Washington Editor

WASHINGTON - A pair of biotech execs addressed a congressional subcommittee in their fight for an exception to a Small Business Administration rule that precludes their companies from receiving Small Business Innovation Research (SBIR) grants.

"The irony of this is that you have companies that have proven themselves at some level at developing technology for which they've [previously] gotten funding," explained Douglas Doerfler, the president and CEO of MaxCyte Inc., "but now those same companies aren't eligible to help pivotal technologies that are directly in line with what NIH is trying to achieve in its mission."

He spoke to BioWorld Today following his testimony before members of the Rural Enterprises, Agriculture and Technology Subcommittee of the House Small Business Committee. The hearing was called to address proposed legislation floating in both chambers aimed at amending the Small Business Administration's relatively new interpretation of existing eligibility standards whereby companies that are majority owned by venture capital firms are disqualified for SBIR grants.

A bill introduced in the House earlier this year by Rep. Sam Graves (R-Mo.), called "Save America's Biotechnology Innovation Research Act," is similar to a related measure introduced by Sen. Kit Bond (R-Mo.). The bills are labeled H.R.2943 and S.1263.

MaxCyte, of Gaithersburg, Md., is slightly more than half-owned by the venture capital firms that backed its Series A financing round, which closed last year and brought in $10.9 million. Previously, the 6-year-old company raised money through friends and family and also funded a program through Phase I by way of SBIR grants.

Doerfler admitted that SBIR grants, which typically are worth low to upper six-figure amounts, "are a minor part of my funding strategy." But he added that they are "an important part of the biotechnology industry."

MaxCyte represents one of many biotech companies that are more than 51 percent owned by venture capital firms. A month ago, the Biotechnology Industry Organization (BIO) stood up for those firms at a hearing held by the Small Business Administration, which has been in the process of evaluating size standards in determining qualifications for the monetary awards. (See BioWorld Today, June 20, 2005.)

At the congressional hearing, BIO continued its efforts to amend the tightened restrictions and submitted a letter endorsed by 281 biotech CEOs and other senior executives in support of passing Graves' and Bond's legislation.

"I think it's clear that the committee really wants to solve this problem," Morrie Ruffin, BIO's executive vice president of capital formation and business development, told BioWorld Today. "They realize that we've reached a point in the evolution of this program where the definition itself does not reflect the reality that we're dealing with."

Anthony Cruz, senior vice president of finance and administration for AviGenics Inc., also testified.

"The company probably would not have made the technical strides or even have survived without the SBIR grants and other federal funding," he said of his Athens, Ga.-based firm's early research efforts. Going forward, even with venture backing, he said AviGenics and many other similar companies remain dependent on federal funding for basic research.

That point was echoed by Doerfler, who said SBIR grants are "not about funding companies, they're about supporting NIH" goals to improve human health.

To that end, the industry is drawing direct support from NIH Director Elias Zerhouni, who, concurrent with the congressional hearing, wrote a letter to the Small Business Administration's administrator, Hector Barreto, in support of an exception to the venture capital exclusion for biotech firms.

He said the limits "unduly restrict the ability of the NIH to fund high-quality small companies that receive venture capital investment," adding that the NIH "must turn away many deserving applicants, and the goals of the SBIR program are being undermined."

To remedy that situation, Zerhouni requested that the NIH be granted the authority to award SBIR grants to venture capital-backed biotech companies that are majority owned by U.S. individuals and/or venture capital firms that are no more than 49 percent owned by foreign businesses.

"While many details of this proposal remain to be discussed between our two agencies," he said, "and its precise formulation may change as we work together, please understand that NIH aims to ensure that small business concerns with substantial venture capital support in the biotechnology and public health area are able to receive SBIR awards from NIH."

An alternative proposal floated at the hearing, mentioned by Rep. Roscoe Bartlett (R-Md.), would create another pool of funding for biotech companies that are more than half-owned by venture capitalists. That idea was supported by Jere Glover, the executive director of the Small Business Technology Coalition, who testified in opposition to amending the SBIR eligibility rules. His group represents companies that rely on SBIR grants as their primary source of funding. Ruffin, however, criticized Glover for failing to identify his constituents and Ruffin also opposed the argument that NIH funds are scarce enough, without further restrictions due to percentage ownership.

"I think that the facts have to come out," Ruffin said, "and one of the problems that we're facing here is a lot of misinformation." Doerfler also was critical of Glover's testimony, saying that "you don't limit competition. Science has been driven on competition, and if you limit competition, you get less attractive ideas."

Graves' bill has been referred to the House Science Committee.

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