[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 ======================================================================= HEARING before the COMMITTEE ON SMALL BUSINESS UNITED STATES HOUSE OF REPRESENTATIVES ONE HUNDRED TWELFTH CONGRESS FIRST SESSION __________ HEARING HELD APRIL 7, 2011 __________ [GRAPHIC] [TIFF OMITTED] TONGRESS.#13 U.S. GOVERNMENT PRINTING OFFICE 66-202 WASHINGTON : 2011 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected]. Small Business Committee Document Number 112-009 Available via the GPO Website: http//www.fdsys.gov 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 ---------- 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:] [GRAPHIC] [TIFF OMITTED] T6202A.001 [GRAPHIC] [TIFF OMITTED] T6202A.002 [GRAPHIC] [TIFF OMITTED] T6202A.003 [GRAPHIC] [TIFF OMITTED] T6202A.004 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:] [GRAPHIC] [TIFF OMITTED] T6202A.005 [GRAPHIC] [TIFF OMITTED] T6202A.006 [GRAPHIC] [TIFF OMITTED] T6202A.007 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:] [GRAPHIC] [TIFF OMITTED] T6202A.008 [GRAPHIC] [TIFF OMITTED] T6202A.009 [GRAPHIC] [TIFF OMITTED] T6202A.010 [GRAPHIC] [TIFF OMITTED] T6202A.011 [GRAPHIC] [TIFF OMITTED] T6202A.012 [GRAPHIC] [TIFF OMITTED] T6202A.013 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:] [GRAPHIC] [TIFF OMITTED] T6202A.014 [GRAPHIC] [TIFF OMITTED] T6202A.015 [GRAPHIC] [TIFF OMITTED] T6202A.016 [GRAPHIC] [TIFF OMITTED] T6202A.017 [GRAPHIC] [TIFF OMITTED] T6202A.018 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. 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