[Senate Hearing 111-620]
[From the U.S. Government Publishing Office]
S. Hrg. 111-620
THE NIH/SBIR EXCLUSION
IN THE RECOVERY ACT
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JUNE 22, 2009
__________
Printed for the Committee on Small Business and Entrepreneurship
Available via the World Wide Web: http://www.access.gpo.gov/congress/
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED ELEVENTH CONGRESS
----------
MARY L. LANDRIEU, Louisiana, Chair
OLYMPIA J. SNOWE, Maine, Ranking Member
JOHN F. KERRY, Massachusetts CHRISTOPHER S. BOND, Missouri
CARL LEVIN, Michigan DAVID VITTER, Louisiana
TOM HARKIN, Iowa JOHN THUNE, South Dakota
JOSEPH I. LIEBERMAN, Connecticut MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington JOHNNY ISAKSON, Georgia
EVAN BAYH, Indiana ROGER WICKER, Mississippi
MARK L. PRYOR, Arkansas JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland
JEANNE SHAHEEN, New Hampshire
KAY HAGAN, North Carolina
Donald R. Cravins, Jr., Democratic Staff Director
Wallace K. Hsueh, Republican Staff Director
C O N T E N T S
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Opening Statements
Page
Cardin, Hon. Benjamin L. a United States Senator from Maryland... 1
Van Hollen, Hon. Chris, a United States Representative from
Maryland....................................................... 4
Edwards, Hon. Donna F., a United States Representative from
Maryland....................................................... 6
Witness Testimony
Pickett, Penny, Senior Advisor to the Administrator, Acting
Associate Administrator for Entrepreneurial Development, Small
Business Administration........................................ 8
Glover, Jere, Executive Director, Small Business Technology
Council........................................................ 13
Cohen, Jonathan, President and CEO, 20/20 GeneSystems............ 28
Pilon, Aprile, CEO, Clarassance, Inc............................. 34
Hernandez, Joe, President and CEO, Innovative Biosensors, Inc.... 42
Alphabetical Listing and Appendix Material Submitted
Cardin, Hon. Benjamin L.
Opening statement............................................ 1
Cohen, Jonathan
Testimony.................................................... 28
Prepared statement........................................... 31
Edwards, Hon. Donna F.
Opening statement............................................ 6
Feingold, Hon. Russell D.
Prepared statement........................................... 63
Glover, Jere
Testimony.................................................... 13
Prepared statement........................................... 16
Hernandez, Joe
Testimony.................................................... 42
Prepared statement........................................... 44
Pickett, Penny
Testimony.................................................... 8
Prepared statement........................................... 10
Pilon, Aprile
Testimony.................................................... 34
Prepared statement........................................... 37
Rockey, Dr. Sally J.
Prepared statement........................................... 48
Van Hollen, Hon. Chris
Opening statement............................................ 4
Prepared statement........................................... 5
THE NIH/SBIR EXCLUSION
IN THE RECOVERY ACT
----------
MONDAY, JUNE 22, 2009
United States Senate,
Committee on Small Business
and Entrepreneurship,
Rockville, MD
The Committee met, pursuant to notice, at 12:59 p.m., in
the 7th Floor Hearing Room, Stella B. Warner Montgomery County
Council Office Building, Hon. Benjamin L. Cardin, presiding.
Present: Senator Cardin, Representative Van Hollen, and
Representative Edwards.
OPENING STATEMENT OF THE HONORABLE BENJAMIN L. CARDIN, A UNITED
STATES SENATOR FROM MARYLAND
Senator Cardin. Well, let me welcome everyone to this
hearing of the Small Business and Entrepreneurship Committee of
the United States Senate. I particularly want to thank Senator
Landrieu and Senator Snowe, the chairwoman and ranking member
of the Small Business Committee, for permitting this field
hearing to take place and allowing me to chair the hearing
today in Montgomery County.
I want to thank my colleague, Donna Edwards, who is joining
me today. Congresswoman Edwards sits on the Science Committee
as a very active member on these issues, and we very much
appreciate her attendance today. We expect to be joined by
Congressman Chris Van Hollen, who also represents Montgomery
County in the Congress of the United States, does a fabulous
job with people of this region, and serves on the Ways and
Means Committee.
So I appreciate my colleagues being here, and I understand
the schedule and expect that they may have to leave during the
hearing, and I thank you very much for being here.
I see Councilman Michael Knapp is here. First of all, let
me thank Phil Andrews and the full Council for allowing us to
use this facility. And I want to thank Councilman Knapp for his
interest in this issue. I had a chance to meet with the Council
last week, and it was Councilman Knapp who pointed out to me
one very obvious reason why we are so concerned about research
funds getting to small businesses. And he made the very valid
point that one of our objectives in getting our economy back on
track is to energize companies to bring products to market, and
that is an issue that we think was sensitized by the SBIR
program. So that is another reason why we are pleased to
convene this hearing today.
Earlier this year, Congress passed the American Recovery
and Reinvestment Act. We did that to help bring our economy
back on track from this recession. My colleagues mention
frequently that in order to get our economy back on track, we
have to stimulate small businesses, and that most of our job
growth will come from small businesses. Small businesses are
very suited for innovation and moving forward in creating new
job opportunities. And that is true generally. It is also true
with the SBIR program.
As the ARRA, the American Recovery and Reinvestment Act,
worked its way through the Congress, in the Conference
Committee, there was language that was added. Let me point out
that during the consideration of the Recovery Act, there was an
amendment that increased the funds to NIH from about three and
a half billion to about $10 billion, a significant increase to
say the least, in NIH funding. And as the Conference Report was
being considered, language was added to the Conference Report
that said, ``the funds provided in this Act to NIH shall not be
subject to provisions of 15 U.S.C. 638 and 15 U.S.C. 638(f) and
(1)''.
I welcome my colleague, Congressman Van Hollen, who I
acknowledged earlier and thank him for joining me here.
What that meant was that the allocation of the funds to go
through the SBIR program and STTR program, that is required
under statute, was waived by the language added to the
Conference Report.
I can assure you that we were unaware of that language
being placed in the Conference Report. Senator Landrieu and
Senator Snowe sent a letter to NIH, encouraging them to comply
with the allocations because of the importance of the SBIR
program to small businesses. Along with Senator Feingold, I
also sent a letter to NIH, encouraging them to comply with the
spirit of law. They could still allocate the money. There is
nothing in the conference report that prohibits them from
making funds available to small business. And to date, we have
not received an adequate reply.
Now, I know that NIH is going through some transition and
we certainly understand that, with a change in the
administration. I strongly support, as do my colleagues, NIH in
its mission and its budget, and I have worked very hard over
the years to make sure that it can be the premier facility of
its type in the world, located right here in Montgomery County.
We are very proud of NIH, and we will continue to fight for
their mission.
But I am puzzled as to why they are not responding to our
request as it relates to the small business community and I am
disappointed. We had hoped to have a representative from NIH
with us today on this panel. I do not believe that someone will
be here. Certainly, I think my colleagues would acknowledge it
would not be too far from their job, right down the street, so
it is certainly not a geographical problem. This is certainly a
convenient location.
We are going to pursue this. This is a matter that is too
important. We are going to make sure that NIH responds to our
inquiries. We believe this matter can be adequately addressed
if the will is there at NIH to make sure that there is a fair
allocation of the research funds to the small business
community. So we are going to continue to work on that, and I
do not want the absence of NIH here today to impart anything
other than that.
The SBIR program is 27 years old. It was established to
stimulate technology innovation related to each participating
federal agency's goal and mission, use small businesses to meet
the federal research and development needs, and increase
private sector commercialization of innovation that is from
federal research, the point that Councilman Knapp was referring
to.
The Small Business Technology Transfer program was
originally created as a pilot program in 1992 to stimulate
partnerships through small businesses and nonprofit research
institutions, such as our universities, a partnership that we
think makes a great deal of sense. But though departments with
an annual external research and development budget of more than
$100 million are required to allocate two and a half percent of
that amount to the SBIR program, a rather modest sum, and
departments with external R&D budgets of more than a billion
must allocate 0.3 percent to the STTR program-so these are
modest allocations but important allocations--11 different
departments have SBIR programs and five have STTR programs.
According to the Small Business Administration, the largest
share awards is attributable to the Department of Defense and
the Department of Health and Human Services.
Since the two programs were created, more than 100,000
awards have been made for a total exceeding $24 billion. In
addition, small businesses receiving SBIR awards employ more
than 1.5 million people, so funding for these programs is a
major source of job creation. Between 2005 and 2009, Maryland
companies received 1,004 SBIR awards, and the SBA reports that
SBIR firms have received more than 84,000 patents.
This past Thursday, the Small Business Committee in the
United States Senate, by a unanimous vote, reported out a bill
reauthorizing both of these programs for the next 14 years.
The bill would increase gradually the SBIR program's
allocation from two and a half percent to three and a half
percent and double the STTR's allocation from 0.3 percent to
0.6 percent. The bill would also increase awards guidelines
from $100,000 to $150,000 for phase one, and $750,000 to a
million dollars for phase two. It also strengthens the Office
of Technology at the SBA so it has the authority and resources
to carry out its duty overseeing SBIR and STTR across the
Federal Government.
I am pleased that a couple amendments that I authored were
included. The first clarifies that small businesses with
cooperation, research and development agreements with federal
labs, can participate in the SBIR program, and the second
clarifies that the allocations are not ceilings, with regard to
the amount of funds that can be made available by NIH and other
agencies. They can supplement SBIR and STTR awards with other
funds for small businesses. We want to make that very clear,
that we do not expect this to be a firewall with other programs
of support for the small business community.
We are pleased that we do have a very distinguished panel
that we will be hearing from as to the importance of these
programs and the impact on economic recovery from the inability
to release adequate funds under the ARRA. But before I turn to
our panel, I will give my colleagues an opportunity to give an
opening statement. We will start with Congressman Van Hollen,
who, I pointed out earlier, serves on the Ways and Means
Committee and as part of the leadership in the House of
Representatives. He is a close colleague and friend, and he
does a great job representing the people of Montgomery County
and Prince George's County.
OPENING STATEMENT OF THE HONORABLE CHRIS VAN HOLLEN, A UNITED
STATES REPRESENTATIVE FROM MARYLAND
Representative Van Hollen. Thank you, Senator Cardin. I
want to start by thanking Senator Cardin for his leadership on
a whole range of issues important to both Maryland and the
country and for organizing this gathering, hearing, today on
this very important subject. It is also great to be here with
my colleague, Congresswoman Donna Edwards. And Mike Knapp,
always good to see you, joining us from the County Council, and
others here.
I am not going to be long. In fact, if I could just have my
statement included in the record, I will not go through the
whole thing.
[The prepared statement of Mr. Van Hollen follows:]
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Representative Van Hollen. I just want to underscore the
importance of two things. Number one is when you passed the
Economic Recovery Bill, it was designed to try and get the
economy moving again. As all of us know, the economy was in a
tailspin, and I think there are some promising signs that
things have begun to at least flatten and end the downward
spiral. But it will take some time for the economy, of course,
to recover.
As part of that effort, we did substantially increase our
investment in the National Institutes of Health. I am proud
that they have their home in the 8th Congressional District
because we believe there are lots of researchers out there with
great ideas that have not been able to be funded. In fact,
there is a big backlog of proposals out there that have already
been deemed to be promising proposals that have not been
adequately funded. So we want to make sure that the funds
provided that increase for NIH.
We also need to recognize that small businesses are the
engine of our economy and that the whole idea behind the SBIR
grants is to take advantage of small business entrepreneurship
and innovation with respect to the areas of scientific endeavor
and technological breakthrough. So I believe it was very short-
sighted for that provision to find itself in the Economic
Recovery Bill to essentially say that the NIH portion of the
funds were no longer subject to the requirement that that
percentage go to SBIR grants, and that the Senator made that
known to the Department of Health and Human Services as well as
NIH.
We look forward to working with Senator Cardin and his
colleagues as we do the reauthorization of SBIR in both the
House and Senate to ensure that going forward, the SBIR program
is not just saved but it is enhanced and strengthened going
forward, because I think the results speak for itself. The
National Academy of Sciences report indicated that this was a
good investment for the country, and I am, like the Senator,
disappointed that there is not a representative from NIH. If it
was not due to inadvertence on their part, I think that means
that we will have to let them know very clearly that we are
disappointed and we will be following through and taking
further action.
Thank you, Senator.
Senator Cardin. Thank you very much.
Congresswoman Edwards represents also Prince George's
County and Montgomery County.
OPENING STATEMENT OF THE HONORABLE DONNA F. EDWARDS, A UNITED
STATES REPRESENTATIVE FROM MARYLAND
Representative Edwards. Thank you, Senator Cardin. And in
their absence, thank you to Senator Landrieu and Ranking Member
Snowe for enabling us to be here this afternoon, where it is
always very important, I think, to be out in the field and
among the community of people who share an interest, as we all
do, in NIH and the small business program.
I have the responsibility in the Congress, I serve on the
Science and Technology Committee, and it has oversight
responsibility for the NIH. And on April 23rd, really just a
few weeks ago, we held a hearing about this very issue and both
the challenges and opportunities of the SBIR program.
Mr. Glover, you testified before our committee that day.
And also present was the deputy director from NIH, and we had
an opportunity to explore the way that NIH views the program. I
have to say that coming out of that hearing, that was somewhat
surprising to me, that although supportive of the SBIR program,
there seems to be a bit of, at least unexplained, reluctance
about the program, about expanding it, providing more
opportunities for small business. And I think it is important
for us both on the Senate and the House side to come and get to
the bottom of that.
Like my colleagues, I share the concern that, especially
with NIH--and, of course, Prince George's and Montgomery County
have the great benefit of being home to some of the best
federal laboratory and research facilities in the country in
addition to our education institutions. Both, internally, the
programs within NIH and our other laboratories, as well as the
supporting industry infrastructure is really important to our
economy here in this region but also to our economy in this
state.
So when we passed the American Recovery and Reinvestment
Act, while it is important across the country to create--and
all of us heard that--this notion of shovel-ready jobs, here in
a state like Maryland, for us, in addition to the roads and
infrastructure projects, infrastructure and shovel-ready means
investing in research and technology and science. I mean, it is
a backbone for our state.
So all of us in the delegation and with our colleagues in
the Congress, we are pleased to be able to support increased
funding for programs at NIH and NIST and NOAA and NASA, and all
of the science and research facilities here, but disappointed
about the inclusion of this exclusion in the legislation with
respect to the SBIR program. And it seems very unfortunate
because, as my colleagues have described, small businesses are
really the engines and innovators, the creators, places where
experiments can take place, and sometimes cannot take place, in
a larger business setting, where we need to make investments in
the early stages of research and science, not because you are
ensured of success but because you are experimenting with the
opportunity for success. And that is really important in
science and investigation.
As some of you know, I started off my early days at the
National Aeronautics and Space Administration at Goddard Space
Flight Center, systems engineer for the Spacelab program, at a
time when we were making investments in science, and people
just said, ``What are they doing over there?'' But the fact is
that making those investments now, 20 years hence, has proved
to be the bedrock of what we are doing with our space telescope
program and a range of other programs. And so, I deeply
understand the importance of investing in technologies early
and experiment. And you are nodding. I think that is great
value of the SBIR program.
One of the questions that we released in the April 23rd
hearing on the House side was also, in addition to small
business, what the agency is doing with respect to
incorporating the needs and the reach to minority businesses,
to women businesses and entrepreneurs. I think that these still
remain really important questions in the context of the
program, and partnering with institutions that are not your
obvious larger educational institutions to invest in science
technology and research.
So I look forward to your testimony today. I, like my
colleagues, am disappointed that NIH is not here represented
today, but I know that both from our delegation as represented
here and our respective committees, that we will have increased
opportunities over the next several weeks and months to probe a
little bit more deeply of NIH about where it sees the direction
of this SBIR program and how it will make the greatest use of
resources to really support small business innovation and the
range of those innovators in whom the NIH can invest. And so, I
thank you very much for being here. And thank you, Senator
Cardin, for your invitation, and I look forward to your
testimony.
Senator Cardin. Well, let me thank both of my colleagues
for being here. As I pointed out earlier, I know the schedule
today is difficult, so we just appreciate your being here as
long as you can. It is certainly helpful.
Ms. Penny Pickett, representing the Small Business
Administration, Acting Associate Administrator for
Entrepreneurial Development, it is a pleasure to have you with
us.
I might point out to all of our witnesses that your entire
statements will be made part of record, and you may proceed as
you would like.
STATEMENT OF PENNY PICKETT, SENIOR ADVISOR TO THE
ADMINISTRATOR, ACTING ASSOCIATE ADMINISTRATOR FOR
ENTREPRENEURIAL DEVELOPMENT, SMALL BUSINESS ADMINISTRATION
Ms. Pickett. Thank you. Good afternoon, Senator Cardin,
Representative Van Hollen, Representative Edwards. Thank you
for the opportunity to speak with you today about a very
important program for the Small Business Administration. Many
of America's most powerful innovations start with small
business. A study by the SBA's Office of Advocacy showed that
small firms produce 13 to 14 times more patents per employee
than do large firms, and these patents were cited more often
than the average patent.
For decades, SBA has worked to harness that innovation
through programs like the Small Business Innovation Research
program. Since 1982, SBIR helped to push small business
innovations into the marketplace. The SBIR program's focus on
commercialization turns small business innovation into jobs.
A comprehensive study of SBIR by the National Research
Council of the National Academies concluded that the SBIR
program is sound in concept and effective in practice, meets
its major congressional objectives, and is a driver of
innovation and commercialization for small businesses.
The SBIR program has been able to reach many committees,
contributing innovation, commercialization, job creation and
revenue growth. From 1992 to 2005, nearly 15,000 Phase II
awards have been granted. With respect to innovation, one-third
of NIH's SBIR projects generated at least one patent. Moreover,
from 2002 to 2006, approximately 25 percent of R&D Magazine's
top 100 annual innovations came from companies that had
received SBIR funding. In terms of commercialization, half of
SBIR's Phase II awardees reported bringing their innovations
into the market place. And finally, in terms of job creation
and revenue growth, a 1996 study found that SBIR awardees
generate four times as many jobs and nearly four times as much
revenue when compared with firms that do not receive SBIR
funds.
There are many SBIR success stories right here in Maryland,
home to approximately 440,000 small businesses. Since the start
of the SBIR program, Maryland small businesses have received
over 4,000 awards, for a total of $1.2 billion. In fact, in
Fiscal Year 2007, Maryland ranked number 4 in total SBIR awards
and number 7 in total award dollars.
The SBIR program covers all agencies with extramural R&D
budgets in excess of $100 million, and SBA believes that full
agency participation by all 11 qualifying agencies provides
significant benefits. But at the same time, the SBA recognizes
that its 11 partner agencies have different program missions
and R&D needs, so maintaining program flexibility is critical
to the SBIR program's continued success. The SBA believes that
both full participation and agency flexibility are invaluable.
With the SBIR program scheduled to sunset on July 31st of
this year, it is urgent that Congress take action now to
reauthorize the program. First and foremost, the nature of the
SBIR program makes long-term reauthorization necessary.
Uncertainty associated with a short reauthorization period
would adversely affect program planning efforts and increase
uncertainty for entrepreneurs and small businesses seeking SBIR
funding.
Second, the SBA supports funding the SBIR program's
administration cost to improve oversight and enhance small
business outreach. We recommend that 3 percent of the program's
set aside be available to agencies for program administration.
We support a rigorous competitive process for the SBIR grant
program, and we want to continually reach out to more small
businesses and enhance the quality and quantity of proposals.
In addition, SBA wants to track the performance of the program
more effectively and is driving to develop fact-based metrics-
driven analyses of the program.
Finally, the administration is committed to increasing
federal investment in R&D with a 2.5 percent SBIR requirement
and 0.3 percent STTR allocation in these agencies. This will
increase the total funding available to the programs.
In this challenging economic environment, small business
research and innovation is critical, not only to our economic
recovery but also to our nation's ability to remain competitive
in the global marketplace. This administration is committed to
working with all our partner agencies to strengthen this
program that helps small businesses commercialize their
innovations. Thank you and we look forward to your questions.
[The prepared statement of Ms. Pickett follows:]
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Senator Cardin. Well, thank you very much for your
testimony. We very much appreciate it.
Mr. Jere Glover is well known to all of us for small
business issues. He is executive director of the Small Business
Technology Council. It is a pleasure to have you here.
STATEMENT OF JERE GLOVER, EXECUTIVE DIRECTOR, SMALL BUSINESS
TECHNOLOGY COUNCIL
Mr. Glover. Senator Cardin, Congresswoman Edwards,
Congressman Van Hollen, it is a pleasure to be here with you. I
represent the Small Business Technology Council and the
National Small Business Association, 150,000 members across the
country.
The purpose of the American Recovery and Reinvestment Act
is to create jobs and stimulate the economy. NIH has chosen to
ignore the nation's job creator and innovator. There are three
areas that I would like to discuss today, and I was careful to
footnote the sources of a lot of this information since,
apparently, some of the folks at NIH either do not know about
it or have chosen to ignore it.
The SBIR program is by far the most successful federal
program for leading age innovation, commercialization of
advance technologies and job creation. SBIR creates four times
as many important innovations as universities. Twenty-five
percent of important U.S. innovations come from this one small
program. Four times as many jobs are created by SBIR companies
as other companies; four times as much revenue as other
companies.
The average sale per SBIR award is $1.2 million. The
average outside investment, additional investment, beyond the
SBIR money, is $850,000 per SBIR award. Fifty percent of all
SBIR Phase II awards are commercialized. SBIR makes four times
as many awards to minority and women-owned businesses as do
venture capitalists. It is broad--small business outreach to
over 15,000 different firms have received Phase II awards.
Small business today employs 38 percent of all scientists
and engineers in America. That is up from 8 percent just before
the SBIR program was put into law. Small business itself
creates virtually all of the net new jobs in America and
especially after a recession. Between 35 and 45 percent of all
companies winning SBIR awards develop sufficient technical
knowledge to be worth the time and expense to file a patent
application and awards. That is quite impressive, according to
the National Research Council.
Unfortunately, either the NIH does not realize small
business and SBIR successes or they chose to ignore it. The NIH
has a long history of lack of support for small business going
back over 30 years. NIH's efforts to exclude the SBIR program
from ARRA funds should be reversed.
When we talk about federal R&D, it just has not kept up
with what has really been happening in the marketplace. As
scientists and engineers have gone to work for small
businesses, the federal R&D going to small businesses is just
4.3 percent. That is barely up over 30 years from when the SBIR
bill was first passed, and half of this number is the SBIR
program. If it were not for the SBIR program, the R&D share of
small business would have actually gone down.
Let's talk a little bit about the history of the SBIR
program and the National Institutes of Health staff. In 1978,
before the SBIR law was passed, congressional studies found
that NIH awarded no contracts to small business, not one single
contract, and they testified that there was no small business
that could satisfy their requirements. Today they list 69
current success stories on their Web site. They are quite
impressive, which belies the original argument no one could do
it.
In 1996, NIH asked Congress to exempt them from part of the
SBIR program, citing low scores and lack of quality by SBIR
proposals. Director Van Hollen later provided a clarification
letter to Congress and the Office of Advocacy, correcting some
of the misinformation provided by the NIH staff to the
Congress. Dr. Varmus pointed out that the NIH scoring system
for the SBIR system was on a scale of 100 to 500. The
evaluations scores for everybody else from universities was 100
to 300. So guess what? Small business did not do as well on
their scoring system. They went on to point out this, and
because of the scoring differences they would resist making
side-by-side comparisons on the quality of proposals.
Recently, when the National Research Council was doing its
study, they again used the same mischaracterization of 500
versus 100 to 300.
Now, concerning the information that they used after the
fact to justify this exclusion, it is interesting to note that
the analysis that we conducted shows that the program is 1.7 to
3.6 times more competitive than other NIH programs. And there
are two reasons for that misinformation. One is it is a two-
step process. The SBIR program is a two-step process. You
compete for Phase I and you compete for Phase II. All the other
NIH programs are a one-step process. So they compare
competition at each of those phases, so they, in effect, double
count and thereby reduce the amount of the scoring.
They also failed to point out the fact that if you go back
a few more years from the number of awards, what you find is it
is cyclical. Every few years, the number of awards drop down,
the success rates drop down, and the number of applications
drop down. We saw it happen back in the '80s, it happened in
the '90s, and now it has happened again. So this is not a real
unusual phenomena that justified them running to Congress and
asking for that.
So I think that when you look at these issues, what you see
is that people at NIH just have not been educated outside their
small universe of things. Small business has done a remarkable
job. Large firms have contracted out much of their research. It
is recognized by them, this is where they should be doing
better research, but the Federal Government still lags behind.
So I wanted to just point out that the commercial success
of the SBIR program is truly phenomenal. I mean, you have got
licenses. You have got sales over a million dollars, additional
funding of 850,000. It is the most remarkable success story
that you could ever want under commercialization. That is why I
get upset when some people criticize the program and say, oh,
well, we need somebody else to come in the program, like
venture capitalists or others. The success rate is truly
remarkable and we do not want to lose sight of that.
So just in conclusion, let me just say that this program
has worked extremely well. NIH should be putting more money in
the nation's job creator, not less.
[The prepared statement of Mr. Glover follows:]
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Senator Cardin. Thank you very much for that testimony.
Particularly, for some of the history, which I found very, very
helpful.
We will now hear from Mr. Jonathan Cohen, who is president
and CEO of 20/20 GeneSystems, based in Rockville, Maryland, and
has been very helpful in trying to explain how these programs
work to this senator.
STATEMENT OF JONATHAN COHEN, PRESIDENT AND CEO,
20/20 GENESYSTEMS
Mr. Cohen. Thank you, Senator, for your leadership in
convening this panel this afternoon. And I also want to thank
Representatives Edwards and Van Hollen for taking the time to
come out and hear from us on this very important issue.
I am Jonathan Cohen, president and CEO of 20/20
GeneSystems, based here in Rockville, Maryland. We are a small
biotechnology company focused on developing innovative
diagnostic products for both cancer and biodefense. We hope to
commence marketing of a first generation blood test for the
early detection of lung cancer as early as this fall. Moreover,
our patented BioCheck product for screening suspicious powders
is now routinely used by more than a dozen federal agencies and
more than 500 fire departments throughout the United States.
That product was developed by us following the 2001 anthrax
incidents with the support of only about $100,000 of government
grants, both state and federal. And since then, it has likely
saved tens of millions of dollars to the U.S. economy when
banks, post offices, government facilities and other places of
business can reopen and continue operations following a
suspicious powder incident. And if I am not mistaken, I believe
the building that we are in today may have been one of those
buildings that was reopened with our product a number of years
ago.
Now, as Congresswoman Edwards pointed out in her remarks, a
lot of the Recovery Act funding has gone to so-called shovel-
ready projects, road repair, bridge improvements and so forth.
Though important, it is important to keep in mind that
permanent job creation really requires new products and
technologies that can be made, sold and improved upon for years
after they develop. The shovel-ready projects typically create
jobs only as long as the government money continues, and once
that funding stops, very often, more cases than not, the jobs
stop.
On the other hand, when you have an innovative product,
like the BioCheck product that I had mentioned, it is like the
economic gift; it keeps on giving. The jobs continue long after
the government funding ceases. For example, less than $100,000
for this product has created more than a half dozen jobs, six
to eight jobs, over a 20-year time period, which is typically
about the life of an innovative product, patented product. And
I think that is the point that is often missed, even by
economists and certainly policymakers, and I think it really
needs to be underscored. So, again, it is really sustainable
job growth that we are after, not temporary job growth.
Now, more specifically to the NIH, it is important also to
understand that no amount of academic research will ultimately
deliver products to patients and doctors without the
considerable investment, considerable effort, of companies. And
very often those are small companies.
In my nearly 20 years of experience in the biotech
industry, I have yet to come across an academic technology or
an NIH-funded piece of intellectual property that was further
than about 10 percent of the way that it needed to go. And I
think that is something that I think a lot of policymakers also
may not be aware of. I, frankly, was not aware of that until I
really got into this business.
So, in essence, we have often been asked to do 90 percent
of the development work with what is now about 3 percent of--
more or less, 3 percent of the grants budget, at least to NIH,
plus whatever one can, of course, supplement by the capital
markets. Now, that is tough in a robust economy, to be frank. I
mean, and we all know the tremendous efforts that go on, the
long time frames that so many biotech companies have to go
through. But in an economy like we have today, it is virtually
impossible.
Now, typically, biotech companies are funded through either
institutional investors, particularly venture capitalists, or
individual investors, which we refer to as angels. And our
company is primarily the latter; we raise money from
individuals and have done so for a number of years. We have
been very active in this for the last couple of months. We,
like a lot of Maryland companies, tend to tie our fundraising
around something called the Maryland Biotechnology Investor Tax
Credit, and it is truly an effective and important program. And
the deadline is coming up next week, so I wanted to get in this
state's fiscal year.
I can tell you, it is, from my own personal experience and
from talking to a lot of colleagues, five to ten times harder
to raise capital today than it was two years ago. I have to
work as hard to raise--it takes me as long to get 25,000. Two
years ago, I could have gotten probably 250,000 for virtually
the same amount. So that is really what is going on here. And
in light of that, frankly, I think it justifies an increase in
SBIR and programs like SBIR, and certainly not an exclusion.
Ms. Pickett referred to a study we are doing, 100 Awards,
and I think it is a very important piece of research. And I
have produced a bar graph in my testimony. I do not know if you
have a copy of it, but I can certainly provide that to you
after the hearing. I think it is a remarkable study. Last year,
it was published. Two researchers at the University of
California analyzed over the last--since I think 1960,
something called the R&D 100 Award, which is no less than the
Academy Awards for science and technology, in all fields, not
just the life sciences.
What they found was that there is a remarkable increase in
the percentage of those awards going to small SBIR awardees.
And you can see the climb. It is now about 25 percent of those,
whereas Fortune 500 companies, there has been an equivalent
decline in those awards. And with the universities, it has been
about flatline. So I think this provides some very empirical
evidence of the value that small business in general and the
SBIR program in particular is playing in our innovation
economy. And in my mind, it justifies a significant increase in
SBIR.
Just to conclude, I would respectfully urge, and suggest,
we propose, in light of the economic downturn and in light of
the record that SBIR--the demonstrated record of SBIR
contributing to the economy, an emergency doubling of the SBIR
set aside for at least a two-year period, FY10 and FY11. In
other words, take it from 2.5 percent to 5 percent, and then it
can be reassessed at that point.
But I feel very strongly that until we get through this
downturn, we really need to protect the good companies. Because
what happens is when a company downsizes or goes out of
business, all the R&D, all the technology, all the intellectual
property essentially just drops down. And we simply cannot--in
addition to creating jobs, we cannot afford to lose what could
be important cures and advancements in Alzheimer's disease and
various cancers and so forth.
Just to conclude, Senator mentioned the bill that passed
the Senate Small Business Committee last week, Senate Bill
1233. I want to just commend the Senator and others on that
committee for passing it unanimously. There has been an ongoing
difference in opinion within our own community over the years
on the extent to which venture capital should be permitted into
SBIR. I think that that bill is a very good balance and a very
good compromise.
Regrettably, the legislation coming out of House, at least
in my opinion, I do not believe has achieved that balance. And
I would encourage the House of Representatives to look at that
bill and model their legislation after that. Thank you very
much.
[The prepared statement of Mr. Cohen follows:]
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Senator Cardin. Thank you very much, Mr. Cohen.
Ms. Aprile Pilon is the CEO of Clarassance, Inc. It is a
pleasure to have you here.
STATEMENT OF APRILE PILON, CEO, CLARASSANCE, INC.
Ms. Pilon. Thank you for the opportunity to speak today,
Senator, for setting up this hearing. Thank you,
Representatives Van Hollen and Edwards for taking the time to
be here.
I am Dr. Aprile Pilon. I am president and CEO of
Clarassance and APC Biotech Services, Inc., two small
biotechnology companies based in Rockville, Maryland.
Clarassance is developing protein biologic drugs, and APC
Biotech provides consulting lab services and it is also
developing a novel production platform for biologics under a
current SBIR grant.
Both my companies are located in a Montgomery County
business incubator. I watched many companies, fellow biotech
companies, shrink, contract, lay off employees, sell assets and
move out. Investment capital is not available, and small
biotech companies are in dire need of economic assistance.
I have significant experience utilizing the SBIR program at
NIH to build healthcare technology assets and facilitate their
commercialization. I have personally written and submitted 23
SBIR grant applications since 1995, of which eight have been
funded, for a total of over $2 million. These grants were
submitted on behalf of three different small businesses located
here in Montgomery County.
My lead drug candidate in Clarassance has attracted over 9
million in equity financing to fund two Phase I clinical
trials, is currently poised in our Phase II clinical trials,
and was partially funded in the pre-investment early stages
using 1.1 million in SBIR funding from the NIH. These SBIR
grants add value to my companies, more than just a dollar
amount. And what I mean by that is that they provide third-
party opinion on the technology and the research plan by
qualified experts facilitating investment by angels and small-
institutional investors who do not necessarily have the
resources to do their own technical due diligence.
Basic discoveries made at academic institutions, government
labs, or even in small companies must be evaluated for
reproducibility, product feasibility and de-risked to the point
where institutional investment and corporate partnering are
possible. A significant amount of high risk, specialized R&D
must typically be performed in order to evaluate and reproduce
basic discoveries and to explore product ideas to assess their
commercial potential. Typically, small companies are the only
ones willing to take these risks. This is an especially long
and expensive process for the development of healthcare related
technologies.
The NIH/SBIR program therefore shows a vital huge stage of
funding gap between basic discoveries and commercial enabled
healthcare technologies. The SBIR program and NIH, and the
small businesses that it supports, are essential components of
the food chain in the biotech industry that now develops more
healthcare technologies and creates sustainable jobs. Early
stage commercially directed R&D is thus complementary to the
basic research conducted at academic and government labs and a
necessary stage in the commercialization process.
The NIH basis for requesting the SBIR program exclusion
from the stimulus package and the position that the SBIR
program is underutilized and that poor quality applications,
so-called junk science, would receive funding under the SBIR
program at the expense of higher quality academic applications
is unfounded. NIH's position is based on its funding criteria
established for academic institutions and does not take into
account the situation with small businesses.
It has grown increasingly difficult to obtain grant funding
through the NIH/SBIR program. According to the SBIR program
funding data, provided by the NIH itself in the table attached
to my testimony, the number of SBIR applications and the
success rates have both decreased between 2004 and 2007. The
decrease in the number of applications can be directly
attributed to the decrease in the application success rate.
The preparation of a grant proposal requires an enormous
amount of time and energy, representing both an economic and an
opportunity cost that significantly depletes the resources of a
small business. Small businesses must carefully select and plan
high quality scientific projects. Before considering writing
and submitting a grant proposal, the economic cost of failure
to receiving grant funding can be lethal to a small biotech. I,
therefore, believe that the higher investment of small
businesses in proposal writing and the higher cost of failure
to secure grant funding justifies a significantly higher
success rate for the SBIR program compared to other grant
mechanisms tailored for academic institutions.
A recent NRC report, in which survey responses were
obtained for nearly 400 NIH/SBIR award recipients, stated that
the decrease in the number of SBIR proposals between 2002 and
2005 was directly attributed to three primary causes, including
the high level of competition translating to decreased success
rates; concerns about the selection mechanism; issues about the
quality of the reviews; and funding delays. I am personally
aware of two companies that have funding scores--grants that
have received funding scores and have not received funding yet
for no particular reason. I personally experienced each of
these three primary issues during my 14 years of submitting
grants to the SBIR program at NIH.
When the competition is high and the success rate
decreases, small businesses are not able to devote resources to
these unproductive activities. NIH review committees are
comprised primarily of academics who, in my experience,
generally resent the intrusion of small business in what they
consider their domain of NIH funding, and they often do not
consider translational research conducted by small businesses
to be either innovative or meritorious. Given these prejudices,
the NIH's position that small businesses are eligible to
compete for non-SBIR awards under most of the other RFAs
planned under the ARRA is disingenuous. Therefore, set asides
for small businesses are essential to ensuring that R&D funding
flows to companies. Moreover, the SBIR program is significantly
more efficient at directing R&D funds towards actual R&D
spending when high academic institutional indirect cost rates,
up to 175 percent, are taken into account.
We have an economic stimulus to support NIH-mediated
development of healthcare solutions that completely excludes
small businesses. There is no question that small businesses
are more efficient at converting research dollars into economic
growth under the SBIR program. Small businesses are the
principal vehicle for the development of technology into
marketable healthcare products and services, sustainable new
jobs, and sustainable economic growth.
I urge the NIH to recognize and embrace the SBIR program as
a catalyst for transforming basic biomedical research into
healthcare solutions and to offer more opportunities like the
new RC3 mechanism to fund translational and clinical research.
I urge the Senate to pass S.1233 in its present form and to
expand the SBIR program to 5 percent of the NIH R&D budget, and
if possible, to reverse this exclusion of the NIH-SBIR program
from the economic stimulus funding. Thank you for your
consideration.
[The prepared statement of Ms. Pilon follows:]
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Senator Cardin. Well, thank you very much for your
testimony. I appreciate it very much.
Mr. Joe Hernandez is president and CEO of Innovative
Biosensors, Inc. It is a pleasure to have you on our panel
today.
STATEMENT OF JOE HERNANDEZ, PRESIDENT AND CEO, INNOVATIVE
BIOSENSORS, INC.
Mr. Hernandez. Thank you, Senator Cardin. I appreciate it.
Congresswoman Edwards, Congressman Van Hollen, I appreciate the
opportunity to share a little bit about my experiences as it
relates to biotechnology in general. I am here on behalf of the
Biotechnology Industry Association. We represent 1,200
companies and related groups in 50 states. I am also a member
of the MD Bio Division of the High Tech Council, and also it is
in that capacity I am here.
I have been involved in three biotech companies, three
early stage biotech companies; one in Silicon Valley, a company
by the name of Affymetrix. And we were able to put the human
genome on a computer chip and interrogate the human genome. And
that technology is added to really the knowledge we have in the
genomics to a great extent. I was involved in a local company
by the name of Digene, developed the human papilloma diagnostic
test, that I would argue has revolutionized the way we treat
cervical cancer.
My current company is the name of a company by the name of
Innovative Biosensors. We are a company of 20 employees. We
license the technology out of MIT, technology that was
originally funded by DARPA and developed under the auspices of
the Department of Defense. The technology as well is in
Science, and we have been able to product-tize the technology
in the area of bioweapons detection. We have created sensors,
small box sensors, that we deploy out in areas of interest. Our
primary application is actually one of the most critical
buildings inside the National Capital Region. Obviously, I
cannot disclose where it is for obvious reasons, but it is a
deployed technology. We are very proud of the work we have
done, this company of 20 people.
We have been successful in raising venture capital. We have
raised $20 million in venture capital and numerous rounds of
financing. I can tell you that the capital markets right now
are something I have never seen in my very long--and I look
older--I am older than I actually look--my very long career in
the biotech sector. The value that we provide as an industry I
think is quite evident. We provide significant value in terms
of innovation, knowledge, jobs, and also changing the health
care of our society. But we also have a very important impact
on the economy. And Maryland is a very good example of this.
I am very proud to say that the economy in this state has a
significant impact on the wages we provide to our employees. I
can tell you from a personal perspective, the average salary in
my company is $110,000. Now, I do not say that because I want
applications, but I am just saying that to really illustrate
the fact that we are really an industry that really pays our
employees really well, and it is important that we maintain
this industry strong.
It is a tough market. There is no question about it.
Biotech typically is the highest risk investment in a normal
market. In a market like this, it is considered an ultra high
investment, an ultra high-risk investment. The typical
liquidity events that exist in companies such as the IPO
markets are non-existent. Our investors cannot exit out of
these companies. It is a very, very significant issue, one that
we cannot lose our perspective of.
VCs. While there are a number of VCs both in the area, and,
really, throughout the country, they are really not making
currently new investments, and that is clear in the
marketplace. What you see in venture capital occurring is that
they are actually maintaining the companies and allowing them
to survive this market in hopes that it will change. There are
no new investments coming out of--I would argue that they are
ranking their companies and really dropping the ones that are
at the bottom of that list, which is a significant issue.
The M&A activities slowed down. There is no M&A activity.
The M&A activity you see is really what I call the middle-tier,
larger companies that are consuming each other up because the
market requires that they do that. And small companies, such as
the one represented here today, really have a hard time
existing in an M&A environment.
So survival is key for us, and this is why we believe it is
important that additional capital come into the marketplace via
federal vehicles. Bio has urged the NIH to include small
biotech in the American Recovery and Reinvestment Act. It has
been a position that I think Bio has been consistent about. The
American Recovery and Reinvestment Act does not require the NIH
to direct the SBIRs. In some ways, we are frustrated like
everybody else is about that notion. But I would argue that it
is more important to focus on how do we get those dollars out
quickly to the community.
I would argue that it does not really matter what we call
it. It can be done in the format of recovery vehicles or
recovery grants, the RC1s, RC2s and RC3s that are currently
being solicited by NIH, some of which, though, lend to the
past. So in some ways, these are a moot point. I think that
what we really need to do is just get this capital out there.
In some ways, I would argue that the current RC vehicles
are better because they are faster. They turn around more
quickly. They are suggesting at least--the grants that I am
familiar with are suggesting 30- and 60-day turnaround times in
terms of response, which is really critical in this market. We
really need that capital and that decision really quickly. And
they are larger in size, which is I think quite helpful as
well.
So it is important that we get this capital out there. It
is easy to throw eggs at the NIH, but I would argue that the
NIH has played a very critical role in the development of these
technologies. They play a very important role in our society,
and all we are asking for is that these dollars that are really
part, and intended to be part, of the Recovery and Reinvestment
Act, that they be deployed and they be deployed quickly.
So I thank you for your time, and I would be delighted to
take any questions you have.
[The prepared statement of Mr. Hernandez follows:]
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[The prepared statement of Ms. Sally J. Rockey follows:]
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Senator Cardin. Again, let me thank all of our panel of
witnesses for their testimony. I think there is a general
consensus of the importance of the SBIR program, that it will
create jobs much more efficiently than the other recipients;
that it will help in innovation, and the numbers and statistics
and the leveraging appear to be pretty conclusive.
We are also in a recession, as many of you have pointed
out; therefore, it is very difficult for these small companies,
innovative companies, to get capital necessary for their normal
businesses, let alone the expansions that we would like to see.
Mr. Hernandez, I agree completely with you and other
witnesses that NIH could rectify the problem with that
amendment. There are plenty of opportunities they have to get
money out to small businesses. And they have been reminded of
that by Senator Landrieu and Senator Snowe and Senator Feingold
and myself, and we will continue to do that.
I just want to hear first from Ms. Pickett so that we are
clear on this. Regarding the waiver that was included in the
American Recovery and Reinvestment Act to the allocation, I
just want to get on record your view that this was not
something that the SBA had requested and something that you
think is particularly not helpful in this recovery.
Ms. Pickett. Senator, it was a surprise to us as well.
Senator Cardin. I just want to make sure we were not alone
on that particular issue.
Ms. Pickett. No.
Senator Cardin. I want to talk about the current economic
climate and how urgent it is for us to try to get some relief
to innovative small companies. The $10 billion is a lot of
money at NIH alone. And if we could get SBIR allocations up to
that $230 million level, or somewhere around there, which we
thought was going to be allocated to small businesses, how
important that would be. Has there been any sign of help from
NIH to small, innovative companies under any of their
opportunities?
Have we seen much happening?
Mr. Hernandez. If I can just make a personal comment.
Our company looked at some of what are called RC1s and
RC2s, which are part of the Recovery Act, dollars and granting
vehicles that the NIH had put forth. The RC1s appeared to us--
and, again, we are sort of making a judgment call here--appear
to us that they were pretty selected in terms of the topic
areas that they were seeking dollars for. It just seemed quite
tight in terms of the topics that they wanted applications for.
So we actually dismissed the RC1s for not being really broad
enough to justify us investing the time to really write those
grants. The RC2s were, I would argue, a little better
mechanism, and the RC2s seem like a lot better mechanism to be
able to, in fact, apply for these dollars.
The time that they had proposed to get back to us in these
grants, some of those have come and gone, so I do not know
exactly what is happening in terms of the time line and so
forth. I understand they received an overwhelming amount of
applications, so that is probably part of the reason. But I
would argue that the RC1 vehicle was not of any help to at
least companies I am involved with.
Senator Cardin. My point is, do you see any special effort
by NIH today to reach out to small, innovative companies to try
to make sure that they are included in the Recovery funds?
Mr. Cohen. Hard to say. There has been--to be fair, you
should not conclude that none of the Recovery funds are being
used for small business. And, in fact, as the NIH will say, we
are permitted to compete for virtually everything. We are not
excluded from competing. As a practical matter, the likelihood
of a small business winning a grant that is normally geared for
universities is extraordinarily low.
Furthermore, there have been some SBIR initiatives within
the Recovery Act. In fact, our company has competed for one.
What I do not know, and what I doubt, is whether they have set
aside the required typically 2.5 percent. I suspect it is
considerably less than that, but it is not zero.
Furthermore, a couple weeks ago they came out with an
interesting program. The acronym is BRDG-SPAN. It is an
interesting program for valley of death. It is not an SBIR
program. In other words, companies of all sizes are permitted
to compete. But I will say I think it was a very well thought
out program, still relatively small. I think only $40 million
was set aside for that. So there are some signs of interest and
some signs of progress. I just do not think it is enough and it
is not fast enough.
To the first part of your question, urgency, I can tell you
I have had meetings--I have had companies that have come to us
over the last couple of months, companies that have literally
weeks of capital left. What I think is hard for the NIH
administration to really fully grasp--because they are
typically from academia; they have that mind-set. We do not
have tenure, unlike the university, our university
counterparts. For us--people, when you cannot make payroll,
your best assets, which are your scientists, they have feet.
They have to leave. So it is extremely urgent, and I do not see
that urgency, regrettably, in terms of the NIH and the programs
that they are going forward with.
Senator Cardin. Let me just point out my concern. Mr.
Glover's testimony particularly underscores this, that there
has been an historic hostility at NIH to allowing special
allocations to small businesses within the innovative research
program. And then during the reauthorization of SBIR, we know
the difficulties we had with NIH increasing it from two and a
half percent to three and a half percent. There was hostility
from NIH.
Now, I want to point out, it was done by our committee and
the bill passed unanimously by our committee. So there is
strong support in Congress. And it seems to me that NIH is
still resisting an effort to allow small businesses an even
chance to get in the door. Without the allocation amounts, it
is going to be very difficult to see these other programs at
all filling the gap that the SBIR program has been able to do.
So moving forward, we are going to have a reauthorization
of SBIR. We are going to hopefully get it up to three and a
half percent. We are going to get that done. But on these
stimulus dollars, which are significant funds, we are not there
yet. We are not there yet.
Yes?
Ms. Pilon. I just wanted to address that, first, I have
been in the trenches for a long time, rubbing elbows with
people who review grant proposals, fellow grant applicants from
universities and other institutions, as well as companies.
There is a tremendous bias against applications from companies.
By and large, the academic attitude is that they are throwing--
the government is throwing its money away by funding poor
science in companies. And it is an ingrown prejudice that has
been there since the inception of the SBIR program.
That said, I believe, as I stated in my testimony, that I
do not believe that small businesses would receive any
significant portion, less than a percent, of federal R&D
spending if it were not for the specific set aside. And
secondly, for your earlier questions, I follow these things
fairly closely. There has been nothing from the stimulus for
business specifically, except for the RC3 mechanism allocating
$40 billion to fund approximately 10 large grants, targeted at
business. And it is not focused on small business; it is any
for-profit entity. So small businesses like mine would be
competing with Merck or Pfizer, potentially, if they decided
they wanted to go for these grants, which is not particularly
helpful.
Senator Cardin. Just one final observation before turning
to my colleagues. I support research funding for our
universities. I think that is important research. I am not
trying to suggest that NIH is not doing a service by these
contracts. But the point that was raised earlier on
commercialization, getting the innovation out in the
marketplace, creating jobs, in those areas the SBIR program has
been extremely valuable.
So I really cannot figure out the hostility here. We are
going to have to overcome it, because we need to make sure that
NIH continues its extremely important mission, that the
universities can do the work that they are doing, and the
small, innovative companies have the capital they need,
particularly in this recession, to get the job growth and our
economy back on track.
Congressman Van Hollen.
Representative Van Hollen. Thank you, Senator.
I just wanted to follow up on some of the questions and
comments related to these new programs that NIH has apparently
developed. And, obviously, it is unfortunate that we do not
have a witness from NIH here. But before I do that, let me
underscore the point that I think all of you have made, which
is none of these are a substitute for the SBIR program, and we
all want to work together to increase the set aside, whether it
is three and a half percent, Mr. Cohen made the proposal 5
percent for two years. But whatever it is, I think that
increasing that, based on the National Academy of Science's
study and the observations you have all made with respect to
the data showing that so much innovation comes out of the small
business community in this area, is warranted.
But I would like, to the best we can, get some sense of
what the NIH claims it is doing. I am looking at a letter of
response to a letter that Senator Cardin had written, and this
is the response from NIH, dated May 28th of this year, where
the NIH says, ``You may be aware NIH has released several
funding opportunity announcements.''
Is that what you are referring to by RC1, 2 and 3?
[Witnesses nodding affirmatively.]
Representative Van Hollen. Okay.
And I assume number 1 was then these challenge grants, and
number 2 was the grant opportunities of GO grants, and RC3 you
are referring to is the BRDG-SPAN?
[Witnesses nodding affirmatively.]
Representative Van Hollen. Okay. If we could just take each
of those and get some sense of how much funding NIH is
allocating to these grants, to what extent we know small
businesses are currently or may participate in those. Because
another thing we may want to look at as we go forward, if these
have merit--Mr. Cohen you mentioned--the valley of death issue
is one we have all discussed a lot. So if NIH is on to
something here with the BRDG-SPAN, maybe as part of
reauthorization, we would actually look at further developing
that idea and maybe putting it in a more concrete and
sustainable framework going forward.
So to the extent they have come up with some good new
ideas, maybe it is an opportunity for us not to substitute
those ideas for some set aside, whatever percent it may be, but
to build on them. So I would be interested in your, at least,
preliminary observations based on what you know about each of
these three programs, both in terms of the magnitude of the
funding and whether you think that they make a good investment.
Mr. Hernandez. If I may go ahead, and my colleagues here,
we have the experience that we have applied for the RC1s and
the RC2s, and so we know at least some of those vehicles pretty
well. The RC1, if I recall correctly, is a $1 million program
over a two-year period. The RC2 was a $2 million program over
also a two-year period. RC3s are a little bit larger in size,
but to Dr. Pilon's point, there are a very, very small number
of those. So we are not going to compete simply because we
think it is just not even worth our time.
The RC1s, those dollars--those grants seemed that they were
previous programs that were not funded, and they were, in
essence, re, what is the word, characterized----
Ms. Pilon. Recycled.
Mr. Hernandez [continuing]. Recycled grants is the
terminology we use, the sophisticated terminology that we use
in the industry. I would argue that the vehicles themselves
actually make some sense. And what I mean by that is, the
turnaround time is quite impressive. I remember when we were
writing these grants, or our scientists were writing, they were
astonished that the NIH can turn around the grants in such a
period of time. So maybe there is sort of a positive thing
there.
The other thing is the size. I think, from our perspective,
we have always argued and we made this testimony--I myself made
testimony in front of Congress previously related to the size
of the Phase I and Phase II grants. They are really small,
relatively speaking. A hundred thousand dollars is a very, very
small amount of dollars for our industry. It just,
unfortunately, does not get us a whole lot. So the fact that
these are larger grants actually has some positive things that
I think we should not overlook. But I just felt the first
elements of these grants look like they were predetermined.
Ms. Pilon. They were. I support Joe's comments. The RC1s in
particular are the challenge grants. The topics--there were
something like 400 topics to fund 200 $1 million grants. And
from what I understand, the NIH received upwards of 12 or
15,000 applications for that, for 200 grants. There were single
universities putting in 500 grants for one solicitation, for
one RC1 or RC2 opportunity. So those kind of numbers and that
kind of competition--and particularly in the RC1, the topics
were very academic. They were not--they were not projects,
topics that had a commercial objective. The GO grants, the
RC2s, were a little bit different. Here again, that is 200
grants they were going to fund, and I believe the cap was also
$200 million with 100 grants. It is a small number.
Between RC1 and RC2, I understand that 23,000 applications
were put in. I know that small businesses are competing in
that, but they are vastly outnumbered. The turnaround time is
excellent but remains to be seen, if they can do it and do a
good job. NIH has been requesting reviewers who are volunteers
from both the academic and business communities to help handle
this load. There are significant issues where people in small
companies, to serve as reviewers because of conflict of
interest issues and what you might be reviewing. I personally--
although I have gotten a lot of grants from NIH, I do not serve
as a reviewer. I serve as a reviewer for National Science
Foundation, where my conflict of interest issues are much
reduced.
So anyway, the number of grants that are going to be funded
so far, specifically out of the RC1, RC2 and RC3, are
approximately 410 awards, out of 23,000 applications so far,
and we have not even seen the response to the RC3 mechanism.
As John mentioned, the SBIR has received a little bit of
attention. The other one that just recently came out was a
special program for the next SBIR date, for companies that want
to apply for SBIR funding but have never received it before in
the past.
Representative Van Hollen. Right, the fourth one coming
out.
Mr. Cohen. I do not know the answer to your question. Not
surprisingly, if the NIH is not answering members of Congress,
certainly they are not telling entrepreneurs what is going on.
And beyond the particulars of the Recovery Act, I think what
this underscores is the need for more transparency at the NIH
and more involvement at the policy level on an ongoing basis,
so we can constantly look and relook at whether we are getting
it right. AIG, as they said, is too big to fail. Well, the
biotechnology industry is too important to fail. America needs
this industry to succeed. There are not too many left who are
truly ahead of the world, and we still are ahead of the world
in biotech.
So I think there are a lot of things that Congress can look
at in the long term, beyond the Recovery Act, perhaps
designating an assistant director at the NIH for small business
innovation, somebody who would be focused on this day in and
day out and would have regular interaction with your
committees.
As I recall in the Senate legislation, there was an
advisory board, a small business advisory board. That is a
great mechanism if that is established in the right way, to
have ongoing transparency, some fresh ideas, where we really
know where things stand, where they should be. Let's get input
beyond the academic community. Let's allow the true customers
of the NIH, namely patient advocates, physicians, let them
weigh in. What is the right ratio? How much should be going
toward translational versus basic?
Obviously, as entrepreneurs, we have a bias, but by the
same token, the academic community, who truly own the NIH in
every sense of the word, they have a bias, too. So we need to
get other voices to the table on an ongoing basis. But in the
short run, I cannot give you an answer to your question.
Representative Van Hollen. Ms. Pickett, the SBA's role in
monitoring the allocation of SBIR grants, different agencies,
do you as the Small Business Administration look at all the
different agencies to determine whether they are making their
set-aside requirements, or is that just something that is done
internally at every agency?
Ms. Pickett. Well, quarterly reports, annual reports are
made to the agencies.
Representative Van Hollen. To the Small Business
Administration?
Ms. Pickett. To the Small Business Administration, yes.
Representative Van Hollen. So let me just ask you, with
respect to this NIH issue and the exclusion from the economic
recovery funds, the Department of Health and Human Services was
not exempted, right? The Department as a whole was not exempted
from the two and a half percent requirement?
Ms. Pickett. It was NIH.
Representative Van Hollen. It was NIH. But the NIH funding
would be counted against the full department's, would it not?
Ms. Pickett. Yes.
Representative Van Hollen. So when you monitor whether or
not the Department of Health and Human Services as a whole is
complying with this two and a half percent set-aside
requirement, will you count that two and a half percent against
the funding that goes to the entire department, including the
agencies?
In other words, if they do not provide some of these funds
for NIH, and we all hope to try and reverse that, are you going
to make sure that that two and a half percent still comes out
of their entire budget, which, of course, would give them
incentive to put more into the NIH on a voluntary basis.
Ms. Pickett. We just collect the reporting. We really do
not have the enforcement tools other than to collect the data
and report to the House and Senate committees on the reporting.
Our administrator can work closely with officials there, and
the intent of Congress can be made clear. Right now, we are
just collecting, making sure the money is being spent and that
award is being made.
Representative Van Hollen. But when you make your report to
Congress this time, with respect to the Department of Health
and Human Services set-aside money, will you--I assume you are
agreeing that they have that two and a half percent requirement
that goes department-wide, and the funds that came to NIH are
included in the department-wide funds.
Isn't that right?
Ms. Pickett. I will have to check on what the reporting is.
I do not know that NIH specifically--that HHS has the entire
program, whether it is all focused in NIH or it goes elsewhere.
So I will be happy to get back to you on that.
Mr. Glover. If I may, the Missile Defense Agency several
years ago tried to do something like this and slip something
in. The chairman of the Small Business Committee and ranking
member sent a letter to the Secretary of Defense saying, where
else are you going to make this up, and requiring the other
agencies to make it up. And it was amazing how quickly Missile
Defense withdrew--even though they had the statutory
permission, they said we do not want to have to fight our
friends in the Army and the Air Force and Navy to try and do
this. So they actually found money for it. It is one of the
unheralded success stories. The Small Business Committee in the
Senate did jump right on that, write that letter, and it did
have a remarkable result overnight.
Representative Van Hollen. Well, I am hoping the same can
be said, Senator Cardin, as others have sent that message to
them.
Mr. Glover. It is a wonderful suggestion, sir.
Ms. Pickett. I think that is where the intent of our
legislators is helpful.
Senator Cardin. As this hearing is helpful.
Congresswoman Edwards.
Representative Edwards. Thank you, Senator Cardin.
I just have a couple comments, really. Each of you in very
different ways actually pointed to exactly the reason that we
need investment in the SBIR program and small business in this
economic climate. And particularly, Mr. Hernandez, when you
spoke about the lack of liquidity in IPOs, you talked about the
difficulty and the complexity in this environment of attracting
venture capital investment.
All of these things actually highlight why it is a needed
investment through SBIR. And so, I hope that NIH takes note of
that. I mean, it is very disturbing to hear from Ms. Pilon
about, in your testimony, the numbers of small businesses that
are essentially having to downsize or close doors because of
lack of investment capital. Even on a good day, it is really
difficult to attract venture capital into these businesses
because they are so risky, and that is in a good economic
climate.
I am curious to hear from each of you what you believe the
NIH actually could do, even with the exclusion, because as I
read the language, I actually think that they could--they say--
for example, in the April 23rd hearing, their testimony is,
well, the two and a half percent that they have through the
regular appropriations process enables them to do what they
need to do even now, and especially given the lack of quality.
They pointed to a lack of quality in the applicants. And it is
hard to know how to read that because on the other hand, you
hear from Ms. Pilon and others that this supposed lack of
quality, there are a number of different reasons that can be
pointed toward the applicant pool.
So I wonder what you believe that they have the capacity to
do right now through their regular appropriation and even with
the ARRA funds if they were so inclined.
Perhaps Mr. Glover.
Mr. Glover. First of all, the SBIR legislation says not
less than two and a half percent, so they can go over it very
quickly and very efficiently. In terms of quality, one has to
remember they refuse to give the National Research Council the
data to evaluate the quality and compare because they did not
want anybody else to see it. They still have these funny
numbers where they use different things. And when they talk
about the competitive ratio, they still count us as having two
competitions where everybody else has one.
So their thinking is skewed because of these things, which
gets them to different results. And they also have for SBIR
commercialization evaluation criteria that does not apply to
any other research they do. So there is a difference there. And
they can do whatever they want to do if they have the will to
do it, and, hopefully the new director will have the will to do
it. They can do those things, and there are a lot of other
creative things.
When we talk about the valley of death for businesses, it
is nothing compared to the valley of death for university
research because it still has to get across to a business and
then across the valley. So there really are a lot of things
that could be done to further streamline commercialization of
all of NIH's research, and this would certainly be a wonderful
opportunity with the stimulus money.
I would have hoped instead of just giving a lot more basic
research, they would have looked for things that would create
long-term jobs very quickly. I do not see that they have done
that.
Representative Edwards. Ms. Pilon.
Ms. Pilon. It is my understanding that one of the main uses
that the NIH was intending to put the stimulus funding towards
is to go back and fund grants that had barely missed or were
underneath their funding cutoffs for the past couple of years.
These are shovel-ready projects. They have already been
reviewed. And they could just go back and fund these projects
very quickly.
I am personally aware of a couple of companies that
received fundable scores below the cutoff on SBIR Phase II
grants, and they have heard nothing about getting funded. So
there is this perception, at least for me, that there is a very
distinct preference to fund academic research versus small
business research, even when they do not have the argument that
the scores are inferior to the academic scores. I do not
understand that. They should be funded.
One issue that I am acutely aware of because it happened to
me several years ago is that, particularly with the smaller
institutes, they do not have enough money in their pots to
really fund Phase IIs, putting the small company in the
situation of waiting two or three years for them to accumulate
enough money to get up to that 750K to fund a Phase II
proposal. And I would suspect that there might be a backlog of
highly qualified, highly meritorious Phase II applications,
particularly in the smaller institutes that have not been
funded, not been funded in a timely manner. And, of course,
waiting two or three years for that kind of money is a death
knell for a small company.
Representative Edwards. Yes, Mr. Hernandez.
Mr. Hernandez. If I can just make one comment, is really
highlighting the chart that you have up here. And that is that
it is clear that the number of SBIR applications has been going
down year over year. I know this dialogue is not really about
the SBIR program in general, but I think it is worthy of
looking at why that is and why companies are not interested in
applying for a $100,000 grant. That is the statement I made
earlier. It is just too much effort for a company to focus that
kind of resources to a $100,000 grant. It is very important to
increase competition. Whatever mechanisms we use, I think you
have to increase that and increase the competition in general.
I really think that there are some good elements in the
Recovery Act that we should not overlook, and that is the
expediency of which they are supposedly getting back--we do not
know; the jury is still out on this one--that they are getting
back to the applicants. The sizes of those grants I think
really make it attainable for a company to apply to, and it
makes it a little bit more interesting for a company who really
has multiple projects in the pipeline.
The last comment I would make about these grants is that,
generally speaking, there is an opportunity for us here in
August. I think August is the next SBIR deadline. I do not know
that we can act that quickly, but I would argue that this is a
really, really good opportunity to really have the NIH step up
to the plate and allow companies like us to apply to these
funding programs. So there is an opportunity. I do not know how
realistic it is to expect that they will act.
The one last comment I will make, and that is really in
defense of NIH, if I may be the only sole voice here. And that
is that we did receive an e-mail from the director of the SBIR
program encouraging companies to apply for the Recovery Act
grant. So there is an interest, at least based on that e-mail,
for companies to apply and to be part of that program.
Representative Edwards. Well, again, I just want to
underscore--and I know my colleagues feel the same. I mean,
this is not--we obviously all were very strongly supportive of
the investment funding that went into the NIH and all of our
research facilities. And the question is how do you strengthen
what is happening at NIH so that it more effectively benefits
our small businesses that are actually quite vulnerable in this
economic environment, and how do we challenge NIH to live up to
the opportunities that are available.
I would just say--and thank you again, Senator, for doing
this. And I would just say in conclusion, I have to depart, I
think there are a number of ways that we need to look in the
future at Phase I and at Phase II, how do you move then from
the research and development to really commercializing, through
getting a product often out to market, and how can we
strengthen the program's ability to do that. And I think from
an oversight perspective, many of us are going to be looking at
those. And the question is what do we do in this interim period
with resources that are available through the American Recovery
and Reinvestment Act.
Thank you, Senator.
Senator Cardin. Well, thank you very much.
I am going to put in the record, without objection, Senator
Feingold's statement for today's hearing, and just point out
that I am going to concur with Senator Feingold that we are
going to continue to try to find out, in specific dollars, how
much of the stimulus money that NIH has allocated will end up
with small businesses.
[The prepared statement of Senator Feingold follows:]
[GRAPHIC] [TIFF OMITTED] T7578.034
[GRAPHIC] [TIFF OMITTED] T7578.035
Senator Cardin. Senator Feingold has gotten two responses
from NIH. Neither one is satisfactory to his point of view. We
still do not have adequate information to understand why NIH
took the action they did to secure the exemption. That has not
been answered yet. And the fact that it is at least implied by
NIH--and, again, it is unfortunate that they are not here so
that we could have a complete hearing on this--that the number
of applications for SBIR, at least, weighed in somewhat to
their concern as to whether the allocation should apply to the
stimulus funds.
Mr. Hernandez, you have already pointed out some of the
explanations for the numbers. There is also, as Mr. Glover has
pointed out, a hostile view toward small businesses. So there
is a lot that feeds on this. The bottom line is small
businesses, innovative companies are really struggling today to
get the type of investments they need so that they can
function, stay in business, and, of course, also expand and
create the type of job opportunity and innovation in our
economy that is so important for our recovery.
So the American Recovery and Reinvestment Act was an effort
by Congress working with this Administration to provide tools
to help get our economy back on track. We have not taken
advantage of the small, innovative companies that are out there
that could help us a great deal with a relatively small amount
of federal investment. And they are ready to go. That is the
frustration for all of us.
So I just really want to concur on Senator Feingold's
concern as to how this happened, how this waiver got into this
law. We do not know.
Ms. Pickett, you were very straightforward by saying how
surprised you were. Believe me, those of us on the Small
Business Committee were livid at the fact that this was
included without consultation with the Small Business
Committee, which is a committee of jurisdiction. That is true
also, by the way, in the House. They were unaware of those
provisions being placed in there.
So we want to rectify it, and we want to make sure we get
funding to the businesses. As I said at the beginning of this
hearing, NIH performs an extremely important function, which
has had the support of three members of Congress at this
hearing, and will continue to have our support, but we want to
make sure that there is fair allocation of those funds,
particularly to these small, innovative companies. The SBIR
program is important as is the attitude within NIH to engage
the small business community in accomplishing its mission.
So we will use the information that has been provided
today. It will certainly help us in carrying out our mission.
If there is nothing further from my colleagues, let me conclude
by thanking, again, our witnesses and all of you for being
here. I also want to thank the staff of the Small Business
Committee for their long drive out from Washington to
Rockville. One of the nice things about representing Maryland
is that field hearings, which are in close proximity to
Washington, allow us to get out into the community, and we
thank committee staff very much for making all these
arrangements.
With that, the Committee will stand adjourned.
[Whereupon, at 2:30 p.m., the Committee was adjourned.]