While the world stands transfixed by the specter of a pandemic flu, a very different threat, bioterrorism, remains largely unaddressed. A terrorist attack of smallpox, anthrax, tularemia or other agents could bring thousands of deaths and extraordinary economic disruption. Newer and more effective drugs and vaccines must be developed for most of these threats.

How can we generate a robust biodefense research and development enterprise? The July 2004 Project Bioshield Act offered $5.6 billion in federal money for private development of biodefense drugs and vaccines. This was a start, but we still lack a federal biodefense procurement environment with the necessary transparency, consistency and predictability to elicit top-drawer work from top-drawer pharmaceutical and biotech firms.

The problem is not so much with contract research, where the government makes landmark payments as work proceeds, but with the far more important--and far trickier--mechanism of generating and rewarding privately funded development of essential products. Political risk must be brought under control.

There is no alternative to early and clear signals about what products the government is interested in, how much they are likely to buy, and what kind of priority or timeline is likely to govern these purchases. Maybe the National BioDefense Act of 2005, introduced by Sen. Richard Burt, R-N.C., and presumably about to be renamed the Act of 2006, can do the job. But Congress will have to pay attention to the essentials.

In May 2003, the Congressional Budget Office published an addendum analyzing the recently proposed Project BioShield, in which it laid out the types and quantities of products the government wanted, how much they wanted, and when. That helped generate industry interest and Wall Street funding.

Congress should make that an annual exercise as part of new legislation. It would reduce the inordinate degree of guesswork and insider advantage in the emerging biodefense industry.

Unfortunately, we already know what can happen when signals are diffuse or get crossed. More than three years ago, the Department of Defense approached Hollis-Eden Pharmaceuticals, a small biotech firm, about accelerated development and manufacturing of a treatment for acute radiation syndrome. In October 2003, the firm lost 20 percent of its market value after a stock analyst reported DoD’s purchase commitment looked soft, as noted in an American Enterprise Institute report July 21.

Nearly two years later, the chief executive explained that even as his firm prepared to launch pivotal clinical trials for a product whose only reliable customer would be DoD, he had witnessed a clear lack of consensus as to what the government wants, how much they will buy, what they will spend, when they will buy it and who is making decisions.”

The development of a safer smallpox vaccine tells a similar story. VaxGen, a California biotechnology company, has been funding clinical trials and other development tasks on the vaccine solely on unofficial indications of interest by the Department of Health and Human Services. But the agency has been coy about when or if it will buy the new vaccine in quantities sufficient to support development.

Another key is controlling political risk when doing business with the government, a notoriously unpredictable customer. Buyer’s regret can set in before the first fruits of a development stream arrive, but after most of the investment has been paid for, leaving a business high and dry.

Terms negotiated in strict accordance with the law can take on an unearthly hue when Congress and the press discover that someone is making money by doing something useful that no one would have done without the lure of substantial profit. This kind of threat can stop legitimate drug development in its tracks.

Look at malaria and HIV. To date, no experienced vaccine development firm has invested sufficient funds in what should be a straightforward research task, because everyone knows that a successful malaria vaccine would be commandeered via compulsory licensing. Political risk has also undercut incentives for private firms in HIV research despite an extraordinary number of applied research triumphs.

Politics is leaching the profit out of sales to middle-income nations like India and Brazil, creating intense pressure to reduce prices even in wealthy nations. No wonder the large pharmaceutical powerhouses have been slow to explore biological targets beyond the very few involved in the successful HIV drugs.

That’s political risk at work. If we’re not careful, it can damage biodefense research as it has malaria and HIV research.

Finally, we have to let the private market work when it can. If a company gains FDA approval for a biodefense product that people want, it should be free to market it to patients and health care organizations at market-driven prices. Congress should avoid forestalling private demand and profits and the innovations they can generate--something that almost happened in BioShield I.

Private industry is essentially the only source of innovative new drugs for patients. As Congress proceeds with the daunting task of harnessing private industry to biodefense, it must avoid weighing down the enterprise with unnecessary political risk and instead create a climate that fosters innovation and investment.

John E. Calfee is a resident scholar at AEI.