By Randall Osborne


Nobody was ready.

Since the band of suicide terrorists struck the U.S. last month, and hijacked ¿ with an embarrassing lack of sophisticated effort ¿ four jetliners for use as fuel-loaded missiles, video images of the World Trade Center's flaming twin towers have been burned into the minds of people all over the world.

Pictures of the carnage in New York, and charred wreckage at the Pentagon, looked almost apocalyptic. But an oft-quoted Biblical warning about "the fire next time" seems moot now, since we've already had the fire. Many fear that an attack in the future by zealots bent on mass killing of Americans may be more sinister than what happened on Sept. 11, albeit less dramatic.

Next time, it might be germs. And we still may not be ready enough.

Such a threat is hardly news. Alarmists in the mainstream media long have screamed about how supposedly simple it would be to infect air or water supplies with anthrax or some infernal bug such as smallpox, typhus, Ebola, or even the bubonic plague.

There have been scares, too, although the most convincing ones have been overseas ¿ as in 1995, when the Aum Shinrikyo cult released the nerve gas sarin in the Tokyo subway system and killed 12 people. Reports said the Tokyo group had tried the same thing with anthrax and other agents, and botched the attempts. In the U.S., long before the terrorist attacks that used hijacked jetliners, two men in Nevada were arrested for illegally possessing anthrax ¿ but they hadn't done anything with it, either.

Experts believe sending a virus airborne is the most likely method troublemakers would use, as opposed to trying water-borne or food-transmitted contaminants. In the 1980s, an Indian guru's disciple confessed to spraying salmonella on salad bars in Oregon. His effort was to little avail, terrorism-wise, and air seems the choice for wide-scale damage.

Attacking with airborne germs presents its own challenges, though, such as keeping the material floating around long enough to infect a significant number of people who can then pass it on, and coming up with a concentrated-enough bug to make sure the targets are sufficiently afflicted.

"It's not as easy as it seems," said Thomas Gutshall, chairman and CEO of Cepheid Inc., which makes integrated DNA testing systems for pathogens that might be used by terrorists.

Still, it could happen. For years, the Defense Advanced Research Projects Agency (DARPA) has been granting research money to biotechnology firms and others hunting for ways to block the effects of terrorist contaminations. The agency's total spending on biological warfare is set at $167 million this year, a 34 percent increase over last year.

For 2002, given the squeezed defense budget, the amount is just over $140 million, but any figures are in doubt, at this point. One U.S. government insider said to expect "a major-league increase in [Department of Defense] and [National Institutes of Health] spending, to do biotechnology-related everything," as a result of the Sept. 11 attacks. Already, the NIH had earmarked $93 million for counter-bioterrorism spending in 2002, which almost doubles the amount set aside in 2001.

DARPA grantees include many universities, as well as biotechnology firms large and smaller. Start-ups may have found a lifeline in anti-bioterrorism research, developing their platforms while working on whatever the grant specifies, said Edward Tenthoff, an analyst with Robertson Stephens.

"It's not much different whether it's a DARPA grant or any other NIH grant," he told BioWorld Financial Watch. "If you don't have access to 'angel capital,' it's the way to help your bottom line."

Numbered with biotechnology players in anti-terrorism is Genelabs Technologies Inc., with a DARPA-funded program that involves DNA-binding technology aimed at finding broad-spectrum antimicrobials, and an RNA-binding drug program developed to create drugs with broad-spectrum anti-RNA viral activity. Genelabs also is stockpiling drug subunits for rapid response to biological warfare.

Another leader is Maxygen Inc., which is working on decontamination methods based on industrial enzymes optimized for killing biological warfare spores. Other Maxygen projects related to the anti-terrorism push include one for improved vaccines by DNA shuffling of pathogen antigens.

Tenthoff noted that Maxygen is getting about $22 million for its government-related vaccine work, an amount that puts the firm high among grantees and is "significant for a company of this size." DARPA funding, he added, "while it's not the crux of [Maxygen's] business, was definitely an original contributor to revenues."

Others tapped by DARPA, according to the agency's list, include Ibis Therapeutics Inc., which is exploring "universal pathogen countermeasures," and Isis Pharmaceuticals Inc., charged with finding "drugs to protect against engineered biological warfare bacteria." GeneSoft Inc. is looking into "regulation of pathogen gene expression by DNA-binding polyamides." Osiris Therapeutics Inc. has hope for "sequential auto-vaccination by stem cells."

Many universities are on the roster, along with some smaller companies. Molecular Geodesics Inc. has a program for "biomimetic materials for pathogen neutralization." Abitis Pharmaceuticals LLC is interested in "neuroimmunomodulatory alpha-MSH peptides." Alnis LLC is experimenting with "novel pathogen countermeasures via molecular and nano-surface recognition." Inotek Corp. is casting its vote for mercaptoethylguanidine, which the firm calls "a revolutionary generic immunomodulatory countermeasure for biological warfare defense."

ChemoCentryx Inc. won a grant for "development of novel dendritic cell-active chemokine modalities and advanced cell detection technologies for intensified vaccination and accelerated immunotherapy."

The awarded amounts are not large, often in the single digits of millions. Yet even the powerhouse pharmaceutical firm SmithKlineBeecham plc grabbed some, nailing down a grant for gene expression as it relates to broad-spectrum antimicrobials.

What does it all mean for biotechnology investors? Not much, in the case of Maxygen ¿ a successful company on other fronts ¿ and others, said Michael King, another analyst with Robertson Stephens.

"We don't pay a lot of attention to [the DARPA grants]," King told BioWorld Financial Watch. "It's a very small part of the Maxygen business model, long-term kind of stuff."

King's colleague Tenthoff noted the government funding is "only a paragraph in the March prospectus, and I think there will be a de-emphasis going forward," in favor of drugs for widespread conditions not caused by terrorist acts.

"Even if you were to specifically cater to the government on a defense basis, you wouldn't cut out the opportunity for similar applications to human therapeutics," Tenthoff said.

A short-term winner, anyway, was Cepheid, whose stock rose 89.5 percent on the first day of trading after the terrorist strike, closing at $2.90. Late last week, the stock was hovering in the $2.50 range, substantially up from its earlier levels.

The increased share value was pleasing, acknowledged Cepheid's Gutshall, but "we were just as aghast as anyone else" by the attacks. "If you gave me 20 ways to have our stock rise, this wouldn't even be on the list," he said.

Cepheid in August entered a deal with Environmental Technologies Group Inc. for biological-agent detection systems. Under the terms, the companies will develop and design bio-detection systems based on Cepheid's I-CORE and microfluidic technologies, with Cepheid providing sub-systems and sub-assemblies to ETG for systems ranging from hand-held units to stationary monitoring systems.

On its own, Cepheid makes three versions of its Smart Cycler DNA testing instrument, Gutshall said. One is the laboratory version, one is transportable "with a laptop and a hard case," and the other, XC model, is for extreme conditions, suited for use in the field ¿ in, for example, "dispersal zones associated with troop movement," he said.

"It will run off a battery," Gutshall told BioWorld Financial Watch of the Smart Cycler XC. "No one else's system is portable."

Given fluid samples, the system can identify a pathogen in 25 minutes, he said.

"We're really trying to speed up the time to result," Gutshall said, allowing that "you need a DNA probe whose sequence matches that of whatever pathogens you're looking for."

That's the problem point, of course, but Gutshall said tailoring the probes to detect likely pathogens shouldn't be difficult, since the Centers for Disease Control keeps a list.

"If the sequence was not known, and the probe didn't identify it as the pathogen as being the target, then it wouldn't pick it up," he said. "We can identify four targets per reaction tube. Hypothetically, we can look for 64 targets at one time. And, if you think about the sophistication of the people we're working with, there's going to be a limited menu. They're not Merck or Eli Lilly."

Once the pathogen is identified, it's up to authorities to mobilize resources for making vaccines or distributing stockpiled ones, if they exist.

"We don't build chemistries here," Gutshall said. The chemistry builders will have their own set of tasks, in the event of a bioterrorist attack. Officials of the Department of Defense have met with Carl Feldbaum, president of Biotechnology Industry Organization, to discuss what plans might be made. BIO is acting as a go-between for the DOD and companies hoping to help out, offering its own ideas and initiatives to the push.

Meanwhile, BIO has proposed an amendment to the DOD's authorization bill, saying (in part) that the department's leader "shall, subject to the availability of funds appropriated and authorized to be appropriated for such purposes, design and implement a program to integrate advanced biotechnology applications into biological weapons detection and defense activities and to develop advanced biomedical treatment regimes for military personnel."

If passed, it means more defense work for the industry. Tenthoff, though, said he believes the smart money should stay with traditional biotechnology firms and their medicine, with maybe a slight preference given those such as Maxygen with platforms that overlap somewhat with the needs of national defense.

"A lot of [the anti-bioterrorism research] is done within government labs, or by universities," he said, and even increased spending won't guarantee a rich or certain revenue base for ordinary biotechnology companies or their investors.

"While there's probably the ability to focus on just the government [funding]," Tenthoff said, "why would you, when the human therapeutics area is so robust?"

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