Despite ongoing negotiations in the Senate and House throughout 2009, the new year is beginning with the SBIR reauthorization effort at a continued standstill.

While Congress did successfully save the SBIR/STTR from extinction by implementing a series of five continuing resolutions (“CR”) since the authorization expired back in September 2008, no permanent solution has been reached and the current CR is set to expire on January 31, 2010.  Thus, the SBIR/STTR programs continue to be in limbo.

If you have been following this issue at all and are familiar with the SBIR/STTR programs, you may be wondering why these programs continue to be in a perpetual state of almost extinction.

According to the SBIR Gateway, which has been covering this issue, the problem is that the Senate and the House cannot agree on the terms of a reauthorization bill.  There are apparently eight issues that are still being debated:

1. Length of reauthorization;
2. Venture capital participation in SBIR;
3. Award levels;
4. Sequential Phase II award;
5. Retention of Phase I requirement;
6. Allocation increase;
7. Administrative funds; and
8. Rural and state outreach.

SBIR Gateway attributes the problems to the fact that ” the more the Senate was willing to compromise, the more the House wanted” and asserts that the “House Small Business Committee under the leadership of Nydia Velazquez and her staffer Michael Day wanted to hold the SBIR program hostage.”  According to SBIR Gateway, a key issue is that Velazquez is receiving large campaign contributions from the National Venture Capital Association (“NVCA”) and biotech investors, and they are the groups who would stand to benefit from the House Bill the most.   So, the argument is that Velazquez is unwilling to agree to more than a two year reauthorization for this very reason.

Regardless of what is going on here, it is clear that the whole SBIR reauthorization effort has become bogged down in politics and has been therefore left on the backburner.  Based on what I personally have observed this past year, I would argue that this seems to be the current state of affairs for anything involving small business: Congress seems to have put small businesses in general on the backburner for whatever reason, despite the fact that small businesses, which include biotech companies and other start-ups, provide the majority of jobs in this country and unemployment as well as underemployment continues to be the overarching concern of most Americans today. So, small businesses have largely been left to fend for themselves through this recession and deal with the fact that access to capital has all but dried up, while Congress has been out bailing out banks, failed auto companies, and other “too big to fail” institutions–which employ only a small percentage of the nation’s workforce–with our taxpayer dollars.

Does any of this really make sense?

The California Biotech Law Blog would like to see Congress to reassess its priorities in 2010:  it is time to put the focus on small business.   I am certain that many of you in the biotech community would agree that getting serious about finally passing a  SBIR/STTR reauthorization bill would be a good start.

The Senate Committee on Small Business and Entrepreneurship ("SBE") recently passed a compromise Small Business Innovation Research ("SBIR") reauthorization bill that would allow small companies that are majority-owned by venture capital firms to be eligible for SBIR awards.

According to the SBIR Reauthorization Insider, the SBIR/STTR Reauthorization Act (S. 3362) is a  "completely new bill" that is "not related to H.R. 5819, the House’s SBIR/STTR Reauthorization Act passed in the House" back in April, 2008.  The complete draft of the bill is attached.

According to the SBIR Reauthorization Insider, some of the highlights of this bill are as follows:

1. Higher Award Amounts – The SBIR and STTR awards are increased to $150,000 in Phase One, $1 million in Phase Two, and are now able to exceed the guidelines by up to 50%.
2. Increase in the SBIR/STTR Cap– The SBIR cap will be increased from 2.5% to 3.5% at a rate of .1% over 10 years.  The one exception is the NIH, which will stay at 2.5%. The STTR cap will double from 0.3% to 0.6% over 6 years.
3. Venture Capital Eligibility-A "small business" that is majority owned and controlled by multiple VCs will be eligible to participate in the SBIR program under certain conditions. No single VC can own more than 49% of the small business entity; the VC must be a United States Venture Capital Company; the VC owned small business must register with the SBA when they submit an SBIR proposal. The NIH will be limited to awarding not more than 18% of their SBIR award funding to such VC owned small businesses, and the remaining 10 agencies are limited to 8%.
4. Length of Reauthorization – The new bill would be reauthorized for fourteen (14) years, resulting in new sunset dates of September 30, 2022, for SBIR and September 30, 2023, for STTR.
5. Crossover Between Agencies– The new bill would allow Phase One awards at one agency and Phase Two awards at another.
6. Crossover Between SBIR and STTR Programs-The new bill would allow Phase One awards through the SBIR and Phase Two awards through the STTR, or vice versa.
7. SBA Waivers Will Not Be Required–SBA waivers will not be required for partnering, subcontracting, or entering into a Cooperative Research and Development Agreement ("CRADA") with a  federal lab of a federally funded research and development center.
8. Reorganization of the SBA’s Office of Technology.  The bill will move the Office of Technology out from the contracts department and make the Office of Technology directly reportable to the SBA Administrator.  The aim is to restore some of the authority to this office, which was intentionally rendered ineffective in the past due to funding and staff cuts.

This bill obviously falls short of what the biotech industry was seeking in reauthorization legislation, as there is a cap on the percentage of awards that can be given to vc-backed businesses.  However, the industry should be pleased at the fact that a reauthorization bill is now likely to be passed, and some progress has been made toward opening  up awards to vc-backed businesses.  In all likelihood, the final legislation will no longer include a ban on awards to vc-backed companies, which is in itself a victory for the biotech industry.

Following up on our February 4th report on the debate regarding the future of the SBIR Program,  the House Committee on Small Business held a hearing on March 13th to consider changes to modernize the program, according to a press release issued by the House Committee on Small Business.  SBA Administrator Steven Preston was subpoenaed to appear before the Committee.

The chief items up for consideration by the Committee were as follows: (i) increasing size limits on SBIR grants during the first two phases of the program, potentially doubling the size of the awards, and (ii) changing the definition of small business to include businesses majority-owned by venture capital firms, reported Kent Hoover for the Dallas Business Journal. 

Hoover reported on the second topic of consideration:

The committee also wants to change the SBA’s rules defining what types of companies qualify as a small business in order to allow small companies that are majority-owned by venture capital firms to receive SBIR awards.

These types of companies routinely received SBIR awards until 2003, when the SBA ruled that venture capital firms don’t qualify as individuals under the agency’s eligibility rules for the SBIR program. . .  . Many biotech companies contend the ruling ignores the realities of their industry, where small businesses must get outside capital in order to research and develop new drugs and other treatments. The Biotechnology Industry Organization and the National Venture Capital Association have been lobbying Congress to overturn the SBA’s ruling. . . . .

The House overwhelming passed legislation last September to allow small companies majority-owned by VC firms to be eligible for SBIR awards as long as no single VC owned more than 50 percent. The Senate didn’t act on the bill, so the House is taking another stab at it this year.

BioOptics World ran an article this month on the SBA reauthorization battle.  I was actually interviewed for the article, but my interview did not make it into the published article.  Anyway, Author Susan Reiss reported as follows on the status of SBA reauthorization:

One Hill observer says that the venture-capital issue will boil down to whether Congress wants to emphasize the “S” or the “B” in SBIR. At this point the House and Senate don’t agree on whether they should change the program to address the venture-capital issue. A bill introduced last fall by John Kerry (D-Mass.), chairman of the Senate Committee on Small Business and Entrepreneurship, and ranking member Olympia Snowe (R-Maine) that tried to bridge a middle ground passed in the Senate but failed in the House. An alternative bill was approved in the House, but failed in the Senate.

This year the Senate has yet to hold hearings on SBIR reauthorization, although an aide to Kerry on the Small Business Committee says Kerry is committed to reauthorizing the program. . . .

Reiss further noted:

To lessen impact of the venture-capital issue, some observers have suggested creating a separate program for innovation development at NIH. “NIH is concerned about the path to commercialization. Instead of trying to fit a square peg in a round hole, let’s look at a commercialization program,” suggests James Morrison, a senior advisor for the Small Business Technology Council.

But the chance that someone will devise an entirely new program that addresses the needs of NIH is unlikely. At this point it’s unclear where on the spectrum the House and Senate will meet to reauthorize SBIR, but as Brown notes, “it would be devastating to have a gap in the program.”

Video of the hearing and and copies of written testimony by witnesses are available for review at the Small Business Committee website.

I am interested to hear any comments on the current proposal to the House Committee.  It is a well-established fact that BIO strongly supports the idea of changing the SBIR rules to allow venture-backed companies to recieve SBIR grants.   But the Dallas Business Journal article suggests that some biotech companies may actually oppose BIO’s position.  Is there any truth to this?  If you oppose the changing the rules to allow venture-backed companies to participate, I would like to hear your argument.  Please write us and let us know your position. 

Also, what about the idea of developing a new program at NIH?  Is this a workable or even advisable solution?  Why or why not?  Any comments we receive on this issue will be shared with blog readers, so we welcome the feedback.

Health Advocacy and Medical Specialty Groups Submitted a letter to Congress today arguing for Congress to rethink its position on SBIR eligibility in its upcoming consideration of the reauthorization of the Small Business Innovation Research ("SBIR") program.

As we previously reported in Congress to Consider SBIR Funding Increase , the SBIR program is set to expire in 2008, and Congress is currently considering legislation that would increase the amount that federal agencies with large research and development budgets would have to set aside for SBIR funding. 

The letter sent to Congress today articulated the position of biotech companies that the SBIR eligibility rules should be amended to reinstate funding for majority venture capital-backed companies:

After twenty years of participating in the program, the Small Business Administration (SBA) ruled in 2003 that small companies that are majority venture capital-backed could no longer apply for grants regardless of how few employees the companies have.  Because of the unique capital needs of biotechnology companies, most are now ineligible to be compete for grants.  As a result of the reinterpretation, the SBIR applicant pool is shrinking at the National Institutes of Health ("NIH)," and work on live-saving and life-enhancing technology is being postponed. . . .

Small biotechnology companies take basic scientific discoveries,  many of which originate from universities, and conduct further research and development to turn discoveries into commerically available treatments and cures. This collaborative relationship is one of the ways universities and academic researchers serve the public by contributing to the development of new treatments and cures and supporting the local economy.  Small biotechnology companies require significant venture capital investment, and unfortunately the SBA reinterpretation of the eligibility rules has hampered the continued research and development into biotechnology products, thereby delaying the delivery of future treatments to patients.

Fifty-two organizations signed the letter to Congress, including the Christopher & Dana Reeve Foundation, the Michael J. Fox Foundation for Parkison’s Research, and the Leukemia & Lymphoma Society.

Congress is set to consider an increase to SBIR funding, according to a recent report by Mass High Tech: The Journal of New England Technology.

Sen. Evan Bayh, D-Ind., introduced the legislation, which would increase from 2.5 to 5% by 2013 the amount that federal agencies with large research and development budgets would have to set aside for SBIR funding.

Mass High Tech: The Journal of New England Technology reported on the significance of the SBIR program as follows:

The SBIR program — which doled out $1.9 billion nationwide in 2005 — is a major source of federal funding for early-stage technology development in the United States. The grants are used to explore the feasibility of technologies sought by government agencies, including the U.S. Department of Energy and the U.S. Department of Defense.

Supporters of the SBIR budget increase include biotechnology executives who argue that the funding fills the gap left by declining venture capital investment in the early-stage firms.

Of course, the article points out that the debate on the legislation will likely focus on the role of venture capital firms, since companies majority-owned by large venture-capital backed firms do not qualify for SBIR awards.

The SBIR program is currently set to expire in 2008.

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