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Background
The Small Business Administration (SBA) provides start-up funding to small businesses in a variety of ways. One program is the Small Business Innovation Research program (SBIR) where a specific percentage of all federal R&D grant monies are reserved for small business applicants. These funds provide critical "seed" money to new business innovators.
Small and emerging biotechnology companies depend on SBIR grants to fund R&D activities. To qualify for SBIR grants, a small business applicant must meet certain eligibility requirements. The size and ownership requirements -- or "size standard" -- limit eligibility to those companies that:
- Are at least 51 percent owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States; and
- Have no greater than 500 employees, including its affiliates.
However, on January 10, 2001, the SBA Office of Hearings and Appeals (OHA) ruled in CBR Laboratories, Inc. 1/ that the definition of "individuals" no longer included venture capital backed companies. This new interpretation of "individuals" resulted in the denial of a SBIR grant to CBR Laboratories, Inc. of Boston, Massachusetts because the company was venture capital-backed in excess of 51%. Based on this decision, many biotech companies have since been denied grant money or are holding SBIR submissions in hope that this issue will be resolved prior to their submission. In doing so, the unveiling of life saving and life enhancing technology is being postponed.
In addition to SBIR grant money, venture capital investment is a prominent source of capital for biotechnology research and development. Before most biotechnology products can become commercially available, 10-15 years of work and hundreds of millions of dollars of investment capital are required to complete adequate testing and to gain product approvals. As a result, very few biotechnology companies are capable of commercializing their technologies without significant VC backing. This is made evident by the fact that VC investments in the biotechnology and medical device industry totaled $4.7 billion in 2002 /2.
BIO Position
BIO strongly believes the new interpretation threatens an important funding source for emerging or start-up biotechnology companies across America. We urge the Administration and Congress to restore the eligibility for SBIR grants to venture capital backed start-up biotechnology companies.
Discussion Points:
- As the world's leader in biotechnology, this country has benefited greatly from the SBIR program, which has been an essential component in the commercialization and economic development of the biotech industry. However, this interpretation will prevent the most innovative biotech companies from participating in the SBIR program. If this continues, the results could be devastating for the future of the biotech industry and the patients we serve.
- As a result of the re-interpretation, the applicant pool is downsizing and the unveiling of life saving and life enhancing technology is being postponed. In fact, many companies are not applying for these grants or are holding SBIR submissions in hope that this issue will be resolved prior to their submission.
- Life sciences start-up companies require far more capital investment than any other industry. Therefore, by targeting a restriction on venture capital investment, a major source of funding for this capital intensive industry, biotechnology companies, the future drivers of our economy, are suffering the most.
- SBIR grants serve as a catalyst for future venture capital investment in an SBIR-awarded company. When the legislation that created the program passed in the early 1980's, Congress recognized the relationship between venture capital and the SBIR program, and intended to strengthen that connection. Because the SBIR program is a peer review process, venture capital investment will be more likely to follow with funds to further commercialization.
- We urge you to restore eligibility for SBIR grants to venture-backed biotech companies by cosponsoring H.R. 4149 and S. 2384. These bills will amend the Small Business Act to permit business concerns that are owned by venture capital operating companies or pension plans to participate in the SBIR Program.
Contact:
The Biotechnology Industry Organization (BIO) represents more than 1,000 biotechnology companies, academic institutions, state biotechnology centers and related organizations in all 50 states. BIO members are involved in the research and development of health care, agriculture, industrial and environmental biotechnology products.
For more information and any questions, contact Libby Solon, Director for Federal Government Relations at (202) 962-9200 or lsolon@bio.org.
Footnotes
1/ Appeal No. 4423 (2001)
2/ Money Tree Survey -Price Waterhouse Coopers, www.pwcmoneytree.com
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