[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]


 
                       SMALL BUSINESS INNOVATION
                     RESEARCH: WHAT IS THE OPTIMAL
                        ROLE OF VENTURE CAPITAL?

=======================================================================

                                HEARING

                               BEFORE THE

                SUBCOMMITTEE ON ENVIRONMENT, TECHNOLOGY,
                             AND STANDARDS

                          COMMITTEE ON SCIENCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 28, 2005

                               __________

                           Serial No. 109-20

                               __________

            Printed for the use of the Committee on Science


     Available via the World Wide Web: http://www.house.gov/science


                                 ______

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                          COMMITTEE ON SCIENCE

             HON. SHERWOOD L. BOEHLERT, New York, Chairman
RALPH M. HALL, Texas                 BART GORDON, Tennessee
LAMAR S. SMITH, Texas                JERRY F. COSTELLO, Illinois
CURT WELDON, Pennsylvania            EDDIE BERNICE JOHNSON, Texas
DANA ROHRABACHER, California         LYNN C. WOOLSEY, California
KEN CALVERT, California              DARLENE HOOLEY, Oregon
ROSCOE G. BARTLETT, Maryland         MARK UDALL, Colorado
VERNON J. EHLERS, Michigan           DAVID WU, Oregon
GIL GUTKNECHT, Minnesota             MICHAEL M. HONDA, California
FRANK D. LUCAS, Oklahoma             BRAD MILLER, North Carolina
JUDY BIGGERT, Illinois               LINCOLN DAVIS, Tennessee
WAYNE T. GILCHREST, Maryland         RUSS CARNAHAN, Missouri
W. TODD AKIN, Missouri               DANIEL LIPINSKI, Illinois
TIMOTHY V. JOHNSON, Illinois         SHEILA JACKSON LEE, Texas
J. RANDY FORBES, Virginia            BRAD SHERMAN, California
JO BONNER, Alabama                   BRIAN BAIRD, Washington
TOM FEENEY, Florida                  JIM MATHESON, Utah
BOB INGLIS, South Carolina           JIM COSTA, California
DAVE G. REICHERT, Washington         AL GREEN, Texas
MICHAEL E. SODREL, Indiana           CHARLIE MELANCON, Louisiana
JOHN J.H. ``JOE'' SCHWARZ, Michigan  DENNIS MOORE, Kansas
MICHAEL T. MCCAUL, Texas
VACANCY
VACANCY
                                 ------                                

         Subcommittee on Environment, Technology, and Standards

                  VERNON J. EHLERS, Michigan, Chairman
GIL GUTKNECHT, Minnesota             DAVID WU, Oregon
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
WAYNE T. GILCHREST, Maryland         MARK UDALL, Colorado
TIMOTHY V. JOHNSON, Illinois         LINCOLN DAVIS, Tennessee
DAVE G. REICHERT, Washington         BRIAN BAIRD, Washington
JOHN J.H. ``JOE'' SCHWARZ, Michigan  JIM MATHESON, Utah
VACANCY                                  
SHERWOOD L. BOEHLERT, New York       BART GORDON, Tennessee
                ERIC WEBSTER Subcommittee Staff Director
            MIKE QUEAR Democratic Professional Staff Member
            JEAN FRUCI Democratic Professional Staff Member
                 OLWEN HUXLEY Professional Staff Member
                MARTY SPITZER Professional Staff Member
               SUSANNAH FOSTER Professional Staff Member
       AMY CARROLL Professional Staff Member/Chairman's Designee
                  JAMIE BROWN Majority Staff Assistant


                            C O N T E N T S

                             June 28, 2005

                                                                   Page
Witness List.....................................................     2

Hearing Charter..................................................     3

                           Opening Statements

Statement by Representative Vernon J. Ehlers, Chairman, 
  Subcommittee on Environment, Technology, and Standards, 
  Committee on Science, U.S. House of Representatives............     7
    Written Statement............................................     7

Statement by Representative David Wu, Ranking Minority Member, 
  Subcommittee on Environment, Technology, and Standards, 
  Committee on Science, U.S. House of Representatives............     8
    Written Statement............................................     9

Statement by Representative Brian Baird, Member, Subcommittee on 
  Environment, Technology, and Standards, Committee on Science, 
  U.S. House of Representatives..................................     9
    Written Statement............................................    10

Prepared Statement by Representative Michael M. Honda, Member, 
  Subcommittee on Environment, Technology, and Standards, 
  Committee on Science, U.S. House of Representatives............    10

                                Panel I:

Honorable Sam Graves, a Representative in Congress from the State 
  of Missouri
    Oral Statement...............................................    11
    Written Statement............................................    12

                               Panel II:

Ms. Ann Eskesen, President, Innovation Development Institute, 
  Swampscott, Massachusetts
    Oral Statement...............................................    13
    Written Statement............................................    16
    Biography....................................................    30
    Financial Disclosure.........................................    31

Dr. Ron Cohen, President and CEO, Acorda Therapeutics, Inc.
    Oral Statement...............................................    31
    Written Statement............................................    33
    Biography....................................................    35

Mr. Jonathan Cohen, President and CEO, 20/20 Gene Systems, Inc.
    Oral Statement...............................................    35
    Written Statement............................................    37
    Biography....................................................    39

Dr. Carol A. Nacy, Chief Executive Officer, Sequella, Inc.
    Oral Statement...............................................    40
    Written Statement............................................    42
    Biography....................................................    44

Dr. Frederic D. Abramson, President and CEO, Alphagenics, Inc.
    Oral Statement...............................................    50
    Written Statement............................................    52
    Biography....................................................    53

Discussion.......................................................    54

             Appendix 1: Answers to Post-Hearing Questions

Ms. Ann Eskesen, President, Innovation Development Institute, 
  Swampscott, Massachusetts......................................    70

Dr. Ron Cohen, President and CEO, Acorda Therapeutics, Inc.......    71

Mr. Jonathan Cohen, President and CEO, 20/20 Gene Systems, Inc...    72

Dr. Carol A. Nacy, Chief Executive Officer, Sequella, Inc........    79

Dr. Frederic D. Abramson, President and CEO, Alphagenics, Inc....    82

             Appendix 2: Additional Material for the Record

Statement of the National Venture Capital Association (NVCA).....    84

Statement of the Biotechnology Industry Organization (BIO).......    87

Statement of Anu K. Mittal, Director, Natural Resources and 
  Environment Team, U.S. Government Accountability Office........    92


SMALL BUSINESS INNOVATION RESEARCH: WHAT IS THE OPTIMAL ROLE OF VENTURE 
                                CAPITAL?

                              ----------                              


                         TUESDAY, JUNE 28, 2005

                  House of Representatives,
      Subcommittee on Environment, Technology, and 
                                         Standards,
                                      Committee on Science,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 3:00 p.m., in 
Room 2318 of the Rayburn House Office Building, Hon. Vernon J. 
Ehlers (Chairman of the Subcommittee) presiding.



                            hearing charter

         SUBCOMMITTEE ON ENVIRONMENT, TECHNOLOGY, AND STANDARDS

                          COMMITTEE ON SCIENCE

                     U.S. HOUSE OF REPRESENTATIVES

                       Small Business Innovation

                     Research: What Is the Optimal

                        Role of Venture Capital?

                         tuesday, june 28, 2005
                          3:00 p.m.-5:00 p.m.
                   2318 rayburn house office building

PURPOSE:

    On Tuesday, June 28, at 3:00 p.m. the House Science Committee's 
Subcommittee on Environment, Technology, and Standards will hold a 
hearing to review the Small Business Innovation Research (SBIR) 
program, focusing on issues associated with awarding SBIR grants to 
small businesses owned, or partly owned, by venture capital firms.

WITNESSES:

Panel I:

Representative Sam Graves (R-MO), sponsor of H.R. 2943, the Save 
Biotechnology Innovative Research Act of 2005, introduced on June 16, 
2005. The bill would allow more expansive venture capital participation 
in small businesses eligible for SBIR awards.

Panel II:

Ms. Ann Eskesen, President, Innovation Technology Institute, 
Swampscott, MA. The Innovation Technology Institute is a clearinghouse 
for information on SBIR technology and outcomes and supports 
collaboration between technology companies. Ms. Eskesen believes that 
venture capital is critical to technology development, but that SBIR 
rules should not be significantly changed to favor venture capital 
firms.

Dr. Ron Cohen, CEO of Acorda Technologies, Hawthorne, NY. Acorda 
Technologies is a small biotechnology company that develops treatments 
for neurological disorders. Dr. Cohen believes that venture capital 
investment in SBIR companies should not be restricted.

Mr. Jonathan Cohen, President and CEO, 20/20 Gene Systems, Rockville, 
MD. 20/20 Gene Systems is a small biotechnology company that develops 
diagnostic methods and test kits with applications in drug development 
and testing, homeland security, and disease diagnosis. Mr. Cohen 
believes that venture capital investment in SBIR companies should be 
limited.

Dr. Carol Nacy, CEO, Sequella Inc., Rockville, MD. Sequella develops 
diagnostics, therapeutics, and vaccines for tuberculosis. Dr. Nacy 
believes that venture capital investment in SBIR companies should not 
be restricted.

Dr. Frederic Abramson, President and CEO of AlphaGenics, Inc. of 
Rockville, MD. AlphaGenics is a small biotechnology company that 
focuses on the interactions between nutrition, metabolism, human 
development, and gene expression. Dr. Abramson believes that venture 
capital investment in SBIR companies should be limited.

OVERARCHING QUESTIONS:

    Should companies that are majority-owned by venture capital firms 
be allowed to compete for SBIR awards? If such a change were made, what 
impact would it be likely to have on the SBIR program?

RECENT DEVELOPMENTS:

    A spirited debate is underway in the research and venture capital 
communities on whether it is appropriate for SBIR awards to be given to 
small companies that are majority-owned by venture capital (VC) 
companies.
    On December 3, 2004, the Small Business Administration (SBA) issued 
a final rule saying that to be eligible for an SBIR award, an entity 
must be a for-profit business at least 51 percent owned and controlled 
by one or more U.S. individuals, or 51 percent owned and controlled by 
another small business owned and controlled by Americans. Typically, VC 
firms are not controlled by individuals, but rather by entities such as 
private and public pension funds, financial and insurance investors, 
and endowments and foundations.
    Also on December 3, 2004, to get more guidance on the issue, SBA 
published an Advance Notice of Proposed Rulemaking (ANPR), seeking 
additional public comment on the VC issue. In particular, SBA is 
seeking comment on what the impact of maintaining or changing the 
current rules would have on the eligibility and composition of the SBIR 
applicant pool, which firms would benefit or suffer from a change, and 
whether the broader participation of VC firms would lead to multiple 
award winners at the expense of innovation and diversity.
    SBA has followed up the ANPR with a series of public meetings 
around the United States to obtain further public comment on the role 
of VCs in SBIR. These meetings will continue through June 30, 2005. 
Meanwhile, identical bills\1\ have been introduced in the House and the 
Senate to change the eligibility rules for SBIR. The legislation would 
allow a firm to participate in SBIR even if a consortium of VC firms 
controlled a majority stake as long as no single VC firm held more than 
a 49 percent stake in the company. The legislation is supported by the 
Biotechnology Industry Organization (BIO) and the National Venture 
Capital Association (NVCA).
---------------------------------------------------------------------------
    \1\ S. 1263, Save America's Biotechnology Innovative Research Act 
of 2005, introduced by Senator Bond, and H.R. 2943, Save Biotechnology 
Innovative Research Act of 2005, introduced by Representative Graves.
---------------------------------------------------------------------------
    Proponents of changing the current rule argue that VC firms are a 
major source of financing in certain industries, such as biotechnology, 
and that VC support can help a firm continue research and commercialize 
products. Opponents contend that VC firms are often run by large 
corporations. Therefore, opponents argue, small businesses that are 
controlled by VC firms should not be seen as independent small 
businesses in need of special research funding, but rather as arms of 
large corporations that do not merit SBIR support.

BACKGROUND:

The SBIR Program
    SBIR was established in 1982 by the Small Business Innovation 
Development Act [P.L. 97-219] to increase the participation of small, 
high technology firms in federal research and development (R&D) 
activities. SBIR has been reauthorized twice since its original 
enactment, and the current program authorization is scheduled to sunset 
in 2008. The Science Committee and the Small Business Committee share 
jurisdiction over the program in the House.
    Under SBIR, departments and agencies with R&D budgets of $100 
million or more are required to set aside 2.5 percent of their R&D 
budgets to sponsor research at small companies through the SBIR 
program. Currently, 11 departments and agencies sponsor SBIR programs: 
the Departments of Defense (DOD), Commerce, Education, Health and Human 
Services, Housing and Urban Development, Homeland Security, 
Transportation, Energy, and the Environmental Protection Agency, the 
National Aeronautics and Space Administration, and the National Science 
Foundation.
    Each agency runs its own SBIR program, emphasizing research areas 
of interest to the particular agency. But SBA establishes broad policy 
guidelines for the SBIR program. SBA monitors program implementation 
and reports to Congress on the conduct of the separate departmental and 
agency activities.
    Small businesses are eligible for SBIR awards if they are 
independently owned and operated for-profit companies, not dominant in 
the field of research proposed, and employ fewer than 500 people.
    From its inception in 1983 to 2003, the most recent year for which 
reliable is available, over $15.2 billion in SBIR awards have been made 
for more than 76,000 research projects. In fiscal year 2003, SBIR made 
6,224 awards, totaling $1.66 billion.
The Venture Capital Issue
    The current dispute over VC funding began on January 10, 2001, when 
the SBA Office of Hearings and Appeals issued a ruling against the 
majority ownership of SBIR companies by VC firms. This ruling was based 
on the appeal of CBR Laboratories, Inc., of Boston, Massachusetts, to 
the rejection of its application for SBIR funding by the National 
Institutes of Health. CBR Laboratories' grant application had been 
rejected because a VC firm held a controlling interest (i.e., more than 
51 percent stake) in CBR Laboratories. The ruling made by the 
Administrative Law Judge stated that VC firms were not ``individuals,'' 
i.e., ``natural persons,'' and therefore SBIR agencies could not give 
SBIR grants to companies in which VC firms had a controlling interest. 
The biotechnology and VC industries were dismayed by this ruling, 
seeing it as a new interpretation of the VC-small business relationship 
by SBA, which had treated VC firms as individuals up to this decision.
Advocates for Expanded VC Participation in SBIR-eligible Companies
    The biotechnology industry is the strongest advocate for 
unrestricted VC affiliation with SBIR-funded companies. Advocates argue 
that the SBA rule at best creates a meaningless barrier to private-
sector investment that inhibits growth of budding companies, and at 
worst blocks the translation of new discoveries into life-saving 
products for numerous fatal diseases. They point out that biotechnology 
R&D is capital-intensive and the involvement of VC money is critical to 
bring drugs through the development phase to market. BIO and NVCA have 
taken the official position that eligibility for SBIR awards should be 
expanded to include small companies that are majority owned by a 
consortium of VC firms.
Advocates for Limited VC in SBIR
    However, the biotechnology industry is not entirely united in its 
opposition to SBA's policy. Some biotechnology experts and company 
representatives argue that, if SBA regulations allowed more VC-backed 
companies to apply for SBIR grants, they would crowd out completely 
independent small research companies run or owned by individuals. They 
also point out that SBIR-eligible companies are currently able to 
attract VC backing without giving away a majority stake, and therefore 
it is not necessary to expand the role of VC.
    Beyond the biotechnology industry, some companies and small 
business advocates point out that many large companies, such as Intel, 
have set up VC funds as a means of investing in, and ultimately buying 
promising new companies that develop breakthrough technologies. They 
argue that if the Federal Government funded small businesses backed by 
such VC funds, the SBIR program could end up subsidizing the 
acquisition of small businesses by big businesses. This position is 
held by the Small Business Technology Coalition (SBTC), for example.
History and Background of Small Business Innovation Research (SBIR) 
        program
    The argument for the SBIR program as a whole was that while 
universities and large firms could compete successfully for federal 
research and development contracts and grants, small companies were at 
a disadvantage in spite of their great potential to contribute to the 
Nation's science base. SBIR was designed to redress this disadvantage.
    In 2001, the most recent reauthorization of SBIR, the Small 
Business Reauthorization Act [P.L. 106-554] required a study by the 
National Academy of Sciences review of the largest SBIR programs to 
find out, for example, if SBIR research was leading to new products in 
the marketplace. The Act also required SBA to establish databases of 
SBIR activity to help track and assess the performance of the SBIR 
program, and encouraged SBIR agencies to do a better job of partnering 
with states.
    The SBIR program is structured in three phases. Phase I awards (up 
to $100,000) fund research projects designed to evaluate the 
feasibility, and the scientific and technical merit of an idea. Phase 
II awards (up to $750,000) provide additional funding for Phase I 
projects that have demonstrated potential for successful development. 
Phase III is a not formally funded by the Federal Government, although 
some agencies have begun experimenting with Phase III awards. Phase III 
is where private-sector investment and support is supposed to step in 
and bring an innovation to market. However, Phase III funds may include 
follow-up contracts with federal agencies for the production of Phase 
II innovations. This is particularly true in the case of the Department 
of Defense.
SBIR Legislation in the 109th Congress
    On June 16, 2005, Senator Bond and Representative Graves introduced 
identical bills, S. 1263 and H.R. 2943, the Save Biotechnology 
Innovative Research Act of 2005.
    This legislation would expand eligibility for SBIR awards to 
include small businesses that are majority owned by a consortium of VC 
firms as long as no one VC firm held a majority stake. The legislation 
further would require that, for a small company to remain eligible, the 
participating VC firm cannot be owned by a large company. The 
legislation would allow start-up companies (defined as companies with 
sales of less than $3 million, and no positive cash flow from 
operations) to be eligible for SBIR no matter how large a stake a VC 
firm controlled in them. The legislation has been endorsed by BIO and 
the NVCA.
Issues Raised in GAO Reports on SBIR
    The Government Accountability Office (GAO) has issued a number of 
reports over the years that assess various aspects of SBIR. The 
following are the more significant issues that GAO has highlighted:

          Commercialization Rates

    In 1991, GAO gave SBIR a generally favorable review, stating that 
SBIR ``clearly is doing what Congress asked it to do in achieving 
commercial sales and developmental funding from the private sector.'' 
GAO reported that an SBA study found that approximately one in four 
SBIR projects resulted in the sale of new commercial products or 
processes. GAO issued another report in 1992 in which it addressed 
Phase III activity, saying that although not enough time had elapsed 
since the beginning of the program for SBIR projects to fully mature, 
it appeared that SBIR projects were obtaining Phase III funding (an 
indicator of commercialization potential), with commercial activity 
totaling $1.1 billion in sales since the beginning of the program.

          Multiple Award Winners

    In 1999, GAO testified before the House Science Subcommittee on 
Technology, summarizing the findings of its report on SBIR. In this 
testimony, GAO reported that the 25 most frequent winners of SBIR 
grants, representing less that one percent of the companies in the 
program, received about 11 percent of the program's awards, totaling 
$900 million over 14 years. GAO did note that one-third of winning 
applicants during a five-year period from 1993-1997 were first-time 
applicants, an average of 750 a year, which indicated that the program 
was not stagnating. What GAO focused most on, however, was the lack of 
consistent methods to define and track commercialization and thus 
evaluate the SBIR program's success, and the recognition of the fact 
that commercialization a) meant different things to different agencies 
and b) was not always consistent with the mission of the agency in 
question.
    In its 1992 report, GAO noted that companies that received multiple 
Phase II grants appeared to have lower Phase III-related sales and 
private-sector funding than did those companies with lower numbers of 
Phase II awards. In addition individual companies have occasionally 
complained that there are companies that only do research but are not 
significantly involved in commercializing research results, and are 
thus dependent on SBIR Phase II grants to remain operational. These 
firms have been given the moniker ``SBIR mills.'' SBIR mills do not 
appear to be a widespread phenomenon, but because of the lack of a 
uniform reporting, tracking, and analytical process for SBIR, it is 
impossible for program managers or anyone else to assess their true 
extent.

          Geographical Diversity

    SBIR grants are heavily concentrated (about 40 percent of the total 
funding) in the states of California, Massachusetts, Virginia, 
Maryland, and New York, and this distribution has not changed 
significantly over time. Some critics have said that these 
concentrations are unfair and that SBIR managers should do a better job 
of distributing their awards geographically, and recruiting promising 
companies in under-served areas. Others argue that the distribution of 
SBIR simply reflects where clusters of research intensive companies are 
located. For example, Maryland receives significant amounts of SBIR 
funding because of the biotechnology companies clustered around the 
National Institutes of Health. SBA has an outreach office to publicize 
the SBIR program in under-served areas.

QUESTION FOR THE WITNESSES:

    All of the witnesses were asked the following question:

    In your testimony, please summarize your views on the Small 
Business Innovation and Research (SBIR) program, and answer the 
following question:

        1.  How should venture capital ownership of small companies be 
        treated in the consideration of SBIR applications?
    Chairman Ehlers. Good afternoon, and welcome to today's 
hearing, entitled ``Small Business Innovation Research: What Is 
the Optimal Role of Venture Capital?''
    I thank my colleague, Congressman Baird, for suggesting 
that the Subcommittee examine this important and timely issue.
    The Small Business Innovation Research Program, known as 
SBIR, was created by Congress in 1982 to increase the 
participation of small technology firms in federal research and 
development activities.
    Federal departments and agencies with R&D budgets of $100 
million or more are required to set aside 2.5 percent of their 
R&D funding to sponsor research of small companies through the 
SBIR program. These departments include the Department of 
Defense, the National Institutes of Health, the National 
Science Foundation, as well as smaller agencies, such as the 
National Institute of Standards and Technology. From 1983 
through 2003, more than $15 billion has been awarded to small 
companies for about 76,000 projects. In 2003 alone, more than 
$1.6 billion was awarded to small companies for 6,200 projects. 
These figures are surprising to most, including Members of 
Congress who do not closely follow the program.
    The program has been reauthorized twice since its 
inception, and the current authorization is set to expire in 
2008. While there are many aspects of the program that warrant 
further review, as Congress prepares to reauthorize SBIR, the 
specific issue we wish to discuss today is the role of venture 
capital in the small businesses that receive SBIR grants. For 
the past several years, this issue has been a hot topic for 
debate. The Small Business Administration, which sets the 
underlying rules of the program, has issued rulings that some 
interpret to limit the participation in SBIR of small 
businesses that are largely owned by venture capital firms. For 
small businesses in some industries, such as biotechnology, 
which generally have significant venture capital involvement, 
these rulings have caused great concern. Other small companies 
believe there should be limits on outside ownership for those 
companies wanting to participate in the SBIR program.
    This is a complicated issue, and one which deserves to be 
aired. I am looking forward to hearing from our witnesses. I am 
pleased to welcome our Ranking Member, and I apologize for 
starting without you, Mr. Ranking Member, but I was assured by 
your colleague here that it would be all right, and your timing 
was impeccable, so I am now pleased to recognize you for an 
opening statement.
    [The prepared statement of Chairman Ehlers follows:]

            Prepared Statement of Chairman Vernon J. Ehlers

    Good afternoon and welcome to today's hearing, entitled ``Small 
Business Innovation Research: What Is the Optimal Role of Venture 
Capital?''
    I thank my colleague, Congressman Baird, for suggesting that the 
Subcommittee examine this important and timely issue.
    The Small Business Innovation Research program (SBIR) was created 
by Congress in 1982 to increase the participation of small technology 
firms in Federal research and development activities. Federal 
departments and agencies with R&D budgets of 100 million dollars or 
more are required to set aside 2.5 percent of their R&D funding to 
sponsor research at small companies through the SBIR program--these 
include the Department of Defense, the National Institutes of Health, 
the National Science Foundation, as well as smaller agencies such as 
the National Institute of Standards and Technology.
    From 1983 through 2003, more than $15 billion has been awarded to 
small companies for about 76,000 projects. In 2003 alone, more than 
$1.6 billion was awarded to small companies for 6,200 projects. These 
figures are surprising to most, including Members of Congress who do 
not closely follow the program. The program has been reauthorized twice 
since its inception and the current authorization is set to expire in 
2008.
    While there are many aspects of the program that warrant further 
review as Congress prepares to reauthorize SBIR, the specific issue we 
wish to discuss today is the role of venture capital in the small 
businesses that receive SBIR grants. For the past several years, this 
issue as been a hot topic for debate. The Small Business 
Administration, which sets the underlying rules of the program, has 
issued rulings that some interpret to limit the participation in SBIR 
of small businesses that are largely owned by venture capital firms.
    For small businesses in some industries, such as biotechnology, 
which generally have significant venture capital involvement, these 
rulings have caused great concern. Other small companies believe there 
should be limits on outside ownership for those companies wanting to 
participate in the SBIR program.
    This is a complicated issue, and one which deserves to be aired. I 
am looking forward to hearing from our witnesses.

    Mr. Wu. Thank you very much, Mr. Chairman. Optimal use of 
time is very, very important, and I want to join you in 
welcoming folks to this afternoon's hearing.
    The SBIR program is the largest federal program to support 
the development of new technologies. For the last fiscal year 
in which we have accurate numbers, in 2003, a total of almost 
$1.7 billion, and this compares to $44.5 million in awards made 
in the first year of its operation, way back in 1982, and my 
understanding is that this fiscal year, we are going to be 
close to the $2 billion mark.
    Last year, at home in Oregon, we had a roundtable focusing 
on SBIR and the Advanced Technology Program, and I can attest 
that in Oregon, there is very, very strong interest in both 
SBIR and ATP, and a group of vibrant high-tech startup 
companies in part depend upon the competitive availability of 
these programs. And I have become increasingly aware of the 
difficulties that some of these organizations have in bringing 
their research ideas to proof-of-concept.
    Today, we are going to focus on one SBIR issue, and that is 
the appropriate role of venture capital, or VC firms, who may 
invest in small high-tech businesses, and we have a panel of 
witnesses later on who will be presenting their views on this 
issue. I would like to recognize the leadership and work of my 
colleague from Southwest Washington, Congressman Brian Baird, 
for bringing this issue to this committee's attention through 
his work about 12 months ago, as I recall.
    And before I close, I would like to say that I hope the 
committee will conduct a thorough review of the SBIR program 
before it sunsets in 2008. The core goals of the program have 
not changed much since its inception in 1982. The business 
environment and the support infrastructure, the financial 
support infrastructure, of our business community, especially 
the high-tech community, has changed substantially in the last 
two decades plus, and it is this committee's responsibility to 
ensure that the SBIR and other early public finance programs 
supports the high-tech small business sector while promoting 
U.S. economic competitiveness. And I look forward to the 
insight of Mr. Graves and our other witnesses today.
    Thank you very much, Mr. Chairman. I yield back the balance 
of my time. Would my colleague from Washington like to make a 
statement?
    [The prepared statement Mr. Wu follows:]

             Prepared Statement of Representative David Wu

    I want to join Chairman Ehlers in welcoming everyone to this 
afternoon's hearing.
    The Small Business Innovation Research (SBIR) Program is the 
largest federal program to support the development of new technologies. 
SBIR awards in 2003 total almost $1.7 billion--this compares to the 
$44.5 million in awards made in the first year of it's operation. It is 
doubtful that anyone would have been able to forecast the size and 
scope of this program back in 1982.
    Last year I sponsored a roundtable in my district focusing on 
programs such as the SBIR and the Advanced Technology Program (ATP). In 
Oregon we have a group of vibrant high-tech start-up companies. I 
wanted to make them aware of opportunities for support. I am also aware 
of the difficulties they have in bringing research ideas to proof-of-
concept, the so-called ``valley of death'' and the need to create a 
bridge across this gap.
    Today we are going to learn about one current SBIR issue, that is, 
the appropriate role of venture capital firms who invest in small high-
tech. businesses. We have a balanced panel of witnesses who will 
present their views on this issue. I would like to add that we 
shouldn't discount either the role of venture capital or the SBIR 
program in supporting the development of new technologies in the U.S. 
As Congress begins to focus on this issue, today's hearing will provide 
us some guidance. I also want to thank my colleague and neighbor, Rep. 
Baird for bringing this issue to the Committee's attention.
    Before I close, I would like to say that I hope the Committee will 
conduct a thorough review of the SBIR program before it sunsets in 
2008. The fundamental goals of the program have not changed much since 
its inception 1982. However, few could argue that the economic and 
business climate have changed considerably since then. It is this 
committee's responsibility to ensure that the program supports the 
high-tech small business sector while promoting U.S. economic 
competitiveness. I hope our witnesses will have some insight on this 
issue as well.

    Chairman Ehlers. I am pleased to recognize Mr. Baird for an 
opening statement.
    Mr. Baird. I thank my distinguished Ranking Member and good 
friend from across the Columbia River. Thanks for your 
leadership on this, Representative Wu, and with our mutual 
high-tech companies, this is obviously important.
    Chairman Ehlers, thank you, again, for once again, you have 
looked ahead to a problem, and we appreciate the leadership on 
that, and the time on this issue. I want to commend Mr. Graves 
for his work on this and his legislation. We have been working 
at this bill for some time, with this issue, and I am proud to 
be a co-sponsor of your bill.
    In essence, we believe in the SBIR program. We would like, 
in some ways, to expand it. Possibly--personally, I think it 
might be expanded in terms of who is eligible for it. At the 
same time, there are some concerns that have been raised about 
whether or not the money invested in SBIR always leads to 
products that can be of use. And so, I hope today that we can 
explore both of those issues, how we might make SBIR funds more 
available to effective and successful companies, and how we 
might observe areas in which SBIR moneys might not be used as 
effectively as they may be, and I look forward to today's 
hearing, and thank, again, the Ranking Member and the Chairman.
    [The prepared statement of Mr. Baird follows:]

            Prepared Statement of Representative Brian Baird

    I would first like to thank Chairman Boehlert and the distinguished 
Chairman and Ranking Member of this subcommittee for working with me to 
schedule a discussion on the topic of the Small Business Innovation 
Research program. I would like to thank the panelists for their 
attendance today and valuable insight, and thank Mr. Graves for his 
leadership on this issue. I am an original co-sponsor of his bill, the 
Save Biotechnology Innovative Research Act of 2005, and I look forward 
to continuing to work with him.
    Venture capital (VC) investment has become increasingly important 
and, in some cases, a necessity for many small businesses interested in 
producing new technologies and products. However, it is my hope that we 
can also spend time today exploring some broader aspects of the program 
in an effort to improve this vital program so that we can begin to 
understand the extent to which this program truly meets the intent of 
the original legislation--to encourage small business to explore their 
technological potential and provides the incentive to profit from its 
commercialization.
    The recent restrictions the Small Business Administration (SBA) 
placed on venture capital-backed companies participating in the SBIR 
program was brought to my attention by constituents of mine, a small, 
privately-held company called nLight. They manufacturer high-power 
semiconductor diode lasers and are supported, in part, by four venture 
capital firms. They have been impacted by the SBA's rule to restrict 
VC-backed small businesses from competing for SBIR grants, and are no 
longer able to participate in this competitive process.
    The SBIR program is an approximately $2 billion technology 
development program aimed at small business. This makes it the single 
largest technology development program supported by the Federal 
Government. It is my view that the SBA's new rule creates a barrier to 
private-sector investment and inhibits the growth of start-up companies 
as well as commercialization. It has become incompatible with the 
original intent of the law.
    I look forward to the discussion today and hearing both sides of 
the issue. It is my hope that in exploring the role that venture 
capital plays in the SBIR program we may also touch upon ways in which 
we can improve it to meet the original intent of Congress.

    Chairman Ehlers. If there is no objection, all additional 
opening statements submitted by the Subcommittee Members will 
be added to the record. Without objection, so ordered.
    [The prepared statement of Mr. Honda follows:]

         Prepared Statement of Representative Michael M. Honda

    Chairman Ehlers and Ranking Member Wu, thank you for holding this 
hearing today and for allowing me to participate.
    This issue is very important to me, because so many of the 
companies in my district either are small start-ups or have grown up 
from the start-up stage to what they are today. The ones that made the 
transition successfully relied on a combination of factors, including 
hard work, good ideas, perhaps fortunate timing, and funding.
    The sources of that funding can be many, such as angel investors, 
venture capital, and government grants and contracts from the local, 
federal, or State level. Sometimes more than one of those sources are 
needed, especially at the early stages. In many cases, venture capital 
investors are unable to accept the level of risk inherent in investing 
in an early stage company. Another source of funding, such as 
government funding through the Small Business Innovation Research 
(SBIR) Program, can help to reduce the level of risk these investors 
feel.
    Unfortunately, the way the law is currently being interpreted, 
companies that have received venture capital funding are no longer 
eligible to compete for and receive SBIR awards. I think this is a 
flawed interpretation of the law, and have co-sponsored legislation to 
restore the SBIR eligibility of start-up venture backed firms.
    I look forward to hearing the thoughts of the witnesses on this 
matter, and on other changes that might be made to the SBIR program to 
help it achieve its goal of bringing the results of basic research to 
technological and commercial maturity.

                                Panel I

    Chairman Ehlers. At this time, I would like to introduce 
our first witness, Congressman Sam Graves from Missouri.
    Mr. Graves. Thank you, Mr. Chairman.
    Chairman Ehlers. Mr. Graves is a valued Member of the 
Congress, and I serve with him on the Transportation 
Infrastructure Committee, where he contributes a great deal. I 
especially admire him, because he is doing what I used to do, 
and don't have either the time or money for now, and that is 
flying airplanes. He is also a firearms expert. If you combine 
those two, maybe that is why he is so good at shooting down 
silly ideas that float around here once in a while.
    We are pleased to welcome you. Mr. Graves has introduced 
legislation regarding the involvement of venture capital in the 
SBIR program, and obviously knows a great deal about this 
issue, as does Mr. Baird. Congressman Graves.

STATEMENT OF HON. SAM GRAVES, A REPRESENTATIVE IN CONGRESS FROM 
                     THE STATE OF MISSOURI

    Mr. Graves. Mr. Chairman, thank you, Ranking Member, 
Congressman Baird. I appreciate the opportunity to testify 
today before your subcommittee on the vital need to protect 
small businesses backed by venture capital.
    As Chairman of the House Small Business Subcommittee on 
Rural Enterprise, Agriculture, and Technology, I know the 
importance of venture capital to small businesses, particularly 
small biotech companies, and I appreciate you holding this 
hearing, and bringing this issue even further into the light.
    Venture capital funding is critical to small biotech 
companies. They provide the needed seed money to help get some 
of these innovative ideas off the ground and running. Without 
this investment, given the nature of the biotech industry, I 
think it would be very difficult to finance this process. These 
small businesses are providing the country with the ideas and 
the innovation that has become the identity of the United 
States. Without these thoughts and ideas, the United States, I 
believe, will fall behind the rest of the world in innovations 
and breakthroughs. Unfortunately, these small companies and 
venture capitalists are being blocked out of the promising 
investment, investment that is needed in rural communities all 
across the United States.
    The Small Business Innovation and Research program, or 
SBIR, as you all referred to, this program is obviously a 
federal program administered by the SBA. The program allocates 
a specific percentage of all federal research and development 
grant moneys to small business applicants. This program allows 
for cutting edge research that may not, in its earliest stages, 
attract funding from other sources.
    Eligibility requirements to SBIR are murky at best. 
According to the SBA, to be eligible for a grant, a small 
company must be at least 51 percent owned by one or more 
individuals. For a while, this requirement gave the small 
businesses backed by venture capital access to this critical 
seed money. However, the SBA recently ruled that 
``individuals'' would exclude investment by venture capital. 
This rule change resulted in the disqualification of many small 
biotech firms engaged in promising research towards tomorrow's 
cures.
    As you know, and as was pointed out, I recently introduced 
H.R. 2943, the Save America's Biotechnology Innovation Research 
Act of 2005. Specifically, this bill will allow small, venture 
capital-backed companies to be eligible for the SBIR program, 
as long as no single venture capital fund has a majority 
interest in the company, and the fund is not owned by a large 
firm.
    This legislation is larger than that, however. Not only 
does H.R. 2943 restore small business access to this essential 
program, but it also further encourages venture capitalists to 
provide critical investment in the future of this country. It 
is the research that these companies are doing that leads to 
technological innovations, keeping the U.S. at the forefront of 
discovery.
    Mr. Chairman, it is imperative that venture capital-backed 
small businesses are not blocked out of the SBIR program. Small 
biotech companies are unique in that it costs millions of 
dollars just to begin research. These companies rely greatly on 
both venture capital and the SBIR program. It is this 
combination of funding that will lead to advancements in 
fighting things like cancer, diabetes, and other research in 
many other fields.
    Mr. Chairman, again I want to thank you for allowing me the 
opportunity to discuss this issue before your committee, and I 
commend your efforts, and I would like to offer my continued 
participation in any future action that your committee take, or 
your Members may take in helping small business. I think it is 
crucial. I think it is important in these particular areas, and 
again, I do appreciate the opportunity to testify.
    [The prepared statement of Mr. Graves follows:]

              Prepared Statement of Congressman Sam Graves

    Thank you, Mr. Chairman, for allowing me to testify before this 
Subcommittee on the vital need to protect small businesses backed by 
venture capital. As Chairman of the House Small Business Subcommittee 
on Rural Enterprise, Agriculture, and Technology I know the importance 
of venture capital to small businesses, particularly small biotech 
companies. I appreciate you holding this hearing.
    Venture capital funding is critical to the small biotech companies. 
They provide the needed ``seed'' money to help get some of these 
innovative ideas off the ground and running. Without this investment, 
given the nature of the biotech industry, it would be very difficult to 
finance this process. These small businesses are providing this country 
with the ideas and innovation that has become the identity of the 
United States. Without these thoughts and ideas, the United States will 
fall behind the rest of the world in innovations and breakthroughs. 
Unfortunately, these small companies and venture capitalist are being 
locked out of promising investment; investment that is needed in rural 
communities across the country.
    The Small Business Innovation and Research (SBIR) program is a 
federal program administered by the Small Business Administration 
(SBA). The program allocates a specific percentage of all federal 
research and development grant monies to small business applicants. 
This program allows for cutting-edge research that may not, in its 
earliest stages, attract funding from other sources.
    Eligibility requirements to the SBIR program are murky at best. 
According to the SBA, to be eligible for a grant, a small company must 
be at least 51 percent owned by one or more individuals. For a while 
this requirement gave the small businesses backed by venture capital 
access to this critical ``seed'' money. However, the SBA recently ruled 
that ``individuals'' would exclude investment made by venture capital. 
This rule change resulted in the disqualification of many small 
biotechnology firms engaged in promising research towards tomorrow's 
cures.
    As you know, I recently introduced H.R. 2943, the Save America's 
Biotechnology Innovative Research Act of 2005 (SABIR). Specifically, 
this bill will allow small, venture capital-backed companies to be 
eligible for the SBIR program as long as no single venture capital fund 
has a majority interest in the company, and the fund is not owned by a 
large firm.
    But this legislation is larger than that. Not only does H.R. 2943 
restore small business access to this essential program, but also it 
further encourages venture capitalists to provide critical investment 
in the future of this country. It is the research that these companies 
are doing that leads to technological innovations, keeping the U.S. at 
the forefront of discovery.
    Mr. Chairman, it is imperative that venture capital-backed small 
businesses are not locked out of the SBIR program. Small biotech 
companies are unique in that it costs millions of dollars just to begin 
research. These companies rely greatly on both venture capital, and the 
SBIR program. It is this combination of funding that will lead to 
advancements in fighting cancer, diabetes, and research in other 
fields.
    Mr. Chairman, I thank you for allowing me this opportunity to 
discuss this issue before your committee and I commend your efforts. I 
would like to offer my continuing participation in any future actions 
you may take to help small businesses.

    Chairman Ehlers. I thank you very much for your testimony, 
Congressman, and we will certainly be pursuing this issue in 
the months ahead. So as you know, it is customary that we do 
not allow questions of fellow Congresspersons, because we all 
have time to question you afterwards, and so we will, with 
that, excuse you.
    Mr. Graves. Thank you very much. And please, anything I can 
do to help, I would love to.
    Chairman Ehlers. Thank you. We appreciate that.

                               Panel II:

    Chairman Ehlers. Next, I would like to introduce our next 
set of witnesses. If they would take their places at the 
witness table, please.
    Our first witness is Ms. Ann Eskesen, who is President of 
the Innovation Development Institute, located in Swampscott, 
Massachusetts. Interesting name. Dr. Ron Cohen is President and 
CEO of Acorda Therapeutics, Incorporated, located in Hawthorne, 
New York. Mr. Jonathan Cohen is President and CEO of 20/20 Gene 
Systems, Incorporated, located in Rockville, Maryland. Dr. 
Carol Nacy is Chief Executive Officer of Sequella, 
Incorporated, located in Rockville, Maryland. And finally, Dr. 
Frederic Abramson is President and CEO of AlphaGenics, 
Incorporated, located in Rockville, Maryland.
    We have a good representation here from Rockville. I hope 
at some point we hear from the rest of the country, too. The 
witnesses should know, and should have been told, spoken 
testimony is limited to five minutes each, after which the 
Members of the Committee will then have five minutes each to 
ask questions of you.
    We will start with Ms. Eskesen. Would you please turn on 
your microphone? Just push the button. Push it again, or pull 
it toward you. Push it again. It is still not on.

STATEMENT OF MS. ANN ESKESEN, PRESIDENT, INNOVATION DEVELOPMENT 
              INSTITUTE, SWAMPSCOTT, MASSACHUSETTS

    Ms. Eskesen. This has been a highly divisive issue, that 
has been ongoing for well over two years now, and one of the 
most startling things is that it has proceeded without anybody 
bothering to actually look at the extent and form of venture 
capital involvement in the SBIR program.
    I have been invited to provide that information. My name is 
Ann Eskesen. I was part of that small group who were involved 
in the original development and passage of SBIR, and I have 
been there for just about every fight that there has been 
since. I don't have any answers today, and I might comment that 
most of what I am going to say is going to upset everybody on 
both sides of this issue, but in order to be able to do what I 
do, I have been systematically keeping the SBIR record. I can 
tell you exactly how much money has been awarded to whom, for 
what, by when, and what has happened to it. I can also tell you 
a great deal about the companies who were involved, and in my 
written testimony, there is considerable detail of the type of 
information we compile on the companies that have been SBIR 
involved.
    The reason I was invited here today, I am sure, is that I 
also keep exquisitely detailed information on VC activity 
within the SBIR program. As of today, there have been precisely 
1,083 firms who have been in receipt of SBIR funding, and also 
have been venture capital funded. But before I get into the 
detail of what that all means when you look at the information, 
I want to underscore and to stress the point that was made in 
the introductory remarks of what SBIR is. It is not a small 
business program. I don't think it was ever intended to be a 
small business program. It is fundamentally a program that is 
designed to support the development of new technologies. Those 
new technologies are fundamental to the health and well-being 
of an industrialized economy.
    What has happened as a result of the SBIR participation 
over this time, and I should tell you, as of last Friday, we 
have in this company, in this situation, invested a hair under 
$19 billion. But one of the consequences of this activity has 
been to create, within SBIR, the largest single concentration 
of technical talent anywhere in the United States. We exceed by 
a factor of 300 percent all of the engineers and scientists who 
are employed by all of the academic institutions in the United 
States added together. We are issuing patents at the rate of 
one every three hours, which is comparable to that which is 
being achieved by some of the major corporations in the United 
States. We now have 47,000 issued patents in the United States 
in the SBIR community.
    In order to be able to realize the value that is created in 
that enormous range of technical assets, a different set of 
resources are required to those of, specifically, SBIR. And for 
those firms which present the profile of being centered towards 
large markets, with an opportunity for a liquidity event in a 
reasonable time framework, that other resource is venture 
capital. As of this point, over the life of the program, just 
over seven percent of all SBIR awardees have been VC funded. 
That is nine percent, if you look at companies more recently 
funded. And if you extract out those companies who are doing 
what we would consider to be leading edge work, you are 
probably looking at between 18 and 20 percent of all SBIR 
involved companies are VC funded.
    What is very interesting is that this is not a recent 
phenomenon. In fact, if you look into my written testimony, we 
have documented by year and by agency the number of awards made 
to VC funded firms over the entire life of the program since 
1983. Averaging out over all the agencies, that factors to 
between 18 and 20 percent of all awards ever made in the SBIR 
program have been made to companies who are VC funded.
    Significantly, perhaps, given the emphasis of today's 
effort, the largest concentration of that activity is in the 
National Institutes of Health, where after a slow start in '83 
and '84, we have settled into a situation where between 20 and 
25 percent of all dollars awarded by the National Institutes of 
Health are awarded to companies who either are or will become 
VC funded.
    VC is extremely valuable to an SBIR company. It has the 
effect of allowing the company to bring the technology that 
they have under development much further along in the 
development cycle before they need to apply for SBIR dollars, 
and in my testimony, I have given you indication of when 
companies are, in fact, getting their SBIR dollars.
    What I want to concentrate on in the few minutes I have, is 
to look at why the VC community been so interested in being 
involved in the SBIR program? All of the reasons offered by 
those, most of those opposing the current effort to try and 
extend VC involvement in SBIR fund, turn out to be actually 
inaccurate. The number of the proportionate size of the award 
pool for the venture capital community is absolutely consistent 
with the number of companies that are involved.
    More recently, the assumption has been that after the 
collapse of the markets in 2001, that VC funded companies have 
been flocking to the SBIR program in order to be able to get 
funding from that source. Well, it turns out, in fact, that the 
extent of VC involved companies in SBIR has actually gone down. 
We are now looking at a situation where a significantly smaller 
percentage of the companies that are SBIR involved are VC 
funded.
    If you add up all of the money that has been invested by 
the venture capital community in the SBIR firms, it factors out 
to about $20 billion. If you add up in total all of the SBIR 
dollars that have been received by those funded companies, it 
comes out to $2.5 billion. That negative ratio of ten venture 
capital dollars for one SBIR dollar is probably a surprise--it 
certainly was to us--to--but it certainly is a surprise to most 
people. And it poses the very obvious question, why are the 
venture capital community trying to hang on and expand the 
extent and form of their SBIR involvement, when all they have 
to do is to just drop a bit more money, 10 percent more, into 
the companies who are venture capital SBIR funded. And if you 
understand why the VC firms are so interested in SBIR, I think 
the entire discussion that we have been having for the last two 
years shifts radically in focus.
    And what I have done in my testimony is walked you through, 
on page 10, what we have, how we have tried to make a 
determination of that interest of the VC community. There have 
been, since 2001, 607 firms who have been both VC funded and 
SBIR funded. The investment by the VC community in that 
population is $1,566,768,635.50. Obviously, I am joking about 
the $0.50. But the SBIR investment in those companies, I am 
sorry, I have got these numbers the wrong way around. The $15 
billion is what the VC companies have invested, and $1.5 
billion has come from the SBIR program. If you look at what has 
been happening to those companies, the answer for why VCs are 
so interested becomes very obvious. Of those 607 firms, 208, 28 
have achieved some form of liquidity event, 211 have gone 
public, 41 have been acquired, and a couple have gone belly-up, 
and so on. If you calculate the value of those companies, i.e., 
what the market has said the value of those companies is, it 
comes out to somewhere between $45 and $50 billion. For an 
investment by the VC community of $4.5 billion, and an 
investment by SBIR of $790,639,970.
    What I think, if you think about it, this statistic 
demonstrates is what is the most important thing about SBIR, 
and that is it is a wealth/value creator. For the VC community, 
it enables them to identify and to validate the overall 
competency of a potential investment. It allows them to 
mitigate and to reduce the technology risk on the project, and 
on a whole lot of other things, too, and potentially, it 
increases significantly the value of the investment that they 
have made. What it comes down to is that----
    Chairman Ehlers. Could I ask you to wrap it up?
    Ms. Eskesen. Sorry, sir. What I am trying to get to in the 
body of my testimony is that we need to understand why the 
venture community are interested, and we find that it is 
because of the achieved valuation. What I think what that leads 
me finally into is a couple of general comments about the fact 
that the VC community itself has changed radically, and the 
circumstances in which they operate have similarly changed 
radically, and most definitely, that has occurred in the 
biotech community.
    So, my final comments have to do with, if you look at 
companies like Biogen and Genzyme, who were, in their early 
days, SBIR involved, they were startup, early stage companies, 
who were VC funded shortly after their startup condition. They 
were also income/revenue generating quite early. They were 
selling the picks and the shovels and the tools, fee for 
service, to the pharmaceutical industry. It was comparatively 
easy, given a revenue stream, for them to be perceived as good 
investments, and they were brought to public offering.
    Post that period, we now have a circumstance where the 
biotech firms have become drug discovery companies, and none of 
their revenues are now in place. They are, in fact, in most 
cases, dependent upon being able to make some sort of liquidity 
event occur after clinical trials have occurred. What happens, 
effectively, is this company is now valued. It took you a lot 
more money, and a lot longer time to get you there. And so what 
I find myself saying is that I think that the VC community have 
been enormous beneficiaries of the SBIR program, and I have 
laid out in a lot more detail in my testimony why that is. 
Venture capital is extremely important, but just as important 
is the SBIR program to the VC community, and I think there are 
a number of questions that have to be posed to the VC community 
as to why we should justify opening the doors to a continuing 
access to SBIR funding, when the major beneficiaries of that 
continuing access are, in fact, the VC community themselves.
    [The prepared statement of Ms. Eskesen follows:]

                   Prepared Statement of Ann Eskesen

    First let me say that I appreciate the opportunity to offer my 
perspectives on this complex but important issue of venture capital 
ownership in firms participant in the federal SBIR program. The often 
rancorous `discussion'--now almost two years in duration--surrounding 
this issue has been distracting and highly divisive across the SBIR 
community and outside, almost to the point of being destructive. 
Certainly it is the case that the effort and resources expended could 
have been far more productively utilized on issues of greater 
consequence to the future of SBIR.
    Of major concern to me has been that this entire effort seems to 
have proceeded with remarkably little reference to any systematically 
compiled, topic-relevant information about the actual form and extent 
of VC-funded companies activity in SBIR. Small sample surveys of firms 
which have been encouraged to believe that they will be adversely 
affected; forums in which participants speak but do not listen; and 
anecdotal accountings in the media by carefully selected firms of 
anticipated adverse impact on them of a decision one way or the other 
has generated a great deal of heat. . .but has done almost nothing to 
persuade either side of the validity of the other's position. The 
result is almost total impasse with efforts now to force resolution 
legislatively in a manner that will probably will not only not solve 
the underlying problem, but could well have ramifications with 
potential seriously to damage the integrity of SBIR program longer-
term.
    I do not claim in any way here to have ``The Answer.'' However, I 
am probably better placed than most to provide useful and relevant 
large volume, analytical data--I am sure that being the reason I was 
invited here today. Before proceeding, I should note that in the 
process of setting out my observations and conclusions I will almost 
certainly upset many of the parties on both sides of this issue. Those 
who are firm in the rightness of their cause will likely remain 
unconvinced, if they are listening at all. However, the far larger 
number who understand the compelling need to find appropriate 
resolution to this divisive issue and to get back to business will 
hopefully be open to some shifting in the focus of discussion that my 
analysis may suggest.
    Good afternoon: My name is Ann Eskesen. I am the founding President 
of the Innovation Development Institute, Swampscott, MA. I was among 
that small group--others are here today--involved in development and 
passage of the enabling legislation for this important small-business 
program in 1980-82. To a greater or lesser extent, I have been involved 
in the three reauthorizations since, and in most of the SBIR-STTR 
crises, controversies and confrontations through the years. At the time 
of initial development, the concept of SBIR was highly controversial 
and, for some, to an extent has remained so. Following passage of the 
enabling legislation it was my decision, therefore, to stay involved to 
monitor program implementation.\1\
---------------------------------------------------------------------------
    \1\ I should say that it was never my intent that SBIR advocacy 
would become my primary professional activity these many years--
advocates generally don't get paid and we have been no exception.




    To function in that capacity, from the very earliest days I have 
systematically kept the SBIR record.
    This process began simply by tracking in a single data base the 
detail of every SBIR award--by funding agency, recipient small firm, 
Principal Investigator, relevant dates, project title, Technical 
Abstract, dollar amount(s), Phase II conversion, etc. Through the years 
that awards monitoring process has continued and our SBIR-STTR data is 
complete and accurate to announced awards of recent weeks.




    Over the last several years we have extended our efforts also 
carefully to track various aspects of the firms which have been/are 
SBIR-involved. These data now include:

          Basic business information--current name(s), location 
        and contact information;\2\ founding date, current employment, 
        revenue stream, etc.; and a Business Identifier and Profile.
---------------------------------------------------------------------------
    \2\ Simply to maintain the currency of names and addresses is a 
very demanding task in itself since this is a highly mobile group which 
seemed to have a great propensity for changing their name(s) as well as 
their location.

---------------------------------------------------------------------------
          Various business activity data to include:

                  Issued patents (domestic and international) along 
                with, usefully, a full patent citation index. Almost 
                47,000 U.S. patents have to date issued to SBIR 
                involved firms.

                  All Merger and Acquisition activity--so far 619 
                transactions.

                  Public offerings, daily stock price and other 
                relevant trading information on those 550 firms and 
                aspects of their various SEC filings.

                  Various Collaborative activities--in and out 
                licensing, subcontracting, joint ventures, etc.

    To allow us better to identify and track their technical 
competencies, other areas of data compilation which have more recently 
been added and are in various stages of development include:

                  Several sophisticated business and technical 
                classification systems;

                  Compilation of a Full Capability Statements--with a 
                primary emphasis on the 4800-5000 firms doing what we 
                would consider leading-edge work;

                  Biographies on all Principal Investigators and 
                company principals;

                  Professional papers and referencing articles;

                  Along with a systematic listing of all Recognition 
                Awards.

    Using a sophisticated relational database system, all these 
elements are indexed and fully integrated. Elegant, proprietary tools 
have been developed enabling some extremely interesting and often quite 
complex analyses across the entirety of the SBIR program\3\ or within 
any selected subset.
---------------------------------------------------------------------------
    \3\ It is worth noting that in many important respects SBIR 
reflects--is a mirror for--important changes in the larger economic 
environment: in effect, a living lab that could function as a powerful 
and exciting analytical tool in its own right. To argue for SBIR as a 
causative agent is probably not appropriate. Certainly, however, the 
evidence is strong that effective SBIR participation is positioning a 
important percentage of SBIR-involved firms to take business advantage 
of new opportunities that those changes are creating with major 
positive impact on the economy overall.
---------------------------------------------------------------------------
    Perhaps most useful and important to today's topic, we also compile 
on a systematic basis:

          the extent and form of Venture Capital\4\ activity 
        involving SBIR firms to include a detailed tracking of 
        outcomes--commonly referred to as liquidity events.
---------------------------------------------------------------------------
    \4\ It is important to note what our VC data does and does NOT 
contain. We know how much, from whom, on what date and what stage--
seed, Series, round, etc. It is not a matter of public record and we do 
NOT know on any systematic basis the prepaid for that investment--the 
percentage ownership.




    It is useful to note that our data in this category for more recent 
years (2001-present) is compiled such that, to some extent, we are able 
to set the SBIR VC experience in the context of all venture capital 
activity in United States. It is primarily from this part of our 
databases that I have drawn for the analysis undertaken for discussion 
here.
    Before proceeding to my analysis proper, let me first speak briefly 
to where SBIR came from: what, in my judgment, was both the basis for 
advocacy for SBIR and the Congressional intent.

Why did Congress establish SBIR?

    At the time of passage of the SBIR enabling legislation, this 
country was in the throes of recession. Unemployment rates were high, 
quality (read: high-paying) jobs were moving offshore, the cost and 
availability of capital were issues (particularly early-stage, high-
risk) and many of our major industries were under competitive strain. 
It was broadly understood then, as it is now, that economic viability 
and growth regionally and nationally is anchored primarily in effective 
technology development--using what we know. There was compelling 
evidence from a range of studies that small firms were a prolific and 
cost-effective source of that technological innovation. Add in the fact 
that small firms had been recently shown to be the economy's primary 
job creator and the context for passage of the SBIR enabling 
legislation was set.
    This intentionally stresses the fact that passage of SBIR was 
fundamentally grounded in the notion of the program as a technological, 
business and economic development resource. The proposed investment--as 
noted above now 20 years later approaching $19 billion--was not because 
these firms were small or deserving. It was because this population 
included some of the Nation's best and brightest minds--persons at the 
time, and who had over an extended time period previously, been largely 
excluded from access to federal R&D support. Providing them that 
access, it was argued, was key to improving their potential for 
important economic impact.
    The evidence that SBIR has already delivered in major ways to that 
early promise is compelling. Though this is probably the place, this is 
not the time to present that evidence. However, one factor clearly 
bears mentioning. Beginning in the late eighties/early nineties, the 
structure of U.S. Labor Markets has undergone a major shift. Who the 
technically trained now work for in this country has changed radically.
    Our compiled SBIR employment and biography data suggests that some 
400,000 graduate engineers and scientists now work for SBIR-involved 
firms. Using NSF's data on university employment as the comparative 
index, that means that the number of SBIR-STTR employed scientists and 
engineers today factors to almost three times as many as all those in 
U.S. academic institutions. In other words, the SBIR community now the 
largest single concentration of technical talent in the United States. 
By itself, this is a quite remarkable and hugely important return on 
the SBIR investment that has been made. This is a concentration of 
talent that--if we are as a nation to compete effectively in the global 
economy--it is vital that we not only retain and but also enhance.
    As evidence of that concentration of technology development 
capacity, SBIR companies are now issuing patents at a rate comparable 
to the most prolific of the major corporations--one patent 
approximately every three to four hours--for a total now in excess of 
47,000. That rate far exceeds that of academic institutions, and SBIR 
firms also are achieving a rate of patent citation--often used as an 
indicator of patent importance--that is substantial.

Realizing that value:

    Critical to this current debate is to understand that to realize 
the value of that created asset base requires more than SBIR funding. 
This program is designed to support the high risk, early stage research 
and development of creative new ideas. The all-important transition of 
those ideas which show promise to some appropriate type of use-
condition--completion, if you like, of the innovation process--requires 
a different set of resources and, it should be added, often also 
demands a very different set of skills.\5\
---------------------------------------------------------------------------
    \5\ Not central to this discussion but critical to the continued 
effective functioning of the SBIR program is how we deal with the fact 
that a major percentage of those firms doing what would seriously be 
considered leading-edge work--about 4800-5000 of them over the life of 
the program; about 2500-2800 currently--lack the requisite skills and 
access to the resources which are needed to bring their technologies to 
use-condition.

  Facilitating that access is probably not the answer. The problem is 
    more structural. SBIR awardees are component, not full-systems 
    builders. The market--public and private--demand whole product. To 
    require our guys to assemble all those other elements to meet the 
    demands of the market is an unrealistic and inappropriate use of 
    their capabilities. The real SBIR challenge, in my judgment, is not 
    the current VC eligibility debate, but rather how effectively to 
    draw down on the wealth of what has been created.
    For that subset of SBIR-STTR Awardees addressing potentially large 
markets and offering the likelihood of some form of liquidity event 
(i.e., an IPO or acquisition), among those ``other resources'' is 
frequently Venture Capital.
    1083 VC Funded SBIR-STTR Awardees: The number of SBIR firms to have 
been in receipt of venture funding has now reached 1083: That 
represents

          7.08 percent of all SBIR funded companies over the 
        life of the program.

        
        

          Among those more recently SBIR-involved--2001-2005--
        that percentage\6\ of firms that are VC funded has actually 
        increased to 9.36 percent.
---------------------------------------------------------------------------
    \6\ As an important and useful indicator of the extent of VC 
previous and current interest in SBIR, it is worth noting that these 
percentages are far larger than in any random group of small 
technology-based firms. There is substantial evidence from the work of 
others as well as our own to suggest that SBIR participation 
significantly increases the likelihood that the small firm which 
presents the appropriate VC required profile (large market and the 
prospect of a liquidity event) will attract that often important 
support. Though I cannot document the fact with certainty at this 
point, that seems to be even more the case for those firms located in 
States which are less well VC endowed.




    Factoring only to firms doing leading-edge work--some 4800-5000 
overall (about 2500-2800 currently)--that percentage is even higher: 
perhaps as much as 15-20 percent.
    Over the life of the program, SBIR has proven a valuable and 
important resource both

          to many of the firms funded by the venture capital 
        community

          and, critically, to many of the VCs who have made 
        those investments.

Not a recent phenomenon:

    Though I suspect not intentionally, discussion around the 
eligibility issue has largely proceeded as if VC SBIR involvement is a 
new trend: that fall-out from dot.coms, post-2001 market conditions 
having shut off liquidity events and reduced (and still reducing) 
achieved ROIs on their portfolios has caused these VC funds to look 
elsewhere to leverage on their available dollars. I would suggest this 
misperception has actually served to skew the discussion. In fact, VC 
involvement in SBIR is

          neither a recent condition,

          nor is it limited to any one agency.

    As part of the analysis for this hearing, we backtracked the awards 
record of every SBIR VC funded awardee by year and agency. The Chart 
and Table below shows clearly that VC funded firms have been an 
important percentage of SBIR activity from the onset of the program. 
Beginning less than a year or so into program activity, the pattern of 
participation has been consistent. In the aggregate across the 
agencies, 10-12 percent of awards made have involved firms also been in 
receipt of venture capital at some stage in their business development.
    Perhaps significantly in the context of recent events, by far the 
largest percentage all of SBIR dollars taken by VC-funded companies has 
been in the National Institutes of Health. By the late '80s, the number 
of awards made to firms in NIH which either already were, or 
subsequently became, VC supported entities had settled around the range 
of 20-25 percent of all their awards.
    Though somewhat lower in totals, NSF has similarly consistently 
made a substantial percentage of awards to venture capital funded 
firms. In fact some important level of SBIR VC funding activity can be 
found in every one of the participating SBIR agencies, even the very 
smallest.




Value of SBIR to VC-eligible firms:

    Effective use of SBIR may often permit a small firm to hold off on 
the time at which they need to raise external dollars and/or to reduce 
proportionately the amount they need initially to raise. Note that 
though use of SBIR award dollars to open the doors has dropped 
significantly in the period 2001-2005 (from 26.05 percent to 11.09 
percent), the percentage of those taking their first award(s) in the 
next one-two year period has increased. Examination of a cross-section 
of the start-up records of these firms suggests that SBIR award dollars 
are being used to bring onto the professional staff\7\ people whom they 
probably could not otherwise afford--part of that start-up making the 
transition towards being a viable business and a hugely important pre-
VC, risk-reduction process.
---------------------------------------------------------------------------
    \7\ Development of the original SBIR regulations were specifically 
crafted to support this condition. At the time of applications, whom a 
potential PI works for is not an issue. The commitment must be that at 
the time of award, that PI must join the recipient small firms for more 
than five percent of their time.




    Rarely, if ever, are VC firms in the picture at that time.
    Particularly for Awardees in states which are reasonably well VC-
endowed,\8\ being effectively SBIR-involved seems to serve quite well 
to lower the high-risk profile that the small firm presents and, 
therefore, proportionately may actually reduce the price they have to 
`pay' for that money, i.e., they must give up less of the firm.
---------------------------------------------------------------------------
    \8\ For SBIR-involved firms in less well VC endowed states, this 
risk reducing, better price factor seems to be far less evident. The 
relative lack of options (competition) for the deals puts growth 
oriented firms in these states at an immediate disadvantage. Just as--
perhaps even more important--is the serious shortage in those states of 
professional service providers with the requisite skills and direct 
experience to negotiate to an appropriate price.
---------------------------------------------------------------------------

Value of SBIR to the VC:

    Analysis of our data suggests that the type of SBIR value that is 
of high-interest and importance to the VC Community is almost certainly 
NOT that which many who are opposed to any form of eligibility rule-
change for majority VC-owned, SBIR-involved firms assume it to be. Most 
of that oppositional discussion seems to have organized around one or 
more of several basic points:

          That VCs want access to the funding dollars that SBIR 
        provides as a useful supplement to/substitution for their own 
        investment.

          That VC funded firms are effectively `siphoning off' 
        of these dollars when they already have so much more money 
        available to them, this argument continues, is an inappropriate 
        use of SBIR support.

          A widely-held view (probably not valid) is that the 
        fact that VC supported firms are already well-funded gives them 
        competitive advantage in the awards process.

          That the SBIR-involvement of VC funded firms is 
        tilting the program unfavorably towards the better endowed, 
        limiting the access of more deserving, earlier stage firms.

    In fact, the data shows clearly these assumptions are fundamentally 
in error. See Table following.s




          The extent of SBIR dollars taken by VC-funded firms 
        individually\9\ is significantly less than I think most people 
        are assuming. Collectively totaling `only' about $2.6B over the 
        life of the program this amount is substantial, but entirely 
        proportional to the number of firms involved.
---------------------------------------------------------------------------
    \9\ Separate, but connected to this VC issue, is that relating to 
the number of very large SBIR Phase I (and Phase II) awards which have 
been made, especially in the National Institutes of Health. Of the 12 
Phase I awards made in a dollar amount of $750K or more (three at over 
$1M), not one involved a VC funded firm.

          A common assumption made by opponents to the pressure 
        to achieve special treatment of VC funded firms is that the 
        numbers of awards and dollars taken by VC funded firms having 
        ramped up since the Stock Market downturns of 2001 onwards. In 
        fact, the number of awards per VC funded firm has actually gone 
        down.\10\
---------------------------------------------------------------------------
    \10\ The suggestion that proponents for size-eligibility rule 
change will almost certainly make here that this drop-off is because VC 
funded firms are no longer applying for SBIR award and/or are being 
rejected as ineligible actually does not fit the facts. This reduction 
in per-award participation actually pre-dates by at least a couple of 
years the current controversy.




    The SBIR awards rate to VC-funded firms is now only slightly higher 
than to non-VC funded. Over the earlier period of SBIR activity--1983-
2000--the average awards totals achieved by VC funded firms was 
significantly higher to than to non-VC funded: 6.70 percent versus 3.83 
percent. It now stands at 3.58 percent per to 3.03 percent to the non-
VC funded.
    We know who got VC funding and can document the detail of how much 
VC has been invested in SBIR-involved firms to date to a total of 
slightly over $12B. Investment made in the years prior to 1998 are less 
complete in their detail in our databases but we estimate these factor 
to about another $5-7B. That suggests a total VC investment in SBIR 
involved firms to date of about $20B.

          By far the most telling point made by analysis of the 
        VC SBIR track record, however, is that the amount of VC 
        investment made in SBIR-involved firms far and away exceeds 
        anything that they are receiving from SBIR awards as such--see 
        chart below.

        
        

    For every ONE Dollar received by the VC funded firm in SBIR Awards, 
TEN investment dollars have been recorded.
    This negative-ratio finding of SBIR to Investment dollars was a 
surprise to us initially and, I suspect, will be an entirely unexpected 
finding to just about everyone who has been part of this two-year 
controversy on either side or--as many Members of Congress and their 
staffs have been--who have been caught in the middle.
    In fact, given this highly unexpected finding, the very obvious 
question which must addressed in he context of this overall discussion 
becomes:




    If the amount that VC funded firms are getting from their SBIR 
participation is proportionately so small, one might well ask--why 
haven't/don't the VCs simply put in a few extra dollars into the SBIR-
STTR firms in their portfolio and just avoid all this current hassle?




    In effect, to find resolution to the current impasse demands that 
we understand why SBIR-STTR has been, and continues to be, valuable to 
the VC community.
    A useful way here to find probable answer to this important 
question can be demonstrated by our walking through the set of 
Powerpoint slides provided below.
    This set of slides examines in some detail those 607 VC funded 
firms which have been SBIR program involved since early in 2001; and 
the achieved liquidity event of 228 of those firms.




SBIR is about value/wealth creation:

    In effect, what this analysis shows is at the very core of why SBIR 
overall is such a powerful and important program not only specifically 
for those who invest in SBIR-involved firms, but for the economy 
overall. Effective SBIR participation is fundamentally about value-
creation.
    A fundamental premise of the VC endeavor is that a quality 
investment with significant potential return is one in which an earlier 
injection of the right sort of cash will have a multiplier effect. In 
this instance, for many VC funds, SBIR is that `right sort of cash'. 
With no dilution in investor's ownership in the firm, SBIR supports can 
serve well

          at least at some level to validate the overall 
        competency of the potential investee

          certainly to mitigate/reduce the technology risk in 
        the project and, with a whole lot of other things also

          then potentially to increase significantly the value 
        of that entity.

        
        

    To an important extent, this condition of value creation is a 
characteristic of all those firms in SBIR which we judge to be doing 
leading edge work. The option available to firms which present the 
appropriate VC profile (high growth and liquidity event)--and that is 
largely missing for the more general SBIR Awardees--is a way of being 
able to draw down on that created value--an IPO or MA& event.




    This is not, I would strongly suggest, a task that should be left, 
as it is now, almost entirely to the initiative of individual awardees. 
It is just too important.
    To their credit (and their achieved benefit), many in the VC 
community I would argue, have early recognized this value-added 
condition of SBIR. By being so extensively involved in SBIR from the 
beginning, these VCs have been doing their job--to provide a quality 
return on funds raised from the own investors.
    The challenge presented by the current debate is to consider the 
extent to which we permit use of SBIR support to increase the potential 
for that financial return to those investors?
    It has taken me a long time--both here and in analysis of these 
data over these many months--to get to the point where I think we can 
demonstrate how to

          move away from the largely corrosive discussion of 
        how to provide/prevent an across-the-board eligibility rule-
        change that would treat all VC-funded SBIR-involved firms as a 
        single group--clearly a completely unacceptable condition

          and proceed instead to a discussion which considers 
        the two critical issues which are at the heart of this issue:

        
        

    The essence of my contribution to this debate is that--in my 
judgment

          it is entirely inappropriate that we permit the 
        present discussion to continue as if all VC-funded SBIR firms 
        are at the same stage of development and should be treated such 
        that the same rules apply to all. To open the door to the 
        potential of ever-lasting SBIR participation regardless of the 
        state and stage of the firm involved is not acceptable.

          Just as unacceptable, however, is the notion that we 
        should in any way impede the full and effective SBIR 
        participation by those VC funded firms which, by any other 
        criteria, would more commonly be judged `small business'.

    These two findings are neither contradictory nor mutually 
exclusive.
    To operationalize these findings, I would suggest, will require the 
institution of

        1.  Some mechanism which would enable a level of segmentation 
        of the VC-funded SBIR-involved firms.

                a.  The obviously ineligible are fairly evident--
                actually quite a small number.

                b.  Just as evident are the firms which are clearly not 
                (yet) in that ineligible pool.

            The challenge is to craft the rules to handle that two-
        three dozen firms which fall in the mid-range.

        2.  A set of rules appropriate to define SBIR graduation. This 
        is a concept which has already been broached but more usually 
        with reference to the so-called ``proposal mills.'' \11\
---------------------------------------------------------------------------
    \11\ Based my considerable SBIR experience through the years, I 
would suggest that this perennial accusation is pure myth and fiction, 
entirely without basis in fact and should be finally eliminated from 
any serious SBIR discussion.
---------------------------------------------------------------------------
    Overall, it would be my assertion that this mechanism of 
differentiation probably should not be so much by age and size of the 
firm as by stage of development of the project. In effect, let us 
consider allowing use of SBIR to sweeten the deal--allowing qualified 
firms to undertake higher-risk, earlier-stage work which might well not 
otherwise get done. This is a classic role assumed through the years by 
the Federal Government. Later stage, pre-market development work is 
more appropriately funded by private sources.

    Some final general observations:

          Venture capital:
    There are few who would argue the critical importance of venture 
capital to the effective development of a technology, innovation-based 
economy. The fact that almost every other industrialized and 
industrializing economy seeks to emulate the U.S. VC model (and the 
SBIR program) speaks to that fact. However, U.S. venture capital today 
is quite distinctly different from the industry in its early days, and 
has changed in many important ways even since the mid to late '90s. 
Those changes\12\ manifest in how, from whom--and how much--VC funds 
are raised; what type of investments are being made and at what stage 
of development; at what dollar levels; how return on investment is 
realized; and with what achieved ROI.
---------------------------------------------------------------------------
    \12\ Though not directly the subject of today's hearing, it could 
be argued that modern VC has many of the characteristics of a maturing 
industry with all of the implications of that condition.
---------------------------------------------------------------------------
    In effect, it is my considered opinion that it is critically 
important that that percentage of SBIR involved firms who are 
addressing substantial markets and growth opportunities as their firm 
develops should not be excluded from SBIR participation. This 
population currently represent something in excess of nine percent of 
all currently active, SBIR-involved firms; a significantly larger 
percentage of that population of companies which our analysis suggests 
are doing leading-edge work.
    To disallow the participation of these firms at the appropriate 
point in their development could seriously weaken the overall viability 
and effectiveness of the SBIR program as a business and economic 
development resource. Growth-oriented, small firms requires substantial 
access to capital far in excess of any that could be--and has been--
provided by the SBIR program and, critically, is of a quite different 
type. The adverse consequences of putting any serious impediment in the 
way of their access to this type of capital could have major economic-
impact repercussions

          Current SBIR eligibility rules may need a tweak but 
        wholesale redefinition of those rules in not necessary. It 
        ain't broke; we don't need to fix it:

    As a longtime SBIR advocate, it has been my considered opinion 
throughout the life of the program that the rules pertaining to SBIR 
participation and eligibility should not be changed to accommodate to 
the special needs of any sub-set of otherwise SBIR-qualified small 
firms. This would include any special dispensation for geographic 
distribution, particular industry segment and, in this case, firms in 
receipt of external equity investment.
    A basic premise from which SBIR has proceeded from the outset has 
been that the only criteria by which selection for award should be 
judged are the competency of the firm involved and the technical 
validity of the project submitted. This fundamental premise has 
maintained the integrity of the SBIR program over now twenty-two years.
    It would be my judgment that to set aside size eligibility 
requirements, particularly when the reasons for that need are entirely 
external to the SBIR program, is a dangerous precedent to set. If a 
special dispensation for majority-owned VC funded firms is permitted, 
who will be the next group for whom exception must be made?




                       Biography for Ann Eskesen

    President of Innovation Development Institute (idi) since 1983, Ann 
Eskesen is recognized as among the leading experts nationally on 
effective usage of the federal Small Business Innovation Research 
(SBIR) program and as a longtime, lead advocate for this important 
small business development resource and for those involved. A dynamic 
public speaker, she has an almost unparalleled SBIR knowledge 
integrated with a considerable expertise in the complex task of 
bringing technology from the lab to the marketplace. That experience is 
most currently being utilized in the development of an important new 
form of intellectual asset trading entity--Phase III Ventures (P3V)--
targeted specifically to realizing the created value in SBIR-involved 
small firms. Involving several major corporations and others with 
extensive financial interest in SBIR awardees, the P3V effort is 
anchored in the most comprehensive, complete and in-depth databases 
developed by idi, documenting the technology competencies and 
intellectual assets of SBIR awardees--at this point over 15,000 firms.
    Ms. Eskesen has close working relationships with the various 
players in the SBIR community ranging from relative new-comers to the 
long-time involved awardees. She works closely with the principals in a 
range of State SBIR-STTR Support organization to make more effective 
the form and extent of SBIR-STTR participation in their geographic 
regions. Her detailed understanding of how SBIR-STTR reflects what is 
going on in the larger economic environment bring many invitations to 
work with senior players in major corporations, the federal agencies, 
etc. She is often featured as the keynote speaker at technology and 
economic development events.
    Through the years Ms. Eskesen has served on the boards of several 
technology development organizations. A skilled and informed analyst, 
she has also worked with a range of organizations regionally, 
nationally and internationally which are engaged in encouraging the 
growth of small technology based companies.
    Extensively involved with a small group of others in passage and 
subsequent implementation of the original SBIR enabling legislation in 
1982, Ms. Eskesen has testified frequently before Congressional 
committees of matters of consequence to the SBIR community. She was the 
leading advocate in 1986 for the first SBIR re-authorization; was 
extensively involved in drafting the 1992 re-authorization legislation 
which continued, expanded and modified this important small business 
resource and was a key player in development and implementation of 
strategies to achieve final passage well in advance of sunset. Through 
the years, her knowledge, efforts and counsel have been key in almost 
every situation in which effective functioning of SBIR has required 
support from political attack through agency management decisions. 
Currently, her major focus is finding appropriate resolution to the 
highly contentious issue of SBIR participation of VC funded firms.
                         Financial Disclosure:
    To whom it may concern: Neither the development of the databases 
which underpin this discussion nor the operations of the Innovation 
Development Institute are, or have in any manner, been supported by 
federal funding nor by external contributions from any source.

    Chairman Ehlers. Thank you very much, and I should remind 
the Members that witnesses--before we started, if you will 
watch the lights, green means you have time, yellow means hurry 
up, and red means the trap door opens underneath your chair. 
So, all right. Next, we will go to Dr. Cohen. The first Dr. 
Cohen. Is your microphone on?

     STATEMENT OF DR. RON COHEN, PRESIDENT AND CEO, ACORDA 
                       THERAPEUTICS, INC.

    Dr. Ron Cohen. Thank you very much for the opportunity to 
present today. I am Ron Cohen. I am a Board-certified doctor of 
internal medicine, and founder and CEO of Acorda Therapeutics, 
which is a small, privately held, venture backed biotech firm 
in Hawthorne, New York. Prior to founding Acorda 10 years ago 
in 1995, I was part of the startup team of another biotech 
company, which eventually we took public, which dealt with 
growing skin and liver and other tissues for transplantation.
    The mission of Acorda is to develop and bring to market 
therapies that restore neurological function to people with 
spinal cord injuries, multiple sclerosis, and related 
conditions that damage or affect the nervous system. Currently, 
my company has a drug product in--we have just begun a Phase 
III clinical trial, the final stage, which we hope will finally 
prove efficacy of a drug that restores the walking ability and 
strength in people with multiple sclerosis.
    In addition, we have a small, about a dozen dedicated 
scientists, who are working on bringing other therapies to the 
clinic, notably a protein therapy that has shown in animal 
models the ability to grow new nerve connections in animals 
with spinal cord injuries and various brain injuries, and to 
restore various functions in an unprecedented manner, including 
walking, bladder function, and visual function. We are also 
working on therapies to repair the nerves that have lost their 
insulation in people with multiple sclerosis.
    All of these are quite promising. We are doing all this 
with 59 employees, which I believe would be considered a small 
company under any rational standard. For the first four years 
of our company's existence, I worked out of my second bedroom, 
and then, a sublet office of a friend. I took no salary, and so 
this was a classic entrepreneurial story. Since we were able to 
raise our first venture capital round in 1998, we have raised 
approximately $132 million in venture capital, plus another $8 
million in grants and corporate partnerships.
    I currently have 35 venture capitalists who have seen fit 
to invest in my company. The biggest single owner among them 
owns 10 percent of the company, and the others own five percent 
or less apiece. I believe, therefore, that in the 19 years I 
have been in biotech, I have a reasonable perspective on what 
makes our industry go, what makes it successful, and the role 
of the venture capitalist in it, as well as SBIR grants, of 
which my firm has been awarded several over its lifetime.
    I believe there is a fundamental misunderstanding afoot 
about the proper role of VCs, and also, an erroneous attempt to 
equate VC ownership with big company ownership. The two notions 
are extremely distinct. Venture capital is simply a pooling of 
funds from scores, hundreds, or even thousands of individuals 
to form an efficient way of allocating that capital for 
investing in high risk, high reward propositions. The SBIR 
grant program has proved to be an essential gap filler in the 
progress of technology from the scientist's bench to the 
patient's bedside, or to product.
    Because there is an early stage of technology, particularly 
in biotech, where it takes 10 to 15 years to bring a product 
from idea to market, if at all successful, there is an initial 
gap where the idea is there, the technology may be partly 
formed, but it is too early for a venture capitalist to invest, 
because it is too high risk. Now, venture capitalists take very 
high risks in biotech. For 250 products that enter clinical 
trials, only one, on average, will emerge as a successful 
therapy. So, even if venture capitalists were to invest only in 
clinical stage products, they are still taking a huge risk. The 
fact is, they invest in preclinical products, too, but there is 
that window that requires other funding to create proof-of-
principle and direction for the venture capitalist.
    That is the window that the SBIR program fulfills, and if I 
had not been able to get SBIR and also an ATP grant early on, 
my company would not be here today. Our therapy for MS would 
not be in Phase III trials, and we would not have these 
promising other therapies in our pipeline, absolutely. Indeed, 
if one looks at the SBIR program, to get a Phase II grant, 
which is where you begin to get substantial funds, a million 
dollars or two, rather than the Phase I grants, which are about 
$100,000 to $200,000, one of the requirements is that the 
recipient have proved the ability to raise private funding. And 
so, in many ways, the current interpretation is at odds with 
the actual operation of the Phase I and Phase II program.
    To exclude venture backed companies, therefore, is to 
exclude companies that have actually proved themselves to be 
the most efficient at developing products, because the venture 
capitalists hire the best physicians, the best scientists, the 
best patent attorneys, to review each company's business. And 
those that pass that grade are the ones that get invested in. 
The SBIR grants allow competitive, smart entrepreneurs and 
scientists to bring their products to the point where they can 
run the gauntlet of VC due diligence successfully.
    If this interpretation currently is to stand, it will chill 
our industry. We have already seen a survey from the Biotech 
Industry Organizations showing that over half of the companies 
that previously have been applying for SBIR grants are no 
longer applying, as a result of this interpretation. I have 
heard personally from directors of various divisions at the NIH 
that the quality of grant applications for SBIR is now going 
down, because of this chilling effect. So there are fewer 
grants, and perversely, the very companies that are the most 
competitive are the ones who are no longer applying and getting 
these grants, where the government's return on investment, as 
it were, would be expected to be the highest.
    So in summary, the SBIR grant has played a critical role in 
the technological advancement and the economic advancement of 
this country, which are the envy of the world. Within the 
biotech industry, and companies such as mine, if I have a Phase 
III that costs tens of millions of dollars to run through 
clinical trials, that is where my investors are putting their 
money. So even though I have raised $140 million, I have $20 
million left, and all of it is dedicated to the later stage 
programs. If I can get SBIR grants to fund my nerve growing 
technology, and I can prove that it works, the venture 
capitalists will put in the scores of millions of dollars that 
it will take me to get it the rest of the way and bring it to 
people.
    But without the SBIR program, even within my company that 
has raised so much money, I cannot move those programs forward. 
Thank you very much.
    [The prepared statement of Dr. Ron Cohen follows:]

                    Prepared Statement of Ron Cohen

Key Points:

          The biotechnology industry is unique in that it takes 
        at least several hundred million dollars and an average of 10-
        15 years to develop a drug from concept through to market. 
        Biotechnology companies therefore must rely on venture 
        investment as well as grant sources for sufficient funding.

          By imposing an unnecessary restriction against 
        venture capital owned small business, the SBIR program is 
        denying talented scientists the opportunity to develop new 
        therapies and medical technologies at an early stage, to 
        achieve sufficient proof of principle so that venture 
        capitalists will be willing to invest in them. This exclusion 
        is not consistent with the purpose of the SBIR program, which 
        is to stimulate small businesses that will commercialize 
        important technological developments.

          A prohibition against venture capital owned companies 
        is stifling innovation by lowering the number of applicants and 
        making the SBIR program less competitive. It also is impeding 
        the ability of the National Institutes of Health, which provide 
        most of the SBIR grants received by biotechnology companies, to 
        accomplish their mission of improving the health and medical 
        care of the American people.

          I support BIO's recommendation that the SBA adopt a 
        rule that addresses the actual ownership structure of small 
        biotechnology companies that are owned and controlled by 
        venture capital companies. Specifically, change the size 
        requirements to permit venture capital ownership of SBIR 
        applicants to count toward the 51 percent U.S. ownership and 
        control requirement.

    Good Morning. My name is Dr. Ron Cohen. I am the Founder, President 
and CEO of Acorda Therapeutics. Acorda is a privately held 
biotechnology company located in Hawthorne, New York. My company's 
mission is to develop and market therapies that restore neurological 
function to people with spinal cord injury, MS and related conditions 
of the nervous system.
    I would like to thank the Members of the Committee for the 
opportunity to comment on the current obstacles to participation in the 
Small Business Innovation Research (SBIR) program by businesses that 
are majority-owned by venture capital companies.
    As you know, the biotechnology industry is unique in that it takes 
a large amount of capital--at least hundreds of millions of dollars--to 
develop a drug from concept through to market. These costs are simply 
too high for individuals to fund. Biotechnology companies must rely on 
venture investment and grant sources for sufficient funding.
    Small biotechnology companies often rely on SBIR Phase I and Phase 
II grants to fund cutting edge research in areas that most venture 
capitalists would consider too early stage to fund. However, according 
to the current eligibility standards, a business must be at least 51 
percent owned and controlled by ``individuals'' who are citizens of the 
United States and the company may not have more than 500 employees, 
including its affiliates.
    The problem facing the biotechnology industry is that the SBA's 
Office of Hearings and Appeals has interpreted the term ``individuals'' 
to mean human beings. There is no definition of the term ``individual'' 
in the law that established the SBIR Program. The SBA's current 
interpretation of ``individuals'' excludes venture capital companies.
    This exclusion is not consistent with the purpose of the SBIR 
program, which is to stimulate small businesses that will commercialize 
important technological developments. Not only does this interpretation 
go against Congress' original intent for the program, but it is likely 
also to stifle innovation by lowering the number of applicants and 
making the SBIR program less competitive.
    A recent survey conducted by the Biotechnology Industry 
Organization (BIO), of which Acorda is a member, shows that SBA's 
interpretation is preventing many small biotechnology companies from 
participating in the SBIR program. More than 70 percent of the 
companies surveyed were privately owned small businesses with fewer 
than 50 employees. However, many of these companies were deemed 
ineligible to receive a SBIR grant due to their venture capital 
funding. In the past five years, 62 percent of the survey respondents, 
comprising both public and private companies, had applied for SBIR 
grants. Half of these applicants were denied grants due to the current 
interpretation of the size standards.
    Finally, more than 60 percent of the privately-held companies 
surveyed reported choosing not to apply for SBIR grants at all due to 
perceived eligibility concerns.
    The results of BIO's survey illustrate the negative impact that the 
exclusion of VC-backed companies is having on the biotechnology 
industry and on medical innovation. In imposing this unnecessary 
restriction, the SBIR program is denying talented scientists the 
opportunity to develop new therapies and medical technologies at their 
early stages, to achieve sufficient proof of principle to attract 
venture capitalists to invest in their later stages of development. It 
also is impeding the ability of the National Institutes of Health, 
which provide most of the SBIR grants received by biotechnology 
companies, to accomplish their mission of improving the health and 
medical care of the American people. In the end, even the best science 
requires long, risky and expensive development to be translated into 
usable therapies, something that only companies are equipped to do 
effectively.
    I believe Acorda exemplifies Congress' original intent with respect 
to the SBIR program. We currently employ 59 full-time associates, most 
of whom are highly educated and skilled. Acorda has received several 
grants through the SBIR program and these grants have been critical to 
our ability to develop technologies that have the potential to benefit 
people living with spinal cord injury and multiple sclerosis. Our lead 
clinical product, Fampridine-SR, is a novel therapy that is the first 
shown in clinical trials to improve neurological function, such as 
walking and strength, in people with MS. SBIR grants supported early 
proof of concept data for this product and helped persuade venture 
capitalists to support subsequent stages of development. These venture 
capitalists have provided well over $140 million in investment capital 
to date, already providing the SBIR program with an outstanding 
``return'' on its investment. Acorda recently has begun a large-scale, 
pivotal trial of Fampridine-SR in MS.
    It is important to understand that even small businesses that have 
raised large amounts of investment capital can still put SBIR grants to 
productive use. Typically, such companies' invested venture capital is 
earmarked for the very expensive later stage projects that require tens 
to hundreds of millions of dollars to complete. But these same 
companies often have earlier stage projects, as well, that the venture 
capital investors are unwilling to fund. Yet, because such companies 
have built an infrastructure of talented professionals to develop their 
later stage programs, and also have developed networks of venture 
capital investors, they are uniquely positioned to successfully develop 
their earlier stage programs, as well. SBIR grants can and do provide 
the ``proof of principle'' required by these early stage projects, even 
within ``well-funded'' companies, to persuade the venture capitalists 
to fund subsequent stages of development.
    I support BIO's recommendation that the SBA adopt a rule that 
addresses the actual ownership structure of small biotechnology 
companies that are owned and controlled by venture capital companies. 
Specifically, change the size requirements to permit venture capital 
ownership of SBIR applicants to count toward the 51 percent U.S. 
ownership and control requirement. This change would allow greater 
participation in the SBIR program and help to sustain important 
programs at small companies so they reach the point where novel 
therapies can enter the clinic and potentially save lives.
    This change would ensure that small businesses with ownership 
structures similar to mine would be able to benefit from this important 
program and pursue research efforts that are critical to improving our 
nation's health, maintaining its technological leadership and advancing 
its economic well-being.
    Thank you.

                        Biography for Ron Cohen
Founder, President and CEO, Acorda Therapeutics

    Dr. Cohen previously was a principal in the startup of Advanced 
Tissue Sciences, Inc., a biotechnology company engaged in the growth of 
human organ tissues for transplantation uses. Dr. Cohen received his 
B.A. degree with honors in Psychology from Princeton University, and 
his M.D. from the Columbia College of Physicians & Surgeons. He 
completed a residency in Internal Medicine at the University of 
Virginia Medical Center, and is Board Certified in Internal Medicine.
    Dr. Cohen is Chairman Emeritus and Director of the New York 
Biotechnology Association (NYBA). He also serves as a Director Zymenex 
A/S, as a member of the Scientific Advisory Board of the Daniel Heumann 
Fund and as a member of the Columbia-Presbyterian Health Sciences 
Council.

    Chairman Ehlers. Mr. Cohen.

STATEMENT OF MR. JONATHAN COHEN, PRESIDENT AND CEO, 20/20 GENE 
                         SYSTEMS, INC.

    Mr. Jonathan Cohen. Thank you, Mr. Chairman. Good 
afternoon. I am Jonathan Cohen, founder and CEO of 20/20 Gene 
Systems, a small biotechnology company based in Rockville, 
Maryland, that was founded in 2000, and is focused on 
developing and bringing to market innovative diagnostic 
products for biodefense, cancer, and autoimmune diseases.
    We currently have eight employees, and have raised over $2 
million in investment from both individual investors, often 
referred to as angels, as well as some small venture capital 
money, and some corporate investment, and have won about a half 
a dozen SBIR awards, and the SBIR program has played a vital 
role in our company's success to date.
    While Dr. Cohen and I share a last name, we do not share a 
common vision as to the propriety of having companies owned by 
venture capital firms participating in the SBIR program. I am 
here to strongly discourage Congress from passing any 
legislation that would permit institutionally owned companies, 
and I believe a company owned by one or more VCs is an 
institutionally owned company, from accessing the tiny 2.5 
percent set aside, that this Congress established for small 
companies owned by individuals.
    Now, to the extent that Acorda Therapeutics and other 
companies owned by institutions deserve federal support for 
their R&D, and I believe in many cases they do, for technology 
that is very high risk, or for which the markets are 
unpredictable or small, biodefense, orphan diseases, they 
should be entitled to that money, but it should come out of the 
other 97.5 percent of the Federal R&D pie, in my opinion. To do 
otherwise will have a dramatic effect on the large numbers of 
biotech startups that are individually owned, particularly 
those that have the misfortune of--I started my company in 
March of 2000, about a week before the so-called bubble burst, 
and the last five years have been a very, very difficult time 
for biotech startups.
    I believe that if Congress were to change the size 
standards, as has been proposed, that substantial numbers of 
biotech start-up companies will go out of business, and let me 
explain why. The SBIR process, particularly at the NIH, is 
extremely resource intensive. It costs my company--it takes 
about six weeks for full-time Ph.D.s to work on a Phase I SBIR 
application, and twice that amount of time for a Phase II. If I 
have to--if our company has to compete with Ron's company that 
has raised $132 million, they have the ability to prepare more 
applications in a more cost-effective manner than we do, and I 
am deeply concerned that that 2.5 percent of the pie will 
effectively be one percent or .5 percent. That is the 
consequence that I fear most.
    Now, why should that be of concern to this Congress? I 
believe strongly that both institutionally owned biotech 
companies and individually owned biotech companies play a very 
important role in our economy and in our healthcare system, but 
it is a distinct role, and over the last five years, the 
venture capital community has overwhelmingly invested in late 
stage drugs for large markets. That is not a criticism. Those 
are very important products, and the products that we heard 
about from the last witness deserve substantial funding. But 
there is a lot more to biotechnology than blockbuster drugs. 
Bioterrorism defense, ag biotech, research tools, platform 
technologies, vaccine development. These are fields that, by 
and large, have been ignored by, certainly, the large venture 
capital firms, and we need this 2.5 percent set aside. It is 
extremely important to enable those smaller companies to bring 
products to market.
    Let me just give you one example. Our company, at the 
height of the anthrax incident that affected Capitol Hill in 
2001, we developed and brought to market an important product 
called BioCheck, that is used--right now, it is used by about 
200 first responder organizations throughout the country, 
including about a dozen federal agencies, to screen suspicious 
powders. It was used at the Kerry campaign headquarters a week 
before the Democratic Convention, and it was used at the Bush 
campaign headquarters right before the elections. We would not 
have been able to bring that product to market if we had been 
majority owned by venture capital firms, because they would 
have perceived the markets as too small and the risks too high.
    So the small, individually owned biotech companies are a 
community of companies worth protecting. Yes, venture owned 
companies should be entitled to obtain federal support for 
certain areas of high risk, high impact R&D, but that should 
come out of the other 97.5 percent of the Federal R&D pie. And 
there are, by the way, increasing programs at the NIH to 
address that. In my written testimony, I attached an article 
from the Wall Street Journal last week that talks about how the 
NIH is beginning to fund early stage clinical trials for even 
large companies like Eli Lilly. This is a trend, by the way, 
that this Congress should encourage, and I would look forward 
to working with this committee and its staff in developing new 
programs that support deserving programs from large companies 
that do not destroy the small, innovative biotechnology 
companies.
    Thank you for considering my testimony this afternoon.
    [The prepared statement of Mr. Jonathan Cohen follows:]

                  Prepared Statement of Jonathan Cohen

    Good afternoon. I am Jonathan Cohen,\1\ founder and CEO of 20/20 
GeneSystems, a small biotechnology company based in Rockville, Maryland 
focused on developing and bringing to market innovative diagnostics for 
biodefense, cancer, and auto-immune diseases. Before starting 20/20 in 
2000 I worked as in-house counsel for two publicly traded biotechnology 
companies.
---------------------------------------------------------------------------
    \1\ Jonathan Cohen is President & CEO of 20/20 GeneSystems, Inc., 
Rockville, MD (www.2020gene.com). The views expressed herein are his 
own and do not necessarily represent those of the company or its 
shareholders. He can be reached at [email protected] or 240-424-9424.
---------------------------------------------------------------------------
    As a company with eight employees owned by about a dozen 
individuals and a few institutional investors, the SBIR program has 
played a vital role in 20/20's progress and success. We are deeply 
concerned, however, that if the SBIR size standards were changed to 
permit companies owned and controlled by large venture capital firms to 
qualify for this small pool of funding we could loose our ability to 
continue to bring innovative products to market. Hundreds of small and 
biotech companies like 20/20 throughout the country could be put out of 
business by this change. We therefore urge that the size standards for 
this program be left intact and that companies that are not small 
businesses (as traditionally defined) instead look outside this 2.5 
percent set-aside for appropriate and needed government support.

Likely Consequences of the Proposed Change to SBIR Size Qualifications

    Because the SBIR application process is so resource intensive, 
especially at the NIH, 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 the SBIR program was created to 
support. In other words, the 2.5 percent set aside for small companies 
(as they have been traditionally defined) could quickly become one 
percent or 0.5 percent. There would be several key consequences of this 
change.
    First, it would shift funding away from areas of research underway 
at many small companies that is critical for public health and national 
security but out of favor with Wall Street. This includes biodefense, 
vaccine development, diagnostics, platform technologies, research 
tools, orphan disease therapies, agricultural biotechnology, 
environmental biotech, etc. For example, just after the anthrax 
mailings here on Capitol Hill in 2001 our company developed a novel 
method of screening suspicious powders and brought it to market the 
following year. Today our BioCheckTM test kit is routinely used by more 
than 300 federal, State, and local first responder organizations 
nationwide. Had we been owned and controlled by one or more large VC 
firms it is highly unlikely that this popular and important product 
would have been permitted to be developed and commercialized due to the 
relatively small market it addresses and liability risk as would be 
perceived by our large corporate owners.
    Second, it would decrease support for high-impact, high-risk 
innovative research which small, independently owned companies 
historically excel at in favor of lower risk product development 
favored by most VCs today. The following observation by John F. Wong, 
Ph.D. who writes a monthly ``Wall Street Biobeat'' column in Genetic 
Engineering News accurately describes the current state of biotech 
investment:

         The biotech industry seems to be at a crossroads as it enters 
        the second half of its 50-year cycle. With the focus now on 
        developing products that are already in clinical development, 
        the industry appears to be moving away from its core strength 
        of research and innovation.

         Frustrated by not reaping the benefits of the genomic and 
        proteomic revolution of the 1990s, biotech investors now seem 
        to be more risk adverse. Their investment strategy is to focus 
        on investing in companies with products in late stages of 
        clinical development, which they believe will receive FDA 
        approval. (Emphasis added)\2\
---------------------------------------------------------------------------
    \2\ Genetic Engineering News, March 1, 2005, page 60.

    This phenomenon was reiterated last week by several leading venture 
capitalists attending the annual meeting of the Biotechnology Industry 
---------------------------------------------------------------------------
organization:

         ``In the late 1990s, investors were willing to back early-
        stage technology phases of biotechnology,'' said Jim Barett, an 
        analyst and general partner of New Enterprise Associates. ``Now 
        the investment community is moving toward later-stage projects. 
        That means that early-stage projects are having difficulty 
        raising money in this environment of risk discounting.'' \3\
---------------------------------------------------------------------------
    \3\ ``Investors: Show us the Drugs,'' Business Gazette, June 24, 
2005.

    However, what's best for Wall Street is not always best for 
America. VCs play a critical role in support of important segments of 
the biotechnology industry but blockbuster drugs are not the only need 
of our health care system. Diagnostics and new platform technologies, 
for example, receive little interest from large VCs but are essential 
for both biodefense and the emerging field of ``personalized medicine'' 
where the optimum therapies are tailored to patients based on their 
genetic disease profile.\4\ Small biotech companies supported by the 
SBIR program are making major advancements in these important areas of 
R&D.
---------------------------------------------------------------------------
    \4\ The new paradigm of individualized medicine--strongly being 
pushed by the FDA--will likely create demand for drugs to ``niche'' 
diseases, as defined by molecular profiling, with significantly smaller 
markets than traditional ``blockbuster'' drugs. This will likely 
increase the role of smaller biotech companies which can focus on 
smaller markets than large companies.
---------------------------------------------------------------------------
    Furthermore, as reported by Business Week in March, individual 
Angel investors are filling some of the funding gap in high-risk early 
stage biotech investing that has been vacated by VCs, pouring nearly $2 
billion into biotech last year, up more than 60 percent from 2002 
(Attachment). Having raised over $2 million from Angels I can report, 
however, that this is very time consuming process that relies on the 
SBIR program to keep our R&D advancing and to provide these non-
professional investors with independent validation of our technology.
    Third, it would likely discourage the VC community from deploying 
the staggering $50 billion in unspent funds sitting in their coffers\5\ 
by relying on SBIR grants rather than making follow-on investments in 
their portfolio companies. The proposed eligibility changes would 
simply be giving more ``snow to the Eskimos.''
---------------------------------------------------------------------------
    \5\ Dow Jones VentureOne, March 2005.
---------------------------------------------------------------------------
    Finally, it would hurt regions of the country with a small life 
science investor base, such as Maryland, to the benefit of Boston and 
San Francisco that are home to many seasoned biotech VCs. At the 
Maryland Technology Development Center (MTDC) in Rockville, a county 
operated facility that houses one of the largest numbers of biotech 
start-ups in the mid-Atlantic region not a single biotech company has 
raised a first round of venture capital since we became tenants there 
in 2001 but most have been funded through the SBIR program. The biotech 
entrepreneurs at the MTDC overwhelmingly oppose BIO's efforts to change 
the SBIR size standards.\6\ Yet many of these companies are quite 
productive, and, like 20/20 have managed to develop and launch 
innovative successful biotechnology products with the support of the 
SBIR program, as well as Angel and some smaller institutional 
investors.
---------------------------------------------------------------------------
    \6\ It should be pointed out that BIO does not represent or speak 
for the entire biotechnology industry and certainly not most small 
companies. At best it speaks only for its membership which is heavily 
weighted by very large companies that are either publicly traded or 
have completed several large rounds of institutional investment. I was 
a member of BIO a few years ago and took part in several of its 
committee meetings. I was stunned by the extent to which these forums 
were dominated by professional lobbyists employed by large 
pharmaceutical companies and how few small company entrepreneurs took 
part in these meetings. In my view BIO lacks standing to address issues 
impacting small, individually owned companies since that community is 
so under-represented in its membership and leadership.
---------------------------------------------------------------------------
    Simply put, a company owned and controlled by one or more large VC 
firms is not a small business and should not be entitled access the 
minuscule percentage of funds set aside for small businesses. These 
companies typically lack the culture and attributes of small, 
individually owned companies including the ability to ``turn on a 
dime,'' take substantial risks, and address smaller and less 
predictable markets, including those unpopular on Wall Street. To 
permit this change would essentially take the ``S'' out of SBIR.

Large Entities Should Look Beyond SBIR

    Proponents of changing longstanding definitions of ``small 
business'' are ``barking up the wrong tree'' by pressing for changes to 
the SBIR size standards when they should instead be focusing their 
efforts on the other 97.5 percent of the federal R&D pie not set aside 
for small individually owned companies. While historically most NIH 
funding has gone to support academic basic research, this has been 
changing over the last few years. Today there is an expanding number of 
programs available to businesses of all sizes at the NIH and other 
agencies for high-risk, high-impact R&D or the development of products 
with small or unpredictable markets such orphan drugs or vaccines to 
bioterror agents. These programs collectively have substantially more 
funding available than the SBIR program. For example, as reported last 
week in The Wall Street Journal, the NIH is beginning to offer to pay 
for and carry out early clinical trials of high-risk experimental drugs 
for certain diseases for which improved therapies have been lacking for 
decades. (Attachment) Pharmaceutical giant Eli Lilly is among the 
companies reportedly taking part in this new program.
    Congress should encourage this trend and consider new initiatives, 
open to companies of all size, that help bridge the growing ``valley of 
death'' between basic discoveries and delivery to patients of 
innovative drugs, devices, and diagnostics.\7\ At the same time, the 
integrity of programs like SBIR that safeguard the viability and 
productivity of our nation's small risk taking biotech entrepreneurs 
must be protected.
---------------------------------------------------------------------------
    \7\ This could include a new Advanced Healthcare Technology 
Development Program, modeled after the NIST ATP program, focused on 
supporting innovative platform technologies that improve disease 
diagnosis and therapy selection, drug development, and clinical 
research. Funding for high-risk technology development is severely 
lacking from both the NIH and private investors despite the significant 
impact this can have on our nation's health care system. At least 10 
percent of the NIH budget should be set aside for high-impact 
technology development in fields not supported by VCs or corporations.
---------------------------------------------------------------------------
    Thanks for considering my testimony today.

                      Biography for Jonathan Cohen
    In 2000 Jonathan Cohen founded 20/20 GeneSystems, Inc. a 
biotechnology company dedicated to developing novel diagnostic products 
for biodefense, cancer, and auto-immune diseases. In 2004 he was one of 
three nominees for the ``Entrepreneur of the Year'' award from the 
Technology Council of Maryland. As CEO of 20/20 he lead the company in 
raising over $2.5 in investment capital, procuring over $1 million in 
Federal Government contracts and grants, and launching two innovative 
technology products, one for biodefense and another for life science 
research. The company currently has two diagnostic products in its 
development pipeline, one for biodefense (radiological biomarkers) and 
another for predicting the efficacy of targeted cancer therapies.
    Prior to starting 20/20 served as General and Patent Counsel of 
Oncor, Inc., which pioneered the first gene-based cancer diagnostic 
approved by the FDA. In that capacity he facilitated numerous corporate 
alliances and technology licensing transactions.
    Mr. Cohen is a registered patent attorney with over 14 years 
experience in biotechnology patents and licensing matters. He has a 
Master of Science degree in Biotechnology from Johns Hopkins University 
in addition to a law degree from American University. Mr. Cohen 
previously served on the Patent Committee of the Biotechnology Industry 
Organization and is an active member of the Government Affairs 
Committee of the Technology Council of Maryland.
    He is a former volunteer firefighter and Emergency Medical 
Technician.

    Chairman Ehlers. It is delightful to see such unanimity 
among the witnesses. The buzzers that you heard indicate we 
have votes going on on the Floor. I think we can get your 
testimony in, Dr. Nacy, if you don't linger on it, and then, we 
will have to recess and return.

   STATEMENT OF DR. CAROL A. NACY, CHIEF EXECUTIVE OFFICER, 
                         SEQUELLA, INC.

    Dr. Nacy. Thank you, Mr. Chairman, for hearing me through, 
and thank you, Committee Members, for offering me the 
opportunity to give you my perspective on the effect of the 
current interpretation of the law on both my company and on my 
industry.
    Sequella, Inc. is an eight year old biopharmaceutical 
company developing products for tuberculosis, a disease that is 
a global health threat of awesome proportions. In the world, 
two billion people, out of a total six, that is one out of 
every three people in the world, has tuberculosis. And 15 
percent of these people will come down with this disease in 
their lifetime, in the next 30 to 50 years. That is 300 million 
people with tuberculosis. Annually, there are now over 10 
million new cases of TB every year, and over two million 
deaths. TB is an aerosol transmitted disease. It is of concern 
to the United States, because it is a listed biothreat agent.
    Although we have indigenous tuberculosis under control in 
our country, we exist in a global economy, and we import 
tuberculosis into the United States inside of people who travel 
here for business or for pleasure, or to immigrate permanently 
as citizens from areas in which tuberculosis has literally 
overwhelmed public health systems. In fact, all over Asia, 
China, India, South America, and Africa, only on this continent 
and in Australia do we not have an overwhelming TB problem.
    We risk having tuberculosis walk across our borders in a 
drug-resistant form that would totally annihilate our public 
health control systems. And I will just give you one example of 
how quickly this can occur. In New York City, once we had block 
grants, they shut down a $50 million a year TB control program 
that, for the city itself, and within three years of the 
closure of that program, multi-drug-resistant TB epidemic 
occurred in New York City that cost $1 billion and two years to 
get under control. TB is definitely not a disease that you want 
to underestimate.
    Sequella was established as a for-profit company in 1997 to 
solve the problem that the U.S. Public Health Service, in the 
form of the CDC and the NIH, recognized as a time bomb, the 
reasserting of control for resurgent TB in New York City and in 
the other urban areas of this country, was hampered by the fact 
that products for control of TB are 50 to 100 years old. 
Although TB was the number one killer of U.S. citizens prior to 
1950, the antibiotic era made us complacent. So, Sequella was 
established to reverse the industry trend of no attention to 
tuberculosis.
    We have been financed over the last eight years through 
Founder and Director equity investments, investments by angel 
investors, and a variety of competitive scientific research 
grants, including grants and contracts from the SBIR program. 
We have competed for and received SBIR funding for diagnostics, 
devices, vaccines, and drugs, all focused on TB. And the total 
amount of funding in the SBIR grant contract program that we 
have received to date is over $6.5 million--and I have given 
you a table on page 2--out of a total of $18 million raised for 
my company.
    Despite the healthy success of the SBIR grant competition, 
we will require $10 million in additional funds over the next 
two years to complete the clinical trials of a brand new 
diagnostic that can actually detect active TB, and initiate the 
clinical trials of a brand new drug that, in animals, is both 
more effective and quicker acting than the current treatment of 
six to nine months.
    The SBIR programs at NIH are designed to stimulate the 
research and development of products for diseases of interest 
to our Federal Government regardless of the commercial 
interests in such products. TB is such a disease. It is a U.S. 
problem with little ongoing commercial effort. The amount of 
money and the structure of the SBIR program means that the 
costs of identifying and developing new products for this 
devastating disease are only begun with the SBIR program. The 
overall costs for getting something into the clinic is $2 to $5 
million just for the animal studies, and anywhere from $30 
million to $150 million for the clinical trials. We have to 
find the money somewhere to get the product out that we started 
with the SBIR program.
    I don't know of anyone who is interested in providing me 
with $150 million total amount of money, unless it is the 
venture capital groups who understand high risk and high 
reward. The VC money is clearly for----
    Chairman Ehlers. Excuse me.
    Dr. Nacy. Yes, sir.
    Chairman Ehlers. Hold that thought. We will have to recess 
and go vote, and we will pick up with you.
    Dr. Nacy. Okay.
    Chairman Ehlers. Give you a little extra time when we 
return.
    [Recess.]
    Chairman Ehlers. I apologize for the interruption. It 
happens here frequently. Dr. Nacy, we were in the midst of your 
testimony. Actually, we were at the end, but I will give you a 
little, a couple----
    Dr. Nacy. Thank you.
    Chairman Ehlers. I will give you a couple minutes to add 
whatever additional thoughts you wanted to express.
    Dr. Nacy. I basically wanted--oh, I am sorry. Go ahead.
    Chairman Ehlers. And we will go to Dr. Abramson. And I, 
unfortunately, have to go to another meeting, but we will 
import someone else to chair this meeting during that time, and 
I apologize in advance for having to leave.
    Dr. Nacy.
    Dr. Nacy. Yes, I just wanted to mention what the impact of 
this current interpretation of the law regarding SBIR programs 
means to Sequella. We are currently not venture financed. For 
the last two years, I have been raising money in the venture 
community. I have finally gotten two people who are--who 
believe that tuberculosis is an appropriate company focus for 
Sequella, and are interested in financing us.
    I hope to close the financing by the end of the summer, but 
at the same time, I have my SBIR grants that both exist, and I 
have two applications in that have been approved, but not yet 
funded, and will be funded by the end of the year, worth $2 
million to the company. And so, of course, these--this 
interpretation affects my company specifically, but also 
affects every other company that is in the process of trying to 
commercialize products. The SBIR moneys and the VC moneys don't 
commingle. They are used sequentially. The SBIR moneys are used 
to identify new and potential products that will be useful to 
mankind, and the VC money is used to get them clinically 
evaluated and bring them to commercialization. And so, not 
having the access to both sides of that equation means that I 
will either commercialize what exists today, and forget ever 
developing any new products for TB in the future, or I will 
continue to identify products that will never make it to 
patients, and basically, that--this has put me within a rock 
and a hard place. The venture money will be specifically for 
the clinical trials of the new TB drug, and if there is 
anything left over, for the new TB diagnostic.
    I just also wanted to rebut the issue of the 2.5 percent 
for companies. We really can only compete as companies for the 
SBIR grant, and it is very, very difficult to access the rest 
of the money from the NIH programs, because we do not do 
hypothesis-driven research. We do product development, which is 
guided by FDA rules and regulations, and there is not a lot of 
flexibility in what we can do when we develop a new drug. So, 
we are not competitive. I, as a scientist, sit on review boards 
for the grants for R01 grants, and in fact, just finished one 
last Thursday, in which no company was actually awarded or 
approved for grant funding. All academics. As it probably 
should be, because we do have the SBIR program, as long as we 
are not yet venture financed.
    I think the country, and I think the government, will only 
benefit if the best product-oriented science is funded, and it 
will only benefit if that product-oriented science ends up with 
a product that can be used by patients. I think the two sides 
of that equation have to be together. The venture financing is 
critical for getting products out there. The SBIR grant program 
is critical for innovation in the early stage research.
    And I think that I would like just, then, to close and 
thank you for the opportunity to present this opinion.
    [The prepared statement of Dr. Nacy follows:]

                  Prepared Statement of Carol A. Nacy

Points:

          Medical R&D SBIR Programs (NIH, DOD) were designed to 
        initiate R&D on products for diseases of importance to the U.S. 
        public health. Program requires companies to (a) show evidence 
        of follow-on funding for product commercialization and (b) 
        commercialize a product from at least one Phase II grant (or no 
        more SBIR grants can be awarded).

          Sources of follow-on funding are limited in the high-
        risk clinical phase of product development because of the cost 
        of these development tasks (hundreds of millions of dollars): 
        VC are virtually only source of capital in this quantity.

          SBIR and VC moneys do not co-mingle: they are used 
        sequentially for research (SBIR) and clinical trials/
        commercialization (VC): both are essential to bring products to 
        marketplace for use by physicians/patients.

          SBIR grants should focus on the best science, 
        regardless of VC financing of companies.

Mr. Chairman and Committee:

    Thank you for offering me the opportunity to provide information 
about the impact of the ruling on eligibility of VC-backed companies 
for SBIR grants on my company and my industry.
    Sequella, Inc. is an eight-year-old biopharmaceutical company 
discovering and developing products for the diagnosis and control of 
tuberculosis (TB), a global health threat of truly awesome proportions: 
two billion people (one of every three in the world) are infected with 
the bacterium today, and 15 percent of these people (or 300 million) 
will come down with fulminant and lethal TB in their lifetime, the next 
30-50 years. There are now nearly 10 million new cases of TB every year 
and over two million deaths annually. TB is an aerosol-transmitted 
debilitating disease that is listed as a biothreat agent of concern to 
the U.S. Government.
    Although we have indigenous TB almost under control in our country, 
we exist in a global economy and we import TB on a daily basis inside 
people who travel for business or pleasure or immigrate for permanent 
citizenship from areas of the world that are overwhelmed by this 
disease. Until we solve the global problem of TB, our country is at 
risk for the importation of drug-resistant TB from elsewhere that will 
quickly undermine our public health efforts at control. Just one 
example: New York City closed down their $50 million/year TB control 
program in the late 1980s. Within three years of closure, New York City 
underwent a mini-epidemic of TB and drug-resistant TB that cost the 
city over $1 billion dollars and two years to control. TB is not a 
disease to ignore or underestimate.
    Sequella was established as a for-profit company in 1997 to solve a 
problem that the U.S. Public Health Service (CDC and NIH) recognized as 
a time-bomb: the reasserting of control for resurgent TB in the 1990s 
in New York City and other urban centers in the U.S. was strongly 
hampered by the techniques available to diagnose and treat the disease, 
techniques which are 50-100 years old. Although TB was the #1 killer of 
U.S. citizens prior to 1950, the antibiotic era of 1950-1990 allowed us 
to become complaisant about infectious diseases, and no new antibiotics 
were discovered or developed for TB since mid-1970s. Sequella was 
established to reverse this industry trend.
    Sequella has been financed over the last eight years through 
Founder and Director equity investments, investment by Angel investors, 
and a variety of competitive scientific research grants, including 
grants and contracts from the SBIR program at the National Institutes 
of Health (NIH). We have competed for and received SBIR funding for 
diagnostics, devices, vaccines and drugs, all focused on TB: the total 
amount of funding under the SBIR grant/contract program alone was about 
$6.5 million (see Table 1), out of a total of $18 million raised 
overall for the company.



    Despite the healthy success of SBIR grant competition, Sequella 
will require over $10 million in additional funds in the next two years 
to complete the clinical trials of its new and more effective 
diagnostic and initiate the clinical trials of its new drug that, in 
animals, is both more effective than existing drugs and shortens the 
treatment time for cure.
    The SBIR programs at NIH are designed to stimulate research and 
development of products for diseases of interest to the Federal 
Government, regardless of commercial interests in such products. TB is 
such a disease: a U.S. problem with little ongoing commercial effort. 
The amount of money and structure of SBIR grants ($75K-$300K Phase I; 
$750K-$2M Phase II) is sufficient only to start the process of drug, 
diagnostic, or vaccine discovery and development. The overall costs of 
development of a new product from the time that the research looks 
promising is overwhelmingly large, and the money to cover these costs 
is extremely difficult to find:

        --  Preclinical toxicity studies for drugs/vaccines range from 
        $2M-$5M in cost/product candidate

        --  Clinical trials for a single drug/vaccine range from $30M 
        to $150M/product, depending upon indication

    Non-SBIR money is clearly required to bridge the funding gap to get 
a product to the patients it is to serve: the only source for that 
large an amount of money going to a high-risk venture such as drug 
development (with one in 5000 success rate) is venture capital (VC). VC 
money is for clinical development and commercialization, not the high-
risk discovery research or early translational research before the 
clinic: research into new targets of interest to government is last on 
priority list with VC money, and rightly so. They must push companies 
to develop a product revenue stream so that they can exit their high-
risk investment with an acceptable return on investment.
    Specific impact of the eligibility ruling: Sequella, Inc. has two 
SBIR grant applications (a Phase I for $300K and a Phase II for $1.6M) 
that are in a queue for funding in this FY 2005. Funding is expected by 
late summer. Sequella is also completing its first VC financing to fund 
the clinical trials of the new TB drug and the new TB diagnostic that 
were developed with NIH SBIR and other grant funds. The loss to 
Sequella of the $2M SBIR grants for its portfolio products NOT ready 
for clinical trials will be a significant loss to the company and will 
not be replaced by VC financing. Without SBIR support, we would not 
have spent the time and energy on TB, a disease that is not considered 
a commercial opportunity in the U.S. Without the grant support in the 
future, our remarkable research success in finding new diagnostics, 
drugs, and vaccines for important non-commercial diseases of importance 
to the U.S. will stop.
    In Sequella, and I suspect in most other small biotechnology 
companies, the SBIR and VC money will not co-mingle, but will be used 
sequentially for product development: research (SBIR) funding will 
drive new product identification; commercialization (VC) funding will 
bring the identified product to market for use by patients. Both 
sources of capital are critical for product success. Most VC-backed 
biotechnology companies remain small businesses (many of them very 
small: Sequella has only 17 employees), and the addition of VC to the 
Board or VC commercialization funds to the treasury does not make them 
any larger or less in need of discovery research funding.
    I have heard comments that the SBIR set-aside moneys are only 2.5 
percent of grant support available at the NIH. I continue to review 
grants for the NIH in non-SBIR programs, and I can tell you from 
personal experience that companies do not compete well in this arena. 
The reason? We do not do hypothesis-driven research. Our research is 
governed by rules and regulations of the FDA for product development, 
and even the discovery research we do does not address fundamental 
biology, but product-oriented processes not amenable to review by 
academicians who drive the R01 granting processes at the NIH.
    Competition with other small business industries does not exist for 
NIH SBIR programs: only biotechnology/biopharma companies compete for 
the dedicated small business set-aside moneys from NIH and DOD for 
medical research. Thus, the argument that VC-backed small biotechnology 
companies in medical research are unfairly competing for small business 
funds in general is erroneous: only science-based companies can compete 
for the NIH/DOD medical research funds. Although having VC investment 
provides an opportunity to be a successful company that commercializes 
products, VC investment does not provide a scientific advantage for 
companies: science is reviewed for its merits, not its financial 
backing. Good science that is competitive can come from VC-backed 
companies or companies that are not VC-backed. Sequella is an example 
of the latter: we have been highly successful at grant competitions, 
although we are not yet VC financed. I am absolutely sure that we will 
be as competitive when we have VC funding. Competition is based on 
scientific merit, and for the best science to prevail, we should all 
(VC-backed or not) be in the mix.
    The country will only benefit if all the best product-oriented 
science is funded, but it will also only benefit if that science is 
transformed from a promise to a product, and that will happen most 
efficiently in VC-backed companies with sufficient funds to make it 
though the costly clinical development process.
    Thank you again for the opportunity to express my views before the 
Committee.

                      Biography for Carol A. Nacy

DATE AND PLACE OF BIRTH: 14 January 1948; Tokyo, Japan.

MARITAL STATUS: married, five children

HOME ADDRESS:   2233 Q Street, NW, Washington, DC 20008; Tele: 202-299-
0106; Fax: 202-299-0107; E-mail: [email protected]

EDUCATION:

1966-1977  Catholic University of America, Washington, DC

         1966-1970  A.B., Biology

         1972-1975  M.S., Microbiology

         1975-1977  Ph.D., Microbiology

1976-1978   Department of Rickettsial Diseases, Walter Reed Army 
Institute of Research, Washington, DC; Nation Academy of Sciences NRC 
Postdoctoral Research Associate

BRIEF CHRONOLOGY OF EMPLOYMENT:

1998-present   Sequella, Inc., 9610 Medical Center Drive, Suite 200, 
Rockville, MD; Founder, CEO and Chair, Board of Directors (Company 
focused on products for TB)

1997-1998   Anergen, Inc., 301 Penobscot Drive, Redwood City, CA; Chief 
Scientific Officer (Company focused on products for autoimmune 
diseases)

1993-1997   EntreMed, Inc., 9610 Medical Center Drive, Suite 200, 
Rockville, MD; Consultant (1997); Executive Vice President and Chief 
Scientific Officer (1995-1997); Senior Vice President for Research 
(1993-1995) (Company focused on cancer)

1976-1993   Walter Reed Army Institute of Research, Washington, DC

        1988-1993   Program Director, GS-15 (SES Trainee), 
        Immunotherapy of Infectious Diseases; Assistant Chief, 
        Department of Cellular Immunology; and Task Area Manager, Broad 
        Army Program on Immunomodulators in Biological Defense

        1986-1988   Program Manager, GS-14, Immunity to Leishmania; and 
        Assistant Chief, Department of Immunology

        1980-1986   Microbiologist, GS-12 and GS-13, Department of 
        Immunology

        1978-1979   Microbiologist, GS-12, Department of Rickettsial 
        Diseases

        1976-1978   NRC National Academy of Sciences Post-doctoral 
        Research, Associate, Department of Rickettsial Diseases

1979   Laboratory of Parasitology, National Institute of Allergy and 
Infectious Diseases, National Institutes of Health, Bethesda, MD; 
Visiting scientist

1975-1977   Trinity College, Washington, DC (see teaching experience); 
Instructor, Microbiology

1970-1972   Branch of Infectious Diseases, National Institute of 
Neurological Diseases and Stroke, National Institutes of Health, 
Bethesda, MD; Microbiologist, GS-5

TEACHING EXPERIENCE:

1983-1993   Lecturer, Immunology Course, Military Medical Science 
Fellowship Program, Walter Reed Army Institute of Research, Washington, 
DC

        1985-86   MAJ Charles Davis, MC USA: ``Isolation and 
        characterization of the lymphokine that induces macrophage 
        resistance to infection with obligate intracellular 
        parasites.''(see publications 63 and 64)

        1990-1991   MAJ Wayne Jonas, MC USA: ``Cytokine therapy of 
        aerosol Francisella tularensis infections in mice.''

        1987-1993   Advisor, research manuscript preparation by Medical 
        Science Fellows

1982-1993   Advisor, Microbiology and Immunology, National Research 
Council/National Academy of Sciences, Post-doctoral Resident Research 
Associateship Program, Walter Reed Army Institute of Research, 
Washington, DC

        1983-1985   Dr. Beverly A. Mock: ``Genetic control of 
        susceptibility to cutaneous and systemic Leishmania major 
        infections in mice.'' (see publications 
        41,42,43,46,52,56,65,114)

        1987-1988   Dr. Reiko Nakamura: ``Characterization of an EL-4 
        derived suppressor factor for macrophage cytostatic effects 
        against Mycobacteria.''

        1989-1991   Dr. Barbara Nelson: ``Effect of Transforming Growth 
        Factorb on lymphokine induction of macrophage effector 
        activities,'' (see publications 81,84,87,93,94,95,101)

        1989-1991   Dr. R.B. Narayanan: ``Development of protective 
        monoclonal antibodies for Francisella tularensis infections of 
        mice.'' (see publications 106,107,116,118,122,124)

        1989-1992   Dr. David Leiby: ``Purification of the lymphokines 
        that induce macrophage resistance to infection with Leishmania 
        major.'' (see publications 81,85, 95,96,98,103,104,111,113)

        1990-1993   Dr. Karen Elkins: ``Cellular immune responses 
        during Francisella tularensis infections.'' (see publications 
        103,104,105,109)

        1992-1993   Dr. Ephram Getachew: ``Induction of antimicrobial 
        activities in human monocytes.'' (see publications 121, 127)

1986-1988   Post-doctoral Advisor, Medical Research Council of Canada, 
Ottawa, Canada

        1986-1988   Dr. Miodrag Belosevic: ``Characterization of the 
        resistance of activated macrophages to infection with obligate 
        intracellular parasites.'' (see publications 
        58,60,61,63,64,69,74,76,77,83,94)

1980-present   Professor, Adjunct, Catholic University of America, 
Washington, DC

        1981-1984   Masters Thesis, Anne H. Fortier: ``Characterization 
        of macrophage populations that become infected with the 
        protozoan parasite, Leishmania major.''

        1984-1986   Ph.D. Dissertation, Anne H. Fortier: ``Leishmania 
        tropica infection of P/J mice: analysis of systemic disease and 
        macrophage function in a mouse strain with characterized 
        macrophage defects.''

        1987-1988   Masters Thesis, Matthew Seguin: ``Role of Kuppfer 
        cells in murine infections with Plasmodium berghei.''

        1987-1989   Masters Thesis, Huong Cao: ``Differential induction 
        of macrophage class II histocompatibility antigens by IFN? and 
        Interleukin-4.''

        1989-1993   Master's Thesis, Xioyan Fan: ``Tumor Necrosis 
        Factor a synthesis and secretion: regulation in macrophages 
        infected with the Human Immunodeficiency Virus.''

        1991-1993   Ph.D. Dissertation (Committee Member), Heidi Link: 
        ``T cell specificity repertoire induction by alternate forms of 
        the CS protein of Plasmodium berghei.''

        1994-1997   Ph.D. Dissertation, Adonia Pappathanassiu: 
        ``Factors that regulate angiogenesis.''

1994-1996   Thesis Advisor, Johns Hopkins University, Baltimore, MD

        1994-1996   Master's Thesis, Antonio Ruiz: ``Cytokine circuits 
        in angiogenesis: interaction of bFGF and cytokines for enhanced 
        proliferation of endothelial cells.''

1994-1997   Professor, Adjunct, Howard University, Washington, DC

        1994-1997   Ph.D. Dissertation, Jacinta Uzoamaka Aniagolu: 
        ``Characterization of anti-cholesterol antibodies: implications 
        for atherosclerosis.''

2001-present   Adjunct Professor, George Washington University, 
Department of Tropical Medicine and Microbiology, Washington, DC

1988-1990   Reader: Master's Thesis, Lisa Medvitz: ``Association of two 
genetic traits, defective macrophage killing of Schistosoma mansoni 
schistosomula and defective production of macrophage activating 
lymphokines, in P/N mice.''

1980-1995  Faculty, Wet Workshop on Macrophage Activation, Annual 
Meeting, Society for Leukocyte Biology

1974-1976   Instructor, Department of Biology (General Microbiology), 
Trinity College, Washington, DC

1972-1975   Graduate Teaching Assistant, Department of Biology, 
Catholic University of America, Washington, DC

Academic Honors:

1966-1970   Full Scholarship, Catholic University of America, 
Washington, DC

1971   National Aeronautics and Space Administration Special Fellowship

1974   National Science Foundation Student-originated Studies Grant

1975   Sigma Xi Excellence in Research Award

1976   Outstanding Graduate Student, Catholic University of America

1976   Who's Who in American Colleges and Universities

1976-1978   National Academy of Sciences/National Research Council 
Resident Research Associateship

1983   Young Investigator Award for Excellence in Research, 
Reticuloendothelial Society

1986   Election, Fellow of the American Academy of Microbiology

1994   Honorary Life Member, Society for Leukocyte Biology

2000   Women in Discovery, Texas A&M University

2002   Lifetime Achievement in Science, Catholic University of America

2003   Dean's Development Board, Catholic University of America

Associations:

Society of the Sigma Xi (1978)

American Society for Microbiology (1974)

American Society for Tropical Medicine and Hygiene (1979)

Reticuloendothelial Society/Society for Leukocyte Biology (1979)

American Association of Immunologists (1980)

American Academy of Microbiology (1986)

American Society for Cancer Research (1994)

New York Academy of Sciences (1997)

MEMBERSHIPS IN SCIENTIFIC SOCIETIES AND RESEARCH PANELS:

Offices in National and International Associations:
American Society for Tropical Medicine and Hygiene
         Appointed:
         1993-1994, Nominating Committee
         1995-1998, Scientific Program Committee

Society for Leukocyte Biology
         Elected:
         1987-1991, Secretary
         1991-1992, President-Elect
         1992-1993, President
         1993-1994, Council

         Appointed:
         Publications Committee (1986-89)
         Monograph Series Committee (1991)
         President's Advisory Committee (1991)
         Nominating Committee (Chair), (1995)

         Editorial Responsibilities:
         EDITOR: SLB Newsletter (1992-1995)

         Honors:
         Young Investigator Award for Excellence in Research, 1983
         Honorary Life Membership, 1994

American Society for Microbiology
         Elected:
         1985-1986, Co-Chair, Immunology Division
         1986-1987, Chairman, Immunology Division
         1988-1990, Divisional Group I Representative
         1994-1995, President-Elect
         1995-1996, President
         1996-1997, Past-President, Member of Council

         Appointed:
         1990-1992, Foundation Lecturer
         1992, Ad Hoc Committee on Ethics and Integrity in Publications
         1994-1996, Foundation Lecturer
         1996-1999, Committee on Awards, Abbott Laboratories Lifetime 
        Achievement Award
         1995-1999, Committee on Centennial Heritage

         Editorial Responsibilities:
         Infection and Immunity
                 Editor, Parasitic and Fungal Diseases (1990-1993); 
                Host response and inflammation (1993-1995)
                 Associate Editor (1984-1988)

         Honors:
         Fellowship in the American Academy of Microbiology (1986)

American Association of Immunologists
         Appointed:
         1992-1996, Publications Committee

         Editorial Responsibilities:
         Journal of Immunology
                 Editor, Immunoparasitology (1987-1991)
                 Associate Editor (1986-1989)

Member, Editorial Boards:
         Journal of Immunology
                 Editor, Immunoparasitology (1987-1991)
                 Associate Editor (1986-1989)
         Journal of Clinical Immunology
                 Associate Editor (1989-1993)
         Journal of Leukocyte Biology
                 Associate Editor (1986-present)
         Infection and Immunity
                 Editor, Parasitic and Fungal Diseases (1990-1992)
                 Editor, Host response and inflammation (1993-1996)
                 Associate Editor (1984-1988)
         Invited (Ad Hoc) Reviewer for:
                 Immunobiology
                 Journal of Clinical Investigation
                 Proc. of the National Academy of Sciences
                 EMBO
                 American Journal of Tropical Med. and Hygiene
                 Cellular Immunology
                 Journal of Molecular Parasitology
                 Journal of Infectious Diseases

Global Health Panels:

World Health Organization (1985-87), Study Group on Immunology and 
        Chemotherapy of Leishmaniasis

World Health Organization, Stop TB Alliance (2001-present), Working 
        Group, TB Vaccines

World Health Organization, IVR (2001-2004), Scientific Advisory Group, 
        Vaccines

World Health Organization, Stop TB Alliance (2002-present), Working 
        Group, TB Diagnostics

World Health Organization, IVR (2002-present), Scientific Advisory 
        Group, TB Diagnostics

Ad Hoc review of grants or contracts for:

Experimental Immunology Study Group, National Cancer Institute

Immunology of Parasitic Diseases, Biodefense and Emerging Infectious 
        Diseases, National Institute of Allergy and Infectious 
        Diseases, National Institutes of Health, Bethesda, MD

National Science Foundation, Washington, DC

Medical Research Council of Canada, Ottawa, CANADA

Canadian Cystic Fibrosis Foundation, Toronto, Ontario, CANADA

Advisory Boards and Review Panels

Ad Hoc Member, Advisory Board (1993), Cytokine Division, CBRL, Federal 
        Drug Administration, Rockville, MD

Panel Member, Review Board (1996), NIAID Extramural Tuberculosis 
        Program Review: Priorities for Tuberculosis Research, National 
        Institutes of Health, Bethesda, MD

Member, Advisory Board (1997-2002), National Research Council, National 
        Academy of Sciences, Washington, DC

Panel Member, Review Board (1997), NIDR Infectious Diseases Planning 
        Workshop, National Institutes of Health, Bethesda, MD

CORPORATE BOARDS OF DIRECTORS

Director and Chair of Board (1997-present), Sequella, Inc., 9610 
        Medical Center Drive, Suite 200, Rockville, MD

Director (2001-present), Chair of Board (1999-2001), ASM Resources, 
        1335 Connecticut Avenue, Rockville, MD

Director (2001-present), TolerGenics, Inc., 9610 Medical Center Drive, 
        Suite 230, Rockville, MD

Director (2003-present), Social and Scientific Systems, 8757 Georgia 
        Avenue, 12th Floor, Silver Spring, MD

Director (2003 npresent), Women in BIO, Rockville, MD

Director and Treasurer (2003-present), Sequella Foundation, Inc., 9620 
        Medical Center Drive, Suite 220, Rockville, MD

Director and Chair of Board (1997-2003), Aeras Global TB Vaccine 
        Foundation, (AKA Sequella Global Tuberculosis Foundation, 1997-
        2003), 9610 Medical Center Drive, Suite 220, Rockville, MD

Director (2001-2002), Member, Advisory Board (1998-2000), Life Sciences 
        Research Organization, 9650 Rockville Pike, Bethesda, MD

Director, (1996), Cytokine Sciences, Inc., Denver, Colorado

CORPORATE HONORS

2002  Fast Company: Top 50 Innovators in the World (#6)

2003  Best Business Plan, VaBio Investor Conference

2005  Top 100 Women in Maryland, Daily Record

GRANT SUPPORT

Detection of Pathogens by Flow Cytometry, Small Business Technology 
        Transfer Program Phase I (STTR); $100,000 (15 Aug 94-14 Aug 
        95); PI.

Self MHC class II beta chain vaccine for diabetes, Small Business 
        Innovation Research Program, Phase I (SBIR); $100,000 (1 Sept 
        98-Mar 99), co-PI, I five percent, no salary.

Diagnostic for non-human primate tuberculosis, Small Business 
        Innovation Research Program, Phase I (SBIR); $100,000 (1 Sept 
        98-Mar 99), PI.

Lateral Flow Serologic Test for TB, SBIR grant, Phase I; $168,000 (15 
        Jul 01-14 Jan 02), PI.

Transdermal Patch for Active TB, SBIR grant, Phase I; $300,000 (15 Sep 
        01-14 Sep 02), PI.

High Throughput Screening of TB Drugs, R01 grant from the NIH, $565,000 
        (15 Sep 01-14 Sep 04), PI.

A Second-generation Patch Test for Detection of Active TB, U01 grant 
        from NIH, $1,660,000 (15 Aug 03-14 Aug 2007), PI.

Lateral Flow Serologic Test for TB, SBIR grant, Phase II; $1,600,000 
        (29 Sept 03-28 Sept 05), PI.

PATENTS

Identification of Infection by Flow Cytometry (No. 08/330,533)

Compositions and Methods for Treating Cancer and Hyperproliferative 
        Disorders (No. 5919459)

Method of diagnosis and treatment of atherosclerosis using anti-
        cholesterol antibodies (No. 96944237)

CONSULTING ARRANGEMENTS

1998-2002   Battelle Corporation, 505 King Avenue, Columbus, OH; 
(Nonspecific immunity for defense against Infectious Diseases)

1997-1999   Oncogene Sciences, Inc., 106 Charles Lindbergh Blvd., 
Uniondale, NY; (Drug development for Infectious Diseases)

1997-1998   MIMC, Inc., 1401 Rockville Pike, Rockville, MD; 
(Development of new concepts for pre-clinical CRO)

MANAGEMENT EDUCATION:

Senior Executive Service (SES) Development Program, U.S. Civil Service:
         Dec 91  Utilizing Human Resources
         Jan 92  Reviewing Implementation and Results
         May 92  Strategic Planning and Executive Leadership
         Jul 92  Administering Money and Material Resources

Other:
         Apr 93  FDA Regulatory Compliance
         Jul 04  Finance and Accounting for Non-financial Managers

COMMUNITY ACTIVITIES:

1990-1993   Coordinator, Hands-on Science After School Program, Burning 
Tree Elementary School, Bethesda, MD

1993-present   Maryland High Technology Council

PUBLICATIONS:

    135 papers published in journals and books.

RESEARCH INTERESTS:

    Immunity to infectious agents, specifically intracellular pathogens 
and agents that grow in macrophages; cytokine regulation of macrophage 
function; regulation of endogenous mechanisms for control of disease; 
tuberculosis.

    Chairman Ehlers. Thank you very much. Dr. Abramson.

   STATEMENT OF DR. FREDERIC D. ABRAMSON, PRESIDENT AND CEO, 
                       ALPHAGENICS, INC.

    Dr. Abramson. Thank you very much, Mr. Chairman. This is 
obviously an issue on which reasonable people agree to disagree 
reasonably. I am Frederic Abramson, founder and CEO of 
AlphaGenics, a small life sciences firm in Rockville.
    I founded AlphaGenics in 1999 to use genetic information to 
develop innovative products for consumers. Two products under 
development now include JeneJuice, a sports drink that is 
custom blended based on a person's genetic makeup, and SkyGene, 
a hand-held electronic device that lets people share 
information about their genes for personality and other non-
disease social information. We have also identified a new way 
in which the right mix of nutrients in a person's diet could 
prevent influenza.
    I also teach in the Master's degree program in 
biotechnology at Johns Hopkins, where I teach economics, 
finance, creating the biotechnology enterprise. My Ph.D. is in 
human genetics, from Michigan. I have a Masters of Management 
from MIT, where I was a Sloan Fellow. I also am an attorney. I 
am admitted to the patent bar and the bar of the U.S. Supreme 
Court.
    The essential point that I want to make here is that the 
small business ownership standards, as these relate to SBIR 
awards, is that no change should be made in the current 
interpretation of the law. In other words, biotech companies 
that are majority owned by VC should not be permitted to 
compete for SBIR funds. Any change that permits venture owned 
small businesses to compete for SBIR will jeopardize 
biotechnology innovation as we know it today. There are three 
central reasons why no change should be made.
    The first point is that changing the rule will open the 
door to large companies and venture capitalists who can form 
syndicates and spin off entities to do the research, funded by 
SBIR, that they normally would fund themselves. There won't be 
any meaningful way to distinguish ownership, about who is 
eligible and who isn't, so a Fortune 1000 company could be part 
of a syndicate that would own a small company and get SBIR 
funding to fund their research that they would otherwise do in-
house. More important, their vast resources which they have at 
their disposal means they can assemble the better looking teams 
to compete for SBIR in the evaluation process. They will have 
powerful academic credentials, and this actually increases 
their unfair advantage in the competitive process at NIH. If I 
were head of R&D of a Fortune 1000 company, I would take every 
research project that came to me, work to get it syndicated, 
and spin it out in one of these small businesses to get SBIR 
funding.
    Secondly, under the current rules, VCs have a choice 
between owning 49 percent or 51 percent of a business, and 
under one choice, not competing by SBIR, or the other choice, 
competing. These two percentage points is what separates 
prudence from greed. Under the current rule, the investor has a 
fair choice to make, and they can make the choice based on 
their own assessment of the risks.
    The ownership percentages also relate to valuation for the 
business. That is, what is a company worth when someone invests 
in it? There are several ways to calculate valuation, but 
fundamentally, the most powerful way valuation is determined is 
the negotiating position of the parties. If a VC owned firm can 
compete for SBIRs, the VC can drive a bargain in which they 
drive down the valuation of the small business to get a better 
deal.
    Finally, there is a practical question, and a practical 
issue. VCs today are not putting the money in early stage bio. 
They have moved downstream into later stage companies, because 
these investments are more attractive and lower risk. Many of 
the companies they invest in, as noted earlier by another 
witnesses, have already obtained SBIR funding, which gives them 
a more attractive profile for funding. VCs also are only a 
small percentage of the total bio funding. Angel investors and 
corporate investment constitute a major portion of the bio 
investment profile. Most of these deals don't have the investor 
taking control of the business. So, this is really--the current 
stand and the current rule is consistent with the longstanding 
policy that small bio companies need a chance to prove their 
value to become attractive to investors, not the other way 
around.
    So, to summarize, Mr. Chairman, there is an Olympic sized 
swimming pool of funds available from NIH and DOD that every 
company in the United States can compete for, and large 
companies can get funds to innovate in science and technology. 
And we know organizations like Harvard, Cal Tech, Yale, Boeing, 
Lockheed-Martin, and IBM all compete for these. Congress 
realized years ago that small companies need a special kind of 
pool, a wading pool, if you will, to compete in.
    And what we want here, and the VC backed firms are asking 
for, these are, you might call, young adults. They don't like 
swimming in the big pool with the big guys, because it is hard 
to swim in, so they want to get over in the baby pool with the 
little guys, to get what is there.
    It is well documented that most of America's innovation 
comes from small companies. Permitting venture backed companies 
to obtain SBIR funds will siphon off the funds that small 
companies need, and will erode America's competitive position 
in the world as we know it.
    I thank you for the opportunity to share these views, and I 
will answer any questions.
    [The prepared statement of Dr. Abramson follows:]

               Prepared Statement of Fredric D. Abramson

    My name is Dr. Fredric Abramson, founder and CEO of AlphaGenics, a 
small life science firm located in Rockville, Maryland.
    I founded AlphaGenics in 1999. AlphaGenics uses genetic information 
to develop innovative products for consumers. Two products now under 
development include JeneJuice, a sports drink that is custom blended 
based on a person's genetic makeup, and SkyGene, a hand-held electronic 
device that lets people share information about their genes for 
personality and other non-disease social information. We have also 
identified a new way in which the right mix of nutrients in a person's 
diet could prevent influenza.
    I also teach in the Master's of Biotechnology program at Johns 
Hopkins University. I teach courses in economics, finance and creating 
the biotechnology enterprise. My Ph.D. is in Human Genetics from the 
University of Michigan. I have a Master's of Management from MIT, where 
I was an Alfred P. Sloan Fellow, and I hold a law degree from American 
University. I am is admitted to the U.S. patent bar and the bar of the 
United States Supreme Court, among others.
    The essential point for the Small Business ownership standards as 
these relate to Small Business Innovative Research funds is that no 
change should be made to the current interpretation of the law. In 
other words, biotech companies that are majority owned by VCs should 
not be permitted to compete for SBIR funds. Any change that permits 
venture owned small businesses to compete for SBIR will jeopardize 
biotechnology innovation as we know it today. There are three central 
reasons why no change should be made.
    The first point is that changing the rule will open the door to 
large companies and venture capitalists spinning off and owning small 
companies to obtain SBIR funds. There is no meaningful way to 
distinguish what kind of majority ownership is not eligible. Each of 
the Fortune 1000 companies can create these eligible subsidiaries to 
cash in on the small business funding. Worse, their vast resources 
means they will be able to assemble better looking teams with powerful 
academic credentials, which will increase their unfair advantage in 
obtaining NIH funds. If I were head of R&D for a Fortune 1000 company, 
I would spin out virtually every bio project into a subsidiary to get 
SBIR funding.
    Second, under the present rule, VCs have a choice: take 49 percent 
ownership and compete for SBIR funds, or take 51 percent or more 
control and develop the company on your own. These two percentage 
points is what separates prudence from greed. Under the current rules, 
an investor has a fair choice to make. Take control of the small 
business and be excluded from SBIR competitions, or take a minority 
interest and let the small business compete with others. That's a fair 
choice.
    Related to ownership percentages is the area of valuation. That is, 
what is a company worth when someone invests in it? There are at least 
four well recognized ways to calculate valuation. But perhaps the most 
powerful is the negotiating position of the parties. If VC owned firms 
are allowed to compete for SBIR, it will mean that VCs can demand and 
get a larger percentage ownership for the same investment dollars. This 
lowers the valuation, and in effect devalues the contribution of the 
founders.
    Finally, there is the practical the issue of where VCs are putting 
their money in biotechnology. For the past few years, virtually no VC 
investment went into early or seed stage bio companies. Why? Because 
the risks are higher than investing in later stage companies. Indeed, 
many of the later stage investments became attractive BECAUSE they 
obtained SBIR funding, not the other way around. Factually, the VCs are 
only a small percentage of early and seed stage bio funding. Most of 
the early stage funding comes from angels and from corporate-strategic 
alliances. And most of these deals do not have the investor taking 
control of the small business. Again, this is consistent with the long 
standing policy of giving small bio companies a chance to prove their 
value to become attractive to investors, not the other way around.
    To summarize, there is a large Olympic-sized adult swimming pool of 
federal dollars for every company in the U.S. This pool funds 
innovations in science and technology, and organizations such as 
Harvard, Johns Hopkins, Cal Tech, Boeing, Lockheed-Martin and IBM have 
been able to develop innovations with this funding. However, Congress 
realized that the small companies, the early stage companies have 
trouble getting funding in this pool. So Congress created a wading pool 
called the SBIR program. Small companies in this pool compete against 
other small companies.
    The VC backed firms are teenagers who don't like swimming in the 
adult pool. So they want the rules changed so they can get into the 
wading pool with the little guys, who will be forced out.
    Since it is well documented that a substantial source of America's 
innovation comes from these start-up small businesses, permitting 
venture backed companies to siphon off SBIR funds will, in my opinion, 
erode America's competitive technology position in the world.
    Thank you, and I am happy to answer any questions.

                   Biography for Fredric D. Abramson
    Dr. Abramson is taking the lead in developing genetic-information 
based consumer products to improve the lives of ordinary people. He 
comes to this emerging field, which he calls Directive Genomics, with 
four decades experience in a broad variety of business, scientific and 
educational activities. These range from developing advanced computer 
software that reduced hospital-acquired infections to operations & 
marketing in the recording industry. His scientific work included 
developing a computerized tracking system to deal with Dengue Fever in 
the Caribbean, demonstrating that women can produce antibodies to 
synthetic steroids, and analyzing over half-million pregnancy outcomes 
to show that roughly 75 percent of all human pregnancies result in a 
spontaneous fetal death. He worked on federal and state policy, 
including U.S. Department of Health Education and Welfare Secretary 
Joseph Califano's national policy review of alcohol abuse programs, the 
Nuclear Regulatory Commission's measure of inspector objectivity, a 
policy analysis of future technology in emergency medical services for 
the U.S. Department of Transportation, scientific experiment selection 
for NASA's Spacelab, and Chaired the Maryland Governor's Commission on 
Workers Compensation Laws.
    His business activities include founding the Association for 
Medical Emergency Informatics, Inc. (publisher--U.S. DOT emergency 
medical services training materials), United Software Associates, Inc. 
(publishing European source computer software in the American market), 
and the Fit America Research Center (research on weight loss). His work 
experience additionally includes retail sales, wholesale distribution, 
rock and roll show promotion, manufacturing of sheepskin seat covers 
for sports cars and industrial elastomer products.
    Dr. Abramson is recognized as a gifted teacher and lecturer, and 
was named Teacher of the Year in the Johns Hopkins Master's program in 
biotechnology, where he teaches courses in the economics of 
biotechnology, creating the biotechnology enterprise, financial 
development, and legal aspects of biotechnology. He also is an adjunct 
in the Hopkins graduate program in information technology. He 
previously held full-time academic appointments at the University of 
Kentucky Medical School (Assistant Professor of Community Medicine) 
where he founded and directed the Research Design Biostatistics 
Laboratory, and the American University, Washington, D.C. (Associate 
Professor of Management) where he taught business strategy and 
organization development. He taught MBA students as an adjunct in the 
Executive Program at Loyola College in Baltimore and the Georgetown 
University School of Business.
    Dr. Abramson holds his Ph.D. in human genetics from the University 
of Michigan (1972) and a Master of Science in Management from MIT 
(1977) where he was an Alfred P. Sloan Fellow. He also received degrees 
from the University of Pennsylvania (A.B. mathematical biology, 1963), 
University of Rochester (M.S. biology, 1965), and the American 
University Washington College of Law (J.D., 1987). He is admitted to 
the bars of Maryland and the District of Columbia, and to practice 
before the United States Supreme Court and the United States Patent 
Office.

                               Discussion

    Chairman Ehlers. Thank you all very much for your comments. 
I--when I walked in, I was happy to see you all engaged in 
vigorous conversation with each other. Perhaps we should just 
appoint you to go to another corner and resolve the problem and 
come back.
    But while sitting here, I have generated a half-dozen ideas 
of my own about what we might do. I will not announce those at 
this time, but I certainly appreciate your stimulating 
testimony.
    I apologize that I have to leave for another meeting, and 
normally, I would never do that when I am chairing a committee, 
but in this case, we are trying to solve the pension problems, 
which of course, as Mr. Baird says, we will never see me again. 
But I certainly appreciate your testimony, in case I am not 
back before you leave. Thank you very, very much for coming, 
and you have made a major contribution to the discussion.
    With that, I am pleased to turn over the chair to Dr. 
Schwarz, who was a practicing physician for many years, and 
since most of you talked about life sciences, he is eminently 
suited to chair the remainder of the meeting.
    Thank you.
    Mr. Schwarz. [Presiding] The gentleman from Oregon, Mr. Wu.
    Mr. Wu. Thank you very much, Mr. Chairman.
    I was reading these summaries, and I am in the process of 
asking for the statute. Well, I have requested the statute, but 
it hasn't come yet, and it seems to me that asking some 
questions of first impression might help here, or at least 
might help me, and that is when I looked at the language of 
some of these secondary materials, this requirement about the 
recipient being a citizen or a resident, which has subsequently 
been interpreted to require a real person, other than an 
entity, that seems to be a drafting error more than anything 
else. I mean, that seems to be the kind of language that 
Congress typically inserts to say we want an American to be 
doing this, and the unintended consequence is that it has been 
interpreted to mean a natural person and exclude institutions.
    Do you all have any comments on that? Dr. Cohen.
    Dr. Ron Cohen. Thank you, Mr. Wu. I would support that 
entirely. It seems, just historically, that the intent was to 
ensure majority ownership by American entities, American 
people. With respect to venture capitalists, having dealt with 
35 venture capitalists in my company, I will tell you, I am not 
sure I understand what the argument is about, because after 
all, what is venture capital? A venture capital firm is a bunch 
of limited partners, it is a partnership, of people with high 
net worth, and also institutions, such as pension funds and 
401Ks and so on, who pool their money for the purpose of 
investing in high risk, potentially high reward endeavors. So, 
it does represent American individuals in a very real sense.
    Mr. Wu. Well, Dr. Cohen, you will forgive me if I truncate 
your answer. I take that as a yes, you agree, and thank you, 
and that others might not. I would be interested in hearing 
your perspective.
    Mr. Jonathan Cohen. I have a very different perspective, if 
I may. I can't comment on what the original intent of Congress 
was in using this----
    Mr. Wu. But that is what I am going to, what Congress 
drafted in 1982, or passed in 1982, probably drafted between, I 
don't know, '80, '82, '79, '82, however long it was worked on.
    Mr. Jonathan Cohen. I suspect they were deliberate when 
they used the term individuals, because--and I don't think this 
is splitting legal hairs. I believe there is a profound 
difference between an individual, a living, breathing person, 
and a pension fund. And let me give you, if I may, just one 
concrete example. There is an emerging trend, and I cited an 
article from Business Week, and that I entered into the record, 
a very encouraging trend in biotechnology the last few years is 
there is an increased interest on the part of angel investors, 
particularly what are called disease angels, in other words, 
people that invest in startup biotech companies, in part for 
return for investment.
    Mr. Wu. Mr. Cohen, I understand that. I understand that, 
but if that is the case, how do you account for interpretation 
between 1982 and 2003 when venture capital funds were included? 
It wasn't until 2003 that VC funds were excluded, at least that 
is my understanding.
    Mr. Jonathan Cohen. I suspect it was an oversight.
    Mr. Wu. This is a matter of statutory interpretation. There 
seems to have been a 21-year period when it was interpreted 
another way.
    Mr. Jonathan Cohen. I think it was--I suspect, and I am not 
sure, but I suspect it was an oversight, and nobody had asked 
for, perhaps no one had asked the SBA for an interpretation. 
What happens with a lot of these, when we get the grants, we 
are asked to check a box. And a lot of entrepreneurs perhaps 
check the box, and didn't consult with counsel, and perhaps 
over the years, there were recipients of SBIR that were, in 
fact, ineligible. That does not, in my view, mean that that is 
the way it should be in perpetuity. I think the program has 
grown, and also, as the amount of venture capital has gone 
down, that perhaps demands on the program have gone up, and 
this has gone to the forefront, but I suspect that the term 
``individual'' was a deliberate one, and in hindsight, it is an 
appropriate one. And a company that is individually owned is 
different than----
    Mr. Wu. My light has turned yellow here, so--and you will 
forgive me----
    Mr. Schwarz. Mr. Wu, the Chair will be happy to grant you 
the time you need to continue your questioning.
    Mr. Wu. Well, thank you very much, and Dr. Abramson, when 
you said let us stick with the original rules, I mean, the 
original rules seem to be the way that they were interpreted 
from '82 to '93. And then, there is this change from '93, I am 
sorry, 2003 to now, and so, if you are advocating for a return 
to the status quo ante, it seems like, you know, the 21 year 
interpretation seems to be a little bit more stable one.
    Dr. Abramson. I would say that there was no prior 
interpretation. I think no one interpreted it one way or the 
other. It was left open, with the assumption that somehow, 
institutional ownership was excluded. It would be obvious if 
Congress created a carve-out for small business, and the small 
business could be owned, by a majority, by an institution, a 
non-natural entity, it would, in effect, eviscerate the purpose 
of creating the carve-out.
    I would agree with Jonathan that what probably happened in 
nobody raised the question, asked the question, because up 
until, certainly from the '80s through the mid-90s, the role of 
venture capital, particularly in bio, was relatively small. I 
mean, Amgen and Genetech go back into the '80s, but we are 
talking about venture capital as a growth industry taking place 
in the '90s. It appears that somewhere along the line, someone 
said wait a minute, what is the interpretation we should be 
using? And that is where the definitive statement was made, 
well, this language would exclude the VCs. So, in our view, we 
are arguing that the prior interpretation was a non-
interpretation. When it was finally asked, the interpretation 
was natural person means natural person.
    Mr. Wu. Dr. Eskesen, it seems only fair to give you a 
chance to comment.
    Dr. Nacy. I just--a small business is a small business. I 
am 17 person business at the end of my venture financing, 
hopefully at the end of this summer, I will be a 17 person 
business. I will be a small business. The venture capital money 
will not provide for a research program in my organization. I 
am still a small business, no matter what the venture 
capitalists have invested in me, it is a small business. I am 
not sure I understand what the distinction is between venture 
capital-backed companies and non-venture capital-backed 
companies who hope to be venture capital-backed.
    Mr. Jonathan Cohen. I just want to point out that there 
seems to be an awful lot of energy and potentially acrimony 
poured into this debate, and I would encourage you all to think 
about this as the pool is big enough for everybody. I mean, in 
2003, we are looking at, my understanding is, what, $1.7 
billion, and in the current fiscal year, we are looking at $2 
billion or more, and this is up from a $44 million, some odd 
dollar figure in 1982. We are looking at a 1.2 percent split in 
1982, and a 2.5 percent split today. I mean, you know, when I 
was dealing with the technology segment of our economy, you 
know, one of the fundamentally different ways of looking at the 
world in that technology, in that business segment, was that 
you know, if you grow the pie, there is enough room for 
everybody, and I guess I find an absence of that approach, at 
least today, and I hope that it will be restored at some point, 
and Mr. Chairman, I thank you for your indulgence, and the 
little bit of extra time. Appreciate it.
    Mr. Schwarz. Very welcome. The gentleman from Washington, 
Mr. Baird.
    Mr. Baird. I thank the Chairman. I thank the witnesses, and 
my distinguished Ranking Member, as well, for his astute 
comments, insightful comments.
    This issue was brought to my attention by a company, a 
laser company in my district, BioLasers, world leaders. And the 
incredible capital it takes to do some of these things, be it 
biotech, be it lasers, be it any of the high technology, one of 
the things that has struck me is the enormous size of fiscal 
infrastructure, physical infrastructure we have to have to make 
very small things, and especially in high tech.
    I am interested in your experience, in terms of the funding 
you need, and it is relevant, because to say that we want 
innovation in high technology areas, but we are going to 
exclude venture capital, it seems to me that you significantly 
exclude some of the high capital intensive activities that we--
that may generate the very kind of innovations and create the 
jobs we hope SBIR will do. I open that up to the panelists.
    Ms. Eskesen. If I could respond, sir, to go back to the 
question that Mr. Wu posited, the----
    Mr. Baird. Now, wait a second. You are going to have to 
answer my question on my time. I mean----
    Ms. Eskesen. Well, I will, because I need to answer his in 
order to answer--I need to answer his to----
    Mr. Baird. I am just funning with you.
    Ms. Eskesen.--answer yours. The precipitating action that 
caused this interpretation to occur involved a company in Utah 
who had a $16 million investment. They were ``turned in'' by a 
competitor, who argued that they were not any longer a small 
firm because they were majority owned by a venture capital 
community, or by a venture capital fund. In fact, in this 
particular case, the venture capital investment was 90 percent 
of the company was owned for that $16 million. And the point is 
a very basic one, and it speaks directly to the issue that you 
are raising, sir.
    We are not talking at all about excluding venture capital-
funded firms. What we are talking about fundamentally is the 
value that that VC is placing on the company when they make 
that initial investment. In this particular instance, the 
person who negotiated the deal was actually very proud of 
himself.
    Mr. Baird. I am going to cut you off there. I think you 
raised a good point. My question, more broadly speaking, is a 
general question about the amount of capital that is involved, 
either for a Stage III type clinical trial, or other kinds of 
innovation, so that we get a general sense, because let us say 
we are talking 50 percent of $5 million. $5 million in this 
town isn't all that much, but if you are a business, it is a 
lot of money. But it is a hell of a lot of money when we are 
talking 50 percent of $60 million or $100 million, because some 
of the factories and plants you need to do some of this 
research are expensive, for a Stage III clinical trial.
    I am going to ask Dr. Cohen or Dr. Nacy to talk a little 
bit about the kind of capital intensive activities you are 
involved in.
    Dr. Ron Cohen. Thanks very much. It currently is estimated 
that the cost for the average drug to develop from the 
laboratory bench to the patient's bedside is on average, about 
$1 billion from beginning to end. Now, I grant you that that 
takes all comers, including the big pharmaceutical industries, 
and it includes a lot of overhead costs and so on. But even 
under the best of circumstances, within the biotech industry 
itself, it is a minimum of $300 million, $250 to $300 million, 
and often $400 or $500 million to get to the point where you 
have a success, if in fact, you ever have a success.
    Mr. Baird. So in effect, if we--to the extent that we 
reduce venture caps percentage, and mind you, in the bill we 
are talking about, no single venture cap firm could own more 
than 50 percent. A consortium could, or an amalgam could, maybe 
better put. But the point is, if you exclude venture cap, where 
do you get the rest of the money to do this kind of operation? 
Are you not, de facto, excluding certain areas of technology or 
certain kinds of research if you say that venture cap can't be 
more than 50 percent, because where else do you get that kind 
of money?
    Dr. Nacy. That is--may I speak to that?
    Mr. Baird. Please.
    Dr. Nacy. I just want to ask anybody who is sitting on the 
committee whether they would want to give Carol Nacy and 
Sequella $30 million and not have any control over the way I 
use my money. In the SBIR program, we are controlled over how 
we use our money. We apply--we have to meet certain milestones, 
and it has to be on the product that we applied for. Venture 
capital has the same requirements, and they want to make sure 
if they put $30 million into my company that I am using that 
$30 million the way they like it, and it is in clinical trials, 
and in late stage product research. It is not in the early, 
innovative stages of a high risk venture that one in 5,000 
might end up at registration.
    So, when we talk about 51 percent control, 51 percent 
control is simply to make sure that their money is used by my 
company in an appropriate way. They don't have control of the 
company, necessarily. They have control of the stock, and they 
can vote at the stockholder's meeting. But the way we structure 
our boards, we have control of our companies. They have a lot 
of say in the company, because they have one or two or three 
board members of a total, but they don't have the majority 
board members.
    Mr. Baird. That is a helpful way----
    Dr. Nacy. So they have control of the company, and--but 
they want to control the money, so their shareholder ownership 
is in a majority ownership, so that if we should make a very 
bad decision on how to use their money, they can reverse that 
at the shareholder meeting.
    Mr. Baird. Dr.--Mr. Cohen or Dr. Abramson, what is wrong 
with my reasoning?
    Dr. Abramson. The issue is not whether there is valuable 
research being done by the companies that are here, or other 
companies in biotech, or that they shouldn't be funded. 
Certainly, there is a phenomenal amount of ongoing research 
that has potentially incredible benefits coming out of the 
pipeline.
    The issue here is where the starting point is for 
innovation, and how do we support that. In the technology 
incubator that I am located in, and----
    Mr. Baird. Let me--but my question is, let us suppose you 
are in an industry where--but the nature of the industry is 
hugely capital-intensive, and so you cannot do the innovation 
in that industry without the capital for the machinery. I mean, 
just get a chip----
    Dr. Abramson. It is not a question of doing innovation. It 
is a question of commercializing innovation. The innovation of 
discovering a drug takes place in the early stage. The Phase 
II, Phase III clinical trials are devoted to validating and 
ensuring that the drug is safe and effective, and can be used 
by the public. The innovation has already taken place in the 
discovery and research stage.
    So, the purpose of SBIR is to stimulate the very early 
stage, when the idea is generated in the scientist's mind, and 
needs to get to the bench to be proven. Now, in the incubator 
we are located in, there are about 20 bio companies. Only about 
a third of them are able to successfully compete for SBIR 
money. That means two thirds are not. Now, either the two 
thirds of those scientists are just cosmically stupid, and 
investing their time on things that are bad ideas, or the pool 
of money that Mr. Wu talked about isn't large enough to sustain 
that level of innovation. So, people working on eye research or 
cancer research or other areas that may be innovative, but 
can't be funded today, with the existing pool, would have a 
greater difficulty in getting funded. Now, once an SBIR takes 
place, and I have proven my idea, and I have proven the basic 
science, and I go to Phase II, and I get some ability to take 
it to the next level, at that point, it is incumbent on me to 
go out to the community, the funding community, which includes 
VCs, other corporations, whatever, to raise the funds necessary 
to take it to market.
    Human Genome Sciences, the very famous company in our area, 
is now taking the drugs it is developing and teaming with large 
pharma companies to take it to market. Human Genome Sciences 
raised $2 billion. I would love to have $2 billion to work 
with. But the fact is, you are absolutely right----
    Mr. Baird. But they are now, presumably if they raised it 
through venture cap, they are ineligible for SBIR.
    Dr. Abramson. Well, they raised it publicly, in a public 
market. They have gotten products to a point where they can 
start testing in Phase III, but in order to lay off their risk, 
because these are substantial risks, no question about it, they 
are teaming with larger, even larger companies----
    Mr. Baird. Why is a public offering more sacrosanct than 
venture cap?
    Dr. Abramson. I am not sure it is.
    Dr. Nacy. It is a series staged way of funding your 
company.
    Mr. Baird. Yeah. That is what I understand. My question is 
if our goal--look, my goal is to innovate, create jobs, and 
inspire competition. And that is my focus, and to the extent 
that we nitpick on some of the other elements, I think we have 
lost focus. Dr.--or Mr. Cohen, I wanted to ask you.
    Mr. Jonathan Cohen. Yeah, and I share those goals. But I do 
not believe the pool is currently big enough. The pay lines 
have gone up, the bar has been raised. The last few years, and 
last year, particularly, it has been harder to get SBIR 
funding, and Frederic and I are in the same facility. I have 
seen over the last few years a lot of companies, a lot of good 
companies, go under. And that pool is going to get an awful lot 
smaller if H.R. 2943 is passed as written, because by my back 
of the envelope calculations, about 80 to 90 percent of the 
biotech industry would be eligible for this slender 2.5 percent 
of the pie.
    It will hurt innovation, in my view.
    Mr. Baird. Thank you. I had further questions, but I will 
yield back.
    Mr. Schwarz. Thank you, Mr. Baird. Mr. Miller, the 
gentleman from North Carolina.
    Mr. Miller. Thank you. I am reminded of the old line about 
university faculty politics, that the reason faculty politics 
are so bitter is that the stakes are so small. It does seem 
that the reason that this debate is so vigorous, I won't say 
bitter, is because we are doing so little to help companies 
through the valley of death, to help that very expensive, high 
risk effort to get ideas from research all the way into the 
marketplace.
    Mr. Cohen, Jonathan Cohen, made that point in his 
testimony, and pointed to a couple of models, ATPR being one of 
them, excuse me, ATP being one of them, which is a source of 
patient capital. What do you all think, do you all think we are 
doing enough, and what else can we do to try to get research-
based products into the marketplace through this very tortured 
process, tortured and expensive?
    Dr. Abramson. If I may comment, I think two--several 
things. One, for example, the ATP program. Congress has 
repeatedly unfunded--I think it is funded this year only for 
ongoing programs. There is no new money. So, Congress can 
stimulate this innovation in these high risk areas by funding 
things like ATP. That would be one thing.
    Another is, and Dr. Nacy is correct, in part, that the 
culture of NIH is very academic oriented, and not oriented 
towards transferring the benefits of research into the 
mainstream, and delivering it. And so, to the extent Congress 
can help shape the NIH culture to allow companies like Sequella 
to compete for the 97.5 percent of the funds with Yale and 
Harvard and Hopkins, so that they can take these products into 
the marketplace, that would be invaluable.
    Mr. Miller. I am sorry. Say that again.
    Dr. Abramson. The companies represented here, for example, 
should be able to compete at NIH for funding to get their 
products through Phase I, Phase II, and Phase III clinical 
trials, which are very expensive. Jonathan mentioned a program, 
of a shared program to lower the risk, lower the costs. More 
work needs to be done to get the funds necessary. It is really 
unfair for a company the size of Dr. Nacy's to have to try to 
figure out how to raise $100 million to deliver something with 
the value of the solution she is working on.
    This is precisely the role of where the Federal Government 
and its resources can make selective choices to help us all.
    Dr. Ron Cohen. I am going to differ, and say that it is 
absolutely right and proper that Dr. Nacy's company or mine, or 
any of ours, be compelled to compete for the funding we get, 
based on the merits of what we have to offer to society. That 
is the system I grew up with, and I love that system. And I am 
willing to throw in my lot with that system.
    As to your question about are we doing enough, I can't 
answer that, because really, at the bottom, it seems to me it 
is a question of what is society interested in investing for 
its future well-being. So, how much does our society want to 
invest, and I draw a distinction between invest and handouts or 
charity. Because in a real sense, I think the SBIR has been one 
of the most successful of our government's programs precisely 
because it is an investment based on competitive grant reviews 
by some of the leading scientific minds in the world of the 
various grants that come in. And those grants that get funded 
have passed through that gauntlet successfully, and have been 
deemed meritorious, and one sees the results.
    Ms. Eskesen quoted some figures earlier, where companies 
that have gotten SBIR grants have gotten venture capital 
investment at 10 to one ratio. Well, that alone tells you that 
this has been successful, because of all the jobs that are 
created, the technology that has been advanced, and generally, 
the contribution to the commonwealth. So, I don't know if we 
are doing enough or not. I don't know what that magic number 
is, but I will tell you that I am well satisfied with the way 
the SBIR program is administered.
    Could we use more funding? Sure. If you ask me as an 
entrepreneur, I will always say sure, we would love to have a 
bigger pool, and to promote more innovation. But at some point, 
you do wind up with a lowering of the overall quality, right, 
so the more competitive the grant process, the higher the 
quality of what you get out.
    Mr. Miller. There are several kind of fingers raised to 
speak, but Dr. Cohen, I don't think anyone is suggesting, I am 
certainly not suggesting, that we set aside a substantial 
amount of money, simply ring a dinner bell, and say who wants 
some money, we got some.
    Dr. Nacy. But if you did that, we would be there.
    Mr. Miller. Everyone here would be--everyone in the room 
would be, yes. And everyone in America. Yes.
    Ms. Eskesen. In my written testimony, I made the point that 
there is a profile that a company has to present in order to be 
of interest to a venture capitalist, and that profile is a 
large market potential, and the significant likelihood within a 
relatively short time framework of a liquidity event, an IPO or 
an M&A. I think you have to recognize there is a big percentage 
of SBIR involved companies who will never be eligible for 
venture capital, because they don't fit that profile.
    And a major concern to me, that is really rolled into this 
VC issue, is that we have a serious deficit of the availability 
of transitional funding for the development of technology. We 
have very effectively, through the extreme competitiveness of 
SBIR, created the funding for the research and for the 
development. We have not created that second D, which is the 
demonstration of the technology, which is often necessary for 
it subsequently, then, to make it to commercial condition.
    For those companies that have VC eligibility, they are 
often able to use part of that money to transition. But even if 
we resolve this divisive issue, we are still left with the very 
basic problem of where does the capital come from that will 
enable the companies who are not VC eligible, and it is a lot 
of firms. Our estimates are that we are looking at--we have 
47,000 issued patents in the SBIR community. If you look at 
that that have some potential market, could be being used, our 
estimates are that it is worth somewhere $50 and $60 billion, 
but the vast majority of it at this point is sitting on the 
shelves, because the resources that are required to transition 
that technology are not there. The problem is far more 
fundamental, it seems to me, than just the availability of 
venture capital.
    Mr. Miller. If the Chair is being reasonably forgiving----
    Mr. Schwarz. The Chair is being more than reasonably 
forgiving, so please continue, Mr. Miller.
    Mr. Miller. Mr. Cohen, I think you had your----
    Mr. Jonathan Cohen. Thank you, and Representative Miller, I 
think you have really put your finger on the core issue here. 
We in the biotech sphere are clearly not doing enough.
    We are not doing enough, because we are not making 
sufficient progress in the war on cancer. We are not developing 
countermeasures to bioterrorism fast enough, and I believe if 
there is one message that I am hearing from this testimony 
today, and from this panel, is that there is a need for 
something new.
    We need a new program, particularly at the NIH, although it 
could cross into other agencies, such as NIST, to fund high 
risk, high impact technology development, not basic research, 
but technology development, that companies of all shapes and 
sizes, and universities, and federal agencies, for that matter, 
can compete for, that can help us move research to patients, 
and put products into the strategic national stockpile.
    I have been giving this quite a bit of thought, and I would 
be happy to reconvene with you or your staff, but I do think 
ATP is a very good starting point. And I regret that the 
program is not entirely popular with all of the Members of 
Congress. I think that is regrettable, but what is important, I 
think, about that program, and where it differs from SBIR is it 
contemplates companies of different sizes, and it has different 
levels of matching funds. So, it may very well be that a large 
company or a medium sized company should get federal support, 
but we might ask, in that case, for example, some level of 
match from their investors. That--this goes, perhaps, beyond 
the scope of the hearing today, but I would strongly encourage 
this committee and this Congress to continue to look at that 
issue, because from my perspective, the stakes couldn't be 
higher.
    Mr. Miller. Go ahead, sir.
    Dr. Ron Cohen. You know, this is, perhaps a happy 
milestone, because I find that Mr. Cohen and I are in complete 
agreement on this point.
    I would like to just amend my earlier response, and say 
that while I cannot comment, myself, on what is the appropriate 
level of investment, certainly some sort of panel or study 
might be convened to look at that question, but I will say that 
in fact, currently 97.5 percent of the NIH budget is allocated 
for what is called hypothesis-driven research, very important, 
basic, discovery research. 2.5 percent is allocated for applied 
research or practical drug development, or other technology 
development from that research.
    It is an interesting question as to whether that is the 
right ratio there, and it is an interesting question that Mr. 
Cohen raises as to whether there is a series of funding 
vehicles that one could create to invest at different stages of 
development. So SBIR for proof-of-principle, let us say an ATP-
like program, which we did get one ATP grant, so I am well 
familiar with it, to get it the next step of the way.
    Mr. Miller. Chairman, just one more.
    Mr. Schwarz. Okay.
    Mr. Miller. Given the chair's extreme indulgence. Early on, 
I am in my second term now, but early on, I met with folks from 
Duke University, which I think is some measure of what I am 
willing to do to serve in Congress, and they said that they 
were--the sacrifices that I am willing to make. They said that 
Bayh-Dole worked great. Bayh-Dole worked great. They had lots 
of patent lawyers on staff. They immediately got patent 
protection for any ideas coming out of their research. They had 
the pipeline established. They could get products to what you 
call the liquidity event. And it was working great, and the 
profits that came from those products that had made their way 
to the marketplace was going back to fund that whole stream, 
that whole pipeline.
    I then talked to folks from smaller universities, less well 
endowed universities. North Carolina A&T, an historically black 
college or university in Greensboro, but also, a research 
university. University of North Carolina, Greensboro, much less 
well endowed than Duke University, but also, a research 
university. They said yeah, Bayh-Dole is working great for 
Duke. It is not working for us at all. We can't get products 
from research to a liquidity event. We can't--we don't have the 
funds to establish the pipeline.
    Is that your own experience as well, particularly for 
smaller--Dr. Abramson, I think you distinguished Harvard from--
or some other similar university from other universities doing 
research. Any thoughts on that topic, Dr. Nacy?
    Dr. Nacy. I think it is very difficult to educate 
scientists as to what is a product and what isn't a product, 
and I am 30 years into my scientific career. I am an actual 
scientist who went into business 12 years ago. It is hard. 
Smaller universities do have a difficult time getting 
reasonable patents written, and supporting those patents until 
somebody comes along and says yes, we can commercialize this. 
And even if they say yes, it is usually a startup company like 
mine, in which I like to have all my technologies come in with 
no costs to me, because I have no money to pay for them. So, I 
can put everything that I have in the way of money into their 
development.
    Universities need some upfront payments, and this is--it is 
a very cumbersome system that we have in the United States 
right now. I, for 18 years, was at Walter Reed Army Institute 
of Research. I hated the Bayh-Dole Act when I was there. It 
created problems with collaborations with the NIH and with 
other people.
    I am now on the other side of the story. I love it in one 
sense, and I am frustrated by it in another, because I think 
young universities or small universities, whether they are 
research or not, are never going to have the right kind of 
resources to provide the right kind of advice to their 
scientists and their patent attorneys to actually get 
commercialized product.
    By the way, may I just mention one more thing. Not all 
science is good, and not all scientists are good.
    Mr. Miller. All right.
    Dr. Nacy. And so, not all science should be funded, and 
that is why the competitive process is really so important.
    Mr. Miller. And we are getting back to the dinner bell 
issue again. I don't think anyone wants to suggest that we have 
someone ring a dinner bell and say, who wants money, we got 
some. That they are--of course, there should be standards, and 
they should be rigorous. But there were----
    Mr. Schwarz. Go ahead.
    Mr. Miller. There were other hands. I just wanted to see if 
anybody else wanted to address that.
    Dr. Ron Cohen. Yeah, just to amplify, indeed, smaller 
universities have, almost by definition, less research going 
on, are less likely to come up with the sort of research that 
would come out of a Harvard or a Stanford or a Duke, which is 
not to say that they won't come up with meritorious research. 
It is a matter of just size and volume. But it is the case that 
when their scientists do come up with something meritorious, 
their infrastructure is not equipped, as Duke or Harvard would 
be, to take advantage of it. And what does that mean? That 
means having the technology transfer infrastructure with 
appropriate business and legal people, first of all, to patent 
the discoveries in a timely way. So, you need to have that 
knowledge and those people, and the money to do it, and then, 
to have the connections with the venture capital and other 
funding communities and entrepreneurs to be able to go and 
license that technology to them, so that they can go and 
develop it. That is where those universities have difficulty, 
because they just don't have the funds and the infrastructure 
to take full advantage of the discoveries that come out of 
their labs, even when they do come out of their labs.
    Dr. Abramson. Congressman, if I may add, I speak to the 
economic development people around the country on a regular 
basis, and there is an interesting thing happening right now, 
particularly in the bio field. Regions of the country are 
becoming aware of the need to build their own ability to 
commercialize biotechnology. At the BIO meeting in 
Philadelphia, I actually talked with people from North Carolina 
who talked about Research Triangle, but then talked about areas 
outside of the Research Triangle that are working to develop 
their own infrastructure to attract technology, but also, to 
commercialize what is being done at other universities.
    So, I would have to say that what--the points here are 
correct, but what is happening is that around the country, 
people are aware, more and more, that they have to begin 
developing this. And one of the things they do, interestingly 
enough, is they put on small, local conferences for these local 
companies from, say, Carolina A&T, to get SBIR funding. And 
they do it, because these companies that they are talking to 
are early stage startups without many resources, coming out of 
a small university, not a whole lot of local capital, maybe 
some angel money. And they are talking to the--helping them to 
compete with the larger, more established players. So, in fact, 
this is happening, and I would go back to my original point.
    Having the rule to allow the larger companies come in would 
make it more difficult for these smaller areas to actually 
develop their infrastructure at all.
    Mr. Miller. Mr. Chair, I am going to ask that you proceed--
--
    Mr. Schwarz.--Mr. Wu, who I believe is going to yield to 
the gentleman from Washington, Mr. Baird.
    Mr. Wu. Yes. It is my intention to yield the majority of my 
time to Mr. Baird, but first, I just wanted to--we have a key 
triangulation on at least one issue, that Dr. Cohen, Mr. Cohen, 
and I all believe in the concept of leverage, and that the more 
leverage we get, the better off we are. I am glad we are making 
steps forward in this. But it is good that we have achieved 
this. I am still somewhat concerned about what statutory basis 
the Small Business Administration had in its interpretation, 
and this is something that I intend to take up with counsel 
from the Small Business Administration, and see what kind of 
statutory basis they did have, and what the language, precise 
language was, that--which was used in 1982. I have been 
perusing the statute, and thus far, have found little statutory 
basis for their interpretation, but I remain educable.
    And forgive me for being hung up on such small things, but 
something else I heard during the course of testimony is the 
repeated referral to award sums in the range of $1.5 to $2 
million, and it is my read of the statute that it says $100,000 
in Phase I, and $750,000 in Phase II. Do you all know how NIH 
is achieving a larger number, when the statute, at least on its 
face, seems to state something different?
    Dr. Nacy. I don't know how they are doing it, but I am very 
grateful that they are, because you can get almost nothing done 
for $100,000 in biotech----
    Mr. Wu. I understand. We are talking about small sums of 
money----
    Dr. Nacy. Don't change that part.
    Mr. Jonathan Cohen. The $100,000 is for--up for Phase I, 
and that does seem to obtain, in my company's experience. Phase 
II, there are some grants that are in the $700,000, $750,000 
range, but clearly, there are some that are between $1 and $2 
million. I don't know what they do that with the statute. I am 
not an expert----
    Mr. Wu. Well, I am all in favor in flexibility in 
interpretation, and achieving what innovation needs, but we 
need some level of statutory compliance, and sometimes 
returning to the statute and revising it may be necessary. I am 
just concerned that we live in an era when our Attorney 
General, when he was counsel to the President, apparently wrote 
a memo that the President doesn't need to follow the statutes 
of the United States, but I am getting further afield, and I am 
going to yield the balance of my time to Mr. Baird.
    Mr. Schwarz. Mr. Baird.
    Mr. Baird. Thank you. I thank the Chair.
    Mr. Schwarz. I am a little disappointed that I am not 
hearing more about Michigan and OU and UW and University of 
North Carolina here, but I note that Dr. Abramson is a 
University of Michigan graduate, as am I. So, we are not too 
bad out there, are we?
    Dr. Abramson. No.
    Mr. Schwarz. In fact, quite good.
    Dr. Abramson. Quite good.
    Mr. Schwarz. Mr. Baird.
    Mr. Baird. I thank the Chair. If I were to look at this 
issue more broadly, my concerns are sort of in three parts. One 
is the issue before us today, and I think it is appropriate 
that we focus on that. That has to do, within my judgment, the 
need to expand, or actually not expand, maybe return to the 
eligibility of VC based firms to compete with SBIR. The other 
two sides are the needs that you have just articulated. We 
have, in fact, with legislative staff here, have been working 
for the better part of a year now on essentially establishing a 
Phase III element of the SBIR program that would address some 
of these very concerns. Perhaps additional funding or 
additional percentage, et cetera, but I think it is a point 
well taken. So, on the one hand, I think we need to, in my 
judgment, assure that venture cap firms have access to this.
    Second, I think we need to expand and create, possibly, 
this Phase III element to actually get products to market. The 
other side to the coin, and I would like some commentary on 
that, there are also concerns, and I know Mr. Gutknecht and I 
have discussed this. I can't speak for him, but I know we have 
discussed the issue, and you hear it out there, that there are 
companies that exist, basically on repetitive SBIR granting, 
and that the actuality that they ever bring something of use to 
our society to the fore, other than maybe employing a few 
people for the short-term until their next SBIR grant is 
funded, that is out there, and I think it is a valid concern, 
and I wonder if people could comment on that. Given that we 
have a finite pool, making sure that people who are going to 
compete for that pool actually do something worthwhile for 
society.
    Dr. Nacy.
    Dr. Nacy. In the NIH program, which is where the biotech 
companies generally look for their SBIR funds, if you have had 
a number of Phase I and Phase II programs, you are not eligible 
for any additional SBIR grants, unless you have commercialized 
at least one product in the process.
    And now, I am not sure that they tell you how many grants 
you can get before you commercialize something, but they are 
now asking in Phase II grants for a commercialization scheme 
and a funding scheme that is associated with commercialization, 
to ensure that we are compliant with that part of the 
regulation.
    Mr. Baird. And part of the reason I--earlier, it was 
mentioned that it is getting harder to get SBIR funding. My 
take on that is probably that is good, given these concerns I 
have heard.
    Dr. Abramson. And there are really two other issues here, 
which really are related to the issue before the committee. 
Scientists, by their nature, aren't trained to be 
businesspeople, and programs like MIT and Hopkins and so on, 
are working to transition the scientist to a more businesslike 
mentality. So, many of the people who receive SBIR awards just 
don't have the acumen and the knowledgebase to actually take it 
through the steps of commercialization. So----
    Mr. Baird. I think that is a good point, but I certainly 
hear of people who have the acumen and knowledge to get SBIR 
funds, but don't actually have any intent but to chase SBIR 
funds repeatedly.
    Dr. Abramson. Well, that is the other side--the other 
flipside. There is also, obviously, there are what you might 
call boutique kind of firms, and they live off the SBIR 
funding. But there is another element, which is also on the NIH 
side. The bulk of the NIH review still takes place with 
scientists who are allied with academics or NIH. They 
themselves have very little experience in commercialization, so 
there is a skewness in terms of what really is commercializable 
or not.
    Mr. Baird. A good point.
    Dr. Abramson. So, we end up with kind of a trap here.
    Mr. Baird. Other comments on that?
    Mr. Jonathan Cohen. I would just like to reiterate 
Frederic's point. I think, as part of looking at this whole 
process holistically, we really do need to look at the NIH 
process, the review process. And I do think that may, in part, 
contribute to what some perceive as a poor commercialization 
rate on the part of companies.
    We also have some funding from DOD, although it is not SBIR 
funding. It is biodefense funding, and it is striking to me the 
difference between the DOD and NIH. The DOD process was a very 
rigorous, probably a more competitive process, because we were 
competing against the Lockheed-Martins of the world, and 
academia, and so forth. So, it was a rigorous process, but it 
was structured in a way, and the way they are managing that, we 
have monthly reports, we have quarterly meetings. They want a 
deliverable. They are managing taxpayers' money toward a 
deliverable, and I think what the NIH did with the program, at 
least from my observation, is they basically said--they took 
the same machinery that they used to review academic grants--
which may be appropriate, I am not qualified to say--and 
applied it to businesses. And it is a square peg in a round 
hole.
    So, I think we need to take a fresh look at that review 
process to see if, in fact, it can be improved.
    Mr. Baird. I have heard very similar things from folks, 
that there is a much different level of oversight or 
management, depending on which entity is providing the SBIR 
funding. Other final comments before I yield back?
    Dr. Ron Cohen. I would--I have heard of companies of the 
sort you describe, sort of chasing SBIR grants, but I don't 
have the facts and figures. It would be interesting to see if 
it is anything more than a very, very tiny minority of 
recipients, which is what I suspect it would be, and it is an 
issue, and should be addressed, probably, separately. But 
overall, it occurs to me, listening here, that one of the 
things that was very impressive to me and my colleagues in the 
ATP grant process, and I realize it has been in and out of 
favor, but this is an element that was really quite compelling, 
was that in a 40-page grant, about 20 pages were the science 
and the technology, and how we were going to develop, and the 
other 20 pages were a business plan. And when the grants were 
reviewed, these are, you know, $2 million or up, they had 
people with industry experience actually passing judgment on 
the business plan side as much as the technology people were 
passing judgment on the technology side. So, when you got the 
grant, what that said was, we deem this to be not only 
scientifically exciting and technologically exciting, but also, 
that your team and your plan are sufficiently realistic that 
you might actually get this to market and prosper. Something 
that may be worth considering.
    Mr. Baird. I know others want to comment, but in deference 
to my chair, I will yield back, unless he wants to allow that.
    Mr. Schwarz. Why don't you, Mr. Baird, go ahead and finish, 
and we will bring it to a close when you finish your 
questioning.
    Dr. Nacy. I just want to say, just from the NIH 
perspective, that the list of reviewers from my previous grants 
in the last two years have changed dramatically. We now have a 
lot of people from industry on those committees reviewing the 
grants. So, I think the NIH recognized that they were getting a 
lot of academic----
    Mr. Baird. So, there has been evolution in that.
    Dr. Nacy. There is--it is an evolving process, and now, I 
would say about 80 percent of the people are from industry, and 
it is improving the comments that we get back as part of the 
review.
    Mr. Baird. Ms. Eskesen.
    Ms. Eskesen. I have been involved in SBIR for a long time, 
and this issue of the proposal mills is a myth and a fiction 
that has absolutely no basis in fact, and really, it 
realistically should be allowed to die.
    Mr. Baird. Well, I would tell you that people--I would 
dispute that vigorously. I am familiar with people who have 
left SBIR mills to found valid, successful companies, and I 
have 100 percent confidence in the veracity of their personal 
statements and personal experience. So, it may not be as 
rampant as some may assert, but I have personal knowledge of 
people who have worked in those kind of settings that have 
received repeated SBIR funds, and have never produced anything 
of substance, of use to the public. So, with that, I will yield 
back the balance of my time.
    Mr. Schwarz. Thank you very much, Mr. Baird, and thank you, 
I want to thank the panel for being here. I do not have any 
questions, but I am very interested in, for instance, what you 
might be doing, Ms. Eskesen, with Microbacteria tuberculosis, 
simply because I lived for five years, I am sorry. You are not 
doing anything----
    Ms. Eskesen. I am----
    Mr. Schwarz. Yeah. Yeah--not to your knowledge. But I am 
very interested in that, having lived in an endemic 
tuberculosis area for five years in Southeast Asia, and with a 
tubercular positive rate of probably about 70 percent, where I 
was, in any event. And also, very interested in what Dr. Cohen 
is doing with spinal cord and--I will ask you a couple of 
questions about embryonic stem cells, perhaps, when we are done 
here today, having been a very strong supporter of the 
embryonic stem cell bill, which just passed the House and is 
now in the Senate, and being a physician of now 41 years 
duration myself.
    So I thank all of you for being here, and before we bring 
the hearing to a close, I want to thank our panelists for 
testifying before the Subcommittee. It has been a great 
hearing. The witnesses have given the Committee a great deal to 
consider.
    If there is no objection, the record will remain open for 
additional statements from Members, and for answers to any 
follow-up questions the Subcommittee may ask the panelists. 
Without objection, so ordered.
    The hearing is now adjourned.
    [Whereupon, at 4:40 p.m., the Subcommittee was adjourned.]
                              Appendix 1:

                              ----------                              


                   Answers to Post-Hearing Questions




                   Answers to Post-Hearing Questions
Submitted to Ann Eskesen, President, Innovation Development Institute, 
        Swampscott, Massachusetts

    These questions were submitted to the witness, but were not 
responded to by the time of publication.

Q1.  If a firm is more than 51 percent owned by one or more venture or 
institutional investors, would you consider your business to be 
controlled by these investors?

Q2.  Aside from the issue today, what other recommendations would you 
make on how the SBIR program could be improved? For example are the 
Phase I and Phase II award levels sufficient? Also what are your 
thoughts on Phase III funding?

Q3.  What is your assessment of how NIH is managing its SBIR program? 
What could NIH do better?

Q4.  You have heard the arguments made by Dr. Nacy and Dr. Cohen on why 
their company should be able to compete for SBIR awards. Why do you 
think they should not be able to compete for SBIR awards?

Q5.  What is your opinion of the Advanced Technology Program (ATP)?
                   Answers to Post-Hearing Questions
Submitted to Ron Cohen, President and CEO, Acorda Therapeutics, Inc.

    These questions were submitted to the witness, but were not 
responded to by the time of publication.

Q1.  As a small business with less than 500 employees, or in your case 
less than 100 employees, if you raise a round of venture financing 
would you say that all of your fund-raising needs have been satisfied? 
Are you able to pursue all of the projects and business leads you would 
like to pursue with this venture financing?

Q2.  Given the 10 to 15 years of work and hundreds of millions of 
dollars it takes to complete testing and gain approval of a 
biotechnology therapy, venture capital investment is often a necessity 
for many biotechnology companies. If biotechnology companies receive 
venture capital for their research and development, why is it necessary 
for these companies to also receive SBIR grants?

Q3.  If a firm is more than 51 percent owned by one or more venture or 
institutional investors, would you consider your business to be 
controlled by these investors?

Q4.  The SBA recently issued a Final Rule (69 Fed. Reg. 70180) that 
amended SBIR eligibility requirements to allow grant awardees to be 51 
percent owned and controlled by another business, as long as the other 
business is itself at least 51 percent owned and controlled by one or 
more individuals who are citizens of, or permanent resident aliens in, 
the United States. Does this Final Rule solve the eligibility concerns 
by VCC-backed biotechnology companies?

Q5.  The Small Business Administration (SBA) has been holding a series 
of Public Hearings across the country to address two topics: (1) the 
restructuring of small business size standards; and (2) the possible 
participation of small businesses majority-owned by venture capital 
companies in the SBIR program. These hearings follow the SBA's 
announcement that they are considering whether an exclusion from 
affiliation rules for venture capital companies (VCCs) should be 
provided in size determinations for eligibility in the SBIR program. 
Would this exclusion solve the eligibility concerns by VCC-backed 
biotechnology companies?

Q6.  Aside from the issue today, what other recommendations would you 
make on how the SBIR program could be improved? For example are the 
Phase I and Phase II award levels sufficient? Also what are your 
thoughts on Phase III funding?

Q7.  What is your assessment of how NIH is managing its SBIR program? 
What could NIH do better?

Q8.  What is your response to those who say that changing the current 
venture capital participation rules would fundamentally change the 
structure of the SBIR program?

Q9.  What is your opinion of the Advanced Technology Program (ATP)?
                   Answers to Post-Hearing Questions
Responses by Jonathan Cohen, President and CEO, 20/20 Gene Systems, 
        Inc.

Q1.  If a firm is more that 51 percent owned by one or more venture or 
institutional investors, would you consider your business to be 
controlled by these investors?

A1. Yes. The owners of a company have ultimate control of that company 
even if they choose to delegate some or all of that control to a hired 
CEO and management team. Based on my experience VCs and other 
institutional shareholders usually delegate day-to-day operations of 
the firm to the management team. However, if the company fails to meet 
the expectations of the owners, or the management team does not have 
the full confidence of the owners, either the CEO is replaced or the 
owners will begin to micro-manage some or all of the company 
operations.
    In business controlling the majority of stock is equivalent to 
controlling the operations of the company. I base this opinion on my 
experience as in-house counsel for two biotechnology companies that 
were owned and controlled by institutional investors. This is so even 
in the case of syndicate investing by multiple VCs wherein no one VC 
owns a majority of stock but they do so collectively. In such cases one 
or more ``lead'' investors act on behalf of the syndicate.

Q2.  Aside from the issue today, what other recommendations would you 
make on how the SBIR program can be improved? For example are the Phase 
I and Phase II award levels sufficient? Also what are your thoughts on 
Phase III funding?

     What is your assessment of how the NIH is managing its SBIR 
program? What could NIH do better?

A2. The NIH SBIR program is a critically important program but one in 
significant need of improvement. Weaknesses of the program may be 
summarized as follows:

          Favors low-risk, incremental research rather than 
        highly innovative technology development that is a core 
        competency of small tech companies.

          Relies almost entirely on university professors for 
        review and scoring of grant applications. Typically these 
        reviewers lack product or technology development expertise.

          Gives too much weight to ``grantsmanship'' and 
        extensive preliminary data. Gives too little weight to the 
        innovation of the technology or the medical significance 
        thereof, or the track record of the management team in bringing 
        products to market.

          The NIH mistakenly treats the 2.5 percent SBIR set-
        aside as a ceiling rather than a floor. Even institutes that 
        rely heavily on small companies to advance their mission (e.g., 
        the new Bioengineering Institute which receives 30 percent of 
        its grant applications from small businesses) limit their SBIR 
        pool to 2.5 percent.

          STTR set aside of 0.3 percent is much too small due 
        powerful potential synergies between small companies and 
        nonprofit medical centers with access to patients and patient 
        samples.

          Since NIH staff do not normally participate in the 
        application review there is no mechanism to obtain reliable 
        feedback on the likelihood of success before significant 
        resources are invested in the application process.

          Phase I funding ($100,000) is too small for most 
        biotech projects.

          Gap between Phase I and II can last years.

    To remedy these shortcomings and improve the NIH SBIR program I 
would offer the following recommendations:

        1.  Design and implement an NIH SBIR application and review 
        system geared specifically for small businesses rather than 
        universities. Retain program managers with product/technology 
        development expertise and empower them to help guide funding 
        determinations and manage ongoing projects.

    The NIH SBIR program utilizes the same review committees that are 
used for evaluating academic research programs. These reviewers tend to 
place undue weight on good grant writing and preliminary data rather 
than the significance of the technology and the applicant's ability to 
bring needed products to market. The Department of Defense SBIR program 
and the ATP program have review processes more appropriately geared to 
commercialization that should become models for the NIH SBIR program.
    One odd feature of the NIH SBIR program is the ``Chinese wall'' 
between grant reviewers and program managers. This system presumably is 
designed to protect university grant applicants but has no value in the 
SBIR program. In the Army SBIR program, for example, funding decisions 
are typically made by Program Managers in consultation with two subject 
matter experts, one inside the government the other outside. This 
arrangement permits SBIR applicants to get useful feedback from the 
funding agency on prospective applications before investing significant 
recourses in the application process.

        2.  Increase the NIH set-aside for SBIR and STTR

    The SBIR statute requires applicable federal agencies to expend not 
less than 2.5 percent of their R&D budgets with small business 
concerns. 15 USC 638(f). Unfortunately, this floor has been interpreted 
by the NIH to be a ceiling. While 2.5 percent may be a correct set 
aside for many agencies it is too small for the NIH. Most disease 
treatments today are being advanced by small biotech companies.
    The STTR program, which is directed to the transfer of technology 
from universities and non-profit research institutes to small 
businesses, is arguably more significant in the health care context 
than in other areas of technology. Thus the 0.3 percent STTR set aside 
is woefully inadequate for the NIH since and should be raised to at 
least 2.0 percent.

        3.  Expand the size and duration of Phase I awards

    Most biotech projects require a longer award period and greater 
award amount than those commonly allowed under the Phase I SBIR 
program. Budgets of up to $250,000 costs per year and time periods of 
up to two years for Phase I should be routinely permitted. To permit 
these larger amounts to be available to more applicants, companies 
should be limited to total SBIR support per year (Phase I and Phase II) 
of $1 million. Companies deserving of federal support beyond this cap 
should seek it through funding mechanisms outside of the SBIR pool.

        4.  Implement a Preliminary Application Process to Lower the 
        Cost of Failure

    Due to the over emphasis on ``grantsmanship'' and preliminary data 
the NIH SBIR application process is very expensive. It can cost a small 
company nearly $20,000 to prepare and submit a well written Phase I 
application while facing a success rate of only about 18 percent. This 
costly process literally drives many small companies out of business 
and wastes government resources as well.
    To remedy this problem the NIH should adopt a preliminary 
application process along the lines of that employed by the Department 
of Homeland Security's HSARPA program. There, a five-page white paper 
is first submitted by applicants and evaluated by the HSAPA staff who 
provide a written assessment of the likelihood of success if a full 
application is submitted. This process painlessly rules out all but the 
most competitive applications and saves significant time and money for 
both the applicant and the government.

        5.  Permit Phase I recipients with matching funds to apply 
        early for Phase II

    The DOD SBIR program has implemented a Fast Track process for SBIR 
projects that attract matching funds from an outside investor for the 
Phase II effort (as well as for the interim effort between Phases I and 
II). Under this program companies may submit their Fast Track 
application within 150 days of receiving their Phase I contract and 
these applications are given expedited review by DOD.
    This model should be adopted by NIH as it encourages private 
investment and helps bridge the gap between Phase I and II which can 
often last one or more years.

        6.  Encourage private investments in SBIR recipients through 
        tax credits (in lieu of Phase III funding)

    The idea of Phase III funding is problematic because it would 
siphon away funding available for Phases I and II. Instead I believe 
Congress should encourage private investment in small business 
technology developers through a new SBIR investor tax credit. Such a 
program--modeled after the New Markets Tax Credits Program--would 
permit taxpayers to receive a credit against federal income taxes for 
making qualified equity investments in companies that have received a 
Phase II award. The credit provided to the investor would total 40 
percent of the cost of the investment credit from their federal income 
taxes that would accrue over four years. The maximum total credit 
available from combined investments in any one company would be limited 
to two times the value of the Phase II award. Thus, for example, a 
recipient of a $500,000 Phase II award could attract an additional $1 
million in private capital that would earn those investors $400,000 in 
tax credits over four years.
    This model provides a more cost-effective way to leverage taxpayer 
dollars than additive grants and has proven successful in those states 
(Ohio, North Carolina, Maryland) that offer similar investor tax credit 
programs.

Q3.  You have heard the arguments made by Dr. Nacy and Dr. Cohen on why 
their company should be able to compete for SBIR awards. Why do you 
think they should not be able to compete for SBIR awards?

A3. More than 20 years ago Congress astutely recognized that small 
businesses developing innovative products and technologies have unique 
strengths that can help our economy and society but also important 
limitations that put them at a disadvantage in competing for federal 
support. Thus, a small set-aside (now 2.5 percent) for small businesses 
seeking certain federal R&D funding programs was deemed warranted.
    The law that created the SBIR program begins with this declaration 
of Congress' policy in establishing the program:

         The expense of carrying on research and development programs 
        is beyond the means of many small business concerns, and such 
        concerns are handicapped in obtaining the benefits of research 
        and development programs conducted at government expense. These 
        small business concerns are thereby placed at a competitive 
        disadvantage. This weakens the competitive free enterprise 
        system and prevents the orderly development of the national 
        economy (emphasis added). [15 USC 638(a)]

    Entities owned by large venture capital firms typically have access 
to substantial financing and other assets and are neither handicapped 
nor disadvantaged in competing for federal R&D programs. Hence they do 
not require the benefits of a set aside, especially one as small as the 
2.5 percent SBIR set aside.
    On the other hand, companies of various sizes and ownership 
structures should be able to compete for federal support for certain 
high risk, high impact R&D for which adequate private capital is 
unavailable. This support should not, however, be drawn from the SBIR 
pool but rather the other 97.5 percent of the agency R&D budget.

Q4.  Your company 20/20 GeneSystems has institutional investors. What 
are institutional investors and how do they differ from VC investors? 
Don't your investors also push you to develop marketable products?

A4. Our company is currently majority owned by more than a dozen 
individual ``Angel'' investors and our founders and minority owned by 
three institutional investors. These three institutional investors 
include one venture capital fund, a Japanese company that has marketing 
rights to our products in Asia, and a law firm. Collectively we have 
raised about $2.5 million in private equity to date.
    The fact that our company is majority owned by individuals rather 
than institutions has a profound impact on our priorities, culture, and 
method of operations. Individuals invest in companies for multiple 
reasons, some of which go beyond financial return. This is particularly 
the case in biotech where ``disease Angels'' have become an 
increasingly important source of early stage capital. These high net 
worth individuals invest not only in hopes of earning a solid return 
but also to advance treatments to particular diseases that they care 
about personally. In contrast, managers of funds made up of large 
corporations, pension funds and the like have a fiduciary duty to 
disregard their personal interests and seek to maximize the financial 
return for their shareholders.
    In 2001 we introduced a product called BioCheckTM that is now 
routinely used by over 300 first responder organizations and federal 
agencies to screen suspicious powders. I am convinced that had we been 
majority owned by large institutional investors rather than individuals 
we would not have been able to launch this product due to perceived 
liability risk and unpredictable markets.

Q5.  In your remarks I noted that you refer to large VC investors as 
the problem. What is the difference between a large VC investor and a 
small VC investor? How do you define a large VC investor?

A5. A ``large VC'' is a fund (typically organized as a limited 
partnership) that is majority owned by corporations. These corporations 
(limited partners) typically include pension funds, Fortune 500 
companies, or insurance companies.
    A ``small VC'' is a fund that is majority owned by high net worth 
individuals. (I would put Angel clubs in the same category as small 
VCs.) Under current SBA rules, a company majority owned by a small VC 
is eligible to participate in the SBIR program.
    Today individual ``Angel'' investors--not venture capital firms--
are the primary source of early stage capital for most biotech start-
ups in the U.S. This was the subject of a March 7, 2005 feature story 
in Business Week titled ``Where VCs Fear to Tread: Angel investors are 
filling a critical gap by providing early backing for biotechs.''
    The following data compiled by Boston Millennia Partners, a leading 
life science VC firm illustrates how Angel investors in early stage 
companies are growing relative to VCs:




    I believe it is proper for companies that are majority owned by 
small VCs--not large VCs--to access the SBIR program.

Q6.  You recommend that Congress develop new initiatives, open to 
companies of all sizes to bridge the growing ``valley of death'' 
between basic discoveries proof-of-concept. Could you give us some 
examples of what you envision? Are you familiar with the Advanced 
Technology Program (ATP)? If so, should the Federal Government support 
programs like this and others like it?

A6. Biomedical innovation in America today is ``stagnant'' according to 
the FDA.\1\ Significant improvements in outcomes for patients with 
cancer, Alzheimer's disease, spinal cord injury and other maladies have 
changed little over the past 30 years. The problem according the FDA's 
2004 Critical Path Report is that ``the applied sciences needed for 
medical product development have not kept pace with the tremendous 
advances in the basic sciences.'' The report provides the FDA's 
analysis of the ``pipeline problem'' namely, the recent slowdown, 
instead of the expected acceleration, in innovative drugs and 
diagnostics reaching patients. According to the report, despite the 
explosion of bioscience and genomics research over the past ten years 
the number of new drug applications submitted to the FDA has actually 
declined. significantly.
---------------------------------------------------------------------------
    \1\ See Innovation or Stagnation? Challenge and Opportunity on the 
Critical Path to New Medical Products. (www.fda.gov/oc/initiatives/
criticalpath)
---------------------------------------------------------------------------
    I am convinced that this slowdown in biomedical innovation is a 
direct result of the ``valley of death'' phenomenon. Today nearly all 
public funding is allocated for basic research while most private 
capital is flowing towards late stage, lower risk product development. 
This ``barbell'' effect has resulted in a huge gap--a valley of death--
that has effectively stalled biomedical innovation in the U.S. today:




    To help fill this gap and create a ``valley of life'' a two pronged 
approach is needed: (1) shift a greater portion of government funding 
towards high-risk product and technology development and (2) use tax 
credits as an incentive for higher risk private sector investments in 
early stage companies:




    The investor tax credit concept was discussed above as a proposed 
private sector alternative to Phase III funding.
    Regarding government funding, Congress should set as a benchmark 
that about one-third of the NIH budget (extramural and intramural) 
should be dedicated to R&D that can be applied or translated into the 
development--within about five to seven years--of tangible products 
that fill critical unmet patient needs. To that end the NIH will need 
new programs that support high risk, high impact technology development 
by companies of all size as well as non-profit research institutes and 
universities. Such programs at other agencies have proven to be very 
successful including DARPA (Defense), ATP (NIST), In-Q-Tel (CIA), and 
HSARPA (Homeland Security). The National Cancer Institute has stated 
that the DARPA and HSARPA models ``could be highly appropriate to 
accelerate the development of the advanced cancer technologies needed 
to achieve the NCI's 2015 goal.\2\
---------------------------------------------------------------------------
    \2\ NCI Roundtable, ``Leveraging Multi-Sector Technology 
Development Resources and Capabilities to Accelerate Progress Against 
Cancer,'' January 2004, page 24.
---------------------------------------------------------------------------
    Funding decisions and management of such a program would be the 
responsibility government program managers experienced in moving 
advanced technology from concept to market in a timely manner. These 
programs would be open to companies of all size, as well as nonprofit 
research centers and medical schools that can offer a path to bringing 
the products to market through a licensing program, etc.
    At the June 28, 2005 Hearing the otherwise divided panel of biotech 
CEOs seemed united on one issue: that there is clear a need for a new 
ATP-like program dedicated specifically to advanced biomedical product 
and technology development (see transcript pages 71-73). To that end I 
would propose that a new ``Advanced Healthcare Technology Development'' 
program be created that would be jointly administered by the NIST and 
NIH.\3\ NIST, with its considerable expertise in the physical and 
material sciences and engineering, would focus on applications directed 
to innovative platform technologies that cut across multiple disease 
areas. The NIH would focus on novel applications of innovative 
technologies in specific disease areas.
---------------------------------------------------------------------------
    \3\ I have had many discussions with persons in industry and 
government about the idea of such a joint program and have received 
unanimously positive feedback. At the request of the Science Committee 
or any Member I would volunteer to help work on a detailed proposal.

---------------------------------------------------------------------------
Q7.  What is your opinion of the Advanced Technology Program (ATP)?

A7. While I have no direct experience with the ATP program the feedback 
I have received from counterparts at other companies about the program 
has been extraordinarily positive. Companies seem much more 
enthusiastic about the ATP program than any other government support 
program that I am aware of. The most important unique attribute of NIST 
ATP is its emphasis on high risk technology innovation which today 
receives almost no support from either the venture capital community or 
the NIH.\4\ A new report issued in August by the FDA and the 
Association of American Medical Colleges on the decline of innovative 
drugs noted the lack of platform technology development as a key 
problem:
---------------------------------------------------------------------------
    \4\ ``For a few years in the late 1990s, prior to the bursting of 
the ``genomics bubble'' in 2000, Wall Street was very supportive of 
platform technologies. Five years later there remains no sign of 
interest returning to this space. New platform technologies will be 
essential for the emergence of ``personalized medicine'' wherein 
therapies are tailored to patients based on genomic and proteomic 
biomarkers.

         Another problem arises from declining biotechnology industry 
        development of platform technology (fundamental scientific 
        tools used in drug discovery), largely because venture 
        capitalists no longer are interested in funding such research.. 
        . .The creation of new technology platforms is critical to the 
        long-term survival of the bio-pharmaceutical industry and may 
        require more support from government agencies and in the 
        pharmaceutical industry to sustain this field.\5\
---------------------------------------------------------------------------
    \5\ ``Drug Development Science: Obstacles and Opportunities for 
Collaboration'' page 10.

    Also the ATP places heavy emphasis on the ability of awardees to 
bring their technology to market. It is very important that Congress 
restore funding to the ATP and use it as a model for other federal R&D 
programs.
    I believe ATP would serve as an excellent model for the 
aforementioned proposed Advanced Healthcare Technology Development 
program that would be jointly administered by NIST and NIH.
                   Answers to Post-Hearing Questions
Responses by Carol A. Nacy, Chief Executive Officer, Sequella, Inc.

Q1.  As a small business with less than 500 employees, or in your case 
less than 100 employees, If you raise a round of venture financing 
would you say that all of your fundraising needs have been satisfied? 
Are you able to pursue all of the projects and business leads you would 
like to pursue with this venture financing?

A1. No to both parts of the question: The high cost of drug development 
(many hundreds of millions of dollars) means that I will likely have 
several venture financing rounds under my belt at Sequella before I 
will have product on the market. The initial round of venture financing 
(Series A) that I hope to close before the end of 2005 will be applied 
to the clinical trials of two of our products close to registration or 
human testing: a Phase III trial (efficacy in human population) of a 
new TB diagnostic to be used outside the U.S. and a Phase I trial 
(safety only, no efficacy) of a new TB drug to shorten treatment in the 
U.S. from six months to fewer than six months (we hope). Additional 
funding will be required to determine if the new drug actually can 
shorten treatment time, and those are the expensive efficacy trials 
(Phase II and Phase III). Additional funding rounds will be required 
for these later trials.
    In addition to clinical trials of the new diagnostic for ex-U.S. 
use and the new drug that will be funded by the Series A financing, 
Sequella has a pipeline of new and important technologies and drugs 
that will not be funded by the Series A (or subsequent Series B) 
venture round(s). We have a second generation of the ex-U.S. diagnostic 
that is being readied for regulatory submission to the U.S. FDA, we 
have two other anti-TB drugs (both work against multi-drug resistant 
TB, a Class C bioweapon) that are ready for formal preclinical toxicity 
studies that precede human clinical trials, we have a technology that 
enables physicians to determine the antibiotics to which a TB organism 
is susceptible in two days (rather than the current technique that 
takes up to 12 weeks) that is ready for predicate testing in a field 
setting, and we have a wristwatch-like device that can help patients 
take their drugs correctly and inform physicians when they do not (a 
compliance monitor). None of these drugs, diagnostics, or devices will 
be commercialized by the Series A or future Series B venture financing. 
All of these pipeline technologies have been financed, are currently 
financed, or we have applied for financing for them through SBIR grants 
and contracts. Without access to the extra-VC funds that are supplied 
by the SBIR program, our pipeline will dry up, and the U.S. and rest of 
world will be the poorer for not having these resources for 
identification and control of TB.

Q2.  Given the 10-15 years of work and hundreds of millions of dollars 
it takes to complete testing and gain approval of a biotechnology 
therapy, venture capital investment is often a necessity for many 
biotechnology companies. If biotechnology companies receive venture 
capital for their research and development, why is it necessary for 
these companies to also receive SBIR monies?

A2. See above answer for application of venture capital money: there is 
little to no money in the venture capital community today for the early 
discovery and development research that underlies product 
identification and clinical development. Venture money now goes to 
late-stage technologies. Innovation occurs in the earliest stages of 
research, not at the late stages where we must comply with a complex 
set of FDA rules and regulations to assure safety and efficacy of 
products in humans. No innovation can happen once you move to clinical 
trials. Building successful companies, and contributing to the U.S. 
economy with jobs, products, and revenues, requires both innovation and 
clinical development. We will stunt the innovation required to solve 
such complex issues as bioweapon defense, cancer, global infectious 
diseases that impact U.S. public health if every time we move one 
product into clinical trials funded by venture capital we stop the 
innovation process in a company. Companies that can successfully 
navigate the high-risk process of product identification and 
development should be supported by our government at every possible 
level, including at the most fundamental level for product success, 
early-stage research. The program that exists to support that early-
stage, high-risk innovation is the SBIR program.

Q3.  If a firm is more than 51 percent owned by one or more venture or 
institutional investors, would you consider your business to be 
controlled by these investors?

A3. It is difficult to actually control the day-to-day functions of a 
company, even if you own more than 51 percent of that company, although 
there may be companies where such is the case.
    It is rare to find a single venture capital firm ready to assume 
ALL the risk of financing a particular biotechnology company, given our 
spectacular failure rate. They generally invest through consortia of VC 
in order to minimize and share risk. The term sheets that I have seen 
from venture capital consortia, both in my present company, my past two 
companies, and in the industry in which I work, provide for the lead 
(the VC company who contributed the highest percentage of money to the 
consortium) and perhaps one other venture investor to have a seat on 
the corporate Board. The standard format is to reconfigure the company 
Board to have two representatives from the venture groups, two 
representatives selected from the company (usually CEO) and the pre-
financing Board, and one independent Board member. Thus, control is 
balanced by in-house and independent interests, including venture 
interests.
    The ownership percentage could provide a level of control at the 
shareholder level and would be exercized at the annual shareholders 
meeting, where Directors are elected and changes to the architecture of 
the company are voted upon.
    Finally, a certain amount of leverage on how VC funds are utilized 
(and thus the immediate directions of the company) can be assumed from 
the acquisition of capital from any venture group: clearly they are 
investing their money in certain aspects of the company that they 
believe will lead to product and sales, giving them a return on their 
investment. In this sense, they are just like the SBIR program: a SBIR 
grant is given to innovate around a certain set of scientific 
assumptions and data, and you cannot use SBIR money for other unrelated 
innovations that you have not spelled out in advance. Everybody wants 
to know that their money is used ``appropriately.''

Q4.  The SBA recently issued a Final Rule (69 Fed. Reg. 70180) that 
amended SBIR eligibility requirements to allow grant awardees to be 51 
percent owned and controlled by another business, as long as the other 
business is itself at least 51 percent owned and controlled by one or 
more individuals who are citizens of, or permanent resident aliens in, 
the U.S. Does this Final Rule solve the eligibility concerns by VCC-
backed biotechnology companies?

A4. No, not really. If we could select the VC who were willing to 
invest in us, and if there was complete transparency in the identity of 
the Limited Partners of funds that would allow us to make informed 
choices that complied with this rule, then perhaps it would be 
sufficient. In reality, however, we do not have financing choices. It 
is hard enough to get a single VC to agree to lead a financing round 
(as they assume the responsibility for due diligence and risk 
assessment), and it costs so much to bring a biotech product to market 
that we cannot afford to turn down anyone who takes the inherently 
high-risk approach of financing us. That's why VC are able to strike 
such good deals: we need their money. Supply and demand.

Q5.  The SBA has been holding a series of Public Hearings across the 
country to address two topics: (1) the restructuring of small business 
size standards; and (2) the possible participation of small businesses 
majority-owned by venture capital companies in the SBIR program. These 
hearings follow the SBA's announcement that they are considering 
whether exclusion from affiliation rules for VCC-backed companies 
should be provided in size determinations for eligibility in SBIR 
program. Would this exclusion solve the eligibility concerns by VCC-
backed biotechnology companies?

A5. If the ``affiliation rule'' implies that the head-count for my 
company (17 persons at present), once venture-backed, would also 
include the head-count of the VC group itself and all of their 
portfolio companies, then that rule should be revoked in all cases. My 
17-person company gets no benefit whatsoever, financial or business, 
from any other company in an investor's portfolio, whether we are 
talking VC or high net worth individual. But a change in that rule 
would not solve the other interpretation, that VC do not count as 
individuals (even though they and their limited partners are controlled 
by individuals) in the 51 percent individual ownership issue. That's a 
separate and equally problematic stance that should be changed.

Q6.  Aside from the issue today, what other recommendation would you 
make on how the SBIR program could be improved? For example, are the 
Phase I and Phase II award levels sufficient? Also, what are your 
thoughts on Phase III funding?

A6. There is never enough money! The traditional $75,000 for Phase I 
(six months), $750,000 for Phase II (two years) is a drop in the bucket 
for both money and time in biotech product development, where even a 
simple diagnostic kit takes $5-$10 million and 4-6 years to get to 
market. The NIH has an extraordinary SBIR program that recognizes both 
the time and the cost of product development, and this has greatly 
helped in driving products to commercialization. The ability of certain 
government institutions to shift SBIR funding amounts to meet their 
goals would be a good innovation for the SBA and the SBIR program in 
general. Regarding Phase III money, I would certainly avail Sequella of 
the opportunity to compete for such funds, if available. Phase III 
would be particularly useful for Company products that are not of 
interest to VC, but are of interest to the U.S. Government and the 
originating Company.

Q7.  What is your assessment of how NIH is managing its SBIR program? 
What could NIH do better?

A7. I have experience primarily with NIAID at the NIH. I find their 
administration of the SBIR program to itself be innovative (they have a 
special SBIR-AT-NIAID program that is excellent, and they are currently 
experimenting with the idea of Phase III funding for certain of the 
technologies that they determine are important for their mission). They 
have moved from primarily academic reviewers of SBIR grants to 
predominantly industry scientists, with a resulting increase in 
insights into the common problems of product development and the 
science of translational research. This results in better critiques and 
makes revised grants all that much stronger. Other Institutes at the 
NIH should adopt many of the innovations that NIAID has in place or is 
exploring.

Q8.  What is your response to those who say that changing the current 
venture capital participation rules would fundamentally change the 
structure of the SBIR program?

A8. That's a bit disingenuous. The SBIR program did not have 
restrictions on VCC-backed companies for its first 20 years (1983-
2003), then the rules changed for the last two years. The preponderance 
of time and evidence of the structure of the SBIR program is in favor 
of the VCC-backed company participation as the norm.

Q9.  Your company is located in Maryland. What are your thoughts on Mr. 
Cohen's comments that changes to the rules for VC investments would be 
bad for Maryland biotech companies?

A9. Mr. Cohen is entitled to his opinion. However, the argument he 
proposes for no-change is one of competition. Lower the number of 
eligible participants and increase the probability of funding.
    I actually find that offensive. I am looking for the best science 
when I review grants, and I don't actually care whether the person has 
other funding as well, or who supplies that funding. I want the science 
to be sound and the plan to be feasible. There is a lot of science that 
is flawed: not all science should be funded. There are many scientists/
start-up companies who cannot make a cohesive and comprehensible plan 
to move that science forward: not all scientists/companies should be 
funded. Competition is what drives innovation and hones great science. 
I am not venture financed at the moment, and I have no fear that, 
should the rule be changed, I will compete successfully for additional 
SBIR grants no matter who is in the applicant mix. And if my current 
percent success rate begins to decline, I will not blame VCC-backed 
companies, but my own scientists for having not made crystal clear the 
innovation and importance of the products we work on. It's all about 
good science that underpins good products.

Q10.  What is your opinion of the Advanced Technology Program (ATP)?

A10. I like the concept, but at present the ATP program is set up more 
for engineering and environmental technologies than biotechnology. It 
would be nice to have an ATP program dedicated to biotech.
                   Answers to Post-Hearing Questions
Submitted to Frederic D. Abramson, President and CEO, Alphagenics, Inc.

    These questions were submitted to the witness, but were not 
responded to by the time of publication.

Q1.  If a firm is more than 51 percent owned by one or more venture or 
institutional investors, would you consider your business to be 
controlled by these investors?

Q2.  Aside from the issue today, what other recommendations would you 
make on how the SBIR program could be improved? For example are the 
Phase I and Phase II award levels sufficient? Also what are your 
thoughts on Phase III funding?

Q3.  What is your assessment of how NIH is managing its SBIR program? 
What could NIH do better?

Q4.  You have heard the arguments made by Dr. Nacy and Dr. Cohen on why 
their company should be able to compete for SBIR awards. Why do you 
think they should not be able to compete for SBIR awards?

Q5.  What is your opinion of the Advanced Technology Program (ATP)?

                              Appendix 2:

                              ----------                              


                   Additional Material for the Record


     Prepared Statement of the National Venture Capital Association

    The following testimony is submitted on behalf of the National 
Venture Capital Association, a trade organization representing 
approximately 470 venture capital firms in the United States.

    Venture capital is the investment of equity to support the creation 
and development of new, growth-oriented businesses. Venture backed 
companies are critical to the U.S. economy in terms of creating jobs, 
generating revenue, and fostering innovation. This segment of the 
economy, the entrepreneurial segment, is the true differentiator for 
the U.S. in terms of global competitiveness. U.S. companies originally 
funded with venture capital now represent 11 percent of annual GDP and 
employ over 10 million Americans. Companies that were originally funded 
with venture capital dollars include: FedEx, Genentech, Intel, Cisco, 
Amgen, Apple, Starbucks, Amazon, e-Bay and Google.
    We respectfully submit testimony today on behalf of those venture-
backed companies that are developing innovative technologies to improve 
the quality of our lives and raise our standard of living. 
Historically, the dual financing sources of the SBIR program and the 
venture capital community have allowed many of these promising 
companies to conduct groundbreaking scientific research and 
simultaneously build viable businesses that will bring these 
innovations to the marketplace. However, changes in the interpretation 
of SBIR grant eligibility have prevented many small companies that 
receive venture financing from also receiving SBIR grants, effectively 
cutting off a critical research lifeline. This dynamic has negatively 
impacted young companies across the country, particularly in the life 
sciences sector, but in other high tech industries as well.
    For the last two years, we have received calls from our member 
firms alerting us to situations in which an SBIR grant has been denied 
because the company has venture investors. As a result, several of 
these companies have shelved research projects, laid off scientific 
teams, or scaled back operations.
    Venture investment, which has measured more than $350 billion 
during the past 20 years, has vastly improved the quality of our lives 
by bringing innovation to the market place. On the life sciences side, 
more than one in three Americans has directly benefited from a venture 
capital backed innovation. Medical devices such as the pacemaker, the 
MRI, and the pulse oximeter as well as pharmaceuticals such as ENBREL 
for arthritis, Herceptin for cancer and Integrilin for coronary disease 
were all brought to market through venture capital investment.
    It is paramount not to confuse the role of venture capital funding 
with the role of basic R&D funding. Both are critical to bringing 
innovation to the marketplace. However, basic research funding is 
targeted at discovery and invention. It is this type of activity that 
the SBIR program has historically supported in the past. Venture 
capital dollars are applied later in the life cycle and used to build a 
strong and viable business so that promising discoveries can be brought 
to market.
    There is a myth that says if a company receives venture capital, it 
has ``hit the lottery'' and does not need government funding. Nothing 
could be further from the truth. In the life sciences sector, the cost 
and time associated with bringing a discovery to market is colossal. 
Multiple rounds of financings at millions of dollars per round is 
required. In 2004 alone, the venture capital industry invested more 
than $5.7 billion in the sector with the average investment in each 
biotech company at $9.8 million.\1\ Yet these venture capital 
investments are aimed at commercializing products and are not 
sufficient to meet a company's ongoing research needs. With the average 
cost of bringing a new drug to market at $800 million,\2\ young 
biotechnology companies cannot divert precious venture capital funds 
earmarked for business growth to embark upon new research projects. And 
although these projects may hold the next ground breaking treatment for 
Alzheimer's, cancer, or heart disease, under the current eligibility 
interpretation, the SBIR program cannot fund these projects if the 
company is 51 percent owned by venture capital firms. The result: 
additional research is stalled or permanently shelved and the SBA has 
missed a tremendous opportunity to support a promising innovation.
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    \1\ PricewaterhouseCoopers/Thompson Venture Economics/National 
Venture Capital Association Money Tree Survey (NVCA Yearbook 2004).
    \2\ Journal of Health Economics, Vol. 22, p. 151.
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    There is another myth that venture investment only impacts select 
regions of the country. To the contrary, venture capital is a national 
phenomenon. (see Exhibit A) While California and Massachusetts are the 
leading regions for venture capital investment, VC dollars have been 
flowing into all 50 states over the last twenty years and have directly 
benefited regional economies across the country. More than $10 billion 
has been infused into states such as Texas, Pennsylvania, Colorado, New 
Jersey, and Washington respectively. Other states such as Florida, 
Connecticut, Illinois, Maryland and Minnesota have received venture 
investment of more than $5 billion each. As a result these states have 
experienced economic growth in terms of jobs and revenues. A 
combination of venture capital and SBIR grant distributions in any 
region would have an incredibly positive impact as groundbreaking 
research could be conducted simultaneously with new products being 
brought to market.
    Ironically, the current SBIR eligibility rule hurts the very ``low 
tech regions'' it is trying to support. In regions such as these, where 
there is a small venture capital presence, often numerous venture firms 
must join together to fund a promising start up, as a single local firm 
does not have the resources to meet the company's need. As each firm 
takes an equity stake in the company, the total venture ownership stake 
quickly rises above the 51 percent threshold as defined by the SBIR 
eligibility. Consequently, companies in regions with a low VC presence 
are unjustly penalized by the current SBIR eligibility rule. Since 
there is no way to tell in advance which small companies will grow to 
tomorrow's large public success stories or important regional 
employers, nurturing companies in all segments of the country is 
important.
    The 2000 Small Business Reauthorization Act sought to expand and 
improve the SBIR program, stimulate technological innovation, use small 
businesses to meet federal research and development needs, and 
strengthen the technological competitiveness of small businesses in the 
United States. By excluding venture-backed companies from eligibility, 
the SBIR program is bypassing many of America's most promising and 
innovative small businesses. After all, these are the companies whose 
technologies, business plans, financial strategies and management teams 
have all been vetted by highly skilled professionals with extensive 
backgrounds in science and business who earn their living identifying 
the best and brightest opportunities. The venture capitalist searches 
for companies that are poised for success, companies that will be 
viable for years to come, companies that intend to put a product on the 
market that will improve lives. Funding these types of companies is 
also in the best interest of the SBIR program as it prevents government 
dollars from ending up in grant mills, funding technologies that will 
never see the light of day. Funding venture backed companies brings the 
science to life.
    A way to ensure the ongoing success of the SBIR program is to re-
open it to the broadest and most qualified base of small businesses as 
possible, and this requires allowing venture financed companies to once 
again compete. The venture capital industry has been a major player in 
augmenting the SBIR program since its inception 25 years ago. Venture 
capital and SBIR funding have been proven to work together to research, 
commercialize, and distribute innovative products on an accelerated 
basis. The relationship between the two is symbiotic, with the 
beneficiary being Americans who are the recipients of life saving 
innovations, time saving technologies, and standard of living 
enhancements.
    Last week, Congressmen Graves, Baird, Honda and Inslee introduced 
H.R. 2943. This legislation puts into law a clarification of SBIR 
eligibility requirements for venture backed start up companies. The 
NVCA applauds their efforts and encourages quick action on this 
legislation. H.R. 2943 would amend the Small Business Act by adding a 
definition allowing any business concern that is at least 51 percent 
owned and controlled by one or more individuals and/or venture capital 
companies, provided that no affiliated venture capital company shall 
own or control more than 49 percent of the business concern, nor be 
controlled by a company which is not a small business to participate in 
the program. NVCA believes this legislation addresses this spiraling 
problem.
    Thank you for the opportunity to express NVCA's views on these 
vital issues.



  Prepared Statement of the Biotechnology Industry Organization (BIO)

    This statement is submitted by the Biotechnology Industry 
Organization (BIO), an organization representing over 1,100 companies, 
universities, research institutions, state biotechnology associations 
and affiliates in 50 states.
    BIO applauds the Subcommittee for holding a hearing on the Small 
Business Research Innovation (SBIR) grant program. While BIO represents 
many established companies in the industry, the vast majority of BIO 
members, over eighty-five percent, are small, emerging companies with 
fewer than 500 employees. In fact, more than fifty percent of the 
companies in the biotechnology industry have fewer than 50 employees. 
The SBIR program has played a critical role in providing necessary 
financing for small biotechnology companies. Unfortunately, however, an 
interpretation by the Small Business Administration (SBA) of the 
eligibility requirements for the SBIR program has prevented the 
majority of BIO members from participating in the program.
    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: (i) 
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 (ii) have no more than 500 employees, including any affiliates.
    However, on January 10, 2001, the SBA Office of Hearings and 
Appeals ruled in CBR Laboratories, Inc. that the definition of 
``individuals'' was limited to natural persons and could not include an 
entity such as a venture capital company (VCC). Two years later, this 
new interpretation of ``individuals'' resulted in the denial of a SBIR 
grant to Cognetix, Inc. because the company was venture capital-backed 
in excess of 51 percent. Other biotechnology companies subsequently 
have also been denied SBIR grant money or have opted to delay their 
submissions in the hopes that this issue will be re-considered. As a 
result, work on life-saving and life-enhancing technology is being 
postponed. (See Attachment)
    Before most biotechnology products can become commercially 
available, years of work and hundreds of millions of dollars of capital 
are required to complete testing and gain product approvals. While 
there are many different funding strategies, the typical form of 
investment in promising, early-stage companies is venture capital. Such 
capital comes primarily from VCCs, whose interests are usually owned by 
a combination of individual investors, business entities and pension 
funds. After the initial seed funding is invested in support of basic 
R&D, a typical biotechnology company seeks venture capital investments 
to allow it to expand R&D and eventually launch commercial operations. 
Because of the significant funding required to bring biotechnology 
products to market, very few biotechnology companies are capable of 
commercializing their technologies without significant VCC backing.
    In our industry, even the relatively small amount of money a 
company will raise in its first round of financing (Series A), $5-$8 
million, generally will result in the new investors--usually a 
collection of venture funds--owning more than 50 percent of the 
company. Indeed, based on a survey of our members, it is clear that for 
the majority that have raised venture funding, the ownership structure 
is such that the collection of venture investors and other outside 
investment groups own more than 50 percent of the company.
    In the biotechnology industry, there is a specific need for both 
SBIR and VCC funding. The lengthy and costly clinical development 
process for biotechnology requires investment that is out of reach for 
most small business entities. Limiting government support for this type 
of R&D to firms without VC funding as a main source of additional 
financing effectively cuts out smaller firms with excellent science 
foundations. This restriction risks delaying the discovery and 
development of promising new therapies for cancer, diabetes, 
Parkinson's and, significantly, many disease areas where there is less 
commercial focus, like tuberculosis or diseases that would qualify for 
an orphan drug classification.
    While almost all of our member companies will need to raise venture 
financing to advance their products toward the marketplace, many small 
biotechnology companies have come to rely upon the SBIR program Phase I 
and Phase II grants to fund cutting edge research in areas where 
venture capital and other sources of financing are difficult to obtain. 
This is typically the case for companies that need early-stage funding 
for proof-of-concept, while they are putting together their initial 
rounds of financing. SBIR grants also have been very useful to early-
stage biotech companies to fund research on programs different from the 
lead programs around which they have raised their venture financing. 
Many companies will raise a venture round that is deliberately sized to 
the amount of funds needed to advance a lead program because the amount 
of money required is usually relatively high and the company does not 
want to take on more debt and dilution than necessary. While they are 
working on these lead programs, they often come across new potential 
indications or new project opportunities that they will want to test 
before attempting to raise additional money. The SBIR program is 
ideally suited for this purpose, because the company already has 
demonstrated that it can successfully raise follow-on financing--one of 
the key criteria in evaluating an SBIR Phase II grant proposal.
    BIO conducted two surveys this year to understand the nature and 
scope of this problem for our industry. The results of both surveys 
confirm that SBA's current SBIR size standard is severely limiting and 
discouraging small biotechnology companies from participating in the 
SBIR program.
    Of the respondents to the first survey, 62 percent (public and 
private companies) had applied for SBIR grants over the last five 
years. Exactly half of these applicants were denied grants either 
immediately because they could not meet the SBIR size standard owing to 
their ownership structure, or subsequently, because of an adverse 
determination regarding their size. Interestingly, over 60 percent of 
privately owned companies chose not even to apply for SBIR grants 
because of perceived eligibility concerns.
    The second survey, conducted earlier this month, was designed to 
measure the larger impact the eligibility ruling is having on our 
overall membership and the industry. Of the 274 companies surveyed, 25 
companies reported having been turned down from the program, and 55 
percent of the respondents said they are no longer applying for SBIR 
grants. Importantly, 34 percent of the respondents said they delayed or 
canceled a research project due to the SBIR ineligibility. These 
projects included a promising new drug for lupus, cell therapy for 
delayed wound healing in diabetes, and therapies to protect cells and 
organisms against anthrax and radiation exposure.
    The legislative history makes it abundantly clear that Congress 
intended for the SBIR program to assist small businesses to 
commercialize their creations and products and to stimulate small U.S.-
owned firms to produce innovative technologies. Congress very clearly 
recognized and endeavored to encourage the symbiotic relationship 
between VCCs and small technology firms. For example, an entire section 
of the relevant Committee Report details the importance of encouraging 
private investment. The Committee concluded that:

         providing small firms with R&D seed money. . .will encourage 
        additional private investment in these firms. The agency-wide 
        SBIR program outlined in the legislation should facilitate the 
        ability of participating firms to attract venture capital as 
        well as other financial commitments from the private sector.\1\
---------------------------------------------------------------------------
    \1\ See S. Rep. No. 97-194, 97th Cong., 1st Sess. 1981, reprinted 
in, 1982 U.S.C.A.A.N. 512.

    Congress viewed the SBIR program as providing the necessary ``proof 
of concept'' to encourage venture capital investment in promising small 
businesses seeking to bring products from the workshop to the 
marketplace. Moreover, Congress even created a Phase II SBIR preference 
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for companies that attracted venture capital investment by providing:

         special consideration in the funding review of Phase II 
        proposals to applicants who are successful in attracting 
        private capital commitments to pursue commercial applications 
        of the federal research. This special consideration is given by 
        awarding extra points of merit to those proposals that have 
        attracted private sector commitments for follow-on funding.\2\
---------------------------------------------------------------------------
    \2\ Committee Report at 7-8 (emphasis added).

    It is BIO's belief that restoring the eligibility of majority 
venture-owned companies and granting the VCC exclusion from affiliation 
would not adversely affect the ability of small business concerns 
without such private capital to compete for SBIR awards. However, 
restricting VCC-backed companies from participating in the grant 
program will have a significant negative impact on the quality of 
applications and the type of science that will be studied. The United 
States' global leadership in biotechnology will be threatened if the 
Federal Government's role in promoting critical research and 
development through programs such as the SBIR program is limited.
    BIO has no desire to limit the SBIR grant program so small 
biotechnology companies without venture capital funding will be 
ineligible. On the contrary, BIO believes that the enormous promise of 
biotechnology research and development merits exploration and 
investment on a variety of fronts and by a spectrum of creative, 
dynamic, and dedicated entities. Biotechnology is a fertile field, from 
which patients can reap huge benefits--if it is supported by both 
public and private investment. The rewards of biotechnology are 
limitless, unless we choose to limit them by limiting who can 
participate in this venture.
    Preventing such limits includes removing barriers to participation 
in the SBIR program. To do this, BIO urges a revision of the SBIR 
eligibility requirements to reflect Congress' original intent to 
encourage awards to small businesses that have successfully attracted 
outside investors. BIO supports H.R. 2943, the Save America's 
Biotechnology Innovative Research (SABIR) Act, introduced by Rep. Sam 
Graves (R-MO). This bill would amend the Small Business Act to require 
SBA to broaden its SBIR Small Business Size Standard, to permit 
appropriate venture capital financing by venture capital funds that are 
(1) not dominant and (2) not controlled by a large pharmaceutical or 
other company. BIO stands ready to assist the Subcommittee in ensuring 
that the U.S. remains the global leader in the field of biotechnology. 
We thank you for your time and attention to this matter.

ATTACHMENT

 SAMPLE PROJECTS CANCELED OR ON HOLD AS A RESULT OF SBIR INELIGIBILITY 
                         DUE TO VENTURE BACKING

Protection Against SARS Virus

    A company has developed a therapy against the SARS virus that is 
several hundred times better than other compounds that have been 
reported. This therapy will provide protection against spread of SARS 
virus within an individual and, as a consequence, the spread of virus 
between individuals. The therapy is directed toward those who have been 
exposed and can be used to contain the spread of the disease. Support 
for this potential therapeutic is needed to provide animal testing 
resources, manufacturing, formulation, and other toxicity testing 
before being brought for human clinical trials.

Protection Against Anthrax Infection

    A company has discovered that a potential drug that is effective in 
protecting organs from the injury caused by lack of oxygen or too much 
oxygen is also effective in protecting animals against anthrax 
infection. Survival of the animals was increased significantly after 
anthrax infection in an animal model with compound treatment. This 
provides the therapeutic opportunity to slow or prevent some of the 
initial damage to the infected person and provide an increased time for 
antibiotics to become effective. Support for additional animal testing 
of the compound in conjunction with antibiotics would provide the 
evidence needed to proceed toward clinical development.

Therapy to Decrease Injury Due to Stroke or Heart Attack

    A potential drug has been discovered that decreased the size of 
injury by 50 percent to the heart and to the brain in separate models 
of heart attack or stroke. The compound was delivered at the time when 
the blockage is released which is the therapeutically relevant time of 
application. By reducing the size of injury by 50 percent, the long-
term deleterious effects due to a stroke or heart attack should also be 
reduced allowing a better functional recovery. Support is needed to 
advance this compound for additional animal testing for potential 
toxicities which is required before advancing into human clinical 
trials.

Novel and New Approaches for Anti-cancer Drugs

    A company has developed a technology and demonstrated that it can 
discover anti-cancer agents that will attack cancers by new and 
different approaches than have been previously reported. Cancer cells 
can be killed by activating an internal cell suicide signal which is 
normally off. This company has developed a procedure to identify the 
many different ways by which this cellular suicide signal can be turned 
on. These new anti-cancer agents act in ways that are totally different 
from current drugs and attack cancers by different avenues. One of the 
potential drugs the company has discovered is highly selective for 
breast and colorectal cancers and does not affect normal cells or other 
types of cancers, and it may be anticipated that it would have less 
toxic side effects. Grant support would increase the speed of 
identification of other interesting drugs and their novel pathways to 
bring them more rapidly toward clinical development.

Stem Cell Research to Treat Chronic Wounds

    A small publicly-traded biotechnology company did not qualify for a 
$1.0 million SBIR grant to study the potential benefit of adult stem 
cells for treating chronic wounds, for which there exists a major unmet 
medical need. The NIH approved the research, however because a majority 
of the company's major shareholders are U.S.-based investment funds, 
the company had to withdraw its application since it could not show 
that greater than 50 percent of its shares were held by individual U.S. 
citizens.

Technology for Rapid HIV Detection

    A company was working to develop a rapid test for HIV for quicker 
earlier detection. This proposal has been shelved due to the great 
costs and troubles anticipated with being unable to receive sufficient 
grant funding.

Plastic Atomic Force Microscope (AFM)

    A company has developed manufacturing concepts that could result in 
significant decreases in costs of certain types of scientific 
instrumentation. In particular, this company wishes to develop a low 
cost AFM for more general use than the higher price research grade 
instruments currently in place. This proposal has been abandoned.

Multi-analyte Arrays for HIV Detection

    This proposal was to use the ultramicroarray technology to 
construct capture domains against all of the major HIV proteins and 
their antibodies on a single chip. This will enable simultaneously 
detection from very small sample volumes. This was just submitted as an 
RO1 (not a business grant program), which reduces probability of 
funding significantly.

Detection of Human Cytokines for Cancer Therapy

    Based on mouse models, this proposal was to detect biomarkers for 
cancer using an ultra-miniaturized platform that translates into 
minimal invasiveness and enhanced utility. This proposal has been 
abandoned.

Cancer Biomarker Detection

    This proposal was to use the company's ultra-miniaturized biomarker 
detection platform (the company has detected PSA--and cancer 
biomarker--from just four cells) to cancer detection and monitoring and 
to enhance laser capture micro-dissection capabilities (the ability to 
do protein analysis on very small numbers of cells). This proposal has 
been abandoned.

Staph A Heteropolymer for Prevention and Treatment of Staphylococcus 
                    Aureus Bacteremia

    The Staph A HP heteropolymer will be developed for prevention of 
infection in hemodialysis, cancer, HIV and other patients receiving a 
catheter and who are at risk for infection.

HIV Heteropolymer Therapeutic

    A company plans to undertake a study to evaluate whether a 
heteropolymer containing an HIV specific non-neutralizing antibody can 
clear a Simian/Human hybrid HIV like virus from infected cynomolgus 
monkeys. The HIV heteropolymer will be developed as a therapeutic 
treatment for HIV infected individuals to be used to supplement 
existing treatments.

Candida Heteropolymer Therapeutic

    A company plans to develop a Heteropolymer drug for the treatment 
of blood-borne Candida infections.

Human Polyclonal Antibodies in Genetically Modified Pigs

    Production of fully human polyclonal antibodies in genetically 
modified pigs--Pigs are engineered using cloning technology to make 
potent human antibodies as a new class of therapeutics for infectious 
disease applications, for antibiotic resistant infections, and 
biowarfare countermeasures.

Vitality Chromosome

    A mini-chromosome for soybean containing a set of genes to increase 
expression of omega-3 fatty acids, and phytosterols to improve oil 
quality for human consumption of soy oil products.

Identity Preservation for Consumer Products in Modified Crops

    Development of a panel of visually and genetically coupled markers 
for identifying specialty traits in crops for consumer use, such as 
plastics, pharmaceuticals or nutritional products. Autonomous mini-
chromosomes carrying value-added traits would also carry linked sets of 
unique PCR markers and near ultraviolet or visible pigments for easy 
identification of product specific crops to assist in identifying 
preservation, processing and distribution control.

Mini-chromosome for Ethanol Production From Corn

    A mini-chromosome for corn containing genes for three enzymes that 
would improve the conversion efficiency of plant materials, including 
grain, stover and cellulosic materials from other plant sources.



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