Phyllis Gardner Testimony

Chairman Bilirakis and Members of the Committee, I am pleased to testify before you today regarding technology transfer issues as they relate to the biotechnology industry.

Chairman Bilirakis and Members of the Committee, I am pleased to testify before you today regarding technology transfer issues as they relate to the biotechnology industry. I would like to thank the Committee for its continued leadership on issues related to Americans' health.

I am here today representing the Biotechnology Industry Organization (BIO). BIO's membership includes more than 1,000 biotechnology companies, academic institutions, state biotechnology centers and related organizations in all 50 U.S. states. BIO members are involved in the research and development of health-care, agricultural, industrial and environmental biotechnology products.

My comments today are based on my years of experience on biomedical research in both the academic and private sectors. I have been a tenured associate professor in the departments of molecular pharmacology and medicine at Stanford University since 1984. I am also the former Senior Associate Dean for Education and Student Affairs.

In the past ten years, I have also been associated with ALZA Corporation - a leading drug delivery and pharmaceutical company, recently acquired by Johnson & Johnson - serving as Vice President of Research and Head of the ALZA Technology Institute. In addition, I am or have been a member of the board of directors of several public and private biotech companies, including Aerogen, Inc., Aronex, Inc. (acquired by Antigenics, Inc.), BioMarin Pharmaceuticals, Pharmacyclics, iMEDD Pharmaceuticals, Health Hero Network and Elim Biopharmaceuticals, Inc. I have also served on a number of advisory committees to the National Institute of Health. In addition, I serve as an adjunct partner of Essex Woodlands Health Ventures, a BIO member, and am an advisor to Draupnir, LLC, a private equity firm.

The Private Sector Annually Funds Billions of Dollars of Research and Development in the Biotechnology Field

The biotechnology industry is the most research and development intensive and capital-focused industry in the world. R&D in the biotechnology world is robust, focusing on new targets and highly innovative therapies. No industry spends more on research and development per employee and no industry faces a lengthier or more complex regulatory process to bring products to market than the biotechnology industry. There are over 1,400 biotechnology companies in the United States, of which about 25 percent are publicly traded. The revenue of these companies was about $35 billion in 2001 with a market capitalization of $206 billion in mid-2003. This research-intensive industry spent $20.5 billion on R&D in 2002 /1, with the top five companies spending an average of $133,000 per employee on R&D. Biotechnology companies rely heavily on public-private partnerships in their R&D initiatives. Importantly, however, only approximately 1.6 percent of the industry's R&D funding in 2002 originated from government sources. /2

Biotechnology companies range from very small, private companies with few employees to larger public ones such as Amgen and Genentech. Generally, however, biotechnology companies are either privately held or have much lower market capitalization than the large pharmaceutical companies and very few have yet achieved profitability. While large pharmaceutical companies tend to pursue development of "blockbuster" drugs with market potentials of $1 billion or more, many biotechnology companies will pursue products with lower market potentials, including those products whose projected revenues may only be 10% or so of the acceptable market potential for a large pharmaceutical enterprise.

Biotechnology companies use living organisms to make their medicines rather than the chemicals used by pharmaceutical companies. As well as entailing very complicated R&D efforts, this also requires enormously complex manufacturing capabilities. The manufacturing facilities, whose role is to define the biotech medicine, are subject to strict FDA licensing requirements. In addition, both the facilities and the medicine itself are very tightly regulated.

The biotechnology industry is also a dynamic one. The industry supports 437,000 U. S. jobs, including approximately 200,000 jobs directly in the industry, in sectors as varied as agriculture, industrial products and pharmaceuticals. As a whole, the industry is not yet profitable, but biotechnology companies make tax payments of about $10 billion per year, including income, corporate and other federal, state and local taxes.

Moreover, unlike the pharmaceutical industry, the vast majority of biotech companies spend more than 50 percent of their operating expenses on research and development. This is necessary given the huge investments required to bring a product through the discovery and lead optimization phase, preclinical testing, and then clinical trials required to gain market approval. With the consolidation in the pharmaceutical industry and the risk-averse culture of many of the largest companies, the bulk of early stage research and early clinical development is now performed by the biotech industry, especially in areas focusing on newer targets and featuring the most innovative therapeutics approaches.

It is the early stages of drug development that are most vulnerable to perturbations in the capital markets. While it has been relatively easy for entrepreneurs to obtain seed financing, it is the follow-on financing, the second and third rounds of venture investment required to fund companies beyond "proof of concept", that is often the most difficult. Through the first six months of 2003, follow-on venture financing has represented only twenty five percent of the total venture financings. The total amount of venture financing raised during this period is down twenty seven percent from the same period in 2002. The same challenges also confront smaller cap public companies that have a difficult time raising capital through secondary offerings with depressed stock prices. It is this critical link in the drug development value chain that could be jeopardized if investors become concerned about the government seeking additional compensation for participation in early stage "proof of concept" research.

The Bayh-Dole Act Has Been An Effective Enabler for Technology to be Transferred from Federal Agencies to Universities and Industry

As the Committee examines the effectiveness of the transfer of biotechnology from federal laboratories to universities and private companies, it is important to understand the historical and current framework for these transfers.

Over twenty years ago, Congress enacted the landmark Bayh-Dole Act to promote the transfer of government-sponsored research to universities and small businesses. This action was taken in response to concern that the majority of technologies developed with federal funding were not being commercially exploited.

Prior to Bayh-Dole, federal agencies would rarely relinquish ownership of federally funded inventions to the academic and private institutions, even when private sector scientists and engineers actually contributed to the inventions. Valuable technology was left languishing on the shelves of research institutions. For example, in the 1960s, the U.S. government asserted that it owned rights to 5-fluorouracil (an important anti-cancer drug) even though it had provided merely a fraction of the funding that went into discovery. As a result, market entry of this critical product was unnecessarily delayed and industry distanced itself from federally funded university research.

Bayh-Dole authorizes universities, non-profits and small businesses to elect title to inventions made under federal funding agreements. Additionally, Bayh-Dole authorizes federal agencies to grant exclusive licenses in their technologies to private companies. Later, President Reagan extended the policy of Bayh-Dole to large for-profit businesses which today are able to elect title to many inventions they make under federal contracts and grants. The ability to elect title to inventions and to further license valuable technologies gives companies the market exclusivity they need to achieve commercial exploitation.

At the same time, Bayh-Dole reserves to the government a royalty-free license to use the invention for government purposes. Additionally, Bayh- Dole gives the government so-called "march-in rights," which enable it to compel licensing of a federally funded invention if the patent owner has not commercialized the invention in a reasonable time.

Since the enactment of Bayh-Dole, technology partnerships have led to the founding of more than 1,100 companies based on NIH and university research. These technology partnerships and the patents on which they are based are particularly important to small biotechnology companies, which focus their research on breakthrough technologies that arise from basic biomedical research.

At Stanford University alone, over 1,200 "spin-off" companies have been established by current or former students and faculty. Recognized early on by then University President Fred Terman as an important strategy for seed funding of translational research and innovation, the vast majority of these companies were founded with technologies initially developed under government funding. Successful "spin-off" ventures help bring valuable products to market, and also develop the vibrant Silicon Valley surrounding Stanford, which leads in high tech, biotech, and medical device industries. This thriving business ecosystem, in turn enables further R&D initiatives and two-way technology flow between academia and industry. Stanford's Office of Technology Licensing has a robust record of licensing university patents, with royalty income that flows back to the university and the individual inventor. The Cohen-Boyer patent for gene splicing, for example, was supported by NIH grant funding. That patent yielded $30 million per year in royalty revenue at its peak, for a total value of over one quarter billion dollars to the University, which was spent on further research and education.

The Small Business Innovation Research Program is a Valuable Source of Seed Funding for the Biotechnology Industry, but Should be Improved to Allow Greater Participation by Companies that Are Supported by Venture Capital Funds

The Small Business Innovation Research (SBIR) program is a competitive, three phase, government funded program that was designed to encourage commercialization of promising technologies. Federal funds are used for the critical startup and early development stages - i.e. those stages that provide proof of concept to attract private equity into further funding rounds. Because the private sector is expected to take over 100% of funding by the third stage, companies are incentivized to expedite commercialization of a particular technology, product, or service.

Since the enactment of the Small Business Innovation Act in 1982, SBIR funding has helped many biotechnology companies compete for federal research and development awards. To qualify for SBIR awards, a small business must be owned by U.S. individuals (as defined by the Small Business Administration's [SBA] guidelines) be independently operated, for-profit and limited to 500 employees. Ten federal departments and agencies, including the Department of Health and Human Services, are required by SBIR to reserve a portion of their R&D funds for award to small businesses.

Because they help biotechnology companies evaluate new technologies and products at their earliest stage, SBIR awards can be very useful in helping companies to initiate new commercial opportunities. Before most biotechnology products can become commercially available, however, typically 15 years of work and hundreds of millions of dollars of investment capital are required to complete adequate testing and to secure the necessary approvals.

While SBIRs serve a very useful role, particularly when private equity may be plentiful but directed to late stage private and public companies where the investor's exit strategy is clear and risks are lower, they are by no means a substitute for sustained equity investment. SBA's implementation of the program makes it difficult for companies who also have venture capital (VC) funding to participate in the program.

Under the SBA's current regulations a company applying for SBIR funding must be more than 51% owned by "individuals" who are US citizens or permanent resident aliens and must have less than 500 employees. The SBA has interpreted "individuals" to mean only "natural persons" and not venture capital firms and employee pension funds. Many biotechnology companies have less than 500 employees and obtain the bulk of their funding from venture capital investment. Typical small start-up biotechnology companies that are backed by VC funds are generally more than 51% owned by the VC syndicates. The "individual" shareholders that make up the VC syndicates are often the founders, employees, friends of the company, and angel and family investors. The most promising companies are the ones that attract VC capital. This typical combination of venture funding, industry collaboration and only modest investment directly by individuals boosts "non-individual" ownership above the 51 percent level very early in a company's existence and, in virtually every instance, renders the small business ineligible for SBIR funding. Most if not all start-up biotechnology companies would be ineligible for SBIR funding as interpreted by the SBA.

The SBA has proposed new regulations to clarify the ownership criteria for SBIR awards. However, the proposed regulations do not address the concerns of the industry with respect to VC-backed companies. BIO believes that a provision to remove VCs from determination of size eligibility would allay the concerns of our member companies and fulfill Congressional intent behind the statute. See attached comments filed by BIO. We urge this Committee to express its support for a revised definition of small business that would not penalize those small businesses supported by venture capital funds.

Cooperative Research and Development Agreements are An Important Vehicle for Public-Private Partnerships on Biotechnology R&D and Should be Continued

The Federal Technology Transfer Act (FTTA) allows government and government owned contractor operated laboratories to enter into Cooperative Research and Development Agreements (CRADAs), in order to promote collaboration between the federal government and the private sector. In the medical arena, the goal is to take research "from the bench to the bedside". Under a CRADA, the government shares resources such as personnel, facilities, and equipment with private entities, but does not make cash outlays to the private sector participant. The private sector funds its own activities under the CRADA, thus sharing the total cost of the collaboration.

CRADAs typically allow the private sector participant to retain intellectual property rights to inventions it makes under the CRADA. Also, under recent amendments to the Stevenson-Wydler Act, the private sector participant has a first right of refusal to license any inventions the government makes under the CRADA. Further, technical data that is developed by the government under a CRADA may be protected from disclosure for a period of five years, thus giving the private sector participant a potential competitive advantage in the marketplace.

For biotech companies, CRADAs can be an important opportunity to gain or retain intellectual property rights on biomedical inventions. They can also be helpful by allowing private companies to utilize specialized equipment or tools that are sometimes only available in federal laboratories to test the validity of innovative concepts and new ideas. CRADAs are thus important tools to enable startup biotechnology companies to jump the gap between a useful idea or theory to a successful and profitable product.

NIH has entered into over 400 CRADAs since 1985. One of the most successful CRADAs with NIH was entered into with Aviron (which has since been acquired by MedImmune) in 1995. The CRADA was for a promising influenza vaccine invented at the University of Michigan in the 1960s under US Army sponsorship. This vaccine had been the subject of NIH-sponsored clinical trials through the 70s and 80s. Despite the lack of a committed industrial sponsor, NIAID had built an impressive base of scientific knowledge around this flu vaccine and its novel form of administration via the nose. Under the CRADA, Aviron and NIAID jointly funded the clinical trials resulting in FDA approval of the vaccine now known as FluMist TM.

The Advanced Technology Program Has Been an Important Vehicle for Biotechnology Research and Should be Fully Funded

The Advanced Technology Program (ATP) was instituted in 1990 under the management of the National Institutes of Standards and Technology. The ATP does not fund product development. Instead, it supports enabling technologies that are essential to the development of new products, processes, and services across diverse application areas. This innovative program provides cost-share funding in the critical early stages of R&D, when research risks are too high for other sources of funding. Funding under the program is available to pay up to $2,000,000 in direct costs over a period not to exceed three years for a single company and up to half of the total project costs for a maximum of five years for a joint venture involving more than one company.

Twenty percent of the Advanced Technology Program funding has gone to biotechnology applications. ATP grants are designed to fill the gap in financing the development of high-risk technologies that biotechnology companies often encounter, and that cannot be financed by venture capital.

ATP grants make a tangible difference to the competitively chosen small companies receiving the assistance, especially during periods when seed investment to fund early, technology-validating R&D is scarce. For example, a grant of $1.2 million during a biotech investment trough in 1998 accelerated the development of the stem cell culturing device by two years and helped its fledgling developer subsequently attract more than $70 million in private investment. Another small biotechnology company had just 17 employees when it received a grant in the mid-1990s to develop systems of gene expression analysis. The company leveraged the ATP research into five patents and $100 million in corporate partnerships, growing rapidly into a billion-dollar company with more than 300 employees and a solid balance sheet that will fund the technology's translation into new medicines.

Since its inception, ATP has fostered development of dozens of biomedical technologies that might otherwise have been delayed for years. Examples of ATP success stories include: an autologous stem cell culturing device that eliminates the need for bone marrow extraction or multiple (up to 140) skin punctures to withdraw blood; an enzyme used in DNA sequencing, including the Human Genome Project, and another enzyme that may replace radioactive substances in diagnostic aids; and a mammography innovation that lowered the cost and widened availability of this life-saving diagnostic procedure. More apropos to today's technology needs is the development of miniaturized, automated DNA-analysis "chips" that are becoming invaluable for rapid, accurate genetic analysis.

The ATP program is of course subject to Congressional appropriations. Notwithstanding the multiple successes of the program, Congress has not consistently funded the program at the necessary levels. BIO believes that continued funding for ATP would reap benefits for health and medical research far in excess of the federal funds invested.


BIO supports the continuing efforts of federal agencies to utilize the various vehicles that Congress has authorized for transferring valuable technology from the public to the private sector. As noted, licensing of federally funded inventions and partnering under CRADAs are two critical vehicles for private sector companies to gain access to technology developed with federal support. Additionally, the SBIR and ATP programs provide critical financial assistance to small and emerging biotechnology companies. BIO supports modifications to the SBIR program that would increase the opportunities for companies to participate in the program. Additionally, BIO encourages the Congress to continue fully funding the ATP initiative. The federal government's support helps small companies attract the necessary private sector investment to bring good ideas to the market.

Given the significant technological breakthroughs that have been achieved in the medical and health fields, BIO believes that the federal dollars that are invested in biotechnology research have yielded significant benefits generally for the health of the nation and specifically for the federal treasury.

However, while continued federal support is key to the future of the biotechnology industry, federal funding still represents only about 1.6% of the total funds raised for research and development by the industry. Thus, federal R&D programs must be flexible enough not to stifle the private sector investment that is so critical for bringing products from the bench to the bedside.

Thank you again for your support of biotechnology's efforts to contribute to the advance of health in the United States. I would be pleased to respond to questions from the Committee.


/1 Source: Ernst & Young, "Resilience: America's Biotechnology Report 2003"
/2 Source: BioWorld Online, "2002 Grants and Awards to Biotech Companies," April 7, 2003. Grants and awards to biotechnology companies from federal government agencies totaled $326.1 million in 2002.