Rule limits small biotech firms

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Rockville biotechnology company Sequella Inc. is faced with a dilemma that is affecting many small companies seeking federal government grants for early-stage research of new drugs.

The company risks losing lucrative government grants in order to get financing from two undisclosed venture capital firms.

The source behind Sequella's problem is an eligibility rule by the Small Business Administration (SBA), a federal agency.

An administrative judge in 2001 ruled that entrepreneurs applying for grants from the Small Business Innovation Research Program, which gives funding for early research and development of commercially viable drugs or technologies, must have a 51 percent ownership in their businesses to qualify.

But biotechnology companies, which rely heavily on private investment firms for drug-development dollars, often get investor backing only by handing over a majority of the ownership.

"Keeping a majority stake in a biotech firm is hard to do these days," said Juan Enriquez, head of Biotechonomy LLC, a Wellesley Hills, Mass., research and investment firm.

For Sequella, the decision to pursue $10 million to $30 million in investment financing to bring its drugs to the market likely will result in a change of ownership and loss of nearly $2 million in government research grants.

"We definitely would have to cut back on our research" of developing drugs and diagnostics for tuberculosis, said Chief Executive Officer Carol Nacy. The 17-staff company expects a decision on the deal by midsummer.

The SBA, which is reviewing the rule, said the requirement is intended to keep large corporations from snatching up grants designated for small businesses.

"I wouldn't say there was a huge impact from this, but I'm sure the impact is out there," said Edsel Brown, assistant administrator for the SBA's technology office, which sets the qualification criteria for the grants.

The federal agency has scheduled 11 public hearings nationwide next month that will look at changing small-business size standards, including the grant rule.

Other local biotechnology companies have reported a drop in their drug research because of the requirement, according to the D.C. trade group Biotechnology Industry Organization.

In a January survey, the group found that 32 percent of biotechnology companies that applied for the grants were rejected because of their ownership status. About 44 percent of the 55 companies surveyed said venture capital firms owned more than 50 percent of their business.

MaxCyte Inc., a Gaithersburg biotechnology firm with 22 employees, stopped a research program for genetically modifying cells after a large share of its ownership shifted to Intersouth Partners, a Durham, N.C., venture capital firm.

The preclinical program, which had been funded by a $75,000 grant, had shown potential for being used in vaccine development and biodefense, said President and CEO Doug Doerfler.