As a series of anthrax attacks terrorized the United States in October 2001, Health and Human Services Secretary Tommy G. Thompson launched a showdown with Bayer Corp. that would reverberate through an industry.

Unhappy with the discount the pharmaceutical giant had offered the government on Cipro, the first approved treatment for inhalation anthrax, Thompson told a congressional panel he was ready to seek a waiver of Cipro's patent and open the market to generic drug makers - an extraordinary move that potentially could cost Bayer hundreds of millions of dollars.

"Are you prepared, if Bayer does not cooperate with you, to do that?" Rep. Bernard Sanders, the Vermont Independent, asked pointedly.

"Yes, I am," Thompson said.

The threat pushed Bayer to slash its government price for Cipro. It also laid bare an inherent conflict between government and the only industry capable of developing new vaccines and medicines to protect Americans against biological attack.

Government, the sole potential purchaser of most bio-defense products, wants to buy them cheaply. But drug companies won't make a product unless they believe it will pay.

The result, critics say, is a virtual stalemate that has the world's largest, most accomplished pharmaceutical companies sitting on the sidelines and the national bio-defense effort in disarray.

It persists, even as citizens are warned to get ready for more bio-terror attacks and as U.S. troops prepare for war against Iraq, a country accused of stockpiling biological weapons.

"There is no guarantee that 'If we build it, they will come,' " said venture capitalist J. Leighton Read. "There really is no reason to play for a rational, economic player."

Aventis Pasteur Inc., a leading vaccine maker, is among companies waiting for the federal government to say what new vaccines it wants to stockpile in what order, and for what price, before deciding whether to launch major efforts to develop them.

"In the case of our company, given the extraordinary sense of urgency and emergency, it seems most efficient to us to let the U.S. government and other governments take the lead in identifying the priorities," said Chris Grant, Aventis Pasteur's vice president of public policy and government relations.

Compounding the problem is a government-sponsored scientific research system that often begets more research rather than new products; government bungling of a previous bio-defense manufacturing contract, and a government contracting process that critics see as disorganized and disjointed.

What's more, industry representatives and consultants said Thompson's Cipro ploy has drug companies worrying the government will hammer down prices if they do succeed in developing a new drug or vaccine - a lengthy, expensive process fraught with risk of failure.

"Coercion just isn't an environment where science flourishes," said Dr. Michael Friedman, a Pharmacia Corp. executive who works on biomedical preparedness issues for the trade group Pharmaceutical Research and Manufacturers of America.

To be sure, the government has made fitful progress: The Health and Human Services Department has contracted to make enough smallpox vaccine to inoculate every American. The Department of Defense has hired DynPort Vaccine Co. of Frederick to research up to 17 vaccines, including a next-generation anthrax one. And BioPort Corp. of Lansing, Mich., is at work manufacturing a first-generation anthrax vaccine for the Pentagon after years of problems.

Few countermeasures

Still, a Defense Department advisory panel of experts recently estimated the country has countermeasures for only 13 of the world's top 50 pathogens, according to congressional testimony.

"I don't think the country has yet created a plan for what's needed," said Dr. Tara J. O'Toole, director of the Johns Hopkins University Center for Civilian Biodefense Strategies and a former U.S. assistant secretary of energy for environment safety and health.

President Bush's pledge in his recent State of the Union address to seek up to $6 billion over 10 years for bio-defense countermeasures isn't enough, she said.

"The future of bio-terrorism," she said, "is much scarier than what we are facing now."

Just what level of immediate threat citizens and the military face from biological weapons is a matter of debate. But what is undeniable is that the world's understanding of the inner workings of living substances is advancing at warp speed, increasing the potential to do both tremendous good and unprecedented evil.

In experiments at GenVec Inc. of Rockville, for example, tiny genetic payloads are encapsulated in viral envelopes that act like biological suitcases, carrying genes deep in the body where they direct the making of proteins with healing powers.

What if, scientists worry, similar processes were used to direct the making of harmful substances? Could they be designed to be contagious? Could an entire city be brought to its knees?

When mainstream scientific researchers greet such worries with skepticism, O'Toole has one question for them: "Could you build a bio-weapon that could kill thousands of people?" She has yet to hear a "no."

Basic research

The government has been promoting basic research into vaccines, medicines and diagnostics for years, in part by offering research grants from the National Institutes of Health and other agencies. But research grants largely have failed to promote development of bio-defense countermeasures for a number of reasons, industry and company representatives say.

The first is that the nation's largest and most accomplished pharmaceutical companies generally aren't interested in applying for the grants, finding the two-or-three-year duration too short, the months-long application process too cumbersome and the dollar amounts too small.

Though some of the grants are in the millions of dollars, the sums are still paltry for the likes of a Merck & Co. Inc. The New Jersey pharmaceutical giant last year spent $2.7 billion on research and development and sold $5.6 billion of its Zocor cholesterol medicine alone.

In contrast, the young biotechnology companies that often apply for such grants don't have products on the market, are losing money and looking for a way to show potential investors that their technology has promise. Some have no intention of ever making a bio-defense product, even if they get a grant.

"A lot of these companies are invested there because they don't have any alternative - because it's a way to gin up cash and limp along," said Dr. Scott Gottlieb, a resident fellow at the American Enterprise Institute for Public Policy Research in Washington and a former health care industry analyst at Alex. Brown & Sons.

Osiris Therapeutics Inc. of Baltimore is an example. The unprofitable company is developing products derived from stem cells to regenerate human bone, muscle and cartilage. It trumpeted its win of a $6 million Defense Department research contract in 1996.

At the time Chief Executive Officer James S. Burns said the Pentagon grant to develop ways to protect soldiers from biological and chemical attack was "a vote of confidence in our technology from the United States government."

But Mark F. Pittenger, Osiris' current research vice president and a company veteran, said in a recent interview that Osiris never aimed to develop a bio-defense product.

"The reason to get these grants ... is to develop our technology without selling equity in the company," Pittenger said, adding that developing a product for bio-defense "is not in our current plan. It's not in our foreseeable future."

Similarly, Sangamo BioSciences Inc. of Richmond, Calif., said it is seeking a National Institutes of Health grant to test the company's experimental gene-regulation technology as a means of protecting troops from anthrax.

The grant would be for up to $4.7 million over four years, but that doesn't mean developing an anthrax prophylactic to sell the government is a priority for Sangamo. It isn't.

"There's not necessarily a big financial gain from targeting new bio-defense [products], so that's not the driving force for doing this," said Trevor Collingwood, the company's manager of business development.

But, he said, "Any demonstration of the effectiveness of our technology obviously builds the credibility around it."

Such stories aren't unusual, said Friedman, the chief medical officer for biomedical preparedness at Pharmaceutical Research and Manufacturers of America and a former head of the Food and Drug Administration. Government grant money, he said, is designed "to encourage basic science. That doesn't produce new products."

New vaccines traditionally have taken 10 to 15 years and up to $600 million to develop. Even after extensive research, drugs and vaccines often prove too toxic or ineffective to sell.

So big drug companies are hesitant to embark on testing anything that doesn't have a clear, recurring market.

"It's a business model approach: How do I set up a company so I have ongoing sources of revenue?" said Robert Menzi, chief operating officer of Protiveris Inc., a small Rockville developer of protein-screening technology that has - at least for now - decided not to pursue the market for bio-defense diagnostics. "If these are one-off [one-at-a-time] contracts, where does my continuous revenue come from?"

Little interest

Col. Erik Henchal, head of the Army's top bio-defense research laboratory at Fort Detrick, bemoaned the problem at a briefing for reporters in January. He said the Pentagon hasn't set aside enough money to develop bio-defense drugs and vaccines, and, in any case, drug companies aren't interested in producing them.

"We have 20 medical products waiting on the goal line to move forward, but it was difficult to get the pharmaceutical industry interested in these products because they don't fit people's business model," Henchal said.

Though Henchal said drug companies appear more interested since Sept. 11, he said "what they are going to run up against is the business model. Because it's not going to be profitable."

Henchal said the company that made the vaccine for plague, for example, has stopped making it for business reasons.

In general, he said, drug companies "don't necessarily want to spend their time making 200,000 doses of anthrax [vaccine] when they can make 4 to 6 million doses of measles, mumps, diphtheria vaccine."

Another problem is confusion among executives about where to go when they do have a bio-defense product to sell. Judith A. Britz, chief executive officer of tiny Columbia-based Cylex Inc., is a case in point.

Cylex's FDA-approved test is used to screen patients' immune-system function before and after organ transplants. Britz has been trying for more than a year to interest the government in buying the test to weed out immune-compromised individuals likely to be sickened by the smallpox vaccine.

But she hasn't determined which government agency could buy it, despite discussions with her congressman, the Centers for Disease Control and Prevention, a U.S. Army general, Health and Human Services officials, and the National Institute of Allergy and Infectious Diseases, among others. Nor has she been able to determine what further data the government would like to see.

"At a point where there is not a real potential for progress within a reasonable period of time," she said, "you do throw in the towel."

Such experiences aren't unusual, venture capitalist Read said in congressional testimony in June. "It is impossible to locate the customer for any significant, long lead-time technology that just might save our nation from several of the highly likely attack scenarios," he said.

True, some diagnostics companies have a growing bio-defense business despite the confusion.

Igen International Inc. of Gaithersburg, for example, had bio-defense-related product sales of about $2 million in the last three months of 2002, though it initially didn't seek the business. The U.S. Army Medical Research Institute for Infectious Diseases at Fort Detrick asked Igen in 2001 to custom-make field diagnostic tests for biological agents. Igen now makes five tests.

Igen hopes to expand sales to all of the armed forces, as well as to develop its own proprietary bio-defense diagnostics to sell to others. "I think there is also a private sector opportunity with bio-defense" diagnostics, said Bob Proulx, general manager for Igen's life sciences business.

But that remains to be seen, and critics say the government shouldn't be using a defense-contracting model in asking companies to make drugs or vaccines - especially new ones.

"The big problem is, it's almost impossible for them to know whether a firm can do what you want it to do," said John E. Calfee, an American Enterprise Institute economist, noting the high risk of failure in drug and vaccine development. "They can let out a contract, but there's no guarantee they're going to get anything out of it."

The Defense Department, for example, struggled for years to get a succession of companies to produce anthrax vaccine for troops. New shipments were halted from January 1998 through January 2002 as the plant making it was renovated and sold to BioPort. The company then repeatedly failed to win FDA approval to distribute the vaccine.

Even after all that, the vaccine is still widely considered inadequate in an emergency: It must be administered in six shots over 18 months to be fully effective.

More recently, the Pentagon selected Acambis Inc. of Cambridge, Mass., to make 209 million doses of smallpox vaccine and, separately last week, to develop a next-generation smallpox vaccine that's safer.

The company has never made anything that has won FDA approval. Vaccine giants Merck, Aventis, Wyeth and GlaxoSmithKline all reportedly bid on the first smallpox vaccine contract, attracted by the prospect of charging for enormous batches of a known vaccine - albeit with a different manufacturing method - that didn't require years of costly research.

Acambis President Gordon Cameron said it doesn't matter that big, experienced companies aren't involved. Acambis, he said, is "proving certainly with smallpox that we're capable of producing large quantities in a short period of time and getting product to clinical trials."

Even getting drugs already on the market approved for use against biological agents has proved cumbersome. Large companies are working through trade organizations to donate existing antibiotics for testing to determine if they are effective treatments.

But progress is slow, in part because companies would like the government to first sign off on what animal tests would be required to get approval, given that it would be unethical to expose human test subjects to a biological agent just to test whether a medicine worked.

Bush responds

Within the past several weeks, however, the U.S. government began showing an interest in responding to industry's concerns.

The president's Project BioShield initiative would give the administration a permanent financing authority, allowing it to pay for development and production of a new bio-defense vaccine or drug without going through the annual appropriations process.

If approved by Congress, the authority would allow the administration to assure pharmaceutical companies that, if they develop a useful bio-defense vaccine or medicine, the government will have the ability to purchase it, said Dr. Anthony S. Fauci, director of the National Institute of Allergy and Infectious Diseases.

It would allow the government to say to a company, "If you give us something good, we'll buy it," Fauci said. "Industry wasn't particularly interested in getting involved in bio-defense research. They were saying, 'Don't bother us.' We're trying to court them."

Other provisions would give the National Institutes of Health authority to award grants for research more quickly, avoiding bureaucratic delays. And the proposal calls for the FDA to have the freedom to speed the review process for bio-defense countermeasures in an emergency.

But the provisions don't address all of industry's concerns, including liability and confusion over what countermeasures the administration believes should be developed first.

David Webster, a consultant who works with pharmaceutical companies on pricing issues, thinks a civilian market for bio-defense vaccines will develop in years to come. But he believes the big companies will stay on the sidelines for now.

"They're patient, and they're waiting to see two things develop," he said. "They want to see if the civilian market is going to be a bonanza. And they want to get in bed with a winner. They're not interested in funding a long shot."

But Gottlieb of the American Enterprise Institute thinks it will take government incentives to get pharmaceutical companies involved. He said all it will take for those to pass is another bio-terrorist attack.

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