By Theresa Agovino
AP Business Writer
Thursday, Oct. 25, 2001; 5:28 p.m. EDT

NEW YORK –– As the government squeezed Bayer Corp. on the price for its anthrax-fighting antibiotic Cipro, pharmaceutical companies that may help produce smallpox vaccine were watching. And worrying.

The industry was alarmed by the government's threat to lift Bayer's patent unless it agreed to a lower price, eventually set at 95 cents a pill.

And while the issue was resolved with the patent intact, executives at other companies quietly wonder if negotiations on smallpox vaccine production could lead to a similarly acrimonious – and public – dispute with industry cast as a possible villain.

In their public pronouncements, the major vaccine manufacturers – Merck & Co., American Home Products Corp., GlaxoSmithKline PLC and Aventis SA – stress a patriotic or moral obligation in saying they are prepared to answer a government call to develop plans for producing the vaccine.

Experts say vaccine manufacturers are in much better bargaining position than Bayer because there are no alternative sources: No one currently makes the vaccine. Still, developers need to tread lightly in bargaining because the highly profitable industry already often is characterized as greedy, and no company wants to look like it is profiteering.

Bayer would not comment on whether it would make any money on its Cipro contract. "This is not a time to worry about bookkeeping," said Bayer president and chief executive Helge Wehmeier.

The government said it wants to stockpile 250 million doses of smallpox vaccine and will spend $509 million for them – a sum of no great significance to an industry expected to register $178 billion in revenues this year.

The offer breaks down to about $2 a dose, much less than the $8.50-a-dose contract given to a British company by U.S. officials for 40 million inoculations last year. It might not even cover costs, and would require companies to divert resources from more profitable drugs to manufacture, store and deliver the vaccine.

Still, the companies may have an incentive for getting involved.

"Even if the vaccine companies don't make money, they can get returns in other ways," said Lehman Brothers drug analyst Tony Butler.

"The better way to play this may be in political terms rather than financial," he said. "How do you put a cost on having a bill the drug companies don't like get put on the back burner?"

Pharmaceutical companies spent $90.5 million on lobbying in 1999, more than any other industry.

That didn't save Bayer from being pressured, but the public is not as anxious about smallpox as it is about anthrax, and the government's dependence on the vaccine manufacturers changes the scenario, experts said.

"The government can't be as strident with the vaccine developers as they were with Bayer. They don't have the leverage," says Christopher Milne, assistant director of the Tufts Center for the Study of Drug Development.

The government said 10 firms responded to its request for information about companies' ability to produce the smallpox vaccine. An earlier call by the Centers for Disease and Control was shunned by major developers so the contract fell to a small British outfit, Acambis PLC.

Now that the government considers smallpox a threat, Butler said he expects one of the larger, more experienced manufacturers to receive the contract.

Making vaccines at cost could be a way for some of drug companies to improve a public image that has been badly battered in recent years by numerous issues, from the high costs of many medicines to tough battling for patent protection in confronting the AIDS crisis in Africa.

"This is not an industry people trust. It is just too profitable," said Kenneth LaPensee, senior vice president of Cambridge Pharma Consultancy.

Several companies are responding to calls for more helping in protecting people from anthrax.

Pfizer Inc. said it accelerating production of Vibramycin, the branded name of doxycycline, which is approved for treating anthrax, and will sell the drug at cost to those affected by bioterrorism.

Johnson & Johnson, Bristol-Myers Squibb and GlaxoSmithKline are each seeking to have at least one of their drugs approved for inhalation anthrax, and then would donate the medicine for treatment of the disease.

Analysts applaud the industry's actions, but say if drug companies are increasingly tapped to help fight against terrorism it is unfair to expect them not to be compensated. No one expects defense contractors to operate without a profit, they point out.

"The pharmaceutical companies should not be held to a double standard," said Richard Stover, an analyst at Arnhold & S. Bleichroeder.

The vaccine manufacturers are mindful of the financial implications of the contract.

GlaxoSmithKline spokeswoman Nancy Pekarek said "there is a sense of responsibility to provide assistance" but added that has to balanced with against the company's desire to retain its 110,000 employees and provide shareholder return.

A spokesman for Aventis' vaccine division, Len Lavenda, said it had already stepped up its production for flu and tetanus vaccines to compensate for shortfalls left by competitors who had either left the business or were having problems. He said this new production could be a factor in whether it could meet the government's demand for smallpox vaccine.