[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
SUBCOMMITTEE ON
HEALTHCARE & TECHNOLOGY
THE CREATING JOBS THROUGH SMALL BUSINESS INNOVATION ACT OF 2011
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HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD
APRIL 7, 2011
__________
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Small Business Committee Document Number 112-009
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
CHUCK FLEISCHMANN, Tennessee
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, General Counsel
Michael Day, Minority Staff Directory
C O N T E N T S
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OPENING STATEMENTS
Ellmers, Hon. Renee.............................................. 1
Richmond, Hon. Cedric............................................ 2
WITNESSES
Mr. Glenn Norem, Executive Chairman, Totus Lighting Solutions,
Inc., Lakeway, TX.............................................. 4
Dr. Terry Brewer, President, Brewer Science, Inc., Rolla, MO..... 11
Dr. Albert Link, Professor, Department of Economics, Bryan School
of Business and Economics, University of North Carolina at
Greensboro, Greensboro, NC..................................... 16
Dr. Scott Koenig, M.D., Ph.D., Chairman of the Board of Applied
Genetics Technology Corporation & President and CEO of
MacroGenics, Inc., Rockville, MD............................... 24
APPENDIX
Prepared Statements:
Mr. Glenn Norem, Executive Chairman, Totus Lighting Solutions,
Inc., Lakeway, TX.............................................. 7
Dr. Terry Brewer, President, Brewer Science, Inc., Rolla, MO..... 13
Dr. Albert Link, Professor, Department of Economics, Bryan School
of Business and Economics, University of North Carolina at
Greensboro, Greensboro, NC..................................... 18
Dr. Scott Koenig, M.D., Ph.D., Chairman of the Board of Applied
Genetics Technology Corporation & President and CEO of
MacroGenics, Inc., Rockville, MD............................... 27
Statement for the Record:
The Small Biotechnology Business Coalition....................... 39
HEARING ON THE CREATING JOBS THROUGH SMALL BUSINESS INNOVATION ACT OF
2011
THURSDAY, APRIL 7, 2011
House of Representatives,
Committee on Small Business,
Subcommittee on Healthcare and Technology,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
2360, Rayburn House Office Building. Hon. Renee Ellmers
[chairwoman of the subcommittee] presiding.
Present: Representatives Ellmers, Richmond and Peters.
Chairwoman Ellmers. Thank you all for being here with us
this morning as we discuss legislative legislation to
reauthorize the Small Business Innovation Research (SBIR) and
the Small Business Technology Transfer (STTR) programs.
I would especially like to express my gratitude to each of
the witnesses who have taken time out of their busy schedules
to be with us today. And on a personal note I would also like
to thank Chairman Graves for giving me the opportunity as a
freshman to chair this Subcommittee. That was very generous of
him and the staff as well. They are so incredibly helpful and
it is an honor to be sitting in this position, especially since
this is my very first Subcommittee. So thank you all. And I
will remember you always very fondly.
STATEMENT OF CHAIRWOMAN ELLMERS
Chairwoman Ellmers. Small businesses are a major driver of
high technology innovation and economic growth in the United
States generating significant new jobs, new markets, and high
growth industries. In this era of globalization, optimizing the
ability of small businesses to develop and commercialize new,
highly innovative products is essential for U.S.
competitiveness and national security. This is why programs
like SBIR and STTR are so important.
Created in 1982, the SBIR program was designed to increase
the participation of small, high tech businesses in federal R&D
endeavors. The driving force behind its creation was predicated
upon the belief that while technology-based companies under 500
employees tended to be highly innovative, and innovation being
essential to the economic well-being of the United States,
these businesses were, excuse me, underrepresented in
government R&D activities. By including qualified small
businesses in the nation's R&D effort, SBIR grants and
contracts stimulate innovative new technologies to help
agencies meet the specific research and development needs of
the nation in a wide variety of areas, including health, energy
solutions, and defense.
It has been said that nobody has a patent in good, new
ideas. While that is true, it can be difficult for an innovator
or a small company with limited resources to take that idea and
manufacture it into a new product or process. Programs like
SBIR provide a bridge between product conception and
marketability, a step of vital importance for innovative ideas
to become reality. The new technologies and discoveries that
come out of this program go a long way to keep the United
States competitive edge in the world marketplace. And the SBIR
program is the kind of public-private partnership that is
essential to the continued growth of our economy.
In 2007, the National Research Council (NRC) of the
National Academies of Science completed one of the most
comprehensive examinations of the SBIR program. The study found
that the SBIR program provides substantial benefits for
participating small businesses at all agencies in a number of
different ways. According to the NRC's study, the SBIR program
is a significant job creation engine and considerable factor in
the founding of new companies, helps to provide partnering and
networking opportunities for small businesses, and provides the
impetus to start projects that otherwise would not have gotten
off the ground.
There is a very strong case for reauthorization of the SBIR
and STTR programs. The discussion draft of legislation to
reauthorize these programs that we have before us goes a long
way toward modernizing and improving the SBIR and STTR
programs. They have a proven track record of creating jobs,
advancing innovative science in the marketplace, and solving
federal agency problems. Our legislative goal is to strengthen
these programs to ensure efficient use of taxpayer dollars that
help create more jobs by targeting the best science. Moreover,
the bill does not cost anything but rather sets aside 2.5
percent of all federal extramural research dollars for small
businesses to compete for. Among other things, the draft would
reauthorize the SBIR and STTR programs for three years,
increase Phase I and Phase II award sizes for both programs,
allow for greater participation of small companies regardless
of their financial structure, and enhance data collection for
the programs to help us provide accurate and consistent
oversight.
Again, thank you all for being here today. I am eager to
hear the testimony of our witnesses and I look forward to
working with you, Ranking Member Richmond and Chairman Graves
and Ranking Member Velazquez of the full Committee to
reauthorize these important programs.
I now yield to Ranking Member Richmond for his opening
statement.
[The information follows:]
STATEMENT OF RANKING MEMBER RICHMOND
Mr. Richmond. Thank you, Chairwoman Ellmers.
First, let me thank all of the witnesses for being here--
Dr. Koenig, Dr. Link, Dr. Brewer, and Mr. Norem--for taking
time out and coming to testify today on an issue that is very
important and has the ability to continue to move this country
forward not just in terms of innovation but the products that
are created and the technology that is developed, make this
country a better place, saves lives, and all of those things
that are very important to us, not only that but it also
creates jobs. So thank you for doing that.
And Madam Chairwoman, small businesses have always been our
nation's greatest innovators, developing new products and
technologies. Whether it is new computer software or lifesaving
medicine, small firms are vital to the technological
breakthroughs that keep America competitive. The Small Business
Innovation Research program has been an important mechanism for
enlisting small firms to meet the U.S. government's research
needs.
In my home state of Louisiana, entrepreneurs are receiving
SBIR grants from NASA to work on geographic mapping
technologies from Homeland Security to improve disaster
response and from the National Science Foundation to improve
online distribution of video content. Just yesterday I met with
the president of Tulane University, Dr. Scott Cowen, who is
also in my district, that informed me that their
commercialization efforts are currently underway at Tulane
thanks to SBIR.
In addition to Tulane in my district, the New Orleans Bio
Innovation Center acts as a business incubator helping budding
entrepreneurs turn ideas into products. The Bio Innovation
Center is a cornerstone of Louisiana's commitment to nurturing
biotechnology within the state. It is a component entity of a
larger leadership of the Greater New Orleans Biosciences
Economic Development District, now referred to simply as the
Bio District New Orleans.
Beneficiaries of the work done in New Orleans' Bio District
have made it clear that a sustained, longer term of
reauthorization of SBIR is a priority for their membership. It
is also a priority for me.
The discussion draft before the Committee represents an
important first step in moving forward to reauthorize this
initiative. How we go about modernizing SBIR will determine
whether small firms continue making these kinds of valuable
contributions to the American economy. As we develop this
legislation and begin working with our Senate counterparts, we
should keep a number of goals in mind for the program.
I have a central focus when it comes to SBIR. It is vitally
important to reach an agreement that prioritizes a long-term
reauthorization. The frequent short-term reauthorizations are
disruptive to the planning efforts of SBIR stakeholders. The
program is a proven job creator and a growth engine for small
business. It is time to move forward.
I am satisfied that the draft bill, which we will be
discussing today, mostly addresses my priorities with the SBIR
program. I have identified other areas where I believe the bill
could be strengthened. As the legislative process moves forward
I warmly embrace the opportunity to work with my colleagues and
our chairwomen on both sides to make sure that this piece of
legislation can be one that the SBIR stakeholders are proud of.
Madam Chairwoman, risk-taking and innovation are prized
values in America's entrepreneurial culture. Some of the most
significant technological advancements that forever changed how
we live our lives were developed not in the laboratories of big
corporations but in the backyards and garages of entrepreneurs.
The SBIR program is an important tool for fueling this
creativity and in the process creating new jobs.
During the recession, while big companies were laying off
its employees, it is estimated that the SBIR program helped
spark the creation of more than 1,300 new enterprises. As the
U.S. economy regains its footing, innovation will be crucial
and SBIR grants can be a key ingredient in that equation. For
all those reasons, it is important that while we are taking the
painstaking care to reauthorize this program in a manner that
works for our nation's small businesses.
I look forward to a thorough discussion today of the draft
legislation and I want to thank the witnesses again for
testifying. And with that, Madam Chairwoman, I yield back.
[The information follows:]
Chairwoman Ellmers. Thank you, Mr. Ranking Member. And it
is going to be a pleasure serving on this Subcommittee with
you. Thank you so much.
If additional members have an opening statement prepared, I
ask that they be submitted for the record. I would also like to
take a moment to explain to you the timing light system. You
will each have five minutes to deliver your testimony. The
light will start out as green. When you have one minute
remaining the light will turn yellow. Finally, it will turn red
at the end of your five minutes. I ask that you try to keep to
this time limit but I will be lenient if you are close to
finishing. So, thank you.
STATEMENTS OF GLENN NOREM, EXECUTIVE CHAIRMAN, TOTUS LIGHTING
SOLUTIONS, INC., ON BEHALF OF THE AUSTIN, TEXAS CHAMBER OF
COMMERCE; DR. TERRY BREWER, PRESIDENT, BREWER SCIENCE, INC.;
DR. ALBERT LINK, PROFESSOR, DEPARTMENT OF ECONOMICS, BRYAN
SCHOOL OF BUSINESS AND ECONOMICS, UNIVERSITY OF NORTH CAROLINA,
GREENSBORO; DR. SCOTT KOENIG, PROFESSOR, UNIVERSITY OF NORTH
CAROLINA AT GREENSBORO, ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY
ORGANIZATION.
Chairwoman Ellmers. Okay. At this moment I would like to
start off with Mr. Glenn Norem. He serves as executive chairman
and cofounder of Totus Solutions. I am hoping I said that
correctly. Okay. Incorporated. His company provides advanced
lighting and security solutions for safety, security, and
surveillance applications primarily to government agencies. Mr.
Norem has also served as executive chairman of eeParts,
Incorporated. He received a Bachelor of Science degree in
Electrical Sciences and System Engineering from Southern
Illinois University and an M.B.A. from University of Chicago's
Booth School of Business. Thank you for being here today.
STATEMENT OF GLENN NOREM
Mr. Norem. Thank you. Good morning, Chairwoman Ellmers and
Ranking Member Richmond, members of the Subcommittee and ladies
and gentlemen. It is an honor to be up here before you, and I
commend your Committee for the contributions that you have had
to the growth of our economy, the creation of new jobs, and the
fostering of innovation in the United States. Thank you for the
introduction.
Totus was founded in April of 2009. We manufacture
intelligent lighting-based security platforms that are deployed
and establish electronic security grids to protect the citizens
of our country, strengthen our defenses, and to improve the
response to incidents in their jurisdictions. I am also the
founder of eeParts, a supply chain services company with
operations in Texas and in China. I cofounded ViewCast prior to
that, a provider of streaming and media technologies. Prior to
ViewCast, I was general partner of two successful venture
capital firms focused on early stage and start-up investments.
Totus was started by two serial entrepreneurs, again, to
build these security platforms. It is an integration of secure
wireless communications, video surveillance, and sensor
monitoring arrays. The surveillance and sensor grids enable
customers to provide an advanced level of physical security to
their installations and superior response to incidents that
occur in their jurisdictions. I am also here representing the
Austin Chamber of Commerce. The Austin Chamber represents a
five county region in central Texas and more than 2,400
businesses with a wide range of industries and sizes.
Entrepreneurs, innovation, and access to capital. Certainly
not all small businesses require investment capital from third
party resources to be successful, and many successful firms
have been built solely with money from friends and family and
from individual investors. However, many emerging growth
companies require significantly more capital and will receive
that from one or more venture capital funds. It has been my
professional experience that the relationship between
entrepreneurs and the venture capital professionals has
contributed to unparalleled success of innovation and jobs for
our nation in the last 30 years.
The seeds of our nation's venture capital industry actually
began with the Small Business Administration and their SBIC
programs in the 1970s. Venture-backed companies generally
benefit from both the venture capital's money, their
investment, and the business development expertise of their
professionals as the entrepreneurs strive to grow our
businesses in today's fast paced, globally competitive
environment.
The SBIR program has fostered innovation and new job
creation, and it is important to Totus as it is with many other
small businesses in this country because it keeps us and
enables us to stay close to our federal agencies, such as the
Department of Defense, Department of Homeland Security, to
create solutions to meet the critical needs of their
organizations and the missions to protect our citizens.
The SBIR program is a powerful catalyzer for innovation and
a driver of the American economy. As an example of that, my
cofounder and colleague, Steven Chen previously founded 3eTI
and was a recipient of Phase I, Phase II, and Phase III SBIR
grants which led to the invention and commercialization of the
first FIPS-140 secure wireless technologies, products that were
used by the Department of Defense and other U.S. agencies.
Historically, our country has benefitted greatly from the
successes of our entrepreneurs as they grew in new businesses,
high tech businesses with innovative products creating new
companies, new industries, and new jobs that have been proven
to be vital to our economy.
New company formation and access to capital has been
difficult in the last few years. To fulfill our ambitious
goals, new companies like Totus require both talent and
investment capital. In the formative stages, the investments
need to be secured before the firm recruits talent.
Unfortunately for Texas, the current SBIR rules handicap our
access to investment capital by prohibiting our participation
in the SBIR program if we accept venture capital investment.
While we have been successful in raising debt and equity
capital from individuals, the high visible stock market crashes
of the last decade have had a negative effect on individual
investors that have historically provided angel capital. What
that means for Totus, like many other small businesses hindered
by the current situation, is that we spend more executive time
and resources raising capital which translates to slower growth
for our businesses and limits the creation of new jobs.
In conclusion, it is most confounding to me that the
venture capital-supported companies have been barred from
participating in the SBIR program because the entrepreneurs,
the SBIR program, and the venture capital community at-large
have been solidly aligned in their interest in commercializing
technology, in their missions with spurring innovation, and in
the growth of new, commercially successful businesses. It is
well understood that entrepreneurs and their companies are
dependent on access to capital, and no other single factor more
thoroughly determines whether a business will be successful.
I trust that my comments have both reaffirmed both the
value of the SBIR program and the need to remove barriers or
obstacles to access to capital for entrepreneurs as we seek to
secure capital from all available sources.
Thank you for this opportunity to appear before the
Committee.
[The statement of Glenn Norem follows:]
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Chairwoman Ellmers. Thank you, Mr. Norem.
Next we have Dr. Terry Brewer, who is president and founder
of Brewer Science headquartered in Rolla, Missouri. Founded in
1981, Brewer Science, excuse me, is the discoverer of original
solutions for the world's leading manufacturers of computer
chips, sensors, LEDs, displays, and other microelectronics
devices. Under his leadership, Brewer Science has grown from
only three to 300 employees. Dr. Brewer has served on many
boards and committees, particularly related to the area of
innovation. He is one of the founders of Jordan Valley
Innovation Center and serves on the Board of Springfield
Innovation, Incorporated. Thank you for your testimony, Dr.
Brewer.
STATEMENT OF TERRY BREWER
Dr. Brewer. Good morning, Chairwoman Ellmers, Ranking
Member Richmond, and the members of the Subcommittee.
Thank you for the opportunity to appear here today to
discuss the impact and the value of the SBIR program. I am
Terry Brewer. I am president of Brewer Science, Incorporated in
Rolla, Missouri, and I am appearing here today as a founder and
owner of a small business that sustains high technology
innovation.
I founded Brewer Science in 1981 and based it in Rolla,
Missouri. Brewer Science is a major innovator of high
technology processes used to create ultra small circuits that
enable devices, such as tablet computers from which I am
talking, smartphones, digital cameras, flat panel devices, and
LEDs. The stringent requirements of these products provide
Brewer Science with opportunities to leverage the company's
knowledge and creative capabilities to provide the needed
advanced technologies for both government and private sectors.
Our product line encompasses unique chemicals, processes, and
equipment that are used to give devices more capability in less
space at a lower cost.
Like many entrepreneurs, I started the company with a novel
concept, but with little cash. By using another company's extra
lab space, creating a unique business approach, and accessing
the support of programs like SBIR, Brewer Science has grown to
nearly 300 employees. We are now the largest private employer
in Phelps and the surrounding counties, Missouri, with sales
offices all across Asia and Europe to access worldwide markets
with our U.S. manufactured products.
Additionally, we are making significant headway in the
development of next generation semiconductors using
breakthrough processes and materials, such as carbon nanotubes
in our facilities in Rolla and Springfield, Missouri. Over the
past three years, this small, privately held high tech company
located in rural Missouri has grown into a strong innovator and
exporter of products used by every major integrated circuit
manufacturer in the world. We have participated in the SBIR
program with a high degree of success, including the
commercialization of multiple disruptive technologies. The
global competitors from countries that provide large government
subsidies for the research and development programs require us
to utilize programs such as SBIR which is needed now more than
ever.
The founders of the SBIR program had a great vision to
support and grow a true national treasure, innovation generated
and sustained by American small business. In fact, American
small businesses have become the most powerful innovating force
on earth and it is this ability to not only invent but to
provide sustained innovation that is the hallmark of this
effort.
Since receiving our first SBIR award in 1984, the
microelectronics industry has benefitted from many Brewer
Science technologies facilitated by the program. It has helped
us create and sustain high value jobs en route to influencing
the development of modern electronic devices as we know them
today.
So how do you calculate the impact of Brewer Science and
its effect on the microelectronics industry? It is really not
possible. From local jobs to advances in global
microelectronics, Brewer Science innovations have made a
difference in the way we live. But we are only one example of
how funded innovation drives this kind of change. There are
many more stories like ours that also confirm the value of the
SBIR program.
In driving this change, it is important to distinguish
between science and innovation. While appropriate science
contributes to meaningful innovation, the value of the SBIR
program is more than just finding the best science. Science
does not create jobs. Businesses focused on sustainable
innovation and development do create jobs. The SBIR founders
were right. Small business innovation research empowers
government funding to move great innovations forward to solve
technical challenges through commercialization and
manufacturing thereby achieving economic growth.
The founders of the SBIR program intended for American
small business to generate jobs and technical growth. However,
investment firms driven strictly for financial gain are not
always aligned with this focus. I recognize that monetary
support is critical for small business growth, but while
investment firms can provide support for small businesses,
their driving purpose may not always align with SBIR
objectives. Any changes in the SBIR legislation should be
sensitive to these concerns.
In conclusion, the visionaries of the SBIR program
anticipated the increasing need for sustained innovation from
the U.S. small businesses. As our nation struggles with
challenging economic times there is no better vehicle to get us
through than American small business innovation. No better
vehicle.
While there are differences and distractions associated
with the passage of this bill, I encourage the Subcommittee to
remember the essence of what this program supports and how
valuable SBIR is to supporting these efforts. That essence is
the creation of technology-based jobs in the United States.
[The statement of Terry Brewer follows:]
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Chairwoman Ellmers. Thank you, Dr. Brewer. Thank you for
your testimony.
I now yield to Ranking Member Richmond who will introduce
our next witness.
Mr. Richmond. Madam Chairwoman, it is my pleasure to
introduce Dr. Albert Link.
Dr. Link is a professor of Economics at the University of
North Carolina at Greensboro with a focus on science and
technology policy. He received his Ph.D. in Economics from
Tulane University and is currently the Editor-in-Chief of the
Journal of Technology Transfer. He has written many articles on
the SBIR program, and Dr. Link is a member of the research team
for the National Research Council's Committee for Capitalizing
on Science, Technology, and Innovation, an assessment of the
Small Business Innovation Research program.
As a Tulane graduate, it is my pleasure to introduce Dr.
Link. Dr. Link.
Mr. Link. Thank you.
STATEMENT OF ALBERT LINK
Mr. Link. Good morning, Chairwoman Ellmers, Ranking Member
Richmond, and members of the Subcommittee.
The pollen season has arrived in North Carolina. So if you
would excuse me.
It is a privilege to be here and I thank you for the
opportunity. The observations that I offer to you this morning
are more general than those from Mr. Norem and Dr. Brewer. The
insight that they offer from a company perspective is
enlightening and extremely important.
If I may speak at a more general level, the SBIR program
has had, and I expect it to continue to have, a significant
impact on the technological foundation of our economy, thus
reinforcing the economy's potential for continued and sustained
growth.
Defending this statement is not difficult at an aggregate
level. The evidence is clear that the benefits to society
outweigh the costs of the program. In other words, a benefit
cost analysis calculated under very conservative assumptions
shows that the ratio of social benefits to SBIR funding costs
far exceeds one.
Turning to two specifics, employment growth and
commercialized new technologies, both of which are of economic
importance and both of which are directly linked to SBIR
funding. After I briefly remark on each I will comment on the
common thread between them, namely Phase III funding.
Employment growth is not an explicit objective of the SBIR
program, but it is definitely an important issue, especially in
the current economic environment.
The average annual rate of employment growth in SBIR-funded
companies over the past decade has far exceeded the growth rate
of the economy as a whole. The average rate of employment
growth among, for example, NIH-funded companies has been about
11 percent per year. And this estimate does not take into
account employment growth associated with those companies that
purchase innovations created by the funded companies.
Also, across agencies employment growth has increased by
about 30 persons per million dollars of SBIR funding.
Employment growth varies among companies, and it is greatest
among those that have patented their intellectual property and
have acquired Phase III funding. Controlling for these effects,
there do not appear to be differences in employment growth
among companies that are owned by women and/or minorities
compared to other companies. But women and/or minority
companies tend to patent their intellectual property less
often.
Commercializing new technology funded by SBIR is an
explicit objective of the program, and about 50 percent of the
funded projects reach the commercialization stage. The
probability of commercializing a new technology also varies
among companies and it is greatest among those that have
acquired Phase III funding and who have partnered with the
university. And I suspect that partnering with a national
laboratory would bring about the same result.
And controlling for these effects on the likelihood of
commercialization, again, there do not appear to be differences
among women and minority-owned companies compared to other
companies.
The magnitude of the effect of Phase III funding on the
probability of commercializing a new technology is noteworthy.
Again, if I may draw from NIH as an example, the probability of
commercialization nearly doubles when Phase III funding is
available. Phase III funding thus has an economic importance to
SBIR-funded companies. It is correlated with employment growth
and commercialization, and the two are related.
In conclusion, thank you again, Chairwoman Ellmers, Ranking
Member Richmond, and members of the Committee for the
opportunity to offer these observations on the overall economic
importance of the program. I strongly encourage the Committee
to move toward a reauthorization of the program and to include
in that reauthorization continued evaluation studies of the
program within an emphasis on any economic consequences
associated with changes in the economic environment or in the
composition of applicant and recipient companies. Thank you.
[The statement of Albert Link follows:]
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Chairwoman Ellmers. Thank you, Dr. Link, for your
testimony.
Our last distinguished panel member is Dr. Scott Koenig,
who is the chairman of the Board of Directors at Applied
Genetic Therapy Corporation, a private biotechnology company.
Dr. Koenig is a board member of the Biotechnology Industry
Association, as well as a member of its emerging company
section. Dr. Koenig is also a board member of the Children's
Research Institute at the Children's National Medical Center.
He received his A.B. and Ph.D. from Cornell University and his
M.D. from University of Texas, Health Science Center in
Houston. He completed his residency in international medicine
at the Hospital of the University of Pennsylvania and is board
certified in internal medicine and allergy and immunology.
Dr. Link, you could probably discuss this with Dr. Koenig
to suffer as a fellow North Carolinian.
Welcome to the Subcommittee, Dr. Koenig.
STATEMENT OF SCOTT KOENIG
Mr. Koenig. Thank you very much. Good morning, Chairwoman
Ellmers, Ranking Member Richmond, members of the Committee,
ladies and gentlemen. I am president and CEO of MacroGenics and
chairman of the board of Applied Genetics Technology
Corporation. I am appearing before the Committee on behalf of
the Biotechnology Industry Organization, which represents more
than 1,200 companies, academic institutions, state
biotechnology centers, and related organizations in all 50
states.
I am a scientist, physician, and entrepreneur, and I have
worked at the NIH and in the biotechnology industry for the
past 27 years. During my career I have held positions,
including senior vice president of research at MedImmune,
cofounder and CEO of MacroGenics, and board director of AGTC.
During this time, I have been involved in the development
of multiple biological product, such as a therapy to prevent a
fatal viral illness in premature infants, a vaccine to prevent
cervical cancer, and a number of other promising therapeutics
still in development to treat juvenile diabetes, West Nile
virus infections, and many types of cancers.
I have seen the importance and impact of the SBIR program
in the biotechnology industry, but sadly, from my perspective,
current rules have inhibited the growth and survival of small
private biotechnology companies and the development of
promising technologies and products due to the inability of the
venture-backed companies to participate in the SBIR program.
Let me illustrate examples of each with two quite different
outcomes for treatments for children. In the 1990s, MedImmune
was a small, biotechnology company in Gaithersburg, Maryland,
funded by venture capitalists and became a publicly traded
company in 1991. At that time, one of the lead programs was a
monoclonal antibody to prevent respiratory syncytial virus
infection in neonates. The research and development of this
program was funded by SBIR Phase I and II grants. Today this
product is called Synagis, the first and only FDA-approved
product to prevent an infectious disease and has been used now
in over 600,000 children. MedImmune employs thousands of highly
skilled professionals. If current SBIR rules prevailed at the
time when MedImmune scientists first were working on and
applied for these grants, MedImmune would have been illegible
to receive those SBIR funds and it would have significantly
impacted the development of the program and the company.
Contrast this with the outcome at AGTC. Today AGTC is a
small, private, biotechnology company in Alachua, Florida. It
is developing cutting edge product candidates to treat and cure
different generic diseases using adeno-associated viral vectors
produced by their proprietary manufacturing process. The
company by all parameters is a small company. They have seven
employees, no product revenues, and large capital requirements
to advance their programs through early stage pre-clinical and
clinical development. Currently, all their venture capital
money is being used to fund two early clinical trials and they
have no other capital support to support other avenues of
research.
Prior to 2003, AGTC received several SBIR grants for three
different projects to advance treatments of rare diseases, but
in 2003 the company applied for a Phase I and II grant and was
initially awarded the grant but the application had to be
withdrawn due to the circumstances of VC ownership. This grant
would have advanced the treatment for Pompe disease, a fatal
genetic disorder which results in the death of many infants by
one year of age. No investors were willing to fund this early
stage work for Pompe and no further work has been done in the
last eight years.
Currently, the company is working on one of the most
promising programs to treat blindness in children caused by
genetic disorders. An initial clinical study using their
technology to treat Leber's congenital amaurosis (LCA), a rare
retinal disease affecting a few thousand patients in the U.S.,
resulted in the first restoration of partial sight in legally
blind patients with this inherited, defective gene. The company
desires to use their technology to treat three other genetic
eye diseases but is unable to do so because they have no
resources available and they cannot participate in the SBIR
funding. In fact, AGTC did apply for a grant for one of these
eye diseases called achromatopsia in anticipation of
congressional resolution of matters of SBIR funding related to
VC ownership. The grant was scored and awarded, but AGTC is
unable to accept the funds due to the prevailing rules.
As developers of the next generation of treatments for
diseases that would have been unapproachable just a decade ago,
we need to find ways to support these risky transformational
therapies that could improve the lives of children and adults
suffering from genetic disorders, infectious diseases, cancer
and autoimmune diseases among others. This has personal and
economic benefits to the individuals affected, the
organizations and companies working on these initiatives and
society in general. We should update the SBIR program to
reflect today's realities and this has never been more
important. The impact of the economic downturn is still being
felt by the industry. The amount of venture capital dollars
decreased by 27 percent between 2009 and 2010 and finding
funding for promising early stage projects is still difficult
as it has ever been.
There is an opportunity to strengthen and restore the SBIR
program. First, allow small U.S. biotechnology companies that
are majority owned by venture capitalists to once again compete
for the SBIR awards based on scientific merit. This will ensure
that the most competitive pool of applicants and grants will be
awarded for projects that show the most promise in bringing
breakthrough therapies to the public. Second, clarify SBIR
eligibility rules to make the application process more
straightforward and user friendly. It is equally important that
the reauthorization clarifies SBIR affiliation regulations.
[The statement of Scott Koenig follows:]
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Chairwoman Ellmers. Thank you for your testimony, Dr.
Koenig.
I would like to begin questioning with Mr. Norem.
Technologies such as yours, and really technologies in general,
tend to advance exponentially. Where could you see your
technology going? Where else could it be adapted?
Mr. Norem. Thank you for the question, Chairwoman Ellmers.
We believe, and our investors believe, that we have a very
rare opportunity to expand the physical security levels of our
nation, not only at the Department of Defense military bases,
the State Department and embassies worldwide, both here and
abroad, but also for our communities as they want to deploy
this in universities for increased security on campuses,
hospitals and local jurisdictions, police departments, K-12
education. So it is a very open market at both state, local,
and federal here in the United States, not to mention the
growth of the surveillance and sensor grid arrays that are
being built in Europe and other places in the world.
Chairwoman Ellmers. Thank you.
To Dr. Brewer, we have been really focusing on job
creation. That is the main focus of the 112th Congress. Could
you put your SBIR award into jobs? Upon receipt of a Phase I or
a Phase II, does that directly impact your hiring practices?
Dr. Brewer. Of course we can put SBIR directly into jobs.
We have. And yes, the Phase I and Phase II awards do affect our
hiring practices and make a major contribution to just how far
we can extend our own technology. So very significant to that,
and very significant to job creation.
Chairwoman Ellmers. Great. Thank you.
And Dr. Link, agency flexibility is often cited as a value
to the SBIR program. Can you explain how this flexibility is
beneficial to the program across agencies?
Mr. Link. If one talked to a group of entrepreneurs, each
would probably have a different definition of what an
entrepreneur is. The same if you talk to those in the academic
community who study it. The common thread among those
definitions would be the ability to be creative and the ability
to bring that creativity into action. In this case the
marketplace. And I think the flexibility of the SBIR program
embraces both of those. It embraces both creativity and
embraces both action. It allows for two phases. It allows for
firms to attempt to try out new ideas, and if successful then
follow them forward into a Phase II. It also allows for other
support, whether it be federal or federal non-SBIR money or
other forms of private investment. And there is not a formula
that is presupposed on how those other forms of financing will
have an effect. The market is playing itself out, as it should,
and the success, I think, has been well documented by the
members of this Committee.
Chairwoman Ellmers. Thank you, Dr. Link.
And lastly, Dr. Koenig, have you seen businesses
increasingly seeking out more opportunities in the SBIR program
because of the general lack of availability of capital
nationwide at this time?
Mr. Koenig. I think the effect of the economic downturn has
had a dramatic effect on the biotechnology industry. The lack
of funds available from other sources, particularly venture
capitalists, has ended up forcing the companies to seek other
ways to obtain new sources of capital. I have seen a lot of
effort in trying to get SBIR funding, but because of the
current rules, and since most of the companies within the Bio
organization are majority owned by venture capitalists, they
have been prohibited from participating. That has been a great
frustration, as you can imagine, for the member companies. And
I think that in the interest of both the companies creating new
jobs and getting the most innovative technologies developed, if
the rules can be changed to allow the majority funded VC
companies to participate, it will have a huge impact on our
country and the public.
Chairwoman Ellmers. Thank you, Dr. Koenig.
I now yield to Ranking Member Richmond for his questions.
Mr. Richmond. Madam Chairwoman, if I could, I yield to
Congressman Peters to do his before me.
Mr. Peters. Thank you, Ranking Member Richmond. I
appreciate that. Thank you, panelists, for your comments here.
Dr. Link, I just want to flush out some of the things that
you had mentioned in your analysis of the SBIR program. One,
you talked about how the average annual rate of employment
growth varies across funding agencies, and I think you quoted
the NIH as about 11 percent growth. I do not know if that
correlated to jobs. What sort of variation do you see in these
agencies? Is there a wide variation?
Mr. Link. The NIH was the largest and that is the agency I
studied the most. The Defense Department is about five percent
and the Department of Energy is about six percent. NASA and the
National Science Foundation are in between.
Mr. Peters. And what do you account for that difference?
Anything in particular?
Mr. Link. First of all, NIH and Department of Defense are
the two--projects funded from those two agencies have received
the most amount of Phase III money, and I think that has a
dramatic effect on the probability of commercialization.
When one talks about commercialization, it is not a
dichotomous event. You either commercialize or do not
commercialize. If you do commercialize, how successful are you
in reaching the market? And in those two agencies, which, of
course, are the largest in terms of allocations, they have been
most successful in terms of the magnitude of sales. And I
attribute that primarily to Phase III funding in those two
agencies more so than in the others.
Mr. Peters. And to pick up on that, you quoted about per
one million dollars of investment is 30 jobs. Now, is that
folks that are just getting Phase I and II or is that looking
at Phase III as well? Does that skew the job number because the
Phase III funding is really, and in some respects, most
important when it comes to job creation?
Mr. Link. Those numbers take into account Phase III money.
And I do not think it skews the numbers because I am talking
first about an average and the variance around that 30 is
relatively small. It is a point estimate but I think it is a
very good approximation across funding agencies. And we have
looked at the data from the early 1990s to the present, and so
I feel very comfortable with that as a sound bite.
Mr. Peters. Right. Yeah. But the Phase III, obviously, is
critical, not being done by all agencies. Are there
recommendations that you have to this Committee as to maybe
looking at structuring it to ensure that other agencies are
engaged in Phase III funding?
And I will open this up to all the panelists, too, because
commercialization is the key thing when it comes to jobs. And
the bottom line, we want to create jobs and small businesses
are the engine of growth. I serve on the Financial Services
Committee and deal with financing issues all the time, which is
very difficult right now if you are a small business person to
get the loans you need. Do we need to have a focus on Phase III
to get our best bang for our dollar? And how do we do it? And
just some ideas that any of the panelists have would be
appreciated.
Mr. Link. Let me just finish. I think it is open across
agencies. We just do not see much venture capital among DOD and
NASA projects compared to the others. An issue tied to Phase
III is trying to shorten the time period between Phase I and
Phase II. Shortening that time period helps companies retain
employees, and I think that is very important.
Another issue associated with Phase III funding across all
agencies is consistency in the funding of the SBIR program, not
going through the temporary period from 2008 to the present
time. And the reason for that is venture capital firms, as well
as other private equity and investment firms, they span
companies that have received SBIR awards. The SBIR award is in
a sense a seal of Good Housekeeping approval. It does send a
positive signal to the marketplace, and companies are willing
to--I am sorry, venture capital companies in particular are
willing to invest in the time and effort to study those
projects that have been funded and to approach those that
appear to be the most successful.
Mr. Koenig. So I have a sort of mixed view with regard to
the requirements for SBIR Phase III funding, per se. I have
found historically, and in my own experiences with getting
funds for SBIR one and two, that this has a huge impact. I
think the validation is very important to the VC community, but
beyond that, it is the ability to have these funds to fund very
early stage programs and move them far enough along that you
can actually have results that can be endorsed. They become
attractive not only to the venture capitalists, but to other,
larger biotechnology companies or pharmaceutical companies that
will engage these companies.
There is an amplifying effect that once you have actually
conducted the research that has been funded by Phase I and II,
it helps to mature the early stage work to a point where it has
some validation to be more attractive to larger sources of
capital, both in the venture community, as well as the biotech
and pharmaceutical industries.
Mr. Peters. Good. Thank you.
Chairwoman Ellmers. Thank you. That was very good.
I now recognize Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mrs. Chairwoman.
Gentlemen, before I come back to the venture capital
question that I want to follow up on, I want to ask a general
question. I am a small businessman. I participated in a SBA
program before. It is not the one we are talking about here
today. And I would classify my experience as fair. It could
have been better. I have heard some really good stories about
some things the SBA does well. I have heard some stories about
things that are not administered as well as they might, could
be. Tell me, how hard is it to use this program? Is this a
relatively easy program to use? I mean, you all are in small
business. Does it make sense to you or is it one of those
things you have got to fill out 15 different forms and it is a
complete disaster? Tell me about the experience of actually
using the SBIR process and whether or not we can improve it.
Anybody. Dr. Koenig.
Mr. Koenig. I have to say I have been involved with SBIR
funding since the early 1990s so I have a very long view of
this. I remember telling one of my colleagues back in 1994
musing that this was the jewel of the government. There is
always criticism about government-supported programs, but when
I saw the impact of that program and the ease in terms of
applications and getting the funding, it made this a wonderful
resource.
Move forward to 2003 when the rules changed and I was
actually very depressed about it because I saw tinkering in a
program that was so successful. The actual application process
is quite easy. I mean, we mostly dealt with the SBIRs through
the NIH and this is not any more difficult, and in fact, less
difficult than most grant submissions. The actual
administration of that funding, getting the awards, has been
quite easy. So I have not heard any issues in regards to the
administrative aspects of the granting process.
Mr. Mulvaney. Gentlemen? Yes, sir.
Mr. Norem. We work primarily with the Department of Defense
and I have to say, and I would speak for my colleague, that it
has been a great agency to work with. Sometimes they are short
of administrative help themselves, but for the recipient it is
a very helpful process, very encouraging with their support,
and it has been, I think, a very solid program for our company.
Mr. Mulvaney. Dr. Brewer, do you want to check in on this,
or is it pretty much the same?
Dr. Brewer. Yes, I want to echo pretty much the same. We
have worked with a broad range of agencies, and have also found
that kind of experience across the board. We also do non-SBIR
government contracts and if you compare the two I would say
SBIR is certainly a jewel in the crown I think. It is very
good.
Mr. Mulvaney. That is good to know then. Let us come to the
issue that Dr. Koenig has talked about at length and I know
each of you touched on it a little bit. If we wanted to fix it,
do you just get rid of section 107? Do you get rid of the 34,
35 percent caps or, is there another way? Do you throw all the
200 rule changes out and go back to the way it was before? I
mean, if we decide that we would like to try and take this up,
what are your recommendations about the best, most efficient
way to proceed?
Mr. Koenig. Well, I would personally love to throw the
rules back and go pre-2003. Obviously, I know that this has
been a very difficult process to change. I mean, we have been
discussing this since 2003. I have actually appeared before the
Committee several years ago and we are now eight years beyond
and have not resolved the issue. What I believe and what Bio
believes is let us find a pathway forward that allows as much
participation as we can for majority VC-owned companies. If the
Senate and the House could come to a solution that removes the
caps, of course, we would endorse it, but any ability to have
VC majority owned companies participate at this point would be
very favorable.
Mr. Mulvaney. And I have got only about half a minute left
so let me ask this. Are there any other changes to the 2003
rules that we should be looking at primarily or is this VC rule
the one that seems to be the sticking point for most folks in
your industry? Mr. Norem.
Mr. Norem. I would encourage you to look at the definition
of venture capital firms themselves. When we call on family
offices, wealthy individuals who have a propensity to do this
and angel capital, they form LLCs to protect themselves
legally. They hire professional managers. They make more than
one investment and so many of the angel capital investors are
now deemed venture capital. So it is just another barrier for
us to raise capital and participate in the SBIR program if that
definition is too loosely interpreted.
Mr. Mulvaney. Dr. Brewer, I am out of time so I am going to
let the Chairwoman take it from here. So.
Chairwoman Ellmers. I am going to yield some time to Mr.
Richmond for some questions that he has as well.
Mr. Richmond. I guess I would start with have you all had a
chance to review the draft legislation that would come out of
this Committee? And in that legislation, if you have some ideas
of changes, please go ahead and offer it.
But one of the things that I notice that is different in
this legislation than the previous legislation was a 90-day
window that they would have to respond. Do you think that will
expedite things or do you think that could have some potential
negatives to it? Dr. Brewer.
Dr. Brewer. Yes. I think it is a good idea. Shortening the
time of response will be a real advantage.
Mr. Richmond. And Dr. Link, I think, oh, did you want to
respond, Dr. Koenig?
Mr. Koenig. I have nothing to respond to the 90 but you
asked about other changes.
Mr. Richmond. Yes.
Mr. Koenig. This is actually not an opinion endorsed by
BIO, but is my personal opinion. I remember in the mark-up of
last year's legislation there was a limitation of VC companies
that were affiliated with large corporations and there had to
be less than a 20 percent ownership of the small companies by
these large affiliated VCs. I think this is just a very
arbitrary rule and my personal opinion, it should be excluded.
In fact, AGTC, which I described before, would not be able to
now participate because there is one VC, a large corporation
associated entity, that owns a little more than 20 percent. And
so again, the arbitrary nature of this does not seem very
useful for such companies.
Mr. Richmond. The other thing that I noticed in the bill,
and I would assume you all are going to say it is a very good
thing but I want to make sure, is the increase in the Phase I
and Phase II grant amounts, do you think it is a sufficient
increase? Do you think it was a necessary increase?
Mr. Koenig. The costs of doing research have escalated and
I think, I wholly endorse the amounts here. Knowing where we
are in terms of the economy and issues with regards to funding
new programs, I think there will be limitations and pushbacks.
So any additional funding is well deserved in supporting this
program, but obviously you have to deal with the realities of
funding such programs.
Mr. Richmond. Go ahead, Dr. Link.
Mr. Link. Yes, I agree with the increase in the limits. I
also agree with the inflation escalation that is suggested for
funding.
If I may have a little breadth in my answer here. There is
another part of the proposed bill that gives directors
discretion for a 50 percent increase in those amounts. I did
not see in the bill, perhaps it is there, information with
regard to oversight on how that 50 percent may be monitored,
what kind of accountability may take place there. An
alternative idea may be in the spirit of accountability to
allow those companies that are invited for Phase II awards that
look very promising and perhaps in the spirit of the purpose of
the agency need additional funding, be invited to propose two
Phase II awards, one for the maximum amount and one for 50
percent greater than the maximum amount, and then have both of
them scored rather than have the discretion for the agency to
go above the amount without any oversight associated with that.
Mr. Richmond. Thank you for that.
Mr. Norem.
Mr. Norem. If I could respond to that. I think, and
speaking for the DOD programs and SBIR, the administrators
themselves have oversight, and as long as they have the
discretion on the size of award, they do a very good job, we
find, at managing the amount, an appropriate amount of money
that gets assigned to each program. So the discretion of the
administrator would be my recommendation.
Mr. Richmond. The last question I will ask. Because we keep
talking about venture capital a lot and it is very clear that
VCs play an important role in helping these companies start up.
One of the other shining stars, at least in my experience
through federal programs, is the New Market Tax Credit. And I
was wondering how large of a role New Market Tax Credit
allocations play in this area.
And two, and you do not necessarily have to answer this
now, but do you see a way in the future we could link or make
some provisions in New Market Tax Credit allocations for this
area of technology or in this area? Because I think that when
you talk about job growth and benefit to the country, this is
very significant. The rules on New Market are very open in what
you can invest in is a large area. Would it make sense to
direct or incentivize New Market Tax Credit companies to look
at this area. And just, Dr. Koenig.
Mr. Koenig. I think that tax credits are a great incentive
in general but in the context of the companies we are talking
about, they cannot get to use these tax credits because it
takes over a decade for most of these companies to actually
realize any revenue if they are successful. So unless there is
an ability to take those tax credits and assign them or sell
them or some way of actually helping the company indirectly to
bring in more resources, I do not see an immediate impact on
the company.
Mr. Richmond. No, what the New Market program does is allow
venture capital companies to raise----
Mr. Koenig. Oh, I see. Yes.
Mr. Richmond. So the VCs raise money through New Market but
those VCs are allowed to invest that capital that they raise in
a number of things, from housing to loans to clothing stores.
And I guess I am asking if this is such a jewel should we try
to find a way to incentivize those VCs to look in this area in
terms of investing their money? And after you all answer the
question, Madam Chair, I will now yield back.
Mr. Norem. Ranking Member Richmond, I can only comment that
as an entrepreneur and living in the state of Texas, we have
got a lot of state programs that encourage and foster
innovation and encourage entrepreneurs like ourselves in Texas.
We have found that encouraging and linking those programs,
providing additional access to capital for the entrepreneurs
had been very helpful across the board and we are in a very
severe time to raise--it is very tough to raise capital today
in this economy. And I think all of those programs help a great
deal.
Chairwoman Ellmers. Thank you. Thank you. I have one follow
up question for Dr. Brewer.
In regard to commercialization there has been a lot of
debate about so-called SBIR mills, companies that simply win
multiple Phase I awards, very few Phase II awards, but do not
commercialize much. I have heard both sides of this argument,
but as a participant in the SBIR program do you view this as a
problem?
Dr. Brewer. Thank you. It is a good question. Yes, we
recognize the problem exists, but I think it is a very poor
business model, so I believe the mills will not be around for
long anyway. The mills are there, but I do not see this as a
significant problem. However, additional metrics will help us
better determine the severity of the problem and whether or not
a more comprehensive solution is warranted in the future.
Chairwoman Ellmers. Okay. Thank you. I appreciate that.
Well, in conclusion, I thank all of you for participating
today. The SBIR and STTR programs are widely supported and
recognized as one of the country's most important engines of
innovation. Today was the second step in our Committee's effort
to fully reauthorize these important initiatives. As Chairman
Graves said at our previous hearing, we plan to work quickly,
yet thoroughly, over the next several weeks to get this
legislation on the House floor in May, and ultimately to get a
bill to the President's desk as soon as possible.
Thank you all again, and I ask unanimous consent that the
members have five legislative days to submit statements and
supporting materials for the record.
Without objection, so ordered. This hearing is now
adjourned.
[Whereupon, at 11:08 a.m., the hearing was adjourned.]
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