The Biotechnology Industry Organization last week called for reform of eligibility requirements for the US Small Business Innovation Research grant program, which BIO maintains is preventing more than half of all small US private biotech companies from competing for grants and supports a small number of “grant hogs” that garner a disproportionate amount of funding from the program.
However, according to one such “grant hog” named by BIO, the SBIR program has to the contrary successfully fostered the development of nascent businesses, and BIO’s claim that the rich are getting richer is a red herring for the real issue of keeping large VC-backed companies from securing SBIR funding that they don’t need.
BIO’s call for SBIR reform comes at a time when the program is top of mind for small and large businesses and university technology transfer offices. Last week, the US House of Representatives Science and Technology Committee’s Subcommittee on Technology and Innovation held hearings on SBIR and the Small Business Technology Transfer program with an eye toward reauthorizing the grant programs in the 110th Congress.
The subcommittee heard testimony from several expert witnesses on a variety of issues, including award size, total funding available, outreach, research topics, and program databases. But for its part, BIO said that the most important issue examined by the subcommittee was that of applicant pool, eligibility, and selection criteria.
According to BIO, more than half of all small privately owned US biotech companies are prevented from competing for SBIR grants based on a reinterpretation by the Small Business Administration – the government agency that oversees SBIR – of the program’s eligibility requirements in 2003. The problem with the reinterpreted eligibility requirements, BIO maintains, is that companies in which more than 50 percent of the ownership comprises venture capitalists are ineligible to apply for an SBIR grant.
Last week, BIO’s executive vice president Alan Eisenberg told BTW that two recent surveys of the 650 members of BIO’s Emerging Company Section found that more than half are ineligible for SBIR funding.
Eisenberg said that approximately 70 percent of BIO’s emerging company members are privately owned, and the vast majority of those are majority VC-backed companies. He said that BIO’s concern is that those companies, based solely on their capital structure, are ineligible to participate in the SBIR program according to SBA rules.
“What should dictate the awarding of an SBIR grant is the quality of the science, not a company’s capital structure,” Eisenberg said. “The NIH grant proposal system is based upon the science. It goes through a rigorous peer-reviewed process. Then, at the end, after the NIH makes its assessment, the SBA gets involved and asks, ‘What’s your capital structure?’
“It should be that the NIH says, ‘We, who are charged with providing funds to get the best scientific outcomes on behalf of the American public, want to have the highest quality science, and it shouldn’t matter how a company receives funding,’” Eisenberg added.
Furthermore, according to BIO, the eligibility requirement problems are compounded by a limited group of “grant hogs” that dominate the program by receiving hundreds of grants, which its says runs counter to the program’s goals of encouraging participation and stimulating innovation.
“The wide variety of companies that we call grant hogs are those that are getting more than their fair share – 10, 15, or almost 20 grants a year,” Eisenberg said. “Much of their work is around the SBIR program, and frankly they are taking disproportionate advantage of the program. It certainly doesn’t make sense from the vantage point of the best science.”
Eisenberg cited the testimony of Jo Anne Goodnight, SBIR/STTR coordinator in the NIH’s office of extramural research, at last week’s subcommittee hearings that the amount of SBIR funding garnered by the top 100 SBIR award recipients spiked 22 percent in 2006 over the previous fiscal year, and that the number of new small businesses participating in the NIH SBIR program has been decreasing since 2003, with only about one-fourth of the awardees being new to the program in FY 2006 – the lowest proportion within the last decade.
In addition, Eisenberg said that even some publicly traded companies can access SBIR funding.
“How does it make sense that a company that has no venture backing, or less than 50-percent venture backing, can get access; but then, once you have greater than 50 percent venture backing, you can’t get access; but once you’ve gone public, you can get access?” Eisenberg said.
BIO did not identify “grant hogs” in its statement, but Eisenberg told BTW that one example is Watertown, Mass.-based Radiation Monitoring Devices. Since fiscal year 2004, including fiscal year 2007 thus far, RMD has amassed 49 SBIR awards from NIH worth a total of $13.45 million, according to NIH databases.
“This is a firm that testified against having venture-backed companies participate in the program because they argued it would increase the competition for them,” Eisenberg said. “Well, if their entire business is based around the SBIR program, then I can understand that. But it certainly doesn’t make sense from a public policy or science standpoint that companies like this are getting that many SBIR grants.”
However, Michael Squillante, vice president of research for RMD, told BTW that BIO’s claims are “incredibly misleading,” and that the organization has been trying to distort what is happening with the SBIR program.
“The actual facts are that the vast majority of awards go to companies that have won less than two or three proposals, and that every year, 20 to 30 percent of awardees are companies that are winning awards for the first time,” Squillante said. “The concept that multiple award winners are stifling the SBIR program is just absolute nonsense.”
Squillante, who is also president of the Small Business Technology Coalition, did not deny that RMD, which is 100-percent privately owned and employs almost 100 people, has been successful in the SBIR program. While RMD produces mostly commercial products and services related to radiation detection, it plays in a diverse array of markets including medical instrumentation, non-destructive test equipment, and most recently, homeland security.
“What should dictate the awarding of an SBIR grant is the quality of the science, not a company’s capital structure.”
“The issue of companies that are successful with SBIR and remain successful really is a question of whether or not they’re doing quality research, and whether they’re doing something with their results: commercializing them, passing the info on to other people, publishing them – basically meeting the needs of the agencies that award SBIR grants,” he added.
Squillante called BIO’s “grant hog” accusation a “red herring,” and said that the real issue is the VC ownership eligibility rules, which BIO has been trying to change for several years.
He said that companies with VC backing are presently allowed to participate in SBIR, as long as less than 50 percent of the company is VC-controlled, and that about 25 percent of SBIR awards are going to such companies.
Squillante also said that large VC-funded firms “were never permitted to participate in SBIR. Over the years, the number of companies with VC funding increased that were able to participate because nobody knew any better. Somebody protested, and then the SBA started enforcing a rule that had been there all along.”
In fact, Squillante claimed that BIO’s position is actually potentially harmful to the SBIR program.
“VCs don’t fund high-risk research,” he said. “The SBIR program is specifically intended to fund high-risk research. If you really permit VCs to have a huge fraction of the program, it would completely thwart the goals of the program.”
NAS Study in the Works
BIO stopped short of claiming that SBIR grant hoarders are stifling the formation of university-based spin-out companies, but a vast majority of such companies do rely on SBIR funding to help put wind in their sails in an attempt to commercialize university-developed technologies.
However, a large number of these companies also often secure venture capital in their nascent stage, placing them in the same boat as those companies that BIO believes are being overlooked when it comes to SBIR grants.
“Our companies are looking to try and get one SBIR grant a year, maybe two, at most, for the purpose of either phase I proof of concept, or for phase II, which is some form of development, to try and take a product that may not be a lead product, but to move it from the bench and start it toward the bedside,” Eisenberg said.
But Squillante said that the perception that multiple grant awardees are reducing the number of grants available to move technologies out of university labs through start-up models is inaccurate.
Squillante noted that the National Academy of Sciences is currently conducting a study on the SBIR program to brief Congress in preparation for the program’s reauthorization. The study, spearheaded by Chuck Wessner, program director for the NAS’ Science, Technology, and Economic Policy board, has initially revealed that multiple award winners have not been a problem for the program, and that many new companies participate in the program each year.
Squillante also cited a statistic that says that more than 80 percent of companies that have won SBIR grants have at least one founder who was previously an academic. Wessner could not be reached in time for this article.
Squillante said that he doesn’t believe that BIO’s statistics were a result of a survey of its members, and that most of their figures are at odds with data that is in the public domain.
“The SBTC has also done surveys, and I’m also a member of the New England Innovation Alliance and the Small Business Association of New England,” Squillante said. “All of these organizations have surveyed their membership, and 90 percent of the companies that responded are opposed to BIO’s position. BIO is presenting unique data compared to the data that any other organization has come up with.”