dose regimen.

VaxGen President and CEO Lance Gordon expressed his gratitude in a conference call on Friday to Bush's administration and members of Congress from both parties for highlighting the need for biodefense measures.

"We are honored to play such an important role in our nation's defense," Gordon said.

VaxGen's stock (OTC BB:VXGN) rose 17 percent, or $2.44, Friday to close at $16.79.

According to the U.S. Department of Health and Human Services (HHS) contract, VaxGen will supply 75 million does of vaccine for inhalation anthrax, which is the most deadly form of the disease and the one most likely to be used in bioterrorism. The Brisbane, Calif.-based company will supply the first 25 million doses of its recombinant Protective Antigen anthrax vaccine (rPA102) to the Strategic National Stockpile (SNS) within the next two years, and the remainder within three years. VaxGen then will maintain active manufacturing operations and provide stockpile-related services for the remainder of the five-year contract. The SNS is a national repository of medical products maintained by the Centers for Disease Control and Prevention.

Gordon said the company will begin to deliver the vaccine to the U.S. government in early 2006 and would recognize revenue upon the government's acceptance of the vaccine.

"We intend to produce all of the bulk vaccine in our own manufacturing facility here in California," Gordon said. The vaccine will be filled in syringes for rapid deployment.

The government plans to purchase the vaccine before it is licensed by the FDA. Under the authority of Project BioShield, it could use the vaccine in an emergency with permission from the HHS secretary.

Nevertheless, the contract requires VaxGen to continue developing the vaccine for FDA approval. The vaccine has fast-track status.

"We believe that FDA licensure of the vaccine will open up additional markets, including to the U.S. military," as well as to physicians, state and local governments, and to some foreign governments, Gordon said.

The $877.5 million value of the contract includes a discounted payment at a fixed base price for delivery of the vaccine. The fixed price of $11.70 per dose reflects "the very material role the government has had" in helping VaxGen develop rPA102, Gordon said. It is not indicative of future pricing for the product.

The National Institute of Allergy and Infectious Diseases funded the early development of the rPA102 vaccine, first with a September 2002 contract and then with another contract a year later. Any development costs over and above those two contracts will be covered by VaxGen. The company expects to recover those costs through the sale of the vaccine. (See BioWorld Today, Oct. 2, 2003.)

"Our current product development plan includes a comprehensive series of studies with our vaccine in healthy adults before and after exposure to anthrax," said Carmen Betancourt, VaxGen's senior vice president of regulatory affairs and quality systems. "We also expect it will be used in combination with antibiotics after someone is exposed to anthrax spores to prevent the onset of the disease."

VaxGen would receive milestone payments following FDA approval for use of the vaccine before and after exposure to anthrax, and following the demonstration of a shelf-life of the vaccine that is in line with industry standards.

Beyond the $877.5 million, VaxGen may be entitled to another $69 million to test the vaccine in children and the elderly, to conduct post-marketing studies, and to maintain manufacturing operations for the vaccine.

"It's critical to the national defense that we maintain that capacity," Gordon said.

VaxGen hopes sales to other customers will help cover manufacturing costs. If that does not happen, however, the $69 million will come into play.

VaxGen Chief Financial Officer James Cunha said the company should be "solidly profitable in 2006, with revenues increasing as the contract progresses." The company also plans to move its stock back to the Nasdaq National Market in January, upon the filing of financial statements that incorporate a new revenue-recognition policy.

VaxGen's vaccine is composed of recombinant protective antigen and an aluminum salt. Recombinant protective antigen induces antibodies that have been shown to neutralize anthrax toxins. The vaccine does not cause anthrax infection, and can provide immunity with three doses. The only approved anthrax vaccine in the U.S. requires the administration of six doses.

The vaccine is based on work conducted at the U.S. Army Medical Research Institute of Infectious Diseases. The company has exclusive, worldwide development and commercialization rights from USAMRIID.

Preclinical evidence has shown that rPA102 is effective in providing protection against aerosol exposure to deadly anthrax spores, and clinical testing has shown it to be safe in humans, according to HHS.

"The intentional release of anthrax spores is one of the most significant biological threats we face," HHS Secretary Tommy Thompson said in a prepared statement. "Acquiring a stockpile of this new anthrax vaccine is a key step toward protecting the American public against another anthrax attack."

In addition to purchasing 75 million does from VaxGen, HHS also decided it would include a minimum of 5 million doses of BioThrax in the national stockpile. BioThrax is Lansing, Mich.-based BioPort Corp.'s FDA-licensed anthrax vaccine.