A Gaithersburg-based biotechnology firm was forced to stop research on a breakthrough technology that could have led to faster development of the annual influenza vaccine.
Company officials also believed their early stage project could have been applied to development of biodefense technology.
Similarly,anothersmall biotechnology firm — this one located in Rockville — may have to nix development of a tuberculosis product bound to save thousands of lives in Third World countries.
What do these two firms — just to name a few — have in common? They are both victims of the Small Business Administration’s (SBA) new interpretation of the Small Business Innovation Research (SBIR) program. Many small businesses, including start-up and emerging biotech firms, rely on SBIR grants for “seed” money to fund early stage research.
Unfortunately, the SBA has altered its interpretation of eligibility standards to exclude companies majority-held (51 percent) by venture capital and other investors.
Under this new interpretation, firms are only considered “small” if they record their funding from actual individuals, as opposed to investment groups that provide the bulk of early stage funding in the biotech industry.
We believe this interpretation bears no relationship to how companies are actually funded.
Indeed, let’s take a look at the biotechnology industry.
Before most biotechnology products can become commercially available, 10 to 15 years of research and development, and about $800 million is needed to complete testing and win FDA approvals. Nevertheless, the 800 million patients who have been helped by one or more of the 200 biotech drugs and vaccines currently marketed likely would attest that the wait is worth it.
While there are many funding strategies, the typical form of investment in promising, early stage companies is venture capital. Because of the significant funding required to bring biotech products to market, very few firms are capable of commercializing their technologies without significant venture funding.
Illustrating this point, in 2004, biotech firms raised $5 billion in venture capital funding, and already this year, firms have raised $1.3 billion in such funding.
This may seem like more than enough funding, but biotech start-up companies require far more capital investment than any other industry, and SBIR grants are critical in filling the funding gap. Yet, under this new rule, the SBA is penalizing biotech firms that have the strongest science and likelihood for success — the very purpose of the SBIR program — by excluding them from the very program designed to support development of technology that could attract venture investment. Indeed, the mistaken policy virtually disqualifies the entire biotech industry from this program and further delays the development of new products for patients waiting for new breakthrough medicines.
To get a better idea of how this interpretation is impacting the start-up biotech industry, we conducted an informal survey of some of our members that are active in the SBIR community. Of the privately owned firms that responded, 70 percent are majority owned and controlled by multiple venture capital companies.
As a result of the new interpretation, the applicant pool for grants is downsizing and the unveiling of life-saving and life-enhancing technology is being postponed. Many companies are not applying for these grants or are holding SBIR submissions in hope that this issue will be resolved prior to their submission.
As the world’s leader in biotechnology, this country has benefited greatly from the SBIR program, which has been an essential component in the commercialization and economic development of the biotech industry. However, this interpretation will prevent the most innovative biotech companies from participating in the SBIR program. If this continues, the results could be devastating for the future of the biotech industry and the patients we serve.
Indeed, Rep. Sam Graves, Missouri Republican, and Sen. Kit Bond, Missouri Republican, have introduced legislation to correct the SBA’s misinterpretation of eligibility standards. Please contact your representatives in Washington and urge them to support House bill 2943 and Senate Bill S1263.
James C. Greenwood is president of the Biotechnology Industry Organization.