New SBIR rules open up the playing field for more small firms to get their share of funding. [© Dani Simmonds - Fotolia.com]
Monday, January 28, marks a new era for the U.S. Small Business Innovation Research (SBIR) program, as new rules take effect that are designed to draw more small businesses in biopharma and other technologies to SBIR and its companion Small Business Technology Transfer (STTR).
The changes were written more than a year ago into the National Defense Authorization Act for Fiscal Year 2012, part of which reauthorized SBIR and STTR for six years through the 2017 fiscal year. The Biotechnology Industry Organization (BIO), which fought for the changes, predicted in a statement that SBIR “now will be an aggressively competitive program that fulfills federal research and development goals of bringing breakthrough public health discoveries to the public.”
“Hundreds, if not 1,000, companies, may once again be able to participate in the program,” E. Cartier Esham, Ph.D., BIO’s senior director of emerging companies—health and regulatory affairs, told GEN last week.
Biopharmas would be a relatively small slice of the total roughly 24,000 U.S. businesses estimated by the U.S. Small Business Administration (SBA) to be “impacted” by the rule changes. That number included businesses locked out of the program until now, though SBA did not say how many were included in its estimate.
In the last full year for which figures are available, 6,723 SBIR and STTR awards were approved during FY 2011, according to the programs’ joint website. SBIR is offered by 11 federal agencies, of which five also offer STTR because their extramural R&D budgets exceed $1 billion. Each agency sets its own program and funding guidelines.
SBA wrote final rules for the reauthorized SBIR and STTR. The text of those rules was published Dec. 27 in the Federal Register.
Room for Investor-Owned Startups
One key change to SBIR sets percentages for funds that can be awarded to businesses that are majority-owned by multiple venture capital firms, hedge funds, or private equity firms: 25% of SBIR funds from NIH, NSF, and the U.S. Department of Energy; and 15% for all other agencies.
Those percentages, proposed by the Senate, are well below the 45% and 35%, respectively, offered by an investor-friendlier House of Representatives two years ago—but still better for such companies than having no set-aside. And nothing says the percentages can’t change overtime. In a policy paper last April, Foley & Lardner lawyers Frank S. Murray, Jr., and David T. Ralston, Jr., said the agreed-on percentages are “effectively creating a pilot program to see how the new eligibility rules actually play out in practice.”
STTR still bars companies majority-owned by investor firms from participation. And while allowed by SBIR now, the investor firms must have a place of business located in the U.S. and be created or organized in the U.S.
Both programs will limit participating companies and their affiliates to 500 employees—but in a new rule designed to encourage majority-investor-owned startups, will not rule participating companies to be affiliated with separate companies just because they may share one or more investors.
Another new rule change is that SBA now allows ownership of participating companies to be determined using all “fully diluted” shares—including outstanding common stock, all outstanding preferred stock (on a converted-to-common basis), all outstanding warrants (on an as-exercised and converted-to-common basis), all outstanding options and options reserved for future grants, and any other convertible securities on an as-converted-to-common basis.
The reauthorized SBIR raises the maximum amount of grant funding for awardee businesses in the program’s guidelines for the first time since the program was established in 1982—from $100,000 to $150,000 for Phase I, and from $750,000 to $1 million for Phase II. In addition, projects deemed to be especially promising will be allowed to pursue a second Phase II grant.
Among those anticipating applying for more SBIR funding as a result of the changes are Douglas Doerfler, a BIO board member who is president and CEO of MaxCyte. The company develops cell modification technologies used in discovery, development, manufacturing, and delivery of therapeutics.
“With the new rules that are in place, there’s a pretty bright clean line, which allows us to feel more comfortable,” Doerfler told GEN. “The rules are now much more clear. We know exactly where we fall within the rules.”
MaxCyte won a Phase I grant of $95,725 in 2003 for a new streaming approach to electroportation (EP) technology, followed three years later by another Phase I grant of $116,893 for a scalable lentiviral vector production process, using the EP technology to transfect plasmid DNAs encoding components of bovine immunodeficiency virus (BIV) gene therapy vectors into mammalian cells. In 2008, with its vector production effort showing promise, MaxCyte won a Phase II SBIR grant of $809,064 for an efficient large-scale commercial system for manufacture of lentiviral gene therapy vectors in suspension cells.
“We could not have done that without the support of NIH and the SBIR, no doubt about it,” Doerfler told GEN. “It was a speculative, technically risky program, but it was important, and we really didn’t have the financing available to spend on those kinds of projects—and still today we don’t.”
After receiving its Phase II grant, venture capital firms came to own more than half of MaxCyte. That effectively precluded the company from additional SBIR and STTR funds, since SBA directed that small businesses could only be eligible for the programs if they were “at least 51% owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States. VC and other investor firms were deemed not to be “individuals” by SBA. While SBA’s directive had an exception (joint ventures), SBA still required each JV entity to be 51% owned and controlled by one or more U.S. citizens or aliens.
Today, three VC firms investing in MaxCyte have representatives on the company’s board of directors—Intersouth Partners, Harbert Venture Partners, and MASA Life Science Ventures.
In reauthorizing SBIR and STTR, Congress also gave the programs their first budget increases since the end of the 2008 fiscal year. The percentage that agencies must set aside for SBIR is being raised by 0.1% each fiscal year through FY 2017 when it would be 3.2%. Previously, SBIR required federal agencies with extramural R&D budgets that exceed $100 million to set aside 2.5% of their R&D budget to the program.
STTR funding was raised from 0.3% to 0.45% of federal agency R&D budgets.
The increases ended more than three fiscal years in which funding had been frozen at $2.2 billion—an embarrassing situation made worse by the fact that, during those years, SBIR and STTR were forced to subsist on 13 stopgap continuing resolutions (CRs). SBIR/STTR supporters convinced Congress to act by presenting some numbers: SBIR winners went on to receive 77,000 patents, generate 800 corporate acquisitions, and create 1.5 million jobs since the program was established in 1982.
With the extra money—and now, the final rules—SBIR and STTR will be challenged to grow those numbers by helping biopharmas and other startups develop more technologies and add more jobs. How well the programs succeed will determine whether SBIR and STTR can continue being the best $2 billion Washington spends each year.