Financing is a big issue for companies developing vaccines and treatments designed to prevent or treat illnesses caused by biological terrorism attacks, said retired Air Force Col. Randy Larsen. (Bob Brown/AP)

A U.S. Department of Health and Human Services office has rejected an industry proposal to use government bonds to fund the development of drugs countering bioterrorism threats.

Small biotechnology companies, including Annapolis-based PharmAthene, asked the federal government last year to switch to bond financing from contracts, which are seen in the industry as costly and a sometimes unreliable revenue source when used for drug development.

The Biomedical Advanced Research and Development Authority, part of the Health Department, reviewed the plan and found the office doesn’t have the staff or infrastructure to manage a bonds program, said Robin Robinson, the authority’s director.

“We determined that using any bonds was not in the best interest of the taxpayer,” Robinson said in an e-mail. “The analysis indicated that there are high risks involved in a volatile bond market.”

Using bonds to pay for drug development would allow scientific research to continue uninterrupted without being subject to the costs and delays associated with competing for federal contracts, Eric Richman, Pharm­­Athene’s president and chief executive, said in interviews last year.

PharmAthene officials praised the government for conducting the review of the bonds idea, said Richman, whose company is developing anthrax vaccines and treatments for the federal government.

“We continue to be supportive of innovative ideas like biomedical bonds to advance medical countermeasures and other critical life science technologies,” he said in an e-mailed statement last week.

Penalties for missing goals

The company has received U.S. contracts and grants that may be valued at more than $550 million if PharmAthene meets its milestones and the government exercises options to extend the agreements, according to its Web site.

Richman said last year that he wanted the government to convert a portion of existing grant and contract funding to cover the proposed bonds’ principal and interest.

State and local economic development authorities would then issue taxable revenue bonds and distribute the proceeds to companies in their areas, he said.

The firms would lose funding if their treatments failed to reach developmental milestones. Those meeting their goals would automatically advance to the next stage, instead of bidding for another federal contract and waiting months for an answer, Richman said.

Investors would be interested in biodefense bonds as long as they were fully backed by the U.S. government, said Matt Fabian, managing director at Concord, Mass.-based Municipal Market Advisors.

“If the federal government were unconditionally on the hook to pay for the bonds, then there is no reason why not,” Fabian said in a phone interview. “If the government was fixed at a certain percentage, and the investors had to worry about the company or the prospect, the interest rate would go up.”

Financing is a big issue for companies developing vaccines and treatments designed to prevent or treat illnesses caused by biological terrorism attacks, said retired Air Force Col. Randy Larsen, founding director of the Bipartisan WMD Terrorism Research Center, a nonprofit organization in Washington.

They don’t want ‘a little pill’

Big pharmaceutical companies have little incentive to develop such vaccines or treatments because they may never be needed, Larsen said in a phone interview.

“They don’t want to make a little pill that might be used two weeks, if ever, in someone’s life,” he said. “They want to make the next high-blood-pressure treatment that you need to take the rest of your life.”

As a result, much of the development work for biodefense drugs falls to smaller companies, which are less able to cover the expense of competing for government contracts and weather delays in funding, Larsen said.

Bavarian Nordic A/S, the largest vaccine maker in Denmark, said in August that it would fire hundreds of workers and shut down a factory if it didn’t receive a U.S. government order for a smallpox vaccine by January.

The company relies on the product, meant for people who are at risk of severe adverse reactions to the regular smallpox vaccine, for about 95 percent of its revenue, said Anders Hedegaard, chief executive of the Kvistgaard, Denmark-based biotechnology firm.

Bavarian Nordic was awarded a $500 million U.S. health contract for 20 million doses in 2007. Without a new order, the impact on the company “would be dramatic,” he said.

It isn’t surprising that the government isn’t interested in the bonds idea, said Alan Shaw, chief executive of Vedantra Pharmaceuticals, a Cambridge, Mass.-based company that is working on a more efficient delivery method for administering vaccines that protect against malaria, the tropical parasitic disease chagas and, potentially, cancer.

“You think of bond projects for things like building a new bus stop,’’ Shaw said. “They’re not generally applicable to high-risk endeavors like vaccine development. The failure rate for biotechnology is huge.’’

— Bloomberg Government

With assistance from Danielle Ivory.