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It took quite some time, but



finally scored its big contract to supply an anthrax vaccine to the U.S. government. For VaxGen and its shareholders, the deal appears lucrative and its shares were recently up $3.23, or 22%, to $17.58. Volume was 5.5 million shares, or more than 12 times average.

The grand total of the contract: $877 million over five years, which the government will pay to VaxGen to manufacture and supply 75 million doses of the anthrax vaccine, which will be used to create a national stockpile to protect Americans against a possible terrorist attack. The funding for the contract comes under the auspices of the Project BioShield Act of 2004.

VaxGen has been working on landing this contract for more than two years. VaxGen

switched its corporate focus to developing bio-terrorism vaccines after its much-ballyhooed AIDS vaccine

failed a late-stage clinical study in February 2003.

On a conference call Friday morning, VaxGen said it expects to begin shipping anthrax vaccine to the government in early 2006, ending the year with 25 million doses shipped. At $11.70 per dose, that works out to $292 million in anthrax vaccine revenue for VaxGen in 2006.

The remaining 50 million doses -- worth $585 million -- will be delivered in 2007, the company said. In addition, VaxGen expects to earn $123 million in additional payments from the government in late 2007, based on the achievement of three milestones, including getting final approval from the Food and Drug Administration for the vaccine as well as meeting certain shelf-life standards.

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For perspective, VaxGen is expected to generate about $40 million and $44 million in revenue in 2004 and 2005, respectively, primarily from ongoing government contracts. The company is not currently profitable.

VaxGen says its operating margins (earnings before interest and taxes) for the anthrax vaccine business will be in the range of 20% to 40%, comparable to its peers. At the midpoint of this range, or 30% margins on earnings before interest and taxes, VaxGen could conceivably generate operating income of nearly $90 million from the anthrax vaccine business alone in 2006 and $175 million in 2007.

Based on income projections similar to these, Ehrenkrantz King Nussbaum analyst Robert LeBoyer rates VaxGen outperform with a $26 price target. His firm doesn't have a banking relationship with the company.

CIBC analyst Matt Geller uses a discounted cash flow analysis of the expected revenue from the anthrax vaccine contract to come up with a $25 price target for VaxGen. He rates VaxGen overweight and his firm has a banking relationship with the company.

There are risks, of course. VaxGen has to produce and deliver usable anthrax vaccine to the government before it gets paid. (Interestingly, the vaccine does not have to be fully FDA approved, that will come later.) And this contract, while lucrative, has finite terms, which means the bulk of the revenue stream ends in 2007.

VaxGen may sign follow-on contracts with the government for replenishment stockpiles, and once the vaccine is approved, it will be free to negotiate new supply contracts with the U.S. military, state and local governments or foreign countries.

Finally, VaxGen was delisted from the


in August for failing to file financial documents in a timely manner due to changes being made in the company's revenue-recognition accounting. On Friday, VaxGen executives said re-auditing financial statements for the past three years will be filed in December, which should allow the company to regain Nasdaq listing in January.

Adam Feuerstein writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to