Washington Editor

WASHINGTON - The Biotechnology Industry Organization reports that more than 50 percent of biotech firms have less than 50 employees. Also many young companies are majority owned by venture capital firms.

Those two qualifications work against each other when considering Small Business Innovation Research grants these days. To qualify for a grant under current guidelines, a company must have less than 500 employees and not be majority owned by VC firms, among other restrictions.

That topic surfaced during a session of the Mid-Atlantic Bio conference that began here yesterday.

The matter, which affects company eligibility for the financial awards, was addressed by speakers who fall in two opposite camps.

Two panelists spoke in favor of reworking the current "size standard," which makes companies that are majority owned by venture capital firms ineligible for SBIR grants, while two other panelists supported the existing interpretation.

An informal poll showed conference attendees - just a portion of the total 700 here - to be squarely behind a reinterpretation.

"We don't think it's right," Douglas Doerfler, president and CEO of MaxCyte Inc., said of the current size standard limits. His 19-employee company used to participate in the SBIR program until a private financing caused a change in the Gaithersburg, Md.-based firm's majority ownership. Following that funding, SBIR grants became off-limits to MaxCyte, "an unintended consequence," Doerfler said, of a rethinking on the part of the Small Business Administration.

The company had two fewer employees when it received SBIR funding.

Another Gaithersburg company, Intronn Inc., terminated a cystic fibrosis program and associated employees after it lost SBIR support following a venture round, which made them majority owned by VC firms.

Somewhat perversely, that SBIR funding supported preclinical success that led to the venture financing. But since the cystic fibrosis research would have remained secondary to Intronn's primary therapeutic focus, a lack of SBIR support spelled its end.

"This is having an impact on small companies," Doerfler said, "and it's having an impact on this industry."

Pressure for a change has been mounting over the past year.

BIO has pitched its concerns to the Small Business Administration, which also has heard from NIH Director Elias Zerhouni, who has expressed his support of an exception to the venture capital exclusion for biotech firms.

And on Capitol Hill, two bills (H.R.2943 and S.1263) to rewrite the size standard continue to await committee consideration in both chambers. (See BioWorld Today, June 20, 2005, and July 28, 2005.)

But opponents to the movement have voiced their support for the current interpretation, noting that venture-backed businesses would serve as competition for biotech companies that have little to no other funding.

"The company that doesn't have majority VC funding is the little guy," argued Barry Michael, of Michael Consulting LLC. "This would open up the gates to a lot of competition that would swamp the little guy just starting out."

Both sides agreed that SBIR funding can prove pivotal as a springboard to eventual venture capital, but Michael and others don't support allowing majority venture-backed businesses to go back to the well. They pointed to other government funding programs as alternatives.

"Once a company becomes majority VC owned," Michael continued, "it has passed a hurdle" in terms of its sophistication, development stage and need for start-up funding.

Both sides remained at odds as the session drew to a close. The conference continues through today.