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Published online: 04 September 2003, doi:10.1038/bioent765 Increasing number of companies found ineligible for SBIR fundingAaron Bouchie **Aaron Bouchie is a news editor for Nature Biotechnology
Because of a tightening in the implementation of eligibility rules, a valuable source of US government funding for biotechnology companies is in jeopardy. A two-year-old decision by federal officials on how to determine eligibility requirements for receiving funds from a key US government funding program is currently causing serious disquiet within the biotechnology industry. While many industry groups are lobbying to loosen the requirements, companies are worried that they may not have enough time to save second-tier innovative programs.
The US Congress established the Small Business Innovation Research (SBIR) Program in 1982 to increase technological innovation and facilitate the conversion of federally funded research results into commercially viable products and services. Ten different agencies participate in the program, which in 2002 doled out 5,000 awards totaling $1.5 billion (see Table 1). The Department of Defense (DoD; Washington, DC, USA) has the largest SBIR budget ($800 million), although because of their emphasis on biomedical innovations, biotech companies are more to likely benefit from grants from the National Institutes of Health's (NIH; Bethesda, MD, USA) $450 million SBIR budget. The US Small Business Administration's (SBA; Washington, DC, USA) Office of Technology determines the criteria that a business must meet in order to be eligible to receive an SBIR grant. Two of these criteria are that a firm must have fewer than 500 employees and that it must be "at least 51% owned and controlled by one or more individuals who are citizens of the United States, or permanent resident aliens in the United States." The majority of biotechnology companies clearly have fewer than 500 employees, but the requirement for 51% ownership by individuals presents a serious problem for biotechnology companies because in 2001, an administrative law judge for the SBA rearticulated the ownership requirement such that "individuals" does not include corporations. According to this interpretation, small biotechnology companies that are majority owned by venture capital firms are ineligible for SBIR grants. Nancy Saucier, manager of the Medical Industries Group at the National Venture Capital Association (NVCA; Arlington, VA, USA), estimates that about 40% of all recipients of NIH SBIR grants would be ineligible under the new requirements, which she says run counter to the original intent of the program. "These companies are the innovators, and that is proven by their ability to secure additional funding from venture capitalists. These companies should be encouraged to apply, not discouraged," says Saucier. Saucier's sentiments are echoed by many industry observers, who tend to use words such as "silly" and "crazy" to describe the SBA's new interpretation of the rule. Indeed, in a July 7, 2003 letter to the SBA, the Biotechnology Industry Organization (BIO; Washington, DC, USA) stated, "Congress created a Phase II SBIR preference for companies that attracted venture capital investment." Saucier explains that SBIR phase I grants are a means of validating technology to allow companies to achieve venture capital backing and a phase II grant. "SBIR grants should go hand in hand with venture capital funding, not either-or," she says. As a result of the SBA's recent interpretation of the eligibility requirements, many venture-backed companies that have existing SBIR grants, such as biopharmaceutical firm Cognetix (Salt Lake City, UT, USA), ceased drawing funds from them in acts of caution. Vicki Farrar, vice president of intellectual property at Cognetix, says they had been awarded a $750,000 phase II grant from the NIH in April 2003, but the SBA determined they were not eligible based on their venture backing. Now, Farrar says that Cognetix had to shut down some basic research, which could lead to layoffs. "It couldn't be worse, and I'm sure a lot of other companies are in the same boat," says Farrar. Saucier says this pattern is to be expected, because SBIR grants are designed to fund groundbreaking research that is too risky for a venture capitalist. Therefore, many biotech companies will not see their core technology programs harmed (for example, Cognetix is using its venture funds to get its lead pain therapeutic through phase 1/2 clinical trials), but a lot of innovative programs—the very programs that the SBIR program was designed to help develop—will disappear. Companies that are not located near centers of venture capitalism, such as Massachusetts and California, could be hit the hardest. "It's harder for a midwestern company to go down the street and get venture capital, so they rely more on federal funds for their growth strategies," says Saucier. The SBA released a proposed rule on June 4, 2003 that would relieve some eligibility restrictions, but not the venture-backed exclusion from the term "individual." The NVCA and BIO are two of many interested parties that submitted comments to the SBA requesting that this eligibility requirement be changed. The SBA, which did not reply when contacted by Bioentrepeneur, reportedly may propose another rule addressing this issue in October, but industry observers worry that a new regulation will not come into effect until 2004—if at all—and that by then the grant recipient population will have shrunken substantially. And more significantly, many innovative research programs at US startups will have vanished.
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