NIH grant cutoff upsets biotechs

A Catch-22 federal ruling forbids grants to biotechs that have been too successful in attracting venture capital

June 12, 2005|By Tricia Bishop | Tricia Bishop,SUN STAFF

Doug Doerfler says his Gaithersburg company has had to bag its flu-vaccine manufacturing project.

Carol A. Nacy says her Rockville business might not be able to develop treatments for tuberculosis.

And in Colorado, Kirk Christoffersen says an HIV vaccine his company was developing will have to be shelved because his corporation can't afford to proceed.

"It's extremely costly" to find new cures and treatments, said Doerfler, chief executive officer of MaxCyte Inc., a 22-person company developing technology to help scientists work with cells. "It's just too speculative for companies like ours."

Small biotech businesses across the country are setting aside research because grants they once received from the National Institutes of Health have dried up due to a 2003 ruling that bars the financing to companies that have become more than half owned by venture capital firms.

The change has sent tremors through the biotechnology world, where many companies rely on the NIH money to develop the drugs that in turn attract the venture capital needed to bring them to market.

Once a company becomes majority owned by venture capital firm, it's no longer counted as a small company and becomes ineligible to receive NIH money that might allow it to create other products suitable for venture funding.

Some say that's the way it should be, that venture capital ownership should make a business ineligible for government aid meant to stimulate small businesses.

Biotech companies and their supporters in Congress say the limits on Small Business Innovation Research (SBIR)grants ignore the unique characteristics of businesses that might need a decade and $1 billion to develop a marketable product.

Some federal agencies are legally required to spend 2.5 percent of their research and development budgets on SBIR grants each year. The program is meant to bolster new ideas, help small companies and improve the economy. In 2003, 10 federal agencies distributed $1.8 billion in SBIR grants to more than 6 million businesses.

In 2001, a Small Business Administration judge interpreted program eligibility to exclude companies more than half owned by other companies. In 2003, the same judge specifically said that ownership by venture investors was not acceptable.

And ever since, the National Institutes of Health has stopped giving grants to biotech businesses that fall within that category, forcing some companies to abandon projects.

`Research stops'

"You can see what happens when you suddenly become a VC company: The research stops," said Christoffersen, senior director of development at GlobeImmune Inc. in Aurora, Colo.

His 45-person company, which recently brought in $8 million in venture funds, will set aside an HIV vaccine developed with SBIR money to concentrate on other products. "We had to choose," he said.

The NIH's grants have been a relatively easy source of financing, with 1 in 5 applicants earning an award last year. Because of that, they have become increasingly popular, with the number of applications doubling from 2001 to 2004.

Some contend that the quality of applications is dropping now that biotechs with venture funding have been excluded. The change, they say, will ultimately curtail research and set back the development of new treatments for cancer, West Nile virus and other diseases.

The NIH would not comment on the applications for grants, other than to say they are increasing.

Others say the danger is overstated and unsubstantiated. Even so, the argument has continued for two years, picking up speed this month and gaining attention from legislators and the SBA.

"These [grants] have been a wonderful thing. It's free money, kind of, with no strings attached. If somebody wants to offer you free money, you take it. When it goes away, you're upset," said J. Robert Baum, an associate professor of entrepreneurship at the University of Maryland's Robert H. Smith School of Business.

"On the other hand, the [SBA] had, I think, sound reasons for limiting their grants to companies that get institutional financing. Really, their main goal is to help startups."

SBA to hold hearings

The SBA will hold nationwide hearings on grant eligibility this month to gather information to determine whether changes are needed, a process likely to continue into next year. The SBA has received 160 letters on venture capital participation, with opinions divided.

Some in Congress aren't content to wait for the findings. Sen. Christopher S. Bond and Rep. Sam Graves, both Missouri Republicans, said they would introduce bills to allow venture-controlled companies to apply for the grants. A similar measure failed last year after it stalled in committee.

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