The Small Business Administration's decision to clarify - and start enforcing more stringently - one aspect of the rules regarding Small Business Innovation Research grants has lobbying groups, biotechnology firms and others up in arms.
"This regulation has been in effect for 21 years now," said Maurice Swinton, assistant administrator for technology for the SBA, who blamed earlier improperly granted SBIRs on misunderstandings of the rules.
"What you had was agencies that didn't truly understand the eligibility requirements for the program," and contracting officers who mistakenly recommended the grants be awarded, Swinton told BioWorld Today.
That doesn't make those affected any happier about it. Among the groups involved are the Biotechnology Industry Organization, the National Venture Capital Association and the Medical Device Manufacturers Association.
SBIRs have long been known as ideal funding instruments to help start-ups that otherwise might have to do without.
Phase I grants are awarded in amounts up to $100,000 to test the feasibility of a concept, Phase II funding is up to $750,000 for expansion of first-phase results into a prototype, and Phase III is designed to encourage small business awardees to seek third-party funding sources from investors and venture capitalists, readying the new technology for the market.
SBIR and Small Business Technology Transfer (STTR) programs award grants - about $1.6 billion annually - to companies that meet two main conditions. They must list fewer than 500 employees and they must be at least 51 percent owned and controlled by one or more individuals (in other words, be "independently operated").
There's the problem.
If a subsidiary with fewer than 500 employees applies for an SBIR, it's disqualified because of ownership by a "non-individual" - that is, by the parent firm. If the small company applying for the SBIR is more than half-owned by a venture capital firm (as often is the case with start-ups), it's disqualified, too, at least as of late last year when the enforcement began.
Biotech leaders insist the crackdown goes against the spirit, if not the letter, of the rule.
Morrie Ruffin, BIO's vice president of business development and emerging companies, told BioWorld Today the program is "not there to only fund projects by companies unable to obtain money otherwise" but is also for those who get VC funds. After all, he said, "they're the ones most likely to succeed. It doesn't make any sense."
Program Working Fine - Until Now
Swinton said the SBA is "not discouraging VC backing of companies, but the way the regulations are written, they can't own or control the business," noting that the SBIR program itself is intended to be the figurative "VC" for start-up firms.
"Some SBIR experts have said companies that have VC backing, ownership and control, don't really need SBIR," Swinton said. "When a company with $20 million of VC funding [seeks a Phase I grant], it kind of raises my eyebrows as to why," since the Phase I grant is typically intended to prove feasibility.
One well-known and already resolved case in the SBIR skirmishing is that of Salt Lake City-based Cognetix Inc., a VC-backed developer of therapies for peripheral and central nervous system disorders. In late May, the SBA's Office of Hearings and Appeals refused Cognetix's bid for an SBIR.
The NVCA, in a July letter to the SBA, said the "current interpretation of the size criteria [which disqualifies VC-backed firms] does not reflect the nature of funding for today's small businesses or original congressional intent" and asked the SBA to reconsider.
And this summer, Phyllis Gardner, associate professor of medicine at Stanford University who has been involved with biotech companies such as Mountain View, Calif.-based ALZA Corp., BioMarin Pharmaceuticals Inc., of Novato, Calif., and others, testified on behalf of BIO before a subcommittee of the U.S. House of Representatives.
Among the more recent to win SBIR grants is ViroLogic Inc., of South San Francisco, which got three from the National Institute of Allergy and Infectious Diseases, a division of the NIH. The grants total more than $3 million over three years.
As the SBIR program has been operated so far, it seems to be working well, said Karen Wilson, chief financial officer for ViroLogic.
Could getting government money mean the company would one day have to share its technology? Wilson speculated that a company might run into problems "only if you don't commercialize [the technology for which the grant is being sought] yourself - if you were to sit on it and not make it publicly available."
ViroLogic, of course, has no intention of doing that.
True Issue Is Ownership And Control'
Alain Delongchamp, chief operating officer for Clearant Inc., a privately owned firm in Los Angeles focused on deactivating pathogens in blood, therapeutic proteins and tissue, said guarding the technology (which Clearant developed in-house) has been a concern with SBIRs.
"I don't know if that fear is really well founded," he said. "It's something we're looking into a little more. Our general thinking around innovation and discovery is that we want to fund it."
The company - which raised $18 million recently in a Series B round with VC and private equity investors - has applied for two SBIRs in areas where it "made sense to look at them [as a way of] getting some support to continue to confirm the results we have observed initially, as there was no direct partner," Delongchamp said. (See BioWorld Today, Aug. 14, 2003.)
Intellectual-property worries will be moot if companies with VC backing can't get the SBIRs in the first place.
"The true issue is ownership and control," Swinton said. If companies "can work a deal with the VCs in Phase I and Phase II [grant applications] without giving up control, the VC solution is a viable solution."
At the Phase III grant level, "the VC can own outright the business at that time and still be eligible for government funding," though not SBIR dollars. "I think SBA is being portrayed as the bad guy, even though we're not," Swinton said, noting that a December 2002 meeting and talks afterward with the SBA's general counsel determined how the rules should be correctly interpreted and applied.
"At this time, my hands are tied," Swinton said.