[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/
                                 senate




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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

                              ----------                              

                           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:]

    [GRAPHIC] [TIFF OMITTED] T7578.001
    
    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:]

    [GRAPHIC] [TIFF OMITTED] T7578.002
    
    [GRAPHIC] [TIFF OMITTED] T7578.003
    
    [GRAPHIC] [TIFF OMITTED] T7578.004
    
    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.]
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