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Groups seek biotech funding reforms

Research, biotech organizations are requesting grants for venture capital-backed small businesses

By | November 17, 2005

Sixty research, biotech, and patient advocacy organizations are pressing Congress to overturn a government rule that blocks companies from receiving Small Business Innovation Research (SBIR) grants if those companies are more than half financed by venture capital (VC), a rule they claim is impeding medical innovation.

SBIR grants, awarded by the National Institutes of Health (NIH) and 10 other Federal government agencies, give small companies seed money to fund early stage and proof of concept research with discoveries having potential for commercialization and public benefit. Last year, NIH awarded 2,200 small business grants worth more than $613 million and has given out more than $3 billion since the program's start in 1982.

To qualify for SBIR grants, companies must be at least 51 percent owned by individuals who are U.S. citizens or permanent resident aliens. But in 2001 the Small Business Administration (SBA), which oversees the SBIR program, began interpreting the term "individuals" more strictly to exclude companies backed by venture capital and other institutional investors. Since the SBA change hundreds of biotech and medical device companies have been denied SBIR funding, or have withheld their applications hoping the issue will be resolved, said Morrie Ruffin, vice president for business development at the Biotechnology Industry Organization (BIO). "It's having a huge impact on these companies," Ruffin told The Scientist.

For example, Intronn Inc. in Gaithersburg, Maryland, had its SBIR funding pulled two years ago after the SBA learned the company was backed by venture capitalists. Intronn, which develops RNA trans-splicing technologies, was forced to stop a promising cystic fibrosis research project and terminate the scientists involved. "My frustration is that our technology showed promise, and we didn't get the chance to test it," said Intronn President Gerard McGarrity at a BIO-sponsored press conference last week (Nov. 9).

At the conference, BIO released a letter signed by 60 patient, health, and biotech organizations urging passage of legislation to make venture capital-backed companies eligible for SBIR funding. Supporting organizations include the Association of American Medical Colleges, the Juvenile Diabetes Research Foundation, the Cystic Fibrosis Foundation, Infectious Diseases Society of America, and Muscular Dystrophy Association. In June, Rep. Sam Graves (R-MO) and Sen. Kit Bond (R-MO) introduced the "Save America's Biotechnology Innovative Research (SABIR) Act." The bills (HR 2943 and S 1263) have not yet been voted out of their respective committees, making it uncertain whether they will be passed before year's end.

But legislation may not actually be required. Aware of the controversy it has sparked, the SBA earlier this year solicited comments "on whether it should provide an exclusion from affiliation with venture capital companies in determining small business eligibility for the SBIR program," according to a notice on the agency's website. The SBA is expected to make an announcement concerning venture capital funding in the next several weeks.

Other government officials are also taking notice. In a June 28, 2005 letter to SBA Administrator Hector V. Barreto, NIH Director Elias A. Zerhouni expressed concern that that the SBA definitions "unduly restrict" NIH's ability "to fund high quality, small companies that receive venture capital (VC) investment. As a result, NIH must turn away many deserving applicants, and the goals of the SBIR program are being undermined," Zerhouni wrote.

"Venture capital firms that seek to invest in small biotech businesses do not, simply by their investment, turn a small business into a large business," said Sen. Bond, in introducing legislation to allow VC funding. "These are legitimate, small, start-up businesses. Let's not punish them."

The SBIR program requires Federal agencies to set aside 2.5 percent of their extramural R&D budgets for small companies to conduct innovative research. Phase I SBIR grants, for $100,000, allow companies to conduct technical merit and feasibility studies. Phase II follow-on awards are for up to $750,000 to continue the studies.

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