[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 
                       FULL COMMITTEE HEARING ON
                      LEGISLATIVE INITIATIVES TO
                        STRENGTHEN AND MODERNIZE
                       THE SBIR AND STTR PROGRAMS

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

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             June 17, 2009

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 111-030
Available via the GPO Website: http://www.access.gpo.gov/congress/house


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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman

                          DENNIS MOORE, Kansas

                      HEATH SHULER, North Carolina

                     KATHY DAHLKEMPER, Pennsylvania

                         KURT SCHRADER, Oregon

                        ANN KIRKPATRICK, Arizona

                          GLENN NYE, Virginia

                         MICHAEL MICHAUD, Maine

                         MELISSA BEAN, Illinois

                         DAN LIPINSKI, Illinois

                      JASON ALTMIRE, Pennsylvania

                        YVETTE CLARKE, New York

                        BRAD ELLSWORTH, Indiana

                        JOE SESTAK, Pennsylvania

                         BOBBY BRIGHT, Alabama

                        PARKER GRIFFITH, Alabama

                      DEBORAH HALVORSON, Illinois

                  SAM GRAVES, Missouri, Ranking Member

                      ROSCOE G. BARTLETT, Maryland

                         W. TODD AKIN, Missouri

                            STEVE KING, Iowa

                     LYNN A. WESTMORELAND, Georgia

                          LOUIE GOHMERT, Texas

                         MARY FALLIN, Oklahoma

                         VERN BUCHANAN, Florida

                      BLAINE LUETKEMEYER, Missouri

                         AARON SCHOCK, Illinois

                      GLENN THOMPSON, Pennsylvania

                         MIKE COFFMAN, Colorado

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

                  Karen Haas, Minority Staff Director

        .........................................................

                                  (ii)

  
?

                         STANDING SUBCOMMITTEES

                                 ______

               Subcommittee on Contracting and Technology

                     GLENN NYE, Virginia, Chairman


YVETTE CLARKE, New York              AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana              ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon                TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois          MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois               GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania
PARKER GRIFFITH, Alabama

                                 ______

                    Subcommittee on Finance and Tax

                    KURT SCHRADER, Oregon, Chairman


DENNIS MOORE, Kansas                 VERN BUCHANAN, Florida, Ranking
ANN KIRKPATRICK, Arizona             STEVE KING, Iowa
MELISSA BEAN, Illinois               TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             BLAINE LUETKEMEYER, Missouri
DEBORAH HALVORSON, Illinois          MIKE COFFMAN, Colorado
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, Pennsylvania, Chairman


HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma, Ranking
BRAD ELLSWORTH, Indiana              LOUIE GOHMERT, Texas
PARKER GRIFFITH, Alabama

                                 (iii)

  
?

               Subcommittee on Regulations and Healthcare

               KATHY DAHLKEMPER, Pennsylvania, Chairwoman


DAN LIPINSKI, Illinois               LYNN WESTMORELAND, Georgia, 
PARKER GRIFFITH, Alabama             Ranking
MELISSA BEAN, Illinois               STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             GLENN THOMPSON, Pennsylvania
BOBBY BRIGHT, Alabama                MIKE COFFMAN, Colorado

                                 ______

     Subcommittee on Rural Development, Entrepreneurship and Trade

                  HEATH SHULER, Pennsylvania, Chairman


MICHAEL MICHAUD, Maine               BLAINE LUETKEMEYER, Missouri, 
BOBBY BRIGHT, Alabama                Ranking
KATHY DAHLKEMPER, Pennsylvania       STEVE KING, Iowa
ANN KIRKPATRICK, Arizona             AARON SCHOCK, Illinois
YVETTE CLARKE, New York              GLENN THOMPSON, Pennsylvania

                                  (iv)

  
?

                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Graves, Hon. Sam.................................................     2

                               WITNESSES

Koenig, Dr. Scott, President & CEO MacroGenics, Inc., Rockville 
  MD.............................................................     3
Dwight, Ms. Mary B., Vice President of Government Affairs, Cystic 
  Fibrosis Foundation, Bethesda, MD..............................     5
Sotcker, Mr. John, Senior Vice President of Federal Solutions, 
  Lynntech, Inc., College Station, TX............................     7
Li, Ms., Ning, Chief Resource Officer, PD Inc., Baltimore, MD, On 
  behalf of the U.S. Women's Chamber of Commerce.................     9
Rapp, Mr. Derek K., Chief Executive Officer, Divergence, Inc., 
  St. Louis, MO..................................................    11

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    28
Graves, Hon. Sam.................................................    30
Koenig, Dr. Scott, President & CEO MacroGenics, Inc., Rockville 
  MD.............................................................    32
Dwight, Ms. Mary B., Vice President of Government Affairs, Cystic 
  Fibrosis Foundation, Bethesda, MD..............................    41
Sotcker, Mr. John, Senior Vice President of Federal Solutions, 
  Lynntech, Inc., College Station, TX............................    47
Li, Ms., Ning, Chief Resource Officer, PD Inc., Baltimore, MD, On 
  behalf of the U.S. Women's Chamber of Commerce.................    52
Rapp, Mr. Derek K., Chief Executive Officer, Divergence, Inc., 
  St. Louis, MO..................................................    55

                                  (v)

  


                       FULL COMMITTEE HEARING ON
                       LEGISLATIVE INITIATIVES TO
                        STRENGTHEN AND MODERNIZE
                       THE SBIR AND STTR PROGRAMS

                              ----------                              


                        Wednesday, June 17, 2009

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:04 a.m., in Room 
2360, Rayburn House Office Building, Hon. Nydia M. Velazquez 
[Chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Moore, Dahlkemper, Nye, 
Clarke, Bright, Halvorson, Graves, Akin, Luetkemeyer, and 
Thompson.
    Chairwoman Velazquez. I call this hearing of this House 
Small Business Committee to order.
    An innovative economy is a resilient economy. After all, 
the ability to adapt has helped our country bounce back from 
countless recessions. The best example of this is the downturn 
of the 1990s, during which an army of innovators brought us 
economy recovery and an IT revolution. Not surprisingly, that 
revolution was led by small firms.
    Today, as we continue to work our way out of recession, we 
can look to that same small business community. With the proper 
tools they can help lead us the way back to prosperity.
    For years, the SBIR and STTR programs have helped 
entrepreneurs do what they do best, pioneer new products. 
Nearly 35 years after they were first drafted, these programs 
will spur innovation. In fact, we can thank SBIR for everything 
from needleless insulin patches to wireless technology for 
BlackBerrys. Those innovations are more than everyday 
conveniences. They represent growth in our economy and 
countless homegrown jobs.
    But while SBIR and STTR are inherently valuable programs, 
they are in need of modernization. Today, we are going to take 
steps to not only update these programs, but to enhance them.
    I think we can all agree that a lot has changed in the last 
few years. Our economy has transformed and so have the needs of 
small firms. Yet, regardless of those changes, neither SBIR nor 
STTR has been updated in nearly a decade.
    The legislation we are examining this morning will turn 
that around. It will modernize the programs to reflect today's 
economy and will enhance them to boost commercialization.
    Just as importantly, this bill is going to cut through the 
programs' red tape. To begin, it authorizes an agency to create 
fast track programs. Doing so will eliminate funding delays for 
Phase Two awards, streamlining the R&D process and allowing 
innovators to spend more time in the lab.
    Entrepreneurs are prolific inventors. In fact, they churn 
out 14 times more patents than big businesses do. But there is 
a process for turning dreams into products and many good ideas 
get lost along the way. By creating commercialization 
benchmarks, we are placing new emphasis on bringing products to 
market. We are also improving communication between SBIR 
officers and purchasing agencies. That way, entrepreneurs will 
know what the agencies are looking for and will have a better 
shot at bringing their projects to the marketplace.
    As any inventor will tell you, commercial appeal isn't 
always enough. R&D is an expensive process; entrepreneurs often 
lack the capital to see it through. The legislation we are 
discussing today recognizes that and promises small firms 
increased financial freedom. It is no secret that capital is 
scarce these days, which is why all options should be on the 
table. This bill gives entrepreneurs, not Washington 
bureaucrats, the final say on how their firms are financed.
    While both SBIR and STTR are critical programs, their value 
has historically been limited to certain regions. Through 
workshops and local marketing campaign, we are going to change 
that--outreach in rural regions and amongst underrepresented 
communities, such as women, minority and veterans will expand 
our R&D programs. Tools like training workshops and podcast 
seminars will help these groups do everything from select a 
purchasing agency to file an SBIR application. That is 
important because higher program participation means a deeper 
talent pool and ultimately more products brought to market.
    In the last few years, our country has faced profound 
challenges. Today, we stand at a crossroad on a wide range of 
issues from health care reform to energy policy. In addressing 
this obstacle, one thing is very clear: We need a new approach. 
That why this morning's legislation is so important. It invests 
in America's innovators, entrepreneurs who realize that with a 
little ingenuity, we can turn the page on the old way of doing 
business and usher in a new era of prosperity.
    [The information is included in the appendix.]
    Chairwoman Velazquez. With that, I look forward to hearing 
from today's witnesses, and I want to take this opportunity to 
thank all of you in advance.
    And I now yield to Mr. Luetkemeyer for an opening 
statement.
    Mr. Luetkemeyer. Good morning. And thank you, Madam 
Chairwoman, for holding this hearing. And thank you to all of 
the witnesses who have taken their time with us this morning.
    This hearing represents this committee's continuing work to 
complete legislation reauthorizing and modernizing the Small 
Business Innovation Research and Small Business Technology 
Transfer programs. For over 25 years, these two programs have 
provided invaluable support to our nation's cutting-edge small 
businesses. The grants provided by these programs have kick-
started small companies to help fight disease, protect our 
nation's warfighters and increase crop yields.
    In today's economy, more engineers, researchers and 
technicians work for small businesses than at any other time in 
our nation's history, and many of them have ideas for products 
or a process that can improve various facets of our lives. The 
problem these innovators face lies in bringing those ideas to 
fruition. This is where SBIR and STTR have had a tremendous 
impact on providing the initial seed funding to research and 
develop these ideas into concrete plans. The programs have 
helped launch thousands of companies and grow countless others.
    Winning an SBIR or an STTR grant not only provides initial 
funding for development of an idea, it often validates the 
initiative and spurs private investment. In times when banks 
and traditional lending institutions are tightening their purse 
strings, we ought to be looking at ways to spur such 
investment. The SBIR and STTR programs are exactly the type of 
government programs that provide such a service.
    The SBIR and STTR programs offer competition-based awards 
to stimulate technological innovation among small firms while 
providing government agencies new, cost-effective technical and 
scientific solutions to meet their diverse needs.
    The development of this program is not only critical to the 
unique needs of each of the participating Federal agencies, but 
also to our national economy. Small businesses invigorate the 
U.S. economy by introducing new products and cheaper ways of 
doing business, sometimes with substantial economic benefits. 
They play a key role in introducing technologies to the market, 
often responding quickly to new market opportunities. Some of 
the greatest technological innovations came from small business 
owners, tinkering in their own laboratories or in their 
workshops. These two programs provided these innovators the 
opportunity to grow their ideas into practice, provide jobs and 
improve our economy.
    We are confident that the legislation drafted by our 
committee will maintain the integrity of the program while not 
limiting participation. We must work to find an appropriate 
solution that funds the best science while wisely investing 
taxpayer dollars.
    With that, Madam Chair, I look forward to continuing our 
work on this issue, and I yield back.
    Chairwoman Velazquez. Thank you.
    Chairwoman Velazquez. And now I welcome Dr. Scott Koenig. 
He is the President and chief executive officer of MacroGenics, 
a research firm in Rockville, Maryland. Mr. Koenig has been 
with MacroGenics since September 2001. MacroGenics is 
developing therapies to treat cancer, autoimmune disorders, 
allergy and infectious diseases. Welcome.

             STATEMENT OF SCOTT KOENIG, M.D., Ph.D.

    Dr. Koenig. Thank you. Good morning, Chairwoman Velazquez, 
members of the committee, ladies and gentlemen. I am President 
and CEO of MacroGenics and Chairman of the Board of Applied 
Genetic Technologies Corporation. I am appearing before this 
committee on behalf of Biotechnology Industry Organization.
    I am a scientist, physician and entrepreneur. For the past 
25 years I have worked at the NIH and in the biotechnology 
industry.
    I have seen the importance and impact of the SBIR program 
in the biotechnology industry firsthand. But sadly, from my 
perspective, current rules have inhibited and interfered with 
the growth and survival of the small, private biotechnology 
companies in the development of promising technologies of 
products due to the inability of venture-backed companies to 
participate in the SBIR program.
    Let me provide an example. AGTC is a small, private 
biotechnology company in Alachua, Florida, developing cutting-
edge product candidates to treat and cure different genetic 
diseases using adeno-associated viral vectors. The company, by 
all parameters, is small. They have seven employees, no product 
revenues and large capital requirements to advance their 
programs through the early stages of preclinical and clinical 
development. They have raised $37 million from venture 
capitalists to date, and because of their capital structure, 
they are ineligible to receive SBIR funds.
    AGTC received several SBIR grants from 2001 to 2003 for 
three different projects to advance treatments for rare 
diseases and expand the technology platform. These were 
projects that were either too early in the development cycle or 
targeted to too small a patient population to be of interest to 
the financial investors.
    In 2003, the company applied for an SBIR Phase One/Two 
grant that was initially approved for award with excellent 
reviews, but had to be withdrawn due to the VC ownership. This 
grant would have advanced a treatment for Pompe's disease, a 
fatal genetic disorder that in many cases causes the death of 
infants by 1 year of age. No investors were willing to fund 
this early-stage work on Pompe's. To date, 6 years later, no 
further work has been done on this program. This is a small 
company, doing promising work, whose innovation pipeline is 
hindered by the current SBIR eligibility rules.
    The National Research Council's 2009 report stated that 
restricting access to SBIR funding for firms that benefit from 
venture investments would, thus, appear to disproportionately 
affect some of the most commercially promising small innovative 
firms and that the current SBIR eligibility rules have the 
potential to diminish the positive impact of the Nation's 
investments in research and development in the biomedical area.
    Advancing science now through the valley of death has never 
been more important than it is right now as numerous small 
biotechnology companies are being forced to shelve promising 
therapy as a result of the current economic crisis. In fact, in 
just the last 5 months, at least 40 U.S. biotech companies have 
either placed drug development programs on hold or cut programs 
altogether. These programs include therapies for HIV, cervical 
cancer, multiple sclerosis, diabetes and lots of others.
    The impact of the current economic crisis on small 
biotechnology companies has been and continues to be severe. 
According to the latest data, 45 percent of small biotech 
companies have less than 1 year of cash remaining, and a recent 
joint study by BIO and Thompson Reuters indicates that the 
majority of biotech investors are changing their investment 
approaches towards lower-risk projects.
    I appreciate the opportunity to discuss the much-needed 
changes in the current SBIR program. My recommendations can be 
grouped into three general areas:
    First, increase competition for SBIR grants and provide 
awards to small companies with the best science and most 
promise to benefit the public. SBIR plays a critical role in 
aiding these small biotechnology companies navigate through 
this valley of death where the concept is too high-risk for 
private market support.
    BIO supports the provisions in the SBIR reauthorization 
legislation that would reinstate eligibility for small 
biotechnology companies that are majority venture backed. This 
would ensure that the most competitive pool of applicants and 
that grants awarded will be based on the projects that show the 
most promise in bringing breakthrough therapies to the public.
    Second, clarify SBIR eligibility rules to make them easier 
to understand and increase transparency regarding the program's 
operation. Currently, the application of affiliation rules 
often results in small companies with 50 employees being 
affiliated with hundreds of other employees of companies simply 
because the companies share a common investor.
    BIO supports provisions in the SBIR reauthorization 
legislation that would create a more rational and effective 
affiliation process. Specifically, BIO supports language to 
clarify minority investment by venture capital operating 
companies that does not make the company an affiliate for 
purposes of determining size.
    Finally, third, maintain agency flexibility to make certain 
SBIR programs continue to serve the needs of individual 
agencies. BIO supports provisions of the SBIR reauthorization 
bill that would protect an agency's ability to fund 
commercialization programs and determine when it is appropriate 
to exceed award amounts.
    As the National Academy of Science's 2009 report made 
clear, SBIR should continue to rely on agency managers' 
judgment, experience and understanding of mission needs to 
effectively administer the SBIR program.
    Thank you very much for your time.
    Chairwoman Velazquez. Thank you.
    [The statement of Dr. Koenig is included in the appendix.]
    Chairwoman Velazquez. Now I welcome Ms. Mary B. Dwight. She 
is the vice president of government affairs for the Cystic 
Fibrosis Foundation in Bethesda, Maryland. The Cystic Fibrosis 
Foundation founded in 1955, was established to provide the 
means to cure and control cystic fibrosis.
    Welcome.

                  STATEMENT OF MARY B. DWIGHT

    Ms. Dwight. Thank you, Madam Chairwoman, and thank you, 
members of the committee. It is my privilege to speak about the 
important role of the SBIR program and the development of 
therapies for cystic fibrosis and other serious life-
threatening diseases.
    Cystic fibrosis is a fatal genetic disease that affects 
30,000 Americans. It is one of more than 7,000 rare or orphan 
diseases that impact over 30 million Americans.
    At the Cystic Fibrosis Foundation, we recognize the 
additional hurdles that we face to develop therapies to treat 
this disease. As a rare disease, the small market makes it less 
likely that companies will pursue promising therapies. As a 
life-threatening disease, we do not have time to wait.
    To overcome this hurdle, the foundation pioneered a new 
business strategy, dubbed Venture Philanthropy, through which 
we directly invest, much as a venture capitalist would, in 
research and development for CF therapies. We collaborate with 
biotechnology and pharmaceutical firms, large and small, to 
reduce their financial risk and enable them to join our effort 
to cure CF. In the past 5 years, we have invested over $660 
million in our research and medical programs.
    Through this aggressive research program, we have made 
significant progress in the treatment for CF. When the 
foundation was established in 1955, children with the disease 
were not expected to see kindergarten.
    Today, the median survival is more than 37 years, but no 
one in this room would say that that life expectancy is 
acceptable. We have more to do. And we continue to work with 
innovative companies to pursue therapies, to treat both the 
symptoms of cystic fibrosis, as well as promising products to 
target the genetic disease itself.
    In working to advance innovative drug development for those 
that suffer with the disease, our Venture Philanthropy model 
mirrors the success of the SBIR program. We applaud the 
committee for a steadfast support of this important resource 
for innovative research and ask that you continue to develop 
this program so it may foster research for cystic fibrosis and 
other rare diseases.
    SBIR grants offer critical financial resources for 
promising therapies that may not have high potential for 
commercialization, but are nonetheless vital to people with 
rare disease. The story of our recent partnership with Alnara 
Pharmaceuticals illustrates how funding either through our 
Venture Philanthropy model or the SBIR program can advance 
promising therapies that would otherwise be abandoned by the 
market. We believe that Alnara, a small company in Cambridge, 
Massachusetts, would be well suited to develop an enzyme for 
cystic fibrosis, yet this indication was not a part of their 
business model. The foundation reached out to Alnara with the 
offer of financial support.
    Consider Alnara's principal products like the trunk of a 
tree, established and well funded from a variety of sources, 
including the venture capitalists Dr. Koenig mentioned. We 
asked Alnara in effect to grow a new branch for cystic 
fibrosis. Our funding, or SBIR program funding as well, 
provided the company the stability it needed to take on the 
increased risk of this new branch. The result was a positive 
new direction for the company, for new jobs and a promising new 
treatment for people with cystic fibrosis.
    We thank the committee for recognizing the importance of 
the SBIR program to rare disease research through the 
reauthorization's call for a special focus on rare-disease-
related topics.
    SBIR grants provide the necessary capital and stability 
companies need to pursue promising new approaches or to grow 
new branches of their established business models. This support 
is essential to foster more therapies for rare disease, as 
these therapies are often secondary products or new uses for 
the companies' larger, more commercialized products.
    In our fight against CF, we are fortunate to have so many 
therapies to pursue, yet we are still racing the clock to 
develop new CF therapies. Despite our successful fund-raising 
efforts and our promising pipeline, we cannot pursue all of the 
research opportunities before us without help and without 
partners. Many of our colleagues in the fight against rare 
disease are not as fortunate as we and are even less able to 
foster promising research.
    Congress has reaffirmed its commitment to support 
innovative research for orphan diseases by creating incentives 
for companies to develop orphan drug products and by providing 
discretionary funding for research on orphan disease, including 
SBIR.
    Congress can do even more for these small but deserving 
patient populations by designating 10 percent of the SBIR 
grants for orphan disease research and development. 
Guaranteeing this funding would answer a financing problem 
facing innovative small businesses. With Congress' support, 
small business would be in a better position to move beyond 
basic research on an orphan drug product and commercialize 
products that can improve the health of millions of people with 
rare disease.
    I thank the committee for your time and look forward to 
answering your questions.
    Chairwoman Velazquez. Thank you, Ms. Dwight.
    [The statement of Ms. Dwight is included in the appendix.]
    Chairwoman Velazquez. Our next witness is Mr. John Stocker. 
He is the Senior Vice President of Federal Solutions for 
Lynntech, located in College Station, Texas. Lynntech is a 
research and technology development company with a 20-year 
history of successful innovations in energy, water and health.
    Welcome.

                  STATEMENT OF JOHN J. STOCKER

    Mr. Stocker. Thank you very much, Madam Chairwoman, Mr. 
Luetkemeyer, members of the committee. It is with great 
pleasure that I appear before you today to offer Lynntech's 
views on the proposed legislation to reform the Small Business 
Innovation Research program.
    As the Chairwoman noted, Lynntech is headquartered in 
College Station, Texas. We are the largest SBIR contractor in 
the State and one of the largest in the country.
    The legislation that we are reviewing this morning has been 
the product of very hard work and thought generated by your 
staff, Madam Chairwoman. Contrary to the comments of the 
opposition, this legislation has not been rushed through a 
process of dictatorial powers, but rather through the input of 
all parties to ensure that change is accomplished in a 
thoughtful way and as a result of the input from stakeholders.
    As a result, Lynntech, I would be pleased to note this 
morning, is announcing its intention of forming a new coalition 
of SBIR companies that agree with our view that reform requires 
access to all capital sources and that technology transition 
should be the centerpiece of the program. This new coalition 
will be known as the Council on Small Business Innovation and 
Research and is intended to provide SBIR firms an opportunity 
to present alternative viewpoints to the Congress on issues of 
the day.
    As we have stated many times before, we believe that last 
year's debate focused on the wrong set of issues. SBIR firms 
need the opportunity to access all sources of capital to be 
successful and the one principle that should be guiding the 
program, and that is moving technology into the marketplace.
    Ownership of SBIR companies by venture capital firms should 
not be guiding our discussion regarding reform of the program. 
In fact, venture capital firms and other private capital 
resources should be available to SBIR firms to grow their 
technology development efforts. The only ground rule should be 
that large corporations should not directly benefit from a 
small business program. The issue that debate should be focused 
on, in Lynntech's opinion, is that of technology transition.
    Let me comment for a moment on the venture capital issue as 
it is identified in the proposed legislation. The legislation 
does, in fact, address the issue of capital sourcing by 
allowing SBIR companies majority owned by venture capital firms 
the opportunity to compete for SBIR contracts.
    Let me underline the word "compete." Madam Chairwoman, your 
critics frequently state that your objective is to obtain 100 
percent control of the SBIR market by a majority of VC-owned 
firms. The proposed legislation does not say that. What it does 
do is to allow for the competitive marketplace to be opened to 
those small businesses that would otherwise qualify where their 
majority ownership lies in the hands of venture capital firms.
    Also, contrary to your critics, you do not allow unfettered 
access to this market for large VC firms. Large VC firms can 
comprise no more than 20 percent of an SBIR company. No SBIR 
firm would be opposed to a major company such as Pfizer, 
Lockheed or Boeing taking a stake in their company if there 
existed the possibility of eventually transitioning technology 
to the marketplace.
    In fact, Lynntech is concerned that its ability to raise 
capital in the private markets could be damaged by the 
continued prohibition on majority ownership by VC firms. If 
Lynntech had had a capital infusion that would have transferred 
majority control to a VC firm, it would no longer be eligible 
for SBIR and the country would be effectively denied the 
achievement of new systems and technologies that improve the 
safety and well-being of the country.
    On technology transition, Lynntech is pleased that Title II 
of the proposed legislation clearly indicates that the policy 
of the Congress is that the SBIR program should focus on the 
development of projects that have potential for transitioning 
to the market. Lynntech applauds this objective and believes it 
is key to the efforts undertaken for SBIR reform.
    The proposed legislation further establishes a reporting 
mechanism for Federal agencies to report on the success of 
their commercialization efforts. This last provision is 
especially key, as much of the reform debate has been hampered 
by inadequate data.
    The proposed legislation also establishes a process whereby 
technology transition efforts would be supported by Phase Three 
funding. The definition of that--of what constitutes Phase 
Three is clearly outlined, and the agencies are given a number 
of tools to use in the achievement of Phase Three objectives.
    There are a couple of concerns that we have in regard to 
the legislation. We would like to see the allocation for SBIR 
funds to be increased, and we have also commented in regard to 
the authorization period being extended for more than a period 
of 2 years.
    Despite these minor concerns, however, Lynntech believes, 
in general, the proposed legislation goes a long way to 
achieving the SBIR reforms that are so desperately needed. 
Thank you.
    Chairwoman Velazquez. Thank you, Mr. Stocker.
    [The statement of Mr. Stocker is included in the appendix.]
    Chairwoman Velazquez. Our next witness is Ms. Li. She is 
the Chief Resource Officer and Acting Chief Operations Officer 
at PD International, an applied think tank and solutions 
provider located in Baltimore, Maryland. Ms. Li is testifying 
on behalf of the United States Women's Chamber of Commerce. The 
U.S. Women's Chamber of Commerce was founded in 2001 to 
increase economic growth opportunities for women.
    Welcome.

                     STATEMENT OF NING LI 

    Ms. Li. Thank you, Madam Chairwoman, ranking members of the 
committee. I am here today as a member of the U.S. Women's 
Chamber of Commerce, representing our 500,000 members. Over 
three-quarters of our members are small business owners, many 
of whom are active contributors to high-tech innovations, 
including research and development for both the Federal and 
commercial sectors.
    My firm, PD Inc., is an innovative technology firm and 
hands-on small business. The firm was founded in 2001 for the 
purpose of inventing technologies that are the first to 
effectively solve existing technical problems that are of 
significant social and economic impact.
    Since the year 2004, PD Inc. has devoted major resources 
into the R&D activities of voting technology. Our research has 
focused on the holistic design of a new-breed voting machine 
that would address problems existing in current voting 
technologies in order to accommodate all stakeholders, such as 
election officials, voters and the Federal Government, in their 
need of having an easy to use, easy to manage, accurate, fair, 
transparent and verifiable election process.
    One of the major subcomponents of our design is an 
essential innovation in addressing security problems, which 
have been the major contributor to social controversy and the 
public scrutiny in the past years. At the beginning of 2008, we 
identified that the SBIR opportunity at the National Science 
Foundation could be of benefit to our specific innovation.
    The SBIR application process is complex in its requirements 
of documentation, one of which is a letter from the existing 
potential customer or--an existing or potential customer to 
support the invention of such technology. However, our 
customers would generally be county and municipal election 
officials who, as public sector personnel, cannot endorse a 
product or technology marketed by a particular commercial 
entity. We did not have enough time to allay any endorsement-
related concerns; therefore, we decided not to file our 
application at that point.
    In the latter half of 2008, we proved that the prototype 
built of our product is economically viable and there hasn't 
been such a device in the commercial space. At this point, we 
are beyond Phase One in the R&D process, but we still need 
money to build it. Phase Two of the SBIR award would solve our 
funding needs; however, we are not eligible to apply because we 
haven't gone through Phase One. If we apply for Phase One, it 
is not only dishonest, it also would waste precious human and 
monetary resources to repeat procedures that have already been 
done.
    We recommend that small enterprises which are able to 
secure independent validation of their technology should be 
allowed to bypass Phase One and apply directly for Phase Two 
assistance.
    We support legislation that does not permit business to 
evade Phase One of the SBIR program, but does allow an 
exception to be granted for companies that can demonstrate to 
agencies SBIR proposal evaluators that the company has fully 
completed Phase One work.
    For example, SBIR program participants that have already 
demonstrated proof of concept utilizing their own financial 
resources in addition to having acquired a validation through 
peer review conducted by recognizable subject matter experts 
should be allowed to opt out of Phase One and go directly to 
Phase Two. This would save the innovators time and enable them 
to adhere to their schedule of innovation. Meanwhile, it also 
helps, saving taxpayers money.
    Other recommendations, acquisition of the services of a 
patent attorney should be recognized by all Federal agencies as 
eligible expenditure under both Phase One and Phase Two. 
Efforts should be put into place to protect small business 
rights to intellectual property. Regulations should bind the 
large industrial partners of SBIR program recipients to protect 
small innovators' interests in intellectual property during the 
process of applied research collaboration.
    A standard NDA agreement should be drafted by SBA, which 
large prime personnel would be required to sign before 
requesting small businesses disclose their intellectual 
property information. And a code of conduct should be 
established to regulate large prime personnel behavior.
    SBA should work with SBIR's recipients and perhaps with the 
U.S. Patent and Trade Office to assist businesses with the 
filing of patent applications.
    We strongly support the venture capital provisions detailed 
in the legislation under consideration, which permits SBIR 
awardees to receive venture capital, venture capital 
partnership vital to linking small businesses, innovation and 
research to capital market opportunities.
    We must make sure there are safeguards within the 
legislation, the regulation and the practical application of 
the rules to protect small business from exploitation by larger 
businesses and the venture capitalists. We support maintaining 
majority ownership and board representation by the small firm.
    Thank you again for the opportunity to provide input here 
today. We applaud the work of this committee to energize 
research and innovation within the small business community and 
assist with the transfer of this innovation to Federal 
Government and commercial sectors. Thank you.
    Chairwoman Velazquez. Thank you, Ms. Li.
    [The statement of Ms. Li is included in the appendix.]
    Chairwoman Velazquez. And now I recognize Mr. Akin for the 
purpose of introducing our next witness.
    Mr. Akin. Thank you, Madam Chairwoman. It is a pleasure to 
have Derek Rapp here testifying before this committee today. 
Derek is CEO of Divergence, Incorporated, a science-based 
company that focuses on solutions and the prevention and 
control of pest infections and infestations. The company's 
technologies have applications in plant protection, animal 
health and human health.
    Prior to joining Divergence, Derek worked for Monsanto for 
12 years where he held several positions, including Director of 
Mergers and Acquisitions. During his time in that position, he 
led divestitures with proceeds totaling roughly 2 billion.
    Prior to that position, Derek led the company's acquisition 
and licensing program in the plant biotechnology and seeds 
area, leading several major acquisitions totaling more than 2.5 
billion, as well as numerous licensing transactions.
    Derek is a member of the board of directors of the St. 
Louis Regional Chamber and Growth Association, was chairman of 
the Plant and Life Sciences Network for RCGA in 2008. He is 
also a board member of Missouri Biotechnology Industry 
Association and the St. Louis Life Sciences Project.
    Derek, I appreciate all the hard work you do in St. Louis, 
and I look forward to your testimony today. Welcome to 
Washington, D.C.

                   STATEMENT OF DEREK K. RAPP

    Mr. Rapp. Good morning. Thank you, Congressman Akin and 
Madam Chairwoman and Committee. Thank you very much for the 
opportunity to appear before you today.
    I am going to speak just briefly with regard to my views on 
the SBIR program and its importance. As you will hear, I am a 
strong proponent of the continued awarding of SBIR grants. Such 
grants have made and continue to make a fantastic difference 
for Divergence, and I have no doubt for thousands of other 
companies as well.
    First, a bit of background. Divergence is a life science 
startup company--in Congressman Akin's district, in fact--with 
23 full-time employees. Our research is focused on discovering 
safe and effective products for plant protection, animal health 
and human health. Most of products in development arising from 
Divergence's research are focused on the identification, 
treatment and prevention of parasitic infections caused by 
round worms, also known as nematodes.
    Divergence began operations in 1999 and has raised 
approximately $36 million since its inception. Roughly 60 
percent of this amount has come from equity investors, both 
individuals and venture capital firms; 20 percent has come from 
corporate relationships, and the final 20 percent, upwards of 
$7 million, has come from research grants.
    Of these research grants, $5.5 million has come in the form 
of SBIR grants. Divergence has received nine grants from the 
National Science Foundation, nine grants from the U.S. 
Department of Agriculture and seven grants from the National 
Institutes of Health. In all, Divergence has received 15 Phase 
One grants, eight Phase Two grants and two follow-on grants.
    A life sciences company faces many challenges and its 
investors often take sizeable financial risks. The science is 
difficult and the time line to significant value creation is 
usually lengthy. SBIR grants play three major roles for 
companies. First, they lessen the risk to investors by reducing 
the shareholder dilution and increasing the funds available for 
early-stage projects. This means that more companies get 
started and that more companies reach the proof of concept 
stage with their research.
    Second, SBIR grants provide a validation of the science. 
The fact that the granting process includes peer review as a 
component of the program is quite significant. Investors, 
potential employees, collaborators and others respect this 
rigorous review process.
    Third, SBIR grants provide an incentive and a source of 
pride to the scientific employees. The work in life sciences 
companies is long, difficult and often frustrating. Word of 
receipt of a grant provides real boosts to a team.
    SBIR grants provide important benefits for our society as a 
whole, too. As the name suggests, they foster innovation in 
impactful market areas.
    In each grant application, a company is asked to describe 
its scientific concept, any preliminary data that may have 
generated to date and the resources it will call on to 
undertake its science if the grant is funded. The company is 
also asked to discuss the markets it hopes to target and the 
way it anticipates getting its products to the market place. 
Hence, the program is designed to reward companies that are 
innovative and impactful.
    Such innovation is essential for the U.S. to remain a world 
leader in life sciences, and the benefits to our citizens, 
indeed to people throughout the world, of the products that 
arise from such research are incalculably large.
    For all these reasons, I find SBIR grants quite compelling, 
and therefore I strongly encourage Congress to reauthorize the 
funding of SBIR grants.
    I look forward to the opportunity to engage with you this 
morning in a dialogue about the SBIR program and the pending 
legislation. To be clear, however, I am not an expert on the 
intricacies of the granting program or governmental agencies. 
My strongly held views are on the basic need to fund innovation 
and research institutions and companies.
    I thank you very much for your attention and your efforts.
    Chairwoman Velazquez. Thank you, Mr. Rapp.
    [The statement of Mr. Rapp is included in the appendix.]
    Chairwoman Velazquez. I would like for the members of the 
panel to comment on the legislation that we have before the 
committee today.
    The legislation is designed to encourage more small firms 
to respond to SBIR research solicitations. Can you comment on 
what provisions of the bill will contribute to greater number 
of small companies applying for SBIR awards?
    Dr. Koenig.
    Dr. Koenig. Madam Chairwoman, I think that the most 
important component of this bill is rectifying and changing the 
2003 ruling allowing majority-owned venture companies to now 
participate in this process. This will make this a much more 
competitive program. You will get the best science, the best 
companies involved in this program.
    I think that this rule has taken a fantastic program and 
damaged it. And I think that by reinstituting that change alone 
you will now open up the opportunity for the program to be much 
more successful, more companies benefiting, and the country 
benefiting from it.
    Chairwoman Velazquez. Ms. Dwight.
    Ms. Dwight. We would echo those comments as well. The VC 
changes really do strengthen the program.
    As a founder of biotechnology and pharmaceutical research, 
we often look to the presence of VC funding as proof of concept 
in a way. We cannot do it alone, and especially as a 
philanthropy organization, we should not do it alone. So the 
fact that a company has a promising therapy that has been 
validated by venture capital funding as well really does 
indicate to us that we are on the right horse, and we need to 
work with them in partnership.
    So the VC funding changes in the new bill really will 
strengthen the SBIR program to allow those companies, including 
very small ones, that have very promising therapies to move 
forward.
    Chairwoman Velazquez. Mr. Stoker, I just would like to move 
to my next question I would like to address to you.
    In the discussion of how to treat venture capital 
investment in the SBIR program, some have proposed placing a 
cap on the amount of funds that an agency can devote to 
venture-backed SBIR awards.
    What is your view of this idea and what potential problems 
might this create, if implemented?
    Mr. Stocker. Madam Chairwoman, in Lynntech's view, placing 
artificial caps on the participation of any small business in 
this program, I think creates problems in the agencies. There 
will be substantial questions about interpretation of the cap, 
there will be questions in regard to how the accounting process 
is being managed for ensuring that the cap is honored.
    Frankly, in many agencies, Madam Chairwoman, they have 
problems enough with identifying how many dollars go to the 
SBIR program. There are countless instructions, memos and 
directives, for example, from the office of the comptroller at 
OSD in making sure the services are properly complying with the 
general thrust of SBIR. So by putting a VC cap in place, you 
are just complicating the problem.
    Chairwoman Velazquez. Thank you.
    Dr. Koenig.
    Dr. Koenig. We agree with that assessment. I mean, the 
National Research Council report says that getting flexibility 
in the system, allowing the agencies to make that decision to 
then fund them at the appropriate level, will end up giving a 
better result. And we support that notion.
    Chairwoman Velazquez. Okay.
    Ms. Li, in your testimony you raised an important issue 
about whether Phase One is always necessary in the SBIR 
program.
    Can you elaborate on your views regarding this issue?
    Ms. Li. Thank you, Madam Chairwoman.
    SBIR Phase One practice essentially is an organized peer 
review process. So what is required is, a small business has to 
recommend a name--names of two well-known subject matter 
experts to the program engineer who is in charge of the subject 
that you are submitting your proposal to. The process can be 
done by the small businesses themselves.
    Basically, we would--we suggest possibly a standard 
affidavit form--and the evaluation form can be downloaded from 
SBA Web site--that we can attach to our proposal and send to 
the subject matter experts, because our research activity would 
know who are the subject matter experts.
    The reason we are asking for this is because it would offer 
the flexibility in our schedule. Again, we are--by all means, 
we are enterprise, we are not academic institution. So we have 
other responsibilities. We have responsibility to serve our 
customers, to make profits. So sometimes these activities get 
into the way of doing SBIR.
    Of course, they ideal scenario is, our inventors would like 
to spend all of their time in the lab; but currently, because 
of the way--we have to survive; we need to do those business 
activities, as well as doing innovation.
    So that will offer us a lot of flexibility in conducting 
our innovation.
    Chairwoman Velazquez. Okay.
    Dr. Koenig, since the SBIR program was last reauthorized, a 
number of agencies have made jumbo SBIR awards that exceed 
statutory levels. Many argue that such awards provide agencies 
with the flexibility to fund the research they view as most 
productive.
    What is your perspective on this issue?
    Dr. Koenig. We believe quite strongly that, again, the 
agencies should be the determinant of the size of the award and 
there be certain circumstances when the award should be greater 
than the guidance.
    In the end, the Agency is in the best position to decide 
what is in the best interest of the program towards getting 
that program towards commercialization. So I think putting it 
in the hands of the Agency makes a lot of sense.
    Chairwoman Velazquez. Okay.
    Mr. Stocker, provisions of the legislation authorize 
initiatives to help SBIR grantees overcome the so-called 
"valley of death" and commercialize their research. In your 
opinion, will these provisions bridge this gap and result in 
more SBIR-funded research in the marketplace?
    Mr. Stocker. Madam Chairwoman, I think the legislation goes 
a long way towards addressing that problem. It cites a number 
of tools the agencies could utilize for helping to bridge that 
gap.
    We think the most significant one, because we are largely a 
defense contractor, is that most of the acquisition managers 
are totally unaware of the innovations that are being 
undertaken in the SBIR program. So we think that the guidelines 
that are provided in the legislation will generate a process 
where we hope change will take place. And certainly with the 
reporting requirements you now have in the bill, I think you 
will be able to follow it as well.
    Chairwoman Velazquez. Okay.
    And, Ms. Dwight, SBIR eligibility rules force small firms 
to choose SBIR funding or VC funding when, in fact, many 
growing small companies require both.
    Can you clarify how a change to the SBIR eligibility rules 
will help advance the objectives of the program?
    Ms. Dwight. As I mentioned in my testimony, what we see in 
the companies that we partner with for the cystic fibrosis 
therapies is that they need a variety of resources to bring a 
therapy to market.
    Often our grants may be one of the larger ones they get or 
maybe one of the smaller ones. Our grants range from--anymore 
from around an average of about $1 million to, in some cases, 
$80 million for one promising therapy. So when you have that 
much money going into a company to bring something to patients, 
it requires a vast majority of resources, and SBIR can be a 
really valuable tool to bring into the mix for development.
    So we strongly support the idea that SBIR can be one of 
many resources for a company, not the only one.
    Chairwoman Velazquez. So let me ask you, are you concerned 
that increasing also the average SBIR grant size will mean that 
fewer SBIR grants will be available to small businesses?
    Ms. Dwight. No. In fact, we applaud the increased grant 
size. The reality is, I think the current grant size is often 
inadequate to bring a therapy to the next stage. And it really 
is, the larger grant size will enable the company to more 
accurately focus on the therapeutic development.
    Chairwoman Velazquez. Okay.
    Now, your turn, Mr. Graves.
    Mr. Graves. Thank you, Madam Chair. I want to thank all of 
you for being here today. I apologize for being a little late, 
but I know some of you come a long ways and I appreciate it 
very much.
    My first question is for Mr. Stocker, and it is a friendly 
question. But I see you formed a new association to advocate 
for SBIR and for VC funding, and I would like for you to just 
expand a little bit on why you felt it necessary to come up 
with a new association.
    Mr. Stocker. Largely because of the fact that the 
recognized associations that have commented on the policy 
issues associated with not only this legislation, but in the 
past do not reflect the views of our company. And we have 
discovered other SBIR firms that share our concern about not 
having adequate recourse to multiple sources of capital as well 
as public financing, as in the SBIR program, and the need to 
see SBIR as an important tool in technology transition.
    The current organizations out there have stated flatly that 
commercialization is not the centerpiece of this program. We 
firmly disagree with that.
    Mr. Graves. Thank you very much. Very well said.
    Mr. Rapp, my second question is to you. In your written 
testimony you touched on why small companies tend to be more 
innovative than larger ones. Can you expand on that a little 
bit?
    Mr. Rapp. Certainly. And thank you.
    It goes to a fair extent, my opinion, to a concept of risk 
and assumption of risk. A small company is inherently forced to 
take some pretty significant risks and therefore is willing to, 
I think, think more broadly and doesn't have the baggage of 
institutional memory or projects that are already in existence 
to shed before it can go on and do new things.
    So it is a combination of trying to reward its investors 
who are taking significant risks in the first place and then 
also that lack of institutional baggage.
    Understand that when an investor invests in a company like 
ours, that party is looking for a return of perhaps 10 times on 
its investment. When an investor invests in a major, publicly 
traded company, obviously they are hoping that they beat the 
market, which is not anywhere close to a 10X return in almost 
every case.
    So it is just a question of matching the opportunities with 
the risk profile for the investment in the first place.
    Mr. Graves. Thank you.
    Madam Chairman, thanks for having the hearing. It just 
explains even more why we need the changes to SBIR.
    Chairwoman Velazquez. Thank you.
    Mr. Nye.
    Mr. Nye. First of all, I would like to thank Chairwoman 
Velazquez for her leadership on the issue, and thank you also, 
Ranking Member Graves, for all of your leadership in helping us 
to modernize this program--which I think clearly we have 
established has done some good in terms of promoting small 
business innovation and just needed some tweaks to let it do 
even better.
    As the subcommittee Chair of the Subcommittee on 
Contracting and Technology, we have also had some hearings on 
the same issue. We have heard some great things about the 
benefits of the program.
    I had the opportunity to speak at a breakfast to about a 
1,000 participants in the U.S. Navy's SBIR program a couple of 
weeks ago, and they gave it high marks.
    I have--and I want to thank you particularly, the 
panelists, for making the trip here today, but also for being 
the ones who are out there on the front lines making this 
program work in practice, producing the innovations and 
creating the jobs out in the marketplace--indeed the whole 
reason why we create and are concerned about making sure that 
we get this program right.
    I think most of my questions have been satisfied by your 
testimony in some of the other questions answered. But I have 
seen heads nodding at various times during one or the other of 
your testimony. I just want to see if you can sort of show me, 
by a show of hands, if you all agree that making it easier for 
our venture capital to play a role and dovetail with the SBIR 
program is helpful. And then, if you don't, if you could tell 
me why.
    If you agree that is helpful, if you would raise your 
hands.
    That looks like everybody agrees with that. That is the 
impression I was getting.
    Again, I just want to thank you all for the hard work that 
you are putting into creating the innovation that drives our 
economy, and I look forward to continue working with all of you 
other small business and foundation representatives and our 
chairwoman, making this program even better.
    Thank you. I yield back.
    Chairwoman Velazquez. Thank you.
    Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman. For Ms. 
Dwight, a couple of questions.
    What kind of criteria do you use for the investments that 
you make in the various companies to do research for you?
    Ms. Dwight. We base it on a variety of criteria. The 
fundamental guidance for us is that there are promising 
therapies for cystic fibrosis, do we believe that a compound or 
a small molecule or whatever sort of basic research is 
promising and something worth taking an extra shot on goal 
against the fight against the disease.
    Once we get through that process and look at the viability 
of the science, we also want to look at the viability of the 
company that we may be partnering with. And as I mentioned 
before, venture capital is also a great marker of us that we 
have a viable partner, that we have someone that has been 
proven to know how to take that science, that promising 
science, and move it towards commercialization and towards the 
patient.
    So it really is a combination of both science analytics and 
unless business prowess and ability to move the therapy into 
the next phase.
    Mr. Luetkemeyer. How do you look at the science, though? 
Did you have some scientists on your staff? Do you have some 
sort of doctors that understand and can look at this and see 
that this has got potential?
    I mean, I am not a scientist, so I am just kind of curious.
    Ms. Dwight. I am not either. So I can brag on our very 
well-respected scientific team.
    We have a medical team and it is actually an independent 
entity below the Cystic Fibrosis Foundation called Cystic 
Fibrosis Foundation Therapeutics. We have medical doctors and 
bench scientists on staff and also many folks around the 
country advising us on the promise of the therapies.
    And, really, the foundation is recognized as the leader in 
cystic fibrosis research, convening many of these scientists 
together. Through evaluations internally and also through these 
expert panels nationwide, we are able to look at what is going 
on in cystic fibrosis research. And also, I think particularly 
as I mentioned in my statement, this is a rare disease. So 
typically something may come as a promise for cystic fibrosis 
from the bench science.
    But in many cases, some of the therapies that have been 
most promising for cystic fibrosis may not have originated as a 
therapy for cystic fibrosis. They may have been a molecule that 
was developed for something else in its entirety, and someone 
along the way said, You know what, this might work for us.
    So we are able to look at the science through our experts 
and also through our business model of Venture Philanthropy 
with grants provided; say, Why don't you come and try and work 
this with us, we think the science here has promise; we think 
this may be something that may work for a disease you may not 
even have heard of, so we are going to bring you to the table 
with funding and experts in the science area to say, Let's try 
it for cystic fibrosis.
    And we are very fortunate in that we have over 30 therapies 
in our product development pipeline that have yielded some 
promise for this disease and over--more than four are in 
patients today because of that willingness to take a new risk.
    Mr. Luetkemeyer. I appreciate your patience. I can hear it 
in your voice.
    There was kind of a common theme among all of you this 
morning with regards to the size of the awards or the grants 
from the different programs. Each of you said it needed to be 
larger.
    I guess my question would be this: If you have a finite 
pool of money, would you rather have larger awards and fewer, 
meaning you may not get anything for your projects, or would 
you rather keep it the same to make sure that we maximize the 
ability of each of you to be able to get some dollars for your 
particular program?
    Let's start with Dr. Koenig.
    Dr. Koenig. In the end, it is not the actual number of 
grants that are awarded. You obviously have to have an award 
that is going to have an impact on the business and that can 
lead to that commercialization. And so, therefore, I think that 
that should again be a decision that can be tied to the 
conditions of the company.
    The agencies should have impact on that, so the absolute 
number of grants is not the critical part, making sure that the 
amount of money is fitting with the costs of the ongoing 
research that are required in today's dollars to make an impact 
on that company and getting that company towards 
commercialization.
    Ms. Dwight. One of the things we applaud the committee for 
is language in the bill that calls for a special focus on rare 
or orphan diseases. Again, as I mentioned in my testimony, many 
times a rare disease is overlooked and the commercialization 
opportunities for it are less. It is a small population.
    And so we have asked that you all consider increasing the 
ability of the grants program to look for opportunities to 
support these noncommercialized opportunities for rare disease 
and set aside a specific amount for orphan or rare disease 
product development, because it one place that the government 
really can and has in the past, through other legislative 
initiatives, played a critical role in bringing therapies to 
market that might not otherwise ever be developed for small 
patient populations.
    Mr. Stocker. Let me jump in here and make a comment that is 
slightly different from the prevailing view you have heard thus 
far.
    We do agree that contract award sizes need to be increased. 
I can't tell you what the number of Phase One, Phase Two 
reviews that I have been in, particularly with DOD technical 
monitors where there has been substantial hand-wringing over 
the fact that these award values are so small, not very much 
work can be done. So there is no question that the award sizes 
should be increased.
    But I would also argue that the allocation level needs to 
be increased as well. It has been set at 2.5 percent for many, 
many years. It needs to be looked at as--increased to the 3.75 
percent, we have proposed, in part because of the fact that 
more funding that is made available to the SBIR program means 
all of the innovations that we are talking about here today can 
be achieved. And the important thing is that it is not new 
budget authority.
    So within the confines of whether there is an emerging 
PAYGO legislation or not, this could fit into both PAYGO and 
within the existing budget authority as is currently 
established.
    Chairwoman Velazquez. Time has expired.
    Mr. Moore.
    Mr. Moore. Thank you, Madam Chair. And I would like to join 
the Chair and all of our fellow panelists who have welcomed you 
and thank you for coming here today.
    My first question, I would like to focus on the larger 
economic benefit of the SBIR and STTR programs. In my home 
State of Kansas, 55,000 people are employed by nearly 1,300 
bioscience establishments, some of which are small businesses 
that have used the utilized the SBIR program.
    For example, Pinnacle Technology in Lawrence has used SBIR 
money to develop a wireless neurochemical biosensor that 
researchers use.
    It is estimated for each SBIR dollar awarded, $5 of 
economic benefit accrue in the local economy. Kansas companies 
received $76.9 million in SBIR grants from 2000 to 2002, 
producing approximately $385 million in economic benefit.
    You all are small business owners. Do you believe that SBIR 
grants allow you the necessary flexibility to hire appropriate 
staff, make purchases and participate in the local economies of 
your communities?
    Do any of you care to comment?
    Dr. Koenig?
    Dr. Koenig. In the development of biotechnology products, 
the SBIR program by itself, as has been illustrated and 
discussed earlier, is insufficient by itself to get through the 
regulatory process and approval of these programs. We do 
believe that they have a huge impact on the local economy, but 
if that is the only vehicle to getting that product to the 
market, almost every company would fail.
    So, again, having that program in place with the 
opportunity to provide supplemental grants will not only be 
additive, it will be synergistic in terms of the whole ability 
of that company to ultimately commercialize and be successful.
    Mr. Moore. Does any other panelist have a response?
    Mr. Rapp?
    Mr. Rapp. I would say, the Phase Two grants, the larger 
grants, are particularly the ones where a company's employment 
decisions are going to be affected.
    To be quite honest with you, for a 6-month grant, by the 
time you take out administrative expenses associated with the 
grant, you may be talking about $60- to $80,000. You can't 
responsibly hire somebody for that period of time, and 
therefore, the larger grants and the longer-term grants are the 
ones that are going to have more of an effect on hiring moves, 
I would say.
    But I would also say that all of these programs stimulate 
the near-term activities that you hope then lead to the kinds 
of collaborations or venture capital funding subsequently that 
will bring that product forward and ultimately through that so-
called "valley of death" and into commercialization.
    There hasn't been a lot of focus here today, I feel, on 
Phase Three as the agencies seem to refer to it, that period 
after the grant time. And let us not kid ourselves. These 
grants are great, but you still have a lot of work to do 
afterwards in order to get something to the marketplace; and 
those collaborations and subsequent funding are essential.
    Mr. Moore. Sure. Any other comments?
    I am sorry, Ms. Li, did you have a comment?
    Ms. Li. I very much agree with all of the panelists. I 
agree with Mr. Rapp that Phase Three, actually--we need a lot 
of assistance in that.
    I was not supposed to mention this, but--
    Mr. Moore. Go ahead.
    Ms. Li. For example, I have a colleague, he has developed 
this wonderful technology that can help to put off the wildfire 
through DOD solicitation.RPTS MERCHANTDCMN MAGMER
    Ms. Li. DOD has their application in this particular 
technology, and large prime contractors also are very 
interested in the application in the DOD arena. But this 
particular technology can be used for the betterment of human 
life, and so--you know, to save lives. And so I feel there has 
to be some assistance in some way to help us to realize it.
    Mr. Moore. Thank you
    Chairwoman Velazquez. Will the gentleman yield for a 
second?
    Mr. Moore. Certainly.
    Chairwoman Velazquez. Mr. Rapp, we, too, are concerned 
about Phase Three and the lack of funding; and this why in the 
bill for the first time we authorize funding of $27.5 million 
for Phase Three.
    Mr. Rapp. And I appreciate the beginning of focus there. 
And I had simply mentioned this conversation, but I am glad. 
Thank you very much.
    Mr. Moore. The second question, very briefly. In 2004, the 
Kansas State legislature passed and then Governor Sibelius, now 
HHS Secretary Sibelius, signed the Kansas Economic Growth Act 
of 2004, which, among other things, created the Kansas 
Bioscience Authority. The KBA has worked to, and has been 
successful, in creating partnerships between public-private and 
academic entities. To what extent has receiving any SBIR grants 
allowed you to pursue other sources of funds? Does the SBIR 
grant confirm a measure of credibility to other potential 
investors? Anybody? Mr. Rapp?
    Mr. Rapp. Without a doubt, in our case. We received SBIR 
funding before we ever did our first major equity round, 
actually; and that was an instant validation for us. It was an 
NIH grant. And for us to be able to tell would-be investors 
that we already had received that money was a stamp of approval 
on our science. So you bet.
    Mr. Moore. Very good. Anybody else?
    Ms. Dwight. We would just echo that as well, that many of 
the companies we partner with that is seen as a marker of 
viability, much as any other funding would be as well.
    Mr. Moore. Thank you very, very much.
    I yield back my time, Madam Chair.
    Chairwoman Velazquez. Mr. Akin.
    Mr. Akin. Thank you, Madam Chair.
    I think what I am picking up from all of your testimony is, 
first of all, the SBIR money is--in a way, it is kind of pump 
priming. It isn't the thing that provides all the water in the 
well but gets you started, and it gives you that sort of a 
certification and all.
    I was particularly interested in, Mr. Rapp, your background 
had been buying and selling and these various kinds of 
businesses, start-up, high tech kinds of things. How common is 
SBIR, an SBIR kind of a situation with the start-ups? Is it 
something that you see that is constantly a pattern that 
everybody started there or had some of that in their beginning, 
or is it maybe one out of two or one out of three, one out of 
four? How commonly do you see those? Just because it seems like 
you have had--for a good many years, you have had a picture of 
this kind of business.
    Mr. Rapp. I don't have statistics, certainly, but my--I 
would say to you that success in this sort of program and 
attention to it, it comes as a result of a mind-set within the 
company, a focus on this as an opportunity.
    And I think the companies that have their roots in 
academia, or some of the people come out of academia, are more 
inclined to be thinking about these sorts of grants because 
they are more accustomed to applying for or seeing their labs 
in academic institutions apply for grants for their funding in 
the first place.
    Mr. Akin. So it is more common in high-tech types of areas, 
you would say, then?
    Mr. Rapp. I would certainly say that. And I would say it is 
more common in companies where, again, there is just an 
academic history perhaps associated with some of the founders. 
But a significant percentage of the life sciences companies are 
trying for them. We are in an incubator in St. Louis, and I 
would say well more than half of our companies are applying, 
and probably close to half have received grants over time.
    Mr. Akin. Thank you.
    Others?
    Mr. Koenig. I agreed with your comment that the SBIR is 
pump priming, but it does more than that. I think it is a 
diversification derisking strategy as well. Many of the venture 
capitalists will provide money for later stage programs, 
particularly in this environment. And so this is an opportunity 
for the SBIR to fund some additional research projects that 
could evolve into another project that the venture capitalists 
will continue to fund. So I think that it is both pump priming 
but also derisking and diversifying.
    Mr. Akin. Thank you.
    Anybody else?
    Mr. Stocker. One of the things that we found is that the 
SBIR program gives you an opportunity to move beyond proof of 
concept and begin development of prototypes. It is those 
prototypes that will eventually attract the interest, as I 
mentioned earlier, of acquisition managers, prime contractors 
and investors; and you need those prototypes to show them that 
there is in fact a product that will emerge from this process.
    I would also point out that the reason the Phase Three 
effort is so important is that you may have proof of concept, 
you may have a prototype that will give you the framework of 
what that product will look like. The Phase Three effort will 
really allow you to apply system design efforts to it and to 
have a fully definitized prototype that can be ready to go into 
manufacturing at the end of Phase Three.
    Mr. Akin. So we can have basically all the good ideas in 
the world, but if you can't actually get them over the finish 
line--I think what I heard, a pretty good consensus also on our 
panel, was something to the effect that, even with limited 
supplies of money, from a government point of view probably 
quality would be the thing you would choose, that you really 
want a good fit, you want to have all the parameters right so 
that you are getting the good outcomes that you are shooting 
for, and how many of them may not be the best way of judging 
but, rather, whether or not it is really using the tool in the 
most appropriate way to really achieve a viable kind of 
operation. Is that a good--
    I think my time is up. I thank you, Madam Chair.
    Chairwoman Velazquez. Thank you.
    Mrs. Dahlkemper.
    Mrs. Dahlkemper. Thank you, Madam Chair; and I want to 
thank the witnesses today.
    I just want to kind of talk a little bit on the other side 
of the issue with the venture capitalist businesses. My 
understanding from all of your answers is that you are all in 
support of providing majority owned venture capitalist 
businesses the opportunity to fully participate in all SBIR 
programs. But there has been the other side of the coin. There 
is many who do not believe that this is a good thing.
    I come from the Third District of Pennsylvania in the 
northwestern part of Pennsylvania. We don't have a lot of 
venture capitalists in my district, but what we do have is some 
great small businesses who are working on innovative research. 
And the concern that has come in front of me is that--it is a 
concern that there will be less money available, funding 
available, for those who are truly small businesses.
    I guess I want to just bring that up and ask you if you 
think this could truly hurt small businesses if we open this 
up, and maybe if we need to have some limits for a time to see 
to kind of gauge the impact that this has on truly small 
businesses. Because I think there could be consequences. When 
you look at these venture capitalists, they have staff and 
ability to be on the front end helping these small firms to a 
point that might put them at a disadvantage to a small firm 
that doesn't have the staff. Mr. Rapp, could you maybe address 
this as a small business then?
    Mr. Rapp. It is interesting. So Divergence is a company 
that does have venture capital ownership. But I would say VCs 
own about a quarter of Divergence at this point. Our dealings 
with the agencies when we are applying for grants are quite 
directly with the agencies, not through VCs or anybody else.
    So in terms of an advantage that comes, maybe there is some 
validation, some reverse validation. Just as SBIR has provided 
some validation as we were receiving funding from them, perhaps 
the fact that the VCs and other sophisticated parties believe 
in what we are doing helps us. But, otherwise, I don't see the 
process working in that direction so much, to be honest with 
you. So, from our standpoint, I don't have a strong feeling 
that we would put others at a disadvantage. Because when we are 
scrambling to put together that grant application we feel like 
we are doing it on our own.
    Mrs. Dahlkemper. Do you think there would be any value in 
having some sort of short-term limit so we could gauge the 
impact on other small businesses or not?
    Mr. Rapp. The limit would be of what sort? Sorry.
    Mrs. Dahlkemper. Well, it could be a limit for the first 
few years on putting a cap on the ability for VCs to enter into 
these grants so that you could gauge the impact of the 
consequences on other--
    Mr. Rapp. Well, at least speaking from the perspective of 
life sciences, that chasm is still so large between any funding 
that we are going to receive from an SBIR grant and the 
ultimate commercialization that we need all the help we can 
get; and we are going to have to do a lot more after that, too. 
So it is not as if this makes it easy for us to roll right on 
through. So as far as limits on the participation and all, I 
don't see how that is going to be that broadly helpful.
    Mrs. Dahlkemper. I know, Dr. Koenig, you obviously want to 
answer.
    Mr. Koenig. I appreciate the sensitivity of your particular 
home district, but, in the end, there is a limited amount of 
funds in this program; and, ultimately, what you want is 
competition to be such that the programs that are selected are 
the best ones that will ultimately end up becoming 
commercialized and helping the citizens of this country.
    The example I gave in my testimony of a company in Florida 
that is seven employees, has no revenues, and is far away from 
commercialization, despite the fact that it is a majority 
owned, I think it is the paradigm of the best example of a 
small company. And so to use that rule or to limit it I think 
in the end is going to ultimately hurt the program in general.
    Mrs. Dahlkemper. Ms. Li, did you want to address that?
    Ms. Li. I very much see the side of your story. Because I 
had a learning curve in the past year. I realized that we have 
very limited venture capitalists in our area as well; and we 
are certainly a little disadvantaged in the sense that we are 
not an academic institution, we have limited grant writing 
experience, we learn as we go.
    But, at the same time, because if we don't get a grant from 
SBIR we have to get some money to build our stuff. So I go to 
Northern Virginia, and I found a venture capitalist. I am going 
to have a meeting with them next week. I feel the difficulty, 
but maybe go draw some venture capitalists to your State. Maybe 
that will be helpful.
    Mrs. Dahlkemper. Okay. Thank you.
    My time is up. I yield back.
    Chairwoman Velazquez. Mr. Thompson.
    Mr. Thompson. Well, thank you, Madam Chairwoman and ranking 
member, for your leadership in reworking the current SBIR 
program.
    I am from Pennsylvania. Pennsylvania has been a fairly 
active State, with 761 SBIR awards over the life of the 
program. In my district, the Fifth, Pennsylvania alone has 75 
awardees over the life of the program. Those 75 awardees were 
297 awards, and those 297 awards totaled $102.5 million. So it 
is a lot of innovation investment. It is a great program and 
certainly looking at ways to continue to improve it.
    Dr. Koenig, with the recent economic conditions in the 
country that we have had, and it kind of looks like it has kind 
of touched all parts of our economy, have you seen venture in 
angel capital, that well, dry up at all?
    Mr. Koenig. Absolutely. Definitely. Just the impact right 
now on companies that I described, in terms of the available 
cash that they have remaining, almost half of the companies 
have less than a year of cash. And these are public companies. 
If you talk about the private companies, it is even worse.
    What I have seen is a shift, that the venture capitalists, 
where they are funding many of the companies, they are now 
beginning to place bets and having greater reserves for these 
companies. Because they know it is going to take much longer to 
get to commercialization. And so, in the end, there is going to 
be lots more companies failing as a result of the inability to 
continue to get funding from these sources.
    Mr. Thompson. I think it probably goes without saying that 
especially in these tough economic times and that impact 
certainly emphasizes the importance of the SBIR program.
    Mr. Koenig. Without a doubt.
    It is funny. I recall when I was head of research in 
MedImmune, and MedImmune was one of the most successful biotech 
companies in this country and, actually, in the world and was 
awarded an SBIR One/Two funding. And I remember commenting 
specifically that I called the SBIR program the jewel of the 
government. I really believed at that time that the government 
did everything right. And when the rules changed in 2003 I was 
very upset about that, because I have seen the value of the 
impact of this program on what it could do in terms of the 
lives of people in this country, the development and successes 
of a company and the development of very important products 
that are making differences in the lives of individuals.
    Mr. Thompson. Ms. Dwight.
    Ms. Dwight. I just wanted to address that as well.
    Again, as a funder of promising therapies, our goal is to 
bring therapeutics for cystic fibrosis into the market and into 
patients. And we work with a host of companies, ranging from 
very small companies just out of academia, 5, 10 employees, to 
very large pharmaceutical companies.
    The story I told you in my testimony about Alnara 
Pharmaceuticals I think really illustrates the importance of 
this program now in this current economic time. I mentioned 
that Elmira Pharmaceuticals was a company that we had our eye 
on. They produced enzymes, which is something most people with 
cystic fibrosis must take, but they didn't produce a cystic 
fibrosis enzyme. We thought we had a product where the company 
funding had actually dried up; they were going bankrupt. We 
knew that there was hope for cystic fibrosis in this company's 
product; and so we needed to partner it with a larger, more 
stable company that could carry it through and, using our 
funding, could utilize it as a new branch of their business 
model. And the result was a positive for everyone, for our 
patients, first and foremost, but also for the company. They 
were able to bring new employees in, they were able to bring 
some of the employees who had been working on their product at 
a smaller company, and an SBIR funding would have been 
essential as well in that model.
    Mr. Thompson. Just real quickly a follow-up to Mrs. 
Dahlkemper's question. It is probably an unfair question, 
because you all are working with venture capital.
    Is there anything that you see that would be a safeguard to 
make sure that those small businesses--especially in rural 
Pennsylvania; our districts are very similar--who may not have 
access to venture capital? I think of all the programs we have 
we only have two that we have been able to have that 
connection. Are there safeguards to make sure that the 
competing ground remains kind of fair and equitable for those 
rural small businesses that do not have access to that kind of 
a resource?
    Mr. Stocker. Mr. Thompson, it is a question that has come 
up, and a number of small SBIR firms have been concerned about 
now having to chase after venture capital to ensure that they 
can remain in the game. We think it is an unfounded fear.
    As I mentioned earlier, the caps and the application of the 
caps presents special problems within each of the agencies. We 
think it is poor public policy. The fact that a venture capital 
firm is resident in Silicon Valley doesn't mean they can't come 
to rural Pennsylvania and invest in a project there.
    I think the problem is that there is two issues. One, there 
is a great misunderstanding of what a venture capital fund is. 
The National Academy of Sciences study that was just recently 
completed indicated that SBIR firms without VC funding were 
actually more successful at commercializing than were VC-backed 
companies. And it may be that may change in the future, but 
that was certainly the case in the past.
    The second thing that needs to be done--and this 
legislation provides for that. It provides for tools that will 
require the agencies to report back in terms of actual contract 
behavior showing what has happened in the community between VC-
backed firms and non-VC-backed firms. And, secondly, it 
provides for an opportunity to have SBIR companies be 
introduced to outside potential funding sources. And I will 
give you a good example of that, and I will be brief.
    We are working with the Air Force Research Lab right now at 
Wright-Patterson Air Force Base in Dayton who has selected 
Lynntech as a company that will be introduced to a number of 
venture capital companies that are being brought to AFRL so 
that those firms can see the kinds of technologies that the Air 
Force has been paying for. That is exactly the sort of 
framework that we have been talking about needs to be done on a 
more consistent basis across all of the services and, frankly, 
across all of the agencies.
    And so that fear that has been expressed by your colleague 
from Pennsylvania can be addressed; and with a greater 
awareness, greater knowledge, a greater access to tools, that 
fear will dissipate.
    Mr. Rapp. If I may, also--in terms of leveling the playing 
field, also ensuring that there are resources for any applying 
company to really make sure that they understand what goes into 
a grant application. The relationships that we have developed 
with the different agencies with our program managers have been 
really important for us, both in advance of an application and 
then subsequently. So making sure that the agencies understand 
the importance of assigning someone to that company and that 
they are responsible, in effect, for shepherding things through 
for that company is going to be how you level the playing 
field. Because then you make sure that you are not relying or 
that the company isn't relying on some third party for their 
sophistication.
    Mr. Thompson. Thank you.
    Chairwoman Velazquez. Mrs. Halvorson.
    Mrs. Halvorson. Thank you, Madam Chairman--I apologize. I 
feel so far away from you I probably should have moved over 
there--Madam Chairman and Ranking Member Graves.
    I want to thank all of you for being here, and sorry I was 
a little late. But I noticed in all your testimony you talked 
about how successful these programs were since their inception 
and how we now have the opportunity to both reauthorize them 
and enhance them. So I am very pleased that one of the bills 
under consideration is the World Technology and Outreach Act, 
which is going to seek participation for rural areas as well as 
women and veterans. But I would like to hear further from any 
of you on the panel what you think we need to do or what you 
plan to do with regards to outreach or how do we get more 
participation from those areas.
    Mr. Rapp. One little thing, and, again, I am looking at it 
just from the single company perspective. But I have seen in 
the State of Missouri someone who has been charged with the 
responsibility for working with companies as they apply for 
grants. So whether that is done at the Federal level or at the 
State level, I am not sure what is the right way.
    But again getting back to my comment to Congressman 
Thompson, the idea that there would be resources that would 
help that company make a sophisticated application is I think 
really important. You feel like you are somewhat in a game--I 
will be honest with you--when you are writing up an application 
and you want to make sure you understand the rules of the game.
    Mrs. Halvorson. Well, and also someone said that the rules 
changed in 2003. Was that for the good? I think Dr. Koenig said 
that.
    Mr. Koenig. Yes. As I indicated, I thought it was for the 
bad, not for the good.
    Mrs. Halvorson. Can you explain that for us?
    Mr. Koenig. Yes. I think what happened is that companies 
that were receiving SBIR funds were no longer now eligible to 
receive those SBIR funds. So, as a result, since that time--and 
the NIH has nice documentation--the number of grant 
applications have gone down. There has been a general sense 
that the quality of the applications have gone down. So some of 
the more potentially successful companies with the best 
technology are now excluded from this process, and I think what 
we need to do is change that so that they now can become again 
part of that process.
    Mrs. Halvorson. And one last question. So have you let us 
know that? I am sure--and I am new, but have you let anybody 
know that we need to change that so more people have an 
opportunity to use the funds?
    Mr. Koenig. I think that is a large part of the testimony 
from this panel today. I think there was a consensus that the 
greatest impact would be to change that rule to allow now for 
the venture-backed companies to again participate in that 
program.
    Mrs. Halvorson. Because most people are telling me now they 
are fearful that there is not going to be enough in there 
because we have expanded it to rural, women, veterans.
    Mr. Koenig. I think, again, it is going back to what it 
was. So I think that, in the end, we are getting now back to a 
more even playing field and ultimately having the best 
companies compete for the limited resources here, which I think 
is in the interest of the country.
    Mrs. Halvorson. Thank you, Madam Chairman--or Mr. Chairman. 
I yield back.
    Mr. Moore. [presiding.] Thank you for recognizing there was 
a change up here in the chair.
    Mrs. Halvorson. I had to take a double-check.
    Mr. Moore. Any other questions by any of the members of the 
Committee here?
    If not, I want to thank all of the panelists who appeared 
here today to testify and answer our questions. We very much 
appreciate that.
    I want to thank my fellow panel members on both sides for 
the questions that they have asked; and I think this has been 
very, very helpful.
    I ask unanimous consent that members will have 5 days to 
submit a statement and supporting materials for the record.
    Without objection, so ordered.
    This hearing is now adjourned and, again, thanks to all.
    [Whereupon, at 11:34 a.m., the Committee was adjourned.]

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