Biotech groups push for small-business rule change

More than 60 biotech companies and trade groups sent a letter yesterday to House and Senate leaders urging support for a bill that would change recently issued eligibility requirements for Small Business Administration (SBA) grants.

The bills are necessary to avoid “a regulatory interpretation stifling promising research that could improve the health and lives of people suffering from many diseases,” the letter states. The groups that signed the letter included the Biotechnology Industry Organization, the Cystic Fibrosis Foundation and the Kidney Cancer Association. 

About a year ago, the SBA revised eligibility rules that effectively limited the amount of venture capital a company could receive and still be eligible for grants through the Small Business Innovation Research program. The SBA sets the rules, but larger federal agencies such as the Defense Department and National Institutes of Health pay for and distribute the money.

Under the SBA’s new rules, companies with more than 50 percent of their backing from venture capital can’t compete for grants.

Proponents of the new standards argue that the change ensures that the money goes to small businesses in need of federal help. But the changes “now disqualify many start-up biotech and medical-device companies,” the letter said. That’s so because of the capital-intensive nature of the industry, which often relies on seed money for years before turning a profit.

The controversy hinges on how the administration defines “individuals” in its grant requirements. Previously, an individual could have been a venture-capital firm, but no longer.

Bills introduced in the House by Reps. Sam Graves (R-Mo.) and Brian Baird (D-Wash.) and in the Senate by Sen. Kit Bond (R-Mo.) would revert the SBA definition to the previous standard.

“It’s very expensive to do some of these projects, so research grants are very, very important,” Graves said at a news conference he described as a “pep rally” for the bills, which have yet to pass a committee.

Gary McGarrity, president and CEO of Intronn, said his company received about $3 million from the SBA to develop a drug for cystic fibrosis (CF), a genetic disease that afflicts around 30,000 children and adults. People with CF produce an abnormally thick mucus that clogs the lungs and leads to life-threatening infections.

McGarrity said it was difficult to attract investors because of the risks attendant with developing drugs, an inherently complicated process. Compounding the problem is that afflictions such as CF strike a relatively minor segment of the population and therefore may not promise a market demand sufficient to warrant significant investor interest.

McGarrity said, however, that Intronn did attract about $11 million in venture capital. Its research was also supplemented with about $3 million in SBA money. It lost the opportunity to get further federal help when the grant definition was changed, and McGarrity said the company was forced to stop development of the drug.

Baird said companies are being penalized for what should be seen as an indication their drugs had potential.

“If you can convince venture cap to support you, you must have something going for you,” he said.

Congress created the research-grant program in 1982. It requires agencies with research and development budgets greater than $100 million to set aside 2.5 percent of their funding to sponsor research at small companies.

According to a statement from Rep. Vernon Ehlers (R-Mich.), the chairman of the Science Committee’s Environment, Technology and Standards Subcommittee, which examined the SBA’s new definition in a June hearing, more than $1.6 billion was awarded to 76,000 projects in 2003 under the grant program.

Ehlers called grant eligibility a “complicated issue.”

At the hearing, Jonathan Cohen, president and CEO of 20/20 Gene Systems, said venture-capital-backed firms had an unfair advantage in the grant process.

“Opening up the program to companies owned and controlled by deep-pocketed investment houses presents a genuine risk that a significant percentage of available funds will be siphoned away from the very companies for which SBIR program was created to support,” Cohen said in written testimony.