Increasing number of companies found ineligible for SBIR funding

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N E W SNATURE BIOTECHNOLOGY VOLUME 21 NUMBER 10 OCTOBER 2003 1121A two-year-old decision by federal officialson how to determine eligibility require-ments for receiving funds from a key USgovernment funding program is currentlycausing serious disquiet within the biotech-nology industry. While many industrygroups are lobbying to loosen the require-ments, companies are worried that they maynot have enough time to save second-tierinnovative programs.The US Congress established the SmallBusiness Innovation Research (SBIR)Program in 1982 to increase technologicalinnovation and facilitate the conversion offederally funded research results into com-mercially viable products and services. Tendifferent agencies participate in the pro-gram, which in 2002 doled out 5,000 awardstotaling $1.5 billion (see Table 1). TheDepartment of Defense (DoD; Washington,DC, USA) has the largest SBIR budget ($800million), although because of their empha-sis on biomedical innovations, biotech com-panies are more to likely benefit from grantsfrom the National Institutes of Healths(NIH; Bethesda, MD, USA) $450 millionSBIR budget.The US Small Business Administrations(SBA; Washington, DC, USA) Office ofTechnology determines the criteria that aIncreasing number of companies foundineligible for SBIR fundingCognetix, which develops therapeutics from compounds derived from the conus snail, will no longer be drawing SBIR funds.CognetixThe strategic goal of building a strongerFDA refers specifically to strengthening itsstaff, including taking steps to improve reten-tion and training. Having a very educated,highly qualified scientific staffwill benefit thebiotech industry, Radcliffe says, noting thatthe resources to help pay for agency personnelcome, in part, from user fees charged to com-panies, an approach to supporting FDA thatBIO has consistently endorsed. When FDAregulatory officials are doing research of theirown, they are more familiar and more com-fortable in dealing with the intricate detailsthat are embedded in new product applica-tions, she points out.Meanwhile, the progress report on productmanufacture that the FDA released early inSeptember along with a series of guidancedocuments contains measures with more spe-cific applicability to the biotech industry,according to Radcliffe. The progress reportand accompanying guidance documents are amajor part of our strategic action plan,Commissioner McClellan says, pointing outthat the FDA plans to work more closely withmanufacturers, including those who makebiologics and other therapeutic products inthe biotechnology sector, as producers movetoward adopting the latest technologies intotheir manufacturing processes. We want toencourage the early adoption of advances tomake products more efficiently and safer, saysMcClellan.Among several draft guidance documentsreleased in September, a comparability proto-col that covers protein drug products andbiological products is doubtless the mostfocally relevant to the biotechnology industry.Such protocols amount to comprehensiveplans that companies may develop, and typi-cally include specific tests and validation stud-ies to show that changes in manufacturingprocedures do not lead to adverse effects orany changes instrength, quality, purity orpotency of the approved products with whichthey deal. Issues to consider within such prod-uct-specific plans include: Complexity of the product structure Ability to characterize the physicochemical,biochemical, immunological, microbiologi-cal and biological properties of each prod-uct Degree to which differences in productcharacteristics (e.g., product structure andphysical properties) can be detected Degree of product heterogeneity The effect of potential changes in impuritieson product safety The robustness of the product (that is, theability of the product to remain unaffectedby process changes) Rigorousness of the manufacturing processcontrolsIn addition to this comparability protocoldraft guidance document, others in this seriesinclude one on aseptic products and anotherfinal guideline on electronic record keeping.Everyone believes that electronic submis-sions and reporting will lead to greater effi-ciencies, says Alan Goldhammer of thePharmaceutical Research and Manufacturersof America (Washington, DC, USA). Thosesubmissions eventually will include the fullspectrum of what companies provide FDA,extending not only to new drug applicationsbut also to adverse drug reporting as part ofpostmarket surveillance as well as annualreports for individual products.Jeffrey L. Fox, Washington2003 Nature Publishing Group E W S1122 VOLUME 21 NUMBER 10 OCTOBER 2003 NATURE BIOTECHNOLOGYbusiness must meet in order to be eligible toreceive an SBIR grant. Two of these criteriaare that a firm must have fewer than 500employees and that it must be at least 51%owned and controlled by one or more indi-viduals who are citizens of the United States,or permanent resident aliens in the UnitedStates. The majority of biotechnology com-panies clearly have fewer than 500 employ-ees, but the requirement for 51% ownershipby individuals presents a serious problemfor biotechnology companies because in2001, an administrative law judge for theSBA rearticulated the ownership require-ment such that individuals does notinclude corporations. According to thisinterpretation, small biotechnology compa-nies that are majority owned by venturecapital firms are ineligible for SBIR grants.Nancy Saucier, manager of the MedicalIndustries Group at the National VentureCapital Association (NVCA; Arlington, VA,USA), estimates that about 40% of all recip-ients of NIH SBIR grants would be ineligibleunder the new requirements, which she saysrun counter to the original intent of the pro-gram. These companies are the innovators,and that is proven by their ability to secureadditional funding from venture capitalists.These companies should be encouraged toapply, not discouraged, says Saucier.Sauciers sentiments are echoed by manyindustry observers, who tend to use wordssuch as silly and crazy to describe theSBAs new interpretation of the rule. Indeed,in a July 7, 2003 letter to the SBA, theBiotechnology Industry Organization (BIO;Washington, DC, USA) stated, Congresscreated a Phase II SBIR preference for com-panies that attracted venture capital invest-ment. Saucier explains that SBIR phase Igrants are a means of validating technologyto allow companies to achieve venture capi-tal backing and a phase II grant. SBIRgrants should go hand in hand with venturecapital funding, not either-or, she says.As a result of the SBAs recent interpreta-tion of the eligibility requirements, manyventure-backed companies that have exist-ing SBIR grants, such as biopharmaceuticalfirm Cognetix (Salt Lake City, UT, USA),ceased drawing funds from them in acts ofcaution. Vicki Farrar, vice president of intel-lectual property at Cognetix, says they hadbeen awarded a $750,000 phase II grantfrom the NIH in April 2003, but the SBAdetermined they were not eligible based ontheir venture backing. Now, Farrar says thatCognetix had to shut down some basicresearch, which could lead to layoffs. Itcouldnt be worse, and Im sure a lot of othercompanies are in the same boat, says Farrar.Saucier says this pattern is to be expected,because SBIR grants are designed to fundgroundbreaking research that is too risky fora venture capitalist. Therefore, many biotechcompanies will not see their core technologyprograms harmed (for example, Cognetix isusing its venture funds to get its lead paintherapeutic through phase 1/2 clinical tri-als), but a lot of innovative programsthevery programs that the SBIR program wasdesigned to help developwill disappear.Companies that are not located near cen-ters of venture capital, such asMassachusetts and California, could be hitthe hardest. Its harder for a midwesterncompany to go down the street and get ven-ture capital, so they rely more on federalfunds for their growth strategies, saysSaucier.The SBA released a proposed rule on June4, 2003 that would relieve some eligibilityrestrictions, but not the venture-backedexclusion from the term individual. TheNVCA and BIO are two of many interestedparties that submitted comments to the SBArequesting that this eligibility requirementbe changed. The SBA, which did not replywhen contacted by Bioentrepreneur, report-edly may propose another rule addressingthis issue in October, but industry observersworry that a new regulation will not comeinto effect until 2004if at alland that bythen the grant recipient population willhave shrunken substantially. And more sig-nificantly, many innovative research pro-grams at US startups will have vanished.Aaron Bouchie, New YorkThis story was reprinted with some modificationfrom the News section of the Bioentrepreneurweb portal ( 1 US Federal agencies that grant SBIR awardsAgency Areas of biotech-related research Annual budget ($ million)Department of Defense (Office of the Secretary of Defense, Army, Navy, Biodefense, sensors, nanotechnology 834aAir Force, DARPA, Missile Defense Agency, and Special Operations Command)Department of Health and Human Services (National Institutes of Health) Biomedical 411bNational Aeronautics and Space Administration Biomedical 108bDepartment of Energy Computational research, energy efficiency, 102a,cbiological energy, industrial biotechNational Science Foundation Biological, chemical and physical sciences 84.5aDepartment of Agriculture Plant-related research 16.25bDepartment of Commerce (National Institute of Standards and Technology, Advanced sensing technologies, health care, 9dNational Oceanic and Atmospheric Administration) medical physicsDepartment of Education N/A 8.7dEnvironmental Protection Agency Bioremediation, phytoremediation 8aDepartment of Transportation N/A 5.4dN/A, not applicable. Source: Agency websites. aFiscal year (FY) 2003. bFY 2001. cIncludes Small Business Technology Transfer Program grants. dFY 2002.Companies that are not locatednear centers of venture capital,such as Massachusetts andCalifornia, could be hit thehardest.2003 Nature Publishing Group


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