AT SMALL HIGH-TECH BUSINESSES HEARING BEFORE THE SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION (OMMITTEE ON SCIENCE AND TECHNOLOGY HOUSE OF REPRESENTATIVES ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION APRIL 23, 2009 Serial No. 111–20 Printed for the use of the Committee on Science and Technology - ; ; ; , ; ; ; ; ; ** **, *, *, * * * * : * : * * : *, *, ; , , ; ; ; ; , , ; - t . . . " # , * -- i....' *... : i: ¥ º . . . . ; ; ; ; , --, s ...} : ... - - : , ; ; ; ; & ºv. 2, i. z º. w t * ...] § 3 ; ; *... § 8, §s' x -: $. º - * C*-*., tº i. § 3 ;...} : : , F. : -º- ‘.... : :": 3.3 's 3 ºz-e v The University of Michigan Documents Centeſ U.S. GOVERNMENT PRINTING OFFICE 48–735PS WASHINGTON : 2009 For sale by the Superintendent of Documents, U.S. Government Printing i Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202% Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402-0001". COMMITTEE ON SCIENCE AND TECHNOLOGY HON. BART GORDON, Tennessee, Chair JERRY F. COSTELLO, Illinois RALPH M. HALL, Texas EDDIE BERNICE JOHNSON, Texas F. JAMES SENSENBRENNER JR., LYNN C. WOOLSEY, California Wisconsin DAVID WU, Oregon LAMAR S. SMITH, Texas BRIAN BAIRD, Washington DANA ROHRABACHER, California BRAD MILLER, North Carolina ROSCOE G. BARTLETT, Maryland DANIEL LIPINSKI, Illinois VERNON J. EHLERS, Michigan GABRIELLE GIFFORDS, Arizona FRANK D. LUCAS, Oklahoma DONNA. F. EDWARDS, Maryland JUDY BIGGERT, Illinois MARCIA. L. FUDGE, Ohio W. TODD AKIN, Missouri BEN R. LUJAN, New Mexico RANDY NEUGEBAUER, Texas PAUL D. TONKO, New York BOB INGLIS, South Carolina PARKER GRIFFITH, Alabama MICHAEL T. MCCAUL, Texas STEVEN R. ROTHMAN, New Jersey MARIO DIAZ-BALART, Florida JIM MATHESON, Utah BRIAN P. BILBRAY, California LINCOLN DAVIS, Tennessee ADRIAN SMITH, Nebraska BEN CHANDLER, Kentucky PAUL C. BROUN, Georgia RUSS CARNAHAN, Missouri PETE OLSON, Texas BARON P. HILL, Indiana HARRY E. MITCHELL, Arizona CHARLES A. WILSON, Ohio KATHLEEN DAHLKEMPER, Pennsylvania ALAN GRAYSON, Florida SUZANNE M. KOSMAS, Florida GARY C. PETERS, Michigan VACANCY SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION HON. DAVID WU, Oregon, Chair DONNA. F. EDWARDS, Maryland ADRIAN SMITH, Nebraska BEN R. LUJAN, New Mexico JUDY BIGGERT, Illinois PAUL D. TONKO, New York W. TODD AKIN, Missouri DANIEL LIPINSKI, Illinois PAUL C. BROUN, Georgia HARRY E. MITCHELL, Arizona GARY C. PETERS, Michigan BART GORDON, Tennessee RALPH M. HALL, Texas MIKE QUEAR Subcommittee Staff Director MEGHAN HOUSEWRIGHT Democratic Professional Staff Member TRAVIS HITE Democratic Professional Staff Member HOLLY LOGUE PRUTZ Democratic Professional Staff Member DAN BYERS Republican Professional Staff Member VICTORIA JOHNSTON Research Assistant (II) C O N T E N T S April 23, 2009 Witness List ............................................................................................................. Hearing Charter ...................................................................................................... Opening Statements Statement by Representative David Wu, Chair, Subcommittee on Technology and Innovation, Committee on Science and Technology, U.S. House of Rep- resentatives .............................................................................................…....... Written Statement ............................................................................................ Statement by Representative Judy Biggert, Acting Ranking Minority Member, Committee on Science and Technology, U.S. House of Representatives ......... Written Statement ............................................................................................ Prepared Statement by Representative Harry E. Mitchell, Member, Sub- committee on Technology and Innovation, Committee on Science and Tech- nology, U.S. House of Representatives ............................................................... Witnesses: Dr. Robert M. Berdahl, President, Association of American Universities Oral Statement ................................................................................................. Written Statement ......................................................... ... • * * s e. q 4 - e º e º 'º - - - e e s - e - e º e º 'º - - - e. e. e. e. e. Biography ….....…................................................................................... Mr. James C. Greenwood, President and CEO, Biotechnology Industry Orga- nization (BIO) Oral Statement .................................... - e - - - - - - - - - - - - e º - - - - - - e. e - - - - - e º 'º - - - - - e a - - - - - - - - - - - - e. e º - - - - © & © - Written Statement ............................................................................................ Biography … Dr. Sally J. Rockey, Acting NIH Deputy Director, Extramural Research, Na- tional Institutes of Health, U.S. Department of Health and Human Services Oral Statement ................................................................................................. Written Statement ............................................................................................ Biography ....…...…. Mr. Jere N. Glover, Attorney and Executive Director, Small Business Tech- nology Council, Washington, DC Oral Statement ................................................................................................. Written Statement ............................................................................................ Biography … Discussion … Appendix: Answers to Post-Hearing Questions Dr. Robert M. Berdahl, President, Association of American Universities .......... Mr. James C. Greenwood, President and CEO, Biotechnology Industry Orga- nization (BIO) …..................................................... Dr. Sally J. Rockey, Acting NIH Deputy Director, Extramural Research, Na- tional Institutes of Health, U.S. Department of Health and Human Serv- 1CeS ......................................................................................................................... Mr. Jere N. Glover, Attorney and Executive Director, Small Business Wach- nology Council, Washington, DC ........................................................................ 12 12 14 17 18 23 23 28 29 46 81 112 115 118 THE ROLE OF THE SBIR AND STTR PRO- GRAMS IN STIMULATING INNOVATION AT SMALL HIGH-TECH BUSINESSES THURSDAY, APRIL 23, 2009 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION, COMMITTEE ON SCIENCE AND TECHNOLOGY, Washington, DC. The Subcommittee met, pursuant to call, at 2:35 p.m., in Room 2318 of the Rayburn House Office Building, Hon. David Wu [Chair of the Subcommittee] presiding. - (1) y OCN, TENNESSEE BAR coºl. RALPH #. HAii., TEXAS #ANKººg ###MBER U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON SCIENCE AND TECHNOLOGY SUITE 2320 RAYBURN HOUSE OFFICE BUH DiNG WASHINGTON, DC 20515–6301 (202) 225–6375 TTY: (202) 226–4410 http://science.houte.gov Subcommittee on Technology and Innovation’s Hearing on THE ROLE OF THE SBIR AND STTR PROGRAMS IN STIMULATING INNOVATION AT SMALL HIGH-TECH BUSINESSES Thursday, April 23, 2009 1:00p.m.–3:00p.m. 2318 Rayburn House Office Building Witness List Dr. Robert Berdahl President, Association of American Universities Mr. James Greenwood President and CEO, Biotechnology Industry Organization Dr. Sally Rockey Acting NIH Deputy Director, Extramural Research, National Institutes of Health (NIH) Mr. Jere Glover Attorney and Executive Director, Small Business Technology Council 3 HEARING CHARTER SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION COMMITTEE ON SCIENCE AND TECHNOLOGY U.S. HOUSE OF REPRESENTATIVES The Role of the SBIR and STTR Programs in Stimulating Innovation at Small High-Tech Businesses THURSDAY, APRIL 23, 2009 1:00 P.M.–3:00 P.M. 2318 RAYBURN HOUSE OFFICE BUILDING I. Purpose On Thursday 24 April, the Subcommittee on Technology and Innovation of the Committee on Science and Technology will hold a hearing to examine the role of the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) Programs in supporting innovation at small high-tech firms and how, in turn, this promotes the economic welfare of the Nation. II. Witnesses Dr. Robert Berdahl is the President of the Association of American Universities. Mr. James Greenwood is the President and CEO of Biotechnology Industry Orga- nization (BIO). Dr. Sally Rockey is the Acting NIH Deputy Director for Extramural Research at the National Institutes of Health (NIH). Mr. Jere Glover is the Attorney and Executive Director at the Small Business Technology Council. III. Hearing Issues • How could the SBIR and STTR effectiveness be improved in promoting inno- vation in today’s global R&D enterprise? • Are the current SBIR (2.5 percent) and STTR (0.3 percent) set asides appro- priate? • How effective are the SBIR and STTR programs at stimulating innovation at small high-tech firms? • What is the role and importance of small high-tech firms to the US innova- tion cycle and to foster economic growth? • Should small high-tech businesses with venture capital investment be allowed to participate in the SBIR and STTR programs? TV. Background SBIR Congress has demonstrated an ongoing interest in the small business sector. Ad- dressing issues related to economic growth and competitiveness, special consider- ation has been given to small, high tech firms for several reasons, including the fact that data indicates such companies tend to be highly innovative, play a significant role in technological advancement, and contribute to a high standard of living in the United States. Such was the rationale behind legislation creating the SBIR pro- gram, reflecting an effort to increase that portion of the federal research and devel- opment (R&D) budget provided to small enterprises for work associated with the mission responsibilities of government departments and agencies. Believing that small companies were under-represented in government R&D activities, P.L. 97–219 established agency SBIR programs to guarantee this sector a portion of the govern- ment's research and development budget to compensate for what was viewed as a federal contracting preference for large corporations. 4 Current law requires that every federal department with an extramural R&D budget of $100 million or more establish and operate a SBIR program. Generally, a set percentage of that agency’s extramural research and development budget—cur- rently set at 2.5 percent—is to be used to support mission-related work in small companies. To be eligible to compete in the program, a company must be independ- ently owned and operated; not dominant in the field of research proposed; for profit; the employer of 500 or fewer people; the primary employer of the principal investi- gator; and at least 51 percent owned by one or more U.S. citizens or lawfully admit- ted permanent resident aliens.” Subsidiaries of SBIR-eligible companies are also eli- gible to participate as long as the parent company meets all SBIR requirements. Agency SBIR efforts involve a three-phase activity. In the first phase, awards up to $100,000 (for six months) are provided to evaluate a concept's scientific or tech- nical merit and feasibility. The project must be of interest to, and coincide with, the mission of the supporting organization. Projects that demonstrate potential after the initial endeavor may compete for Phase II awards of up to $750,000 (lasting one to two years) to perform the principal R&D. Phase III funding, directed at the commer- cialization of the product or process, is expected to be generated in the private sec- tor. Federal dollars, but not SBIR funds, may be used if the government perceives that the final technology or technique will meet public needs. P.L. 102–564 directed . to weigh commercial potential as an additional factor in evaluating SBIR proposals. As of FY 2008, 11 departments administer SBIR programs, including the Depart- ments of Agriculture, Commerce, Defense (DOD), Education, Energy, Health and Human Services (HHS), Homeland Security, and Transportation; the Environmental Protection Agency; the National Aeronautics and Space Administration (NASA); and the National Science Foundation (NSF). Each agency’s SBIR activity reflects that organization's management style. Individual departments select R&D interests, ad- minister program operations, and control financial support. Funding may be dis- bursed in the form of contracts, grants, or cooperative agreements. Separate agency Solicitations are issued at established times. The SBA created broad policy and guidelines under which individual departments operate SBIR programs. The agency monitors and reports to Congress on the con- duct of the separate departmental activities. STTR A pilot effort to encourage commercialization of university and federal laboratory R&D by small companies was created by P.L. 102–564 and reauthorized several times through FY 2009. The STTR program provides funding for research proposals that are developed and executed cooperatively between a small firm and a scientist in a research organization and fall under the mission requirements of the federal funding agency. Up to $100,000 in Phase I financing is available for one year; Phase II awards of up to $750,000 may be made for two years. Currently funded by a set- aside of 0.3 percent of the extramural R&D budget of departments that spend over $1 billion per year on this effort, the Departments of Energy, Defense, and Health and Human Services, NASA, and NSF participate in the STTR program. The SBIR program has been extended several times and was scheduled to termi- nate on September 30, 2008. In the 110th Congress, several bills were introduced to reauthorize and alter the SBIR initiative. H.R. 5819 passed the House on April 23, 2008, and S. 3362 was reported from the Committee on Small Business and En- trepreneurship on August 22, 2008. Although no specific legislation reauthorized the program, the Small Business Administration determined that P.L. 110–235 tempo- rarily extended the SBIR activity through March 20, 2009. P.L. 111–10 provides an- other extension of the program through July 31, 2009. 110th Congressional Hearings Hearings were held in the 110th Congress on April 26, 2007 and June 26, 2007 (Serial Nos. 110–23 and 110–43, respectively). The first hearing” focused on several important issues for the future of the SBIR and STTR programs, including: the degree to which the current programs are meet- ing their objectives; the adequacy of the award levels; strategies to maximize small businesses participation and increase participation by women and minority owned Small businesses; the programs' effectiveness in promoting product commercializa- *The House passed H.R. 5819 altered the previous eligibility requirements to permit majority venture capital ownership of small firms in the SBIR and STTR programs. *The following is taken from the Summary of Activities of the Committee on Science and Tech- nology U.S. House of Representatives for the One Hundred and Tenth Congress, 4.6(c). 5 tion; covering administrative costs; and the appropriate role for venture capital- backed small businesses. Chair Wu opened the hearing by discussing the benefits of the SBIR/STTR pro- grams, such as the stimulation of high-tech innovation and strengthening U.S. com- petitiveness. He then invited witnesses to address topics such as the size of the awards, broadening the participation of Small business, creating funding within the program for administrative costs, and determining the extent of participation by venture capitalists. Both Chair Wu and Ranking Member Gingrey emphasized the role that these programs have in moving ideas from the laboratory to the market- place, particularly innovative work on health care issues such as diabetes and Alz- heimer's research. Mr. Held, the Director of the Force Development and Technology at the RAND Arroyo Center at RAND Cooperation, stated that the DOD SBIR program could ben- efit from changes that would make the program more effective in generating tech- nology and products that are utilized by the Armed Forces. He suggested that more flexibility in the solicitation and funding process would enhance the program. He called for increases in the minimum awards for Phase I and Phase II and advised a set-aside for administrative expenses. Mr. Baron, the Executive Director of the Coalition for Evidence-Based program Policy at the Council for Excellence in Government, opened with examples of SBIR successes in the computer and biomedical fields and said that the program had led to multiple scientific breakthroughs and commercial successes. He cited GAO and DOD data that suggests that the projects which fail to meet commercial success are often in firms lacking entrepreneurial capabilities, and recommended that SBIR con- sider methods to build up entrepreneurial skills. In response to a question by Chair Wu regarding using a portion of funding for administrative costs, Mr. Baron as well as Mr. Schmidt and Mr. Held, cautioned that an administrative set-aside could draw funds away from program goals and create disincentives for good management. Mr. Schmidt, the founder and Chairman of Cleveland Medical Devices and Orbital Research Inc., expressed concern that the U.S. was falling behind in the creation of technological products and jobs. He described some benefits of SBIR and STTR such as helping universities to strengthen commercialization and job creation at small high-tech firms. He cautioned against proposals that would give SBIR funds to large companies or blur its research focus and recommended a gradual doubling of the programs. Dr. McGarrity, the Executive Vice President of Scientific and Clinical Affairs at VIRXSYS Corporation, explained that biotechnology research takes a lot of time and a large initial expenditure. He criticized the SBA decision to exclude some venture capital (VC) backed businesses from SBIR and stated that his firm had to abandon promising research in cystic fibrosis and laid off employees as a result of the ruling. He stated that his company is willing to compete with VC backed companies for SBIR funds on the basis of scientific and technical merit, and believes that science suffers from the exclusion of firms that have a commercialization track-record. In response to a question by Mr. Wu about the impact of the SBA ruling, Dr. McGarrity argued that the SBA rule led to ineligibility of businesses based not on the number of employees of their own business, but on the number of employees in their VC backing firms. Mr. Ignati, the President and CEO of Synapse Biomedical Inc., recommended that the minimum award for Phase I and Phase II be increased from their 1992 amounts and that the agencies administering the SBIR program be granted more flexibility making administrative decisions. He also recommended that companies be allowed to apply for Phase II grants without having first received a Phase I grant. He then expressed his concern that the SBIR program is not able to increase participation of innovative high-tech firms as a result of the SBA ruling excluding VC backed firms. He recommended that all VC backed firms be allowed to participate in SBIR. The second hearingº focused on the following issues: program trends; outreach to encourage new applicants and reaching out to a diverse pool of applicants; program data and tracking; and the role of procurement in enabling commercialization. Chair Wu opened the hearing by discussing the large growth of the SBIR and STTR pro- grams, which are now the largest government programs supporting research and de- velopment at Small companies. He emphasized the programs’ duties to promote effi- ciency in operations and maximum public benefit. In Ranking Member Phil Gingrey’s opening statement, he explained that every department and agency with an R&D budget exceeding $100 million must provide 2.5 percent of this budget for research at small companies, resulting in more than $2 billion in funds across the *The following is taken from the Summary of Activities of the Committee on Science and Tech- nology U.S. House of Representatives for the One Hundred and Tenth Congress, 4.6(e). 6 agencies. The goal of these programs, he said, is to stimulate competitiveness and innovation. He was optimistic about past achievements of the programs and the prospect of future success. Mr. Caccuitto, the SBIR and STTR Program Coordinator at the Office of Small Business Programs and the DOD, said that the SBIR and STTR programs at the DOD are crucial in seeding innovation for defense technologies. Each “constituent” military department and defense agency has its own program, with centralized over- sight and decentralized management, with the total DOD SBIR/STTR budget across all military departments at over $1.26 billion. DOD funds about one in seven SBIR Phase I proposals and one in five STTR proposals. Ms. Goodnight, the SBIR and STTR Program Coordinator at the Office of Extra- mural Research of NIH at HHS, emphasized that program flexibility is the key to fulfilling SBIR and STTR goals at NIH. She noted that the programs have not grown at the rate of other NIH programs due to firms losing eligibility, going out of business, or perceived lack of participation incentives. She discussed NIH’s devel- opment of Performance Outcome Data Systems for data tracking that help to mon- itor achievements of awardees. In response to a question by Ranking Member Gingrey about the effect of the 2003 SBA ruling on venture capital-backed compa- nies’ participation in the program, Ms. Goodnight stated that the nature of bio- technology research requires venture capital to fund expensive trials. She described some cases where important research was halted as a result of the ruling. Mr. James, the SBIR and STTR Program Manager and Acting Director at the Small Business Research Division at the DOE, said that, like at the DOD, the De- partment of Energy has a balance of centralized and decentralized management for their SBIR and STTR programs. He explained that the Department hosts State- sponsored events to reach out to small businesses. These small businesses have ex- cellent science skills but lack business skills; thus, DOE provides these professionals with assistance in designing business plans. He stated that in the past 24 years the DOE has invested almost $1.5 billion, 60 percent of the companies have had sales of more that $1.6 billion. Mr. Comstock, the Director of the Innovative Partnership Program Office at NASA, noted that the SBIR and STTR programs were recently moved from NASA's four mission directorates to an agency-wide mission support office that reports to the Administrator’s Office in response to the Innovative Partnerships Program of 2005. This more integrated approach helps to illuminate technology gaps and future technologies which will be infused into NASA, helping to reach mission goals. He cited Phase III authority to enter into sole source contracts as a benefit for NASA's programs. He stressed that NASA's outreach efforts have been successful in pro- viding a fresh applicant pool. In response to a question by Chairman Wu on whether the agencies have adequate funding for administration, Mr. Comstock, as well as Mr. James and Ms. Goodnight, stated that administrative funding is not adequate to allow the optimal level of commercialization assistance. Mr. Narayanan, the Director of the Division of Industrial Innovation and Partner- ships in the Directorate for Engineering and NSF, stated that SBIR plays a critical role in moving discovery to innovation at NSF. He explained that in addition to the SBIR/STTR grants, NSF has pioneered a Phase II supplement for funding, providing greater incentive for third-parties to invest in the awardees' projects. He stated that follow up of 400 NSF SBIR grantees has shown a significant impact; however, lim- ited funds prevent program managers from providing hands-on mentoring. Summary of the SBIR/STTR Reauthorization Act (H.R. 5819) H.R. 5819, the SBIR/STTR Reauthorization Act, a bill that would have reauthor- ized and made several significant changes to the SBIR and STTR programs, passed the House on April 23, 2008. Among these changes were:* • The termination date for the SBIR program was extended from September 30, 2008 to September 30, 2010, while the STTR activity was reauthorized through September 30, 2010 rather than the current sunset date of Sep- tember 30, 2009. • The bill increases the level of awards made under the SBIR and STTR pro- ams from $100,000 to $300,000 for Phase I awards and from $750,000 to 2,200,000 for Phase II awards. • A recipient of a Phase I grant from one federal agency would be permitted to apply for a Phase II award from another agency to pursue the original 4The following points were all taken from the CRS Report The Small Business Innovation Re- search Program: Reauthorization Efforts, April 29, 2008. 7 work. A small business would be allowed to switch between the SBIR and STTR programs. In addition, a small company would have been allowed to apply for a Phase II award without first obtaining and successfully com- pleting a Phase I grant as currently required. The bill also would have per- mitted sequential Phase II awards for a project. For the SBIR and STTR programs, H.R. 5819 would have allowed majority venture capital ownership in a small business if not more than 50 percent of the firm is owned by one venture capital company and the employees of the venture capital company are not a majority of the small firm's board of direc- tors. If the venture capital company is controlled by a business with more than 500 employees, the small business would have been eligible if not more than two large venture capital companies have ownership interest in the small firm, these large venture capital companies do not collectively own more than 20 percent of the small business, and the venture capital companies “do not collaborate with each other to exercise more control over the small busi- ness concern than they could otherwise exercise individually.” The bill would have directed agencies to focus on certain research areas for “special consideration” including energy-related work, R&D in the area of rare diseases, transportation-related topics, and nanotechnology. The bill would have mandated that each agency that administers $50,000,000 or more in SBIR grants establish a SBIR Advisory Board comprised of agency employees, private sector representatives, veteran small business owners, and others deemed appropriate. The Advisory Board was to make recommenda- tions to the agency on programmatic topics including, among other things, mechanisms to encourage a broad range of applicants and commercialization efforts. An annual report was to be required. The bill would have reauthorized and made changes to the Federal and State Technology Partnership (FAST) program, which provides grants to organiza- tions to provide outreach designed to encourage increased participation in the SBIR program. 8 Chair WU. I want to welcome everyone to this afternoon’s hear- ing on the Small Business Innovative Research, or SBIR, and Small Business Technology Transfer, or STTR, Programs. This is the third hearing that this subcommittee has held on these very important programs. Both of them were created over 25 years ago, designed to support and encourage small high-tech entrepreneurial firms and play a more important role than ever in the economy that we live in today. . Almost a year ago the House passed an SBIR Reauthorization Bill, H.R. 5819, which included the first significant changes to the program since its inception. This bill reflected not only the cost of research today but also reflected the international competitive mar- ket American high-tech firms face and the recommendations of var- ious research bodies that have put about SBIR. Much has changed over the past 12 months. Today we are look- ing to small, high-tech firms to create the new products, services, and technologies that can rejuvenate our economy and make us more competitive internationally. - When the SBIR and STTR Programs were created, we didn’t fully appreciate the power of small entrepreneurial high-tech firms to create economic growth. Companies such as AMGEN, Apple, Genentech, and Microsoft all started as small entrepreneurial firms and now employ thousands or tens of thousands. Other companies started small and stayed small. All were innovators and drove eco- nomic growth. When SBIR and STTR were created, these companies were either in their infancy or didn’t yet exist. In part because of SBIR and STTR today the United States is a world leader in IT [Information Technology] and in biotech. -- As the testimony indicates, SBIR and STTR-supported companies are still driving innovation in the IT and biotech fields. The author- ization for SBIR and STTR expires at the end of July, and given the current economic situation, we need to ensure that we struc- ture these programs to reflect the current economy and the globalization of R&D. We can’t afford to think we are the only country with first-class science and engineering talent. We need to foster the innovation that creates economic growth, jobs, and new products and services right here at home. Maintaining the status quo of programs created a quarter cen- tury ago makes neither good business nor policy sense. We must always keep in mind that it is the American taxpayer who pays for these programs. In these difficult economic times we need to ensure they receive the highest return on their investment. We have a varied panel of witnesses here today representing small business and the NIH [National Institutes of Health], which provides the second largest amount of SBIR funding of any federal agency. I hope they can tell us more about the economic challenges facing those firms and their thoughts on the program. At over $2 billion per year the SBIR and STTR Programs are now far and away the largest technologic development programs or transfer pro- grams in the Federal Government. I want to thank our witnesses for appearing before us today. 9 And now I would like to turn to our Ranking Member, the gentle- woman from Illinois, for her opening statement. [The prepared statement of Chair Wu follows: PREPARED STATEMENT OF CHAIR DAVID WU I want to welcome everyone to this morning's hearing on the Small Business Inno- vation Research (SBIR) and the Small Business Technology Transfer (STTR) Pro- grams. This is the third hearing the Subcommittee has held on these programs. Both of these programs, created over 25 years ago, were designed to support and encourage small high-tech entrepreneurial firms. Almost a year ago, the House passed a SBIR reauthorization bill, H.R. 5819, which included the first significant changes to the program since its inception. This bill reflected not only the cost of research today, but also reflected the international competitive market American high-tech firms face. Much has changed over the past 12 months. Today we are looking to small high- tech firms to create the new products and technologies that can rejuvenate our econ- Omy. When the SBIR and STTR programs were created we didn’t fully appreciate the power of small high-tech firms’ ability to create economic growth. Companies such as AmGen, Apple, Genentech, and Microsoft all started as Small entrepreneurial firms and now employ thousands. Others stayed small. All were innovators and drove economic growth. When SBIR and STTR were created these companies were either in their infancy or had yet to exist. In part because of SBIR and STTR, today the United States is a world leader in the IT and biotech industries. And as the testimony indicates, SBIR and STTR supported companies are still driving innova- tion in the IT and biotech fields. The authorization for SBIR and STTR expires at the end of July. Given the cur- rent economic situation, we need to ensure that we structure these programs to re- flect the current economy and the globalization of R&D. We can’t afford to think we're the only country with first-class science and engineering talent. We need to foster the innovation that creates economic growth jobs and new products and Serv- ices here at home. Maintaining the status quo of programs created almost 30 years ago makes nei- ther good business nor policy sense. We must always keep in mind that it's the American taxpayer who pays for these programs. In these difficult economic times we need to ensure they receive the high- est return on their investment. We have a varied panel of witnesses here representing small business and the NIH, which provides the second largest amount of SBIR funding of any federal agency. I hope they can tell us more about the economic challenges facing those firms and their thoughts on the program. At around $2 billion a year, the SBIR/ STTR programs are now far and away the largest technological development pro- grams in the Federal Government. I want to thank our witnesses for appearing be- fore us today. Ms. BIGGERT. Thank you, Mr. Chair, and thank you for holding this hearing today on the role of SBIR and STTR Programs in stim- ulating innovation at small businesses. As you know, our Ranking Member Smith was unable to be here at this moment. He might be in a little bit later, but he had an immoveable conflict, but I am pleased to have the opportunity to take his place as we examine this important program today. On this committee we are, of course, well aware of the impor- tance of innovation to economic growth and improved quality of life, particularly as we work our way through this recession. We recognize that advances in science and technology will help to en- able short-term economic recovery as well as sustain prosperity over the long-term. To this end the SBIR and the STTR Programs play a key role as an important part of an overall federal R&D portfolio, serving to facilitate increased private sector commercialization of promising ideas, while leveraging the unique capabilities of small business to 10 help the government advance its R&D goals and meet its techno- logical needs. - Today’s hearing represents a continuation of the SBIR reauthor- ization efforts undertaken by this committee and the House Small Business Committee during the 110th Congress. As such it will focus on two primary changes under consideration last year. One is whether or not to increase the research set-asides that fund SBIR and STTR, and two, whether or not to relax restrictions on participation by venture capitalist-backed small businesses. These are very important issues that this hearing provides an opportunity for us to hear from the key stakeholders involved. With respect to the set-aside, it is important to remember the unique funding structure through which the SBIR and STTR Programs are funded. Through an assessment on extramural national, extra- mural federal research that is carried out by our universities and national labs. : As a result an increase set-aside comes at the expense of basis and applied research performed at universities and the National labs, and because of the large base from which the funding is de- rived and even what might appear to be a minor increase in the set-aside from two and a half to three percent for SBIR and from .3 to .6, that would be 0.3 and 0.6, percent for STTR, would result in a rough reduction of roughly $650 million to core agency re- search programs. For this reason and because SBIR and STTR budgets have grown substantially over the last 10 years, I am strongly opposing—I am strongly opposed to increasing this set-aside. The issue of eligibility of majority venture capitalist-based small businesses is signifi- cantly more complicated but no less important. The origin of the dispute over this eligibility is due to the lack of clarity in and changing interpretations of the existing statutory definition of a small business. - Regardless of what side of this issue one is on, I think we could agree that the solution is to define small business in a manner that maximizes the eligibility of legitimate small businesses while mini- mizing the inappropriate eligibility of large businesses. To this end I am concerned that the current SBIR rules may unreasonably ex- clude many legitimate small businesses, particularly in the bio- medical sector due to its high dependence on venture capital to ad- vance drugs and therapies through the regulatory approval process. I hope this is something that we will address in this upcoming legislation. This committee and the Full House built a solid record of work on SBIR reauthorization during the 110th Congress, so I anticipate that we will be able to work cooperatively and swiftly to extend the SBIR Program before its July 31 expiration. However, I hope and expect that we can do so through regular order so the Committee Members have an opportunity to review any changes to the legislation from last year and offer input and amendments as necessary. - And I thank your witnesses for being here today and waiting for us. We had those pesky votes, as you know, and I look forward to a productive discussion. And I yield back. [The prepared statement of Ms. Biggert follows:] 11 PREPARED STATEMENT OF REPRESENTATIVE JUDY BIGGERT Mr. Chairman, thank you for holding this hearing today on the role of SBIR and STTR programs in stimulating innovation at small businesses. As you know, Rank- ing Member Smith was unable to make this hearing due to an immovable conflict, but I am pleased to have the opportunity to take his place as we examine this im- portant program today. On this committee we are of course well aware of the importance of innovation to economic growth and improved quality of life. Particularly as we work our way through this recession, we recognize that advances in science and technology will help to enable short-term economic recovery as well as sustained prosperity over the long-term. To this end, the SBIR and STTR programs play a key role as an important part of the overall Federal R&D portfolio, serving to facilitate increased private sector commercialization of promising ideas while leveraging the unique capabilities of small businesses to help the government advance its R&D goals and meet its tech- nology needs. Today’s hearing represents a continuation of the SBIR reauthorization efforts un- dertaken by this committee and the House Small Business Committee during the 110th Congress. As such, it will focus on the two primary changes under consider- ation last year: (1) whether or not to increase the research set-asides that fund SBIR and STTR; and (2) whether or not to relax restrictions on participation by ven- ture-capital backed small businesses. These are both very important issues with po- tentially far-reaching impacts, so I am pleased that this hearing provides an oppor- tunity for us to hear from the key stakeholders involved. With respect to the set-aside, it is important to remember the unique funding structure through which the SBIR and STTR programs are funded—through an as- sessment on extramural federal research that is carried out by our universities and national laboratories. As a result, an increased set-aside comes at the expense of basic and applied research performed at universities and national laboratories, and because of the large base from which funding is derived, and even what might ap- pear to be a minor increase in the set aside—from two and a half to three percent for SBIR and from 0.3 to 0.6 percent for STTR—would result in a reduction of roughly $650 million to core agency research programs. For this reason, and because the SBIR and STTR budgets have grown substantially over the last 10 years, I am strongly opposed to increasing the set aside. The issue of eligibility of majority venture-capital backed small businesses is sig- nificantly more complicated, but no less important. The origin of the dispute over this eligibility is due to lack of clarity in-and changing interpretations of the ex- isting statutory definition of a “small business.” Regardless of what side of this issue one is on, I think we could agree that the solution is to define “small business” in a manner that maximizes the eligibility of legitimate small businesses while mini- mizing the inappropriate eligibility of large businesses. -- To this end, I’m concerned that the current SBIR rules may unreasonably exclude many legitimate small businesses, particularly in the biomedical sector due to its high dependence on venture capital to advance drugs and therapies through the reg- ulatory approval process. I hope this is something that we will address in this up- coming legislation. This committee and the Full House built a solid record of work on SBIR reauthor- ization during the 110th Congress, so I anticipate that we will be able to work coop- eratively and swiftly to extend the SBIR program before its July 31St expiration. However, I hope and expect that we can do so through regular order so the Com- mittee Members have an opportunity to review any changes to the legislation from last year and offer input and amendments as necessary. I thank our witnesses for being here today and I look forward to a productive dis- CllSSIOIl. Chair WU. I thank the gentlelady and would just add that it is fully my intent to move legislation on this very important subject through regular order, but as the gentlelady fully understands, sometimes we have our intentions changed for us. If there are Members who wish to submit additional opening statements, your statements will be added to the record at this point. [The prepared statement of Mr. Mitchell follows:] 12 PREPARED STATEMENT OF REPRESENTATIVE HARRY E. MITCHELL Thank you, Mr. Chairman. Today we will examine the role of the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs in supporting innovation at small high-tech firms. Small businesses are continuously growing in Arizona, especially those in the bio- technology field. Many biotechnology and other small firms are centered in my home district and frequently work with one of the largest universities in the country, Ari- zona State University. ASU often partners with small businesses to apply for Small Business Innovation Research (SBIR) and Small Business Technology Transfer Program (STTR) grants. Through this partnership, businesses are able to benefit not just from grant money, but also the tools, facilities, and knowledge that ASU offers. I look forwarding to hearing more from our witnesses about the effectiveness of the SBIR and STTR programs and how these programs could be improved. I yield back. Chair WU. I just want to note that I will be stepping away for a few minutes at about three o'clock, and I believe that the gentlelady from Maryland will be available to step in the chair for awhile. Thank you very much. At this point it is my pleasure to introduce our witnesses. Dr. Robert Berdahl is the President of the Association of American Universities [AAU]. I would like to add a proud former Duck for almost 20 years. The Honorable Jim Greenwood is the President and CEO of the Biotechnology Industry Organization and well rep- resented Pennsylvania for a dozen years, and I always thought that was such a long, long time, but I am hitting the dozen mark soon myself, and it is amazing how perspective changes. Dr. Sally Rockey is the Acting NIH Deputy Director for Extramural Research at the National Institutes of Health. And finally Mr. Jere Glover is the Attorney and Executive Director of the Small Business Tech- nology Council. Welcome one and all. Your full written testimony will be included in the record of the Subcommittee. Please if you will summarize your written testimony. You will each have five minutes for your spoken testimony, and when you complete your testimony, we will hopefully have plenty of time for questions, and each Member will have five minutes to answer questions. Dr. Berdahl, please proceed. STATEMENT OF DR. ROBERT M. BERDAHL, PRESIDENT, ASSOCLATION OF AMERICAN UNIVERSITIES Dr. BERDAHL. Good afternoon, Chairman Wu, Congresswoman Biggert, and Congresswoman Edwards. It is a great privilege to present our association's views on the Small Business Innovation Research Program and the Small Business Tech Transfer Program. I have to note at the outset that I had the privilege of being a fac- ulty member and an administrator at both the University of Or- egon and the University of Illinois, and so I have some familiarity with the role that those universities play in the economies of those respective states. Chair WU. Your attempt to carry a favorable impression has been very successful. Dr. BERDAHL. All right. Very good. Well, let me begin my testi- mony by stating that the AAU supports SBIR and STTR programs as they are currently structured. We agree with the National Acad- emy's assessment of these programs as being sound in concept and 13 effective in practice. In the early years of SBIR many of our cam- puses were critical of the program, viewing it as coming at the ex- pense of funding that would have otherwise supported university basic research. In recent years, however, as our universities and faculty have be- come—they have become much more interested in commercializing new technologies, our universities have come to support SBIR and STTR Programs as they currently exist. To drive this point home I would like to highlight a SBIR success story from Chair Wu's home State of Oregon and my former uni- versity, the University of Oregon. Electrical Geodesics Incor- porated, EGI, was a University of Oregon spin-off company. It was founded by U of O neuroscientist Don Tucker to develop advanced, non-invasive ways to visualize brain activity. Over the last decade SBIR grants have played a key role in fueling EGI’s maturation, growth, and expansion. As a direct consequence of SBIR support, EGI’s geodesics sensor net can now be found in more than 350 lab- oratories in 28 countries around the world. Given the success of EGI and other SBIR firms, it is clear that the SBIR and STTR Programs have played an important role in stimulating innovation at small high-tech firms throughout the country. The specific degree to which these programs are respon- sible for innovation, however, is not easy to assess due to a lack of sufficient data. According to the National Institutes of Standards and Technologies [NIST|, more than 26 billion has been spent on SBIR and STTR grants, yielding 84,000 patents and attracting more than $36 billion in venture capital for more than 17,000 SBIR-funded companies. Despite the success of these programs, the NRC [National Re- search Council] report makes significant recommendations about the need for better data collection and systematic assessment of SBIR and STTR Programs, and we commend those recommenda- tions to you. - In your letter of invitation you asked us to assess the current SBIR and STTR set-aside percentages. While supportive of the cur- rent set-aside, we oppose any increases in the SBIR set-aside be- cause there is no indication that highly-qualified SBIR proposals are currently being rejected for lack of sufficient funding. Moreover, we question whether there is enough small business research and of sufficient quality to merit an increase in the SBIR set-aside, especially if such funding were to come at the expense of peer reviewed, basic, and applied research programs, where success rates have hit all-time lows in recent years. Our view is that the best way to increase the amount of funding available to these programs is to provide steady and sustained funding increases for federally-supported basic scientific research. As research funding increases, the dollars available to these pro- grams will also increase. At this point the only modification we would encourage would be the slight increase recommended by the NRC in the percentage of set-aside that would be used for program management from the .03 percent to .05 percent. You also asked our views about venture capital and SBIR. AAU supports the Subcommittee's view that firms with significant ven- 14 ture capital funding should be allowed to compete for SBIR and STTR awards. However, the current regulation effectively disquali- fies small companies that have received significant venture capital or are owned by another company with significant venture capital investment from competing for SBIR or STTR funds. The AAU shares the view of the NRC that venture capital invest- ment in companies seeking SBIR funding confirms the quality of ºpºiests and would raise the quality of the applicant pool OVerall. You also asked for thoughts concerning ways to improve the ef- fectiveness of these programs. In responding to this request I would commend to you the recommendations made by the National Re- search Council in its 2008 report. There is one related issue that we would ask the Subcommittee to examine in reauthorizing the SBIR Program, Mr. Chair. Even with today’s existing SBIR Program, there is a funding gap that often prevents universities from moving new research discoveries and technologies quickly into the marketplace. This bridge funding often crossing the “Valley of Death” as it is called, would be very, very important. - Let me conclude, I see my time is up here, let me conclude my remarks with a statement that I made earlier in my testimony that these are sound and effective programs. It is clear that these pro- grams are at their core good programs that help foster successful entrepreneurial opportunities for our nation's scientists, engineers, and innovators. These programs were created well over 20 years ago. They can be improved by adopting some of the NRC's rec- ommendations. I also believe that it might be time to consider supplementing these programs with a new program aimed at pro- viding additional gap funding. Mr. Chair, Members of the Subcommittee, once again, I thank you for the opportunity to share AAU’s thoughts. I look forward to your questions. [The prepared statement of Dr. Berdahl follows: PREPARED STATEMENT OF ROBERT M. BERDAHL Introduction Good afternoon Chairman Wu, Ranking Member Smith, and Members of the Sub- committee. I am Robert Berdahl, President of the Association of American Univer- sities (AAU). I appreciate the opportunity to present AAU’s views on the Small Business Innovation Research (SBIR) and Small Business Tech Transfer (STTR) programs to you today. U is the association of 60 leading U.S. public and private research universities, and we also have two Canadian university members. AAU’s 60 U.S. member institu- tions perform 60 percent of federally funded university-based research and award more than half of all Ph.D. degrees earned in our country. I. AAU supports the current SBIR and STTR programs and set-aside per- centages. Let me begin by stating that AAU supports the SBIR and STTR programs as they are currently structured. We agree with the National Academies assessment of these programs as being “sound in concept and effective in practice.” Both programs play an important role in the Nation's overall innovation ecosystem by transforming cutting-edge, innovative ideas and research into viable, market-ready products for the American consumer. In the early years of SBIR, many on our campuses were critical of the program, viewing it as coming at the expense of funding that would have otherwise supported university-based basic research. In recent years, however, as our universities and 15 faculty have become more interested in commercializing new technologies, our uni- versities' attitude towards the SBIR and STTR programs has become more positive. Indeed, the SBIR and STTR programs are now widely viewed by many faculty and research administrators as an important tool that can help them transform the research generated in our university laboratories into new industrial products, goods, and services. As a result, more and more of our faculty are directly engaged in research funded through these two programs. When the National Research Council (NRC) surveyed SBIR recipients for its 2008 report, “An Assessment of the SBIR Program,” more than half of respondents re- ported that university faculty were involved in their SBIR-funded projects. Clearly, SBIR and STTR are encouraging university faculty to start or work with small com- panies in an attempt to commercialize their research results. The NRC found that the SBIR and STTR programs not only provide a vehicle for commercialization of research but also stimulate scientific and technological collabo- ration between faculty and industry that yields a variety of “knowledge outputs.” These “knowledge outputs” can take the form of “data, scientific and engineering publications, patents and licenses, analytical models, algorithms, new research equipment, prototype products and processes, and spin-off companies.” " To elaborate on this point, I would like to highlight an SBIR success story from two of our AAU universities. The first example comes from Chairman Wu's home State of Oregon. Electrical Geodesics Inc. (“EGI”), a University of Oregon spin-off company, was founded by UO neuroscientist Dr. Don Tucker to develop advanced, non-invasive ways to visualize brain activity. Over the last decade, SBIR grants played a key role in fueling EGI’s maturation, growth and expansion. As a direct consequence of SBIR support, EGI’s Geodesic Sensor Net can now be found in more than 350 laboratories in 28 countries around the world, supporting human neuroscience research on topics ranging from child development to psychopathology to neuroeconomics. EGI’s Geodesic Sensor Net has become an icon of advanced neuroscience technology, appearing on the covers of National Geographic and Newsweek. Electrical Geodesics has been a past winner of the Tibbetts Award for excellence in the SBIR program. This innovative, univer- sity-born small business—whose research, development and manufacturing provide high-quality employment to scores of Oregonians in the City of Eugene—received recognition as Oregon's Bioscience Company of the Year in 2006, and received the Emerald Award for Innovation from the Eugene Chamber of Commerce in 2008. The second example comes from Nebraska, where, in 2002, GC Image, LLC, a Lincoln based company was incorporated based on software developed by a Univer- sity of Nebraska–Lincoln Computer Science Professor, Dr. Stephen Reichenbach. GC Image delivers industry-leading software solutions for visualizing, analyzing, and re- porting on scientific data from comprehensive two-dimensional gas chromatography and comprehensive two-dimensional liquid chromatography. The company has been awarded $1.5 million in SBIR and STTR Phase I and II awards over the last five years from the National Science Foundation and the National Institutes of Health. GC Image continues to grow and build on its successes through strategic partner- ships to deliver software products in diverse markets. So, to address the first of the questions posed by the Subcommittee, clearly the SBIR and STTR programs have played an important role in stimulating innovation at small high-tech firms in Oregon, Nebraska, and throughout the country. The spe- cific degree to which the programs are responsible for innovation, however, is not easy to assess because of a lack of sufficient data. According to the National Institute of Standards and Technology (NIST), more than $26 billion has been spent on SBIR and STTR grants, yielding 84,000 patents and attracting more than $36 billion in venture capital for more than 17,000 SBIR- funded companies. The NRC report cites Small Business Administration (SBA) data indicating that nearly 15,000 small companies received at least one Phase II SBIR grant between 1992 and 2005. Despite the success of these programs, the NRC report makes significant rec- ommendations about the need for better data-collection and systematic assessment of SBIR/STTR, and we commend those suggestions to you. We would agree with the NRC that is difficult to truly assess the economic and innovation impact of SBIR and STTR because there has not been systematic data-gathering on the part of sponsoring agencies. Requiring such data collection and program assessment and providing the resources needed to finance these activities would be one positive ac- tion that this subcommittee and the Congress could take to enhance the SBIR and STTR programs. 1 National Research Council, Assessment of the SBIR Program, National Academies Press, p. 3. 16 You also asked us to assess the current SBIR and STTR set-aside percentages. In response to this question, AAU is supportive of the current SBIR set-aside of 2.5 per- cent of R&D spending for major research agencies and the 0.3 percent set-aside for the STTR program. While supportive of the current set-aside, we oppose any increases in the SBIR set-aside because there is no clear justification for such increases. We question whether there is enough small business research—and of sufficient quality—to merit SBIR funding that would come at the expense of peer-reviewed basic and ap- plied research programs at agencies such as NIH and NSF, where success rates un- fortunately have hit all-time lows in recent years. In our view, increasing the set- aside would reduce even further the number of successful research grants that are awarded by federal research agencies. This is not to suggest that we do not favor increasing the amount of funds going to SBIR and STTR. Our view is that the best way to increase the amount of funding available to these programs are to provide steady and sustained funding increases for federally supported research. Indeed, we hope to work with the small business community to increase research budgets across all of the major research agencies, which would result in significant funding increases for the SBIR and STTR as well as other important research programs. As for modifications to the set-aside, the only modification we would encourage would be the slight increase recommended by the National Research Council in the percentage of the set-aside that could be used for program management and assess- ment from .03 percent to .05 percent of the total program funding. II. AAU supports allowing small businesses with significant amounts of venture capital investments to participate in the SBIR and STTR pro- grams. - AAU supports the Subcommittee's view that firms with significant venture capital funding should be allowed to compete for SBIR and STTR awards. As you know, current Small Business Administration (SBA) regulations limit participation in these programs to companies that are at least 51 percent owned by individuals, rather than companies or other entities. This regulation effectively disqualifies Small companies that have received significant venture capital investment or are owned by another company with significant venture capital investment from com- peting for SBIR and STTR funds. We would note that this was not always the case. Before 2001 and 2003 SBA administrative law judge rulings, companies with ven- ture capital were allowed to participate in the SBIR program. As then-NIH Director Elias Zerhouni said in a 2005 letter to the SBA, “this rule dries up Federal funding for early stage ideas from small companies that, by at- tracting substantial [venture capital] funding, show strong signs of likely success.” AAU shares the view of the NRC that venture capital investment in companies seeking SBIR funding confirms the quality of those projects and would raise the quality of the applicant pool overall. III. Recommendations on how the SBIR and STTR programs can be im- proved. You also asked for thoughts concerning ways to improve the effectiveness of the SBIR and STTR programs. In responding to this request, I would commend to you the recommendations made by the National Research Council in its 2008 report, which we fully endorse. Program Evaluation: We agree with the NRC that the agencies should conduct regular evaluations of their SBIR and STTR programs. As part of this overall eval- uation process, we support the idea of agencies providing annual reports to Congress on the successes or disappointments of their programs, as well as developing a form of external evaluation of the programs' effectiveness. SBIR Award Sizes: We also support the NRC recommendation that award sizes be adjusted. Currently, SBIR/STTR Phase I awards are limited to $100,000 at NSF and $150,000 at NIH, and Phase II awards are limited to $750,000 at NSF and $850,000 at NIH.2 The statutory amount of SBIR and STTR Phase I and II awards should be adjusted to reflect the effects of inflation over the years and, more impor- tantly, to make the awards more attractive. In its report, the NRC calls for a one- time adjustment in award sizes increasing Phase I awards from $100,000 to *National Research Council, An Assessment of the SBIR Program, National Academies Press, p. 44; pp. 95–97. 17 $150,000 and Phase II to $1 million.8 Embedded within this recommendation is the notion that standard award sizes simply serve as guidance for the agencies and that agencies should be given the flexibility to exercise their own judgment when deter- mining the size of the award needed to meet the mission and goals of the SBIR project. Post Phase II Awards: Another NRC recommendation that AAU supports is that agencies be given the flexibility to develop follow-on SBIR funding mechanisms be- yond Phase II. NIH has improvised to provide such funding with its “competing re- newal” mechanism for especially promising projects, and the Navy has a similar “Phase IIb” option. NSF also has a mechanism to match supplemental industry funding for Phase II awards. We agree with the NRC that such follow-on SBIR and STTR funding would enable small companies with highly promising projects to tra- verse “the “Valley of Death” between the end of Phase II research funding and the commercial marketplace.” This is the single greatest challenge for SBIR and STTR- funded companies. Additional “Gap” Funding: There is one other related issue that we would ask the Subcommittee to examine in reauthorizing the SBIR and STTR programs. Even with the existing SBIR and STTR programs, there still exists a funding gap which often prevents universities from moving new research discoveries and technologies quickly into the marketplace. SBIR and STTR funding presumes there is already sufficient evidence that a particular research advance or technology has enough commercial value to attract further investment for commercialization. Often times, however, there is not the funding available within our universities, or from other sources, to push these technologies across the “Valley of Death” to that point. The current economic climate has left companies, angel investors and venture cap- italists even less willing to invest in the proof-of-concept, Scaling up, and modeling required to explore the commercial value of such advances. While the current SBIR program partially addresses this issue, it often still falls short of providing enough funding to allow emerging technologies to reach the level of development required for investment or adoption by the commercial sector. AAU would welcome the oppor- tunity to work with the subcommittee to explore innovative new ways that would allow our universities to extend the horizon for development of research advances and new technologies, thereby making the end product easier to transfer to a small business and improving the success rate of these businesses. - Conclusion If there is a consistent theme in these recommendations, it is that the SBIR and STTR are, at their core, good programs that help to foster successful entrepreneurial opportunities for our nation's scientists, engineers, and technology innovators. How- ever, these programs, which were created well over 20 years ago, can stand to be improved by increasing award sizes, providing flexibility in program administration and management, and providing beyond Phase II award opportunities. We also be- lieve that it might be time to consider supplementing these programs with a new program aimed at providing additional gap funding. Chairman Wu, Ranking Member Smith, and Members of the Subcommittee, thank you for the opportunity to share AAU’s thoughts and perspective on the SBIR and STTR programs. We would welcome the opportunity to work with you in fleshing out some of the recommendations we have made today. I look forward to any questions you may have at this time. BIOGRAPHY FOR ROBERT M. BERDAHL Robert M. Berdahl became President of the Association of American Universities (AAU) in May 2006. Prior to this position, Berdahl served as Chancellor of the Uni- versity of California, Berkeley from 1997 to 2004. As Chancellor at Berkeley, he led the campus in a major effort to renew its infrastructure. During his tenure, more than $800 million was invested in a comprehensive plan to renovate and seismically upgrade numerous buildings, rendering them more suitable for modern scientific re- search and teaching. He worked to restore library collections to a preeminent posi- tion and undertook the construction of two new library buildings. Under his leader- ship, two new major interdisciplinary initiatives were undertaken: the Health Sciences Initiative and the Center for Information Technology Research in the Inter- est of Society. An advocate of enhancing and humanizing undergraduate learning, Berdahl expanded the highly popular Freshman Seminar Program, in which senior 8 National Research Council, An Assessment of the SBIR Program, National Academies Press, pp. 84–85. 18 faculty teach small freshman classes. To integrate student life more fully with a challenging academic environment, six new residence halls were constructed. As the first Berkeley Chancellor to cope with the decline of minority enrollment after the elimination of affirmative action in California, Berdahl strengthened campus out- reach programs for disadvantaged students in the public schools. Following his ten- ure as Chancellor at Berkeley, Berdahl remained as a faculty member. Prior to going to Berkeley, Berdahl served as President of the University of Texas at Austin from 1993 to 1997. While at Texas, he initiated a master plan for the physical devel- opment of the campus, worked to introduce data-driven planning in the allocation of resources to the academic colleges and schools, and endeavored to build a strong- er sense of community within a large, diverse campus. While at the University of Texas and at Berkeley, Berdahl was an active member of AAU, including service as its Executive Committee Chair. Berdahl began his academic career in the History Department at the University of Massachusetts Boston in 1965. He joined the his- tory faculty at the University of Oregon in 1967 and served as Oregon's Dean of the College of Arts and Sciences from 1981 to 1986, when he left Oregon to become Vice Chancellor of Academic Affairs at the University of Illinois at Urbana-Cham- paign. Berdahl received his B.A. from Augustana College in Sioux Falls, South Da- kota, his M.A. from the University of Illinois, and his Ph.D. from the University of Minnesota, which also awarded him an honorary Doctorate of Science in 1997. He is recipient of numerous honors and awards, including an honorary doctorate and distinguished alumnus award from Augustana College, a Fulbright Research Fellow- ship, and an NEH Independent Study and Research Fellowship. He has been a Re- search Associate at the Institute for Advanced Study in Princeton and at the Max Planck Institute for History in Goettingen, Germany. Berdahl was elected to the American Academy of Arts and Sciences in 2001. He is the author of one book and the co-author of another, and has written numerous articles dealing with German history. Berdahl was born in 1937 in Sioux Falls, South Dakota. He and his wife Margaret (Peg) have three married daughters, Daphne (deceased), Jennifer, and Barbara, and six grandchildren. Chair WU. Thank you, Dr. Berdahl. We very much appreciate AAU’s input into this process. * Dr. BERDAHL. Thank you. Chair WU. Mr. Greenwood, please proceed. STATEMENT OF ME. JAMES C. GREENWOOD, PRESIDENT AND CEO, BIOTECHNOLOGY INDUSTRY ORGANIZATION (BIO) Mr. GREENWOOD. Good afternoon, Chairman Wu and Congress- woman Biggert and Members of the Committee. I am Jim Green- wood, President and CEO of the Biotechnology Industry Organiza- tion, BIO, and I am privileged to be here this morning on behalf of BIO's more than 1,200-member companies, academic institu- tions, State biotechnology centers, and related organizations in all 50 states involved in health care, agricultural, environmental, and industrial biotechnology. Congress created the SBIR Program in the early 1980s because it recognized that all too often promising early-stage scientific re- search lacked adequate funding and as a result perished in the “Valley of Death.” The importance of advancing science through the “Valley of Death” has never been more important than it is right In OW. In fact, in just the last several months at least 25 of our compa- nies have either placed drug development programs on hold or cut programs altogether. This includes therapies for HIV/AIDS, cer- vical cancer, multiple sclerosis, and diabetes. Roughly a third of Small publicly-traded biotechnology companies are now operating with less than six months of cash on hand, which is a 90 percent increase relative to this time in 2007. The total capital raised by the industry in 2008 is down 55 percent compared to last year. As such, it is more important than ever that government funding op- 19 portunities such as SBIR are made more accessible to America's cutting-edge companies. My recommendation to strengthen and improve the SBIR pro- gram can be grouped under the following three general goals. First, increase competition and foster innovation and commercialization by the best small companies. For 20 years domestic biotechnology companies competed for SBIR grants. However, in 2003, the Small Business Administration’s [SBA] Office of Hearings and Appeals ruled that a biotechnology company, Cognitics, did not meet the SBIR size standard because multiple venture capital investors in the aggregate, and that is more, that is important, in the aggre- gate, owned more than 50 percent of the company's stock. The ruling, which is not based on the statutory language, ignores the reality of the marketplace where small biotechnology firms must raise tens of millions of dollars to conduct incredibly capital- intensive research. The SBA’s 2003 ruling to exclude majority ven- ture-backed companies inhibits the SBIR's Program's access to the most competitive pool of applicants possible, and it stifles the abil- ity of SBIR to carry out its mission to fund projects that will have the most commercial potential. - The NIH’s acting director recently reported that the number of SBIR applications has dropped over 40 percent since 2004, which is about the same time the SBIR-participating agencies imple- mented the new SBA restriction and majority VC [Venture Cap- ital]-financed companies. - BIO respectfully requests that the Committee reinstate the eligi- bility of small VC-backed biotechnology firms to compete for SBIR awards. This will ensure the most competitive pool of applicants and that grants will be awarded based on projects that show the most promise in bringing breakthrough therapies to the public. Second, Congress should clarify the SBA eligibility rules to make the application process more straightforward and more user friend- ly. It is equally important the authorization clarify SBA affiliation regulations. Under current SBA regulations when determining the size of a business, the SBA considers the number of direct employ- ees at the business as well as affiliated business employees. These affiliation rules create a situation where a small company with 50 employees could be affiliated with hundreds of other employees of companies with which the small company has no relationship whatsoever, simply because the companies share a common inves- tor, even where the investor owns a minority stake in the business in question. BIO recommends the Reauthorization Bill provide language to clarify that minority investment by a venture capital investor does not make the company an affiliate of another company for the pur- poses of determining size. This is a commonsense measure that will provide clarity and peace of mind for small business entrepreneurs looking to participate in the SBIR Program. Third, Congress should maintain adequate agency flexibility within the SBIR Program. One of the great strengths of the SBIR Program is that Congress has provided participating agencies with flexibility in how they administer the program. Maintaining flexi- bility is supported by a National Research Council 2007 report, which states, “Flexibility is a positive attribute in that it permits 20 each agency to adapt its SBIR Program to the agency’s particular mission, scale, and working culture.” BIO does not believe that a hard dollar cap should be applied to the SBIR grant amounts. Agencies should be the best judge of how to use their SBIR funds to advance science and to commercialize new innovations. By making necessary reforms to the SBIR Pro- gram, Congress can continue to support the USA biotechnology community by allowing the government to partner with small bio- technology companies that have promising science but need addi- tional resources at key stages of development. Thank you. [The prepared statement of Mr. Greenwood follows: PREPARED STATEMENT OF JAMES C. GREENWOOD Good morning Chairman Wu, Ranking Member Smith, Members of the Com- mittee, ladies and gentleman. I am Jim Greenwood, President and CEO of the Bio- technology Industry Organization (BIO). I am privileged to be here this morning on behalf of BIO's more than 1,200 member companies, academic institutions, State biotechnology centers and related organizations in all 50 states involved in health care, agricultural, environmental and industrial biotechnology. The role of the SBIR program in bringing breakthrough therapies to the American people is a matter of record. There are 252 FDA approved biologics that have been developed by 163 companies. Thirty-two percent of those companies have received at least one SBIR/STTR award. Despite its noble past, the ability of the SBIR pro- gram to provide critical funding for medical research projects will remain hampered unless SBIR reauthorization updates the program to address the current realities facing Small, innovative American companies. As you know, Congress created the SBIR program in the early 1980's because it recognized that promising, early stage scientific research all too often failed to be funded through the markets because it was viewed as too high-risk. This failure of the markets is often referred to as the “Valley of Death.” The importance of advanc- ing science through the “Valley of Death” has never been more important than it is right now as numerous small biotechnology companies are being forced to shelve promising therapies as result of the current economic crisis. In fact in just the last five months, at least 25 U.S. public biotech companies have either placed drug de- velopment programs on hold or cut programs all together. These programs include therapies for HIV, cervical cancer, Multiple Sclerosis, and diabetes. For twenty years small, domestic biotechnology companies competed for SBIR grants. In addition to providing funding, these grants were a powerful signal to the private sector that a company's research was compelling and possessed scientific and technical merit. However, in 2003 the Small Business Administration’s Office of Hearings and Appeals (OHA) ruled that a biotechnology company, Cognetix, did not meet the SBIR size standard because multiple venture capital investors, in the aggregate, owned more than 50 percent of the company's stock. The ruling, which is not based on the SBIR statutory language, ignores the realities of the market- place where small biotechnology firms must raise tens of millions of dollars to con- duct incredibly capital-intensive research. It is estimated that it takes between 8 and 12 years to bring a biotechnology therapy to market and costs between $800 million and $1.2 billion. These small biotech firms typically have fewer than 50 em- ployees, no products on the market and must raise considerable funds through a combination of angel investors and venture capital firms to make a therapeutic com- mercially available to patients. The impact of the current economic crises on small biotechnology companies has been and continues to be severe. According to the latest available data, 30 percent of small, publicly-traded biotechnology companies are now operating with less than six months of cash on hand, a 90 percent increase relative to 2007. Forty-five per- cent of these companies have less than one year of cash remaining. The total capital raised by the industry in 2008 has seen a steep decline (down 55 percent in 2008 compared to 2007). The SBIR program has always been critical to helping innovative biologic thera- peutic development programs traverse the “Valley of Death” and move towards a publicly-available product. This is a role that has never been more critical than it is today. A recent joint study by BIO and Thompson Reuters found that the current economic crisis has forced over 80 percent of biotech investors to change their in- 21 vestment approaches. They can no longer afford the high-risk characteristic of in- vestment in biotech. The decline of the biotech industry jeopardizes not only Amer- ica's patient population, but also America's competitive edge in the 21st century global economy. The importance of restoring eligibility to small biotechnology com- panies has never been more clear. SBA has stated that the ownership rule is meant to be a proxy for determining that a company is domestic. However, the use of capital structure as a proxy for determining domesticity and the subsequent OHA ruling has had the unintended consequence of excluding a sizable portion of U.S. biotechnology companies that would otherwise be eligible to participate in the program. Even more alarming is the fact that NIH SBIR applications have decreased 40 percent since 2004, about the time that SBIR-participating agencies implemented the new SBA restriction on majority VC-financed companies. A small biotechnology companies is generally engaged in Several projects with one lead product and an average of five other therapies or candidates in early stage/pre- clinical research. Typically, a biotechnology company will begin fundraising for its lead product in development. Companies generally raise between $5 million and $15 million in their first round of venture financing, an amount that often results in multiple venture capital companies collectively owning more than 50 percent of the company. This is especially the case with very young companies whose valuation may reflect their high-risk, early stage nature. However, it is typically the case that no single venture capital company will own more than 15 to 25 percent of the com- pany’s equity. Despite the extensive fundraising a biotechnology company undertakes for its lead product, these funds are tied to very specific milestones to support the lead prod- uct’s development. As such, in order to develop secondary or tertiary candidates/ therapies a company has to find secondary sources of fundraising capital. At the very earliest stages of development other sources of financing, such as SBIR grants, have been instrumental in advancing research and development in biotechnology. Opportunity to Strengthen/Restore SBIR Program I appreciate the opportunity to discuss much-needed changes to the current SBIR program. I believe these changes would strengthen the program and ensure that it is funding the best small biotechnology businesses which are working on innovative programs that have the most potential to benefit the public. My recommendations can be grouped under three general goals. First, increase competition for SBIR grants and, as such, foster innovation and commercialization by Small companies with the most promise. Second, clarify SBIR eligibility rules to make them easier to understand and increase transparency regarding the program's operation. Third, maintain agency flexibility to make certain the SBIR program continues to serve the needs of individual agencies. - I will briefly discuss each of these important goals. Increase Competition and Foster Innovation and Commercialization by the Best Small Companies SBA’s 2003 ruling that excludes majority venture-backed companies inhibits the SBIR program from receiving the most competitive pool of applicants possible and stifles the ability of SBIR to carry out its mission to fund projects that will improve public health and have the most commercial potential. The current SBA interpretation would deem eligible a public company with 499 employees and significant—perhaps hundreds of millions—of dollars in revenue. However, a private company with 20 employees, no annual revenue and $8 million in venture capital by multiple venture capital funds equaling 56 percent of the com- pany’s equity—even though no one venture capital firm has more than 30 percent of total equity—is ineligible. A significant number of BIO's emerging companies are ineligible, the majority of which would apply to SBIR if able. These companies are working on breakthroughs for the treatment of diseases such as cancer, Alzheimer’s, lupus, and leukemia. The National Institutes of Health (NIH) have documented disturbing trends since the 2003 ruling. Applications for SBIR grants at NIH have declined by 11.9 percent in 2005, 14.6 percent in 2006, and 21 percent in 2007. Additionally, the number of new small businesses participating in the program has decreased to the lowest pro- portion in a decade. Small biotechnology companies have high and intense capital needs (over $1 bil- lion) and an unusually long development time of five to twelve years. The vast ma- jority of biotechnology companies raise between $5 million and $15 million in their first round of venture financing for their lead product(s), an amount that usually 22 results in the venture capital firms collectively owning more than 50 percent of the company. However, the investment group usually consists of several firms, none of which owns more than 15–25 percent of the company. SBIR plays a critical role in aiding small biotechnology companies in their early stage research to navigate through the “Valley of Death” where the concept is too high-risk for private market support. This has never been more important as the “Valley of Death” is only getting wider and deeper in these difficult economic times. BIO respectfully asks the Committee to reinstate the eligibility of small, VC- backed biotechnology firms to compete for SBIR awards. This will ensure the most competitive pool of applicants and that grants awarded will be based on projects that show the most promise in bringing breakthrough therapies to the public. Clarify SBIR eligibility rules to make the application process more straightforward and user-friendly. It is equally important that the reauthorization clarify SBA affiliation regulations. Under current SBA regulations, when determining the size of a business, the SBA considers the number of direct employees at the business as well as affiliated busi- nesses’ employees. Businesses are affiliates of each other if the SBA determines that another business has either affirmative or negative control. Current regulations state that a venture capital company that holds a minority share in another busi- ness can be considered an affiliate of that business. If the SBA determines a venture capital company is affiliated with the business, not only are the employees of the venture capital company included in the size determination but so are the employ- ees of other businesses in which the venture capital firm is invested. As a result of these affiliation rules, a small company with 50 employees could be deemed to be affiliated with hundreds of other employees of companies with which the small company has no relationship whatsoever, simply because the com- panies share a common investor. It is important to note that this can be the case where the VC investor owns a minority stake in the small business applying for SBIR. Not only are these affiliation rules nonsensical, the manner in which they are ap- plied is often a mystery to the small business applying for the SBIR grant. As a result, a small company may certify in good faith that it is eligible for an SBIR grant, only to later find out that the SBA has affiliated it with a large number of employees at other unrelated companies, thus making the small business ineligible. BIO recommends the reauthorization bill provide language to clarify that minority investment by a venture capital operating company does not make that company an affiliate of another company for the purposes of determining size. This is a common sense measure that will provide clarity and peace of mind for small business entre- preneurs looking to participate in the SBIR program. Maintain Agency Flexibility BIO also supports maintaining agency flexibility in the SBIR program. One of the great strengths of the SBIR program stems from the fact that Congress provided the affected departments and agencies with flexibility in establishing the program. Maintaining flexibility in the program is also supported by a National Research Council 2007 report which states, “. . . flexibility is a positive attribute in that it permits each agency to adapt its SBIR program to the agency's particular mission, scale and working culture.” The reality is that various government agencies may structure their SBIR pro- grams in different ways to meet differing agency needs. This is a good thing, so long as the original goals of the SBIR program are preserved. Certain agencies, for exam- ple, may need the flexibility to award larger grants, if projects they are funding are in an area where research is typically more expensive. This is sometimes the case for biotechnology companies researching therapies that are especially novel or cut- ting-edge. For this reason, BIO does not believe that a hard cap should be applied to the SBIR grant amounts. Agencies should be the best judge of how to use their SBIR funds to advance science and commercialize new innovations. Additionally, any caps on SBIR grants, if imposed, should apply to particular SBIR phases and should not apply to the entire amount that the agency spends on a particular project. The NIH, for example, has chosen to implement a commer- cialization assistance program for those companies that may need extra funding be- fore they can attract private dollars. A hard dollar cap in the SBIR program could threaten such a program and this would be, in BIO's opinion, very unfortunate. 23 CLOSING REMARKS Congress can continue to support the United States biotechnology community by allowing the government to partner with small biotechnology companies that have promising science but need additional resources at key stages of development not readily available in the private capital markets. SBIR should be an aggressively competitive program that fulfills federal research and development goals of bringing breakthrough public health discoveries to the public. BIOGRAPHY FOR JAMES C. GREENWOOD James C. Greenwood is President and CEO of the Biotechnology Industry Organi- zation (BIO) In Washington, D.C., which represents more than 1,200 biotechnology companies, academic institutions, State biotechnology centers and related organiza- tions across the United States and in more than 30 other nations. BIO members are involved in the research and development of innovative health care, agricultural, industrial and environmental biotechnology products. BID also produces the annual BIO International Convention, the world’s largest gathering of the biotechnology in- dustry, lºng with industry-leading investor and partnering meetings held around the world. Since his appointment in January of 2005, he has markedly enhanced the trade association's capacity increasing both its staff and budget by nearly fifty percent. BIO is now a world class advocacy organization playing a leading role in shaping public policy on a variety of fronts critical to the success of the biotechnology indus- try at the State and national levels as well as internationally. Mr. Greenwood represented Pennsylvania's Eighth District in the U.S. House of Representatives from January 1993 through January 2005. A senior member of the Energy and Commerce Committee, he was widely viewed as a leader on health care and the environment. From 2001 to 2004, Mr. Greenwood served as Chairman of the Energy and Com- merce Committee Subcommittee on Oversight and Investigation with oversight au- thority over issues In the Full Committee's vast jurisdiction. He led hard-hitting in- vestigations into corporate governance at Enron, Global Crossing and WorldCom; terrorist threats to our nation's infrastructure; and waste and fraud in Federal Gov- ernment agencies. Prior to his election to Congress, Mr. Greenwood served six years in the Pennsyl- vania General Assembly (1980–86) and six years in the Pennsylvania Senate (1986– 1993). Mr. Greenwood graduated from Dickinson College in 1973 with a BA in Sociology. From 1977 until 1980, he worked as a caseworker with abused and neglected chil- dren at the Bucks County Children and Youth Social Service Agency. #. Greenwood resides in Upper Makefield, Pennsylvania with his wife and three CIll!CIY’eſ). BIO represents more than 1,200 biotechnology companies, academic institutions, State biotechnology centers and related organizations across the United States and 31 other nations. BIO members are involved in the research and development of health care, agricultural, industrial and environmental biotechnology products. Chair WU. Thank you, Mr. Greenwood. Dr. Rockey, please proceed. STATEMENT OF DR. SALLY J. ROCKEY, ACTING NIH DEPUTY DIRECTOR, EXTRAMURAL RESEARCH, NATIONAL INSTI- TUTES OF HEALTH, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Dr. ROCKEY. Good afternoon, Chairman Wu, Congressman Biggert, and other Members of the Subcommittee. Thank you for the opportunity to discuss the NIH SBIR/STTR Programs, and the role they play in stimulating innovation at small high-tech busi- IlêSS62S. NIH [National Institute of Health] is one of the largest funders of the SBIR/STTR Programs and the largest supporter of bio- medical research that focuses on extending healthy life and reduc- ing the burdens of illness and disability. The SBIR/STTR Programs are poised to fund early-stage, high-risk, high-quality research from 24 which important medical advances can be developed. In fiscal year 2009, the total SBIR/STTR set-aside will be about $672 million. I would like to begin by highlighting several SBIR innovations that have made differences and can make differences in people's lives. Altea Therapeutics, a Georgia company, developed a needle- less infusion patch called the passport system for a painless and controlled delivery of drugs such as insulin or vaccines such as hep- atitis B antigen through the skin. Three Rivers Holding, an Ari- zona company, focused on assistive technology, developing better wheels for wheelchairs. This smart wheel optimized wheelchair route to route out the cause of chronic pain in the shoulder, hand, or wrist of wheelchair users. SIG Technologies Inc. in Oregon developed a small molecule in- hibitor, a small pox virus replication. While small pox has essen- tially been eradicated, it remains a formidable biowarfare threat. And finally, Biopsy Sciences in Florida developed hydroMARK, a novel water containing site marker used in breast cancer proce- dures. This technology is helping patients by replacing lengthy mammogram-guided localization wire procedures with a quick and accurate and more comfortable ultrasound localization. As a breast cancer survivor, I have personally experienced the excruciating pro- cedure that this new technology can replace. I find it very satis- fying that the NIH and the small business community contributes to helping women who are battling a life-threatening disease have one less painful procedure in what can be a grueling treatment re- gime. Stories such as this come from companies all over the United States and underscore the importance of SBIR to our mission. In support of the goal to increase commercialization of federally-sup- ported R&D, NIH has designed programs such as the Phase I, Phase II Fast Track Program and competing renewal award to help our awardees negotiate the agonizing period between discovering commercialization or as we heard mentioned, the “Valley of Death.” In addition, NIH offers commercialization assistance by facili- tating matchmaking. It is our version of match.com, with the NIH pipeline to partnerships. This is a virtual space where SBIR and STTR awardees can showcase their technologies, and it allows for potential strategic partners, licensing partners, or investors to find them on this virtual space. And currently we have over 100 tech- nologies in this database. NIH is pleased that a recent study conducted by the NRC, the National Research Council, found that 40 percent of NIH SBIR- funded projects are commercialized. Further, using a dynamic mon- itoring system that enables NIH to document the continuing achievements of its SBIR awardees over time, we have found that about 50 percent have achieved sales. Other factors such as FDA approval, strategic partnerships, and investments also demonstrate our program's success. We attribute the success and effectiveness of the program to sev- eral factors. The most significant of this is the existing flexibility in our administration of the program to address the changing na- ture of biomedical research and accommodate the needs of multiple industries and diverse product outcomes. 25 Examples include the ability of companies to propose their own project ideas and an opportunity to resubmit unfunded applica- tions. And the ability to exceed the award guidelines in justified CaSeS. Simply stated, one size does not fit all. Flexibility is critical at a time when science is changing rapidly, becoming much more com- plex, and evermore expensive. Despite these program flexibilities and enhancements, as you already heard, what we have observed is there have been some troubling trends. Specifically, the numbers of our applications have declined from 2004 through 2008 by nearly 40 percent. Though the reasons are not fully understood for this de- cline, it is a disconcerting trend—this disconcerting trend may be related to certain distance incentives that are either rendering wor- thy companies ineligible or driving them away for other reasons. For some the award amounts or the current phase structures are not sufficient incentives for applying. For others the process ap- pears too competitive. New companies may find the process daunting or aren’t sure how to match their skills with our research areas. Some firms have lost their eligibility or may be confused by the eligibility criteria. For many biomedical technology companies the SBIR Program is an important source of seed funding for early-stage ideas of unproven feasibility, but venture capital financing is the only real- istic way that their innovative product will enter the marketplace. Research and public health in biotechnology is characterized by high and intense capital needs, as you know, and to see these prod- ucts from idea to market usually have very long development times, exceptionally high burn rates for investment funds, and often multiple rounds of financing to fund the extensive and essen- tial clinical research. Individuals alone simply cannot finance the hundreds of millions of dollars for necessary clinical phases to bring the product to market. The NRC study of the SBIR Program noted that the synergies between SBIR funding and venture capital are useful. As the inno- vative process is not linear, even small business benefiting from venture funding may well seek SBIR funding as a means of explor- ing a new idea. For example, a new drug candidate. Keeping the pipeline full of new ideas is important because in today's high-risk biomedical research environment, the reality is that fewer than one percent of the innovative promising projects reach the marketplace. Therefore, I believe appropriate incentives can be—can strength- en the role of small businesses in stimulating technological innova- tion. In conclusion, I want to reemphasize the NIH’s commitment to supporting small businesses and maintaining the integrity of the SBIR/STTR Programs. We look to small businesses to stimulate technological innovation, help us face new challenges, and to produce benefits for the public. We look forward to working with Congress on ways to reinvigorate the program, incentivize Amer- ica’s small businesses to participate, and create an environment en- abling commercialization of health-related products and services that will sustain our national economy. That concludes my statement. I look forward to answering any questions you have. 26 [The prepared statement of Dr. Rockey follows: PREPARED STATEMENT OF SALLY J. ROCKEY Good afternoon, Chairman Wu and Members of the Subcommittee. My name is Dr. Sally Rockey. I am the Acting Deputy Director for Extramural Research at the National Institutes of Health (NIH), an agency of the Department of Health and Human Services. Thank you for the opportunity to discuss the NIH Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) pro- grams and the role they play in stimulating innovation. Among the 11 federal agen- cies that participate in the SBIR program, the NIH is one of the largest funders of this program, and the largest Federal supporter of biomedical research. IMPORTANCE OF SBIR PROGRAM AT NIH: IGNITING IMAGINATIONS AND SPURRING NEW DISCOVERIES The NIH SBIR Program is ideally suited for creating research opportunities for U.S. Small businesses to stimulate technological innovation. Part of a complex inno- vation system, the NIH SBIR program provides dedicated funding for small busi- nesses to conduct early-stage research and development to explore the feasibility of innovative ideas that may eventually result in products or services that will lead to better health for everyone. The NIH SBIR program is one means by which the NIH Institutes and Centers (ICs) accomplish their R&D objectives. A unique feature of the SBIR program is a focus on commercialization of the outcomes of research. Thus, the program serves to supplement the more basic and applied research pro- grams of NIH. TYPES OF RESEARCH NIH SUPPORTS UNDER SEIR Examples of the types of research that NIH supports through the SBIR program include, but are not limited to, drug discovery, medical devices, biosensors, nanotechnologies, proteomics, imaging, bioengineering, behavioral research, and technologies that reduce health disparities. Investigator-initiated ideas are the cor- nerstone of the NIH research portfolio, including projects supported by the SBIR program. Thus, while we Solicit projects on specific topics, we also encourage small businesses to propose their own innovative research ideas that are relevant to our II].1SSTOIl. NIH SBIR PROGRAM OVERVIEW The NIH, in accordance with statute, must set aside 2.5 percent of its extramural research and development budget for a SBIR program. In fiscal year (FY) 2008, the NIH SBIR set-aside was about $580 million. NIH awarded 806 new Phase I and 288 new Phase II SBIR projects to small businesses working in many different tech- nology areas across the country. Funding decisions are based on several factors: 1) ratings from the scientific and technical evaluation process; 2) areas of high pro- gram relevance; 3) program balance among areas of research; 4) available funds; and 5) the commercialization status, when a small business concern has received more than 15 Phase II awards in the prior five fiscal years (FYs). EMPLOYMENT EFFECTS ON NIH SBIR AWARDEES Since the program's inception in 1982, the NIH has invested more than $5 billion in more than 19,000 projects to over 5,000 small businesses. Past studies of the SBIR program conducted by the NIH1 and the National Research Council (NRC)? have shown that small businesses are seen as sources of economic vitality and are especially important as a source of new employment. In looking at job growth of SBIR awardee firms since the receipt of their award, the NRC found the mean em- ployment gain was 29.9 FTEs. In addition, respondents estimated as a result of their SBIR projects their companies were, on average, able to hire 2.7 full time em- ployees (FTEs), and to retain 2.2 FTEs that might not otherwise have been retained. Although the employee size limit for firms receiving an SBIR award is 500, the me- dian size of companies receiving NIH SBIR awards is actually relatively small: 10 employees. Sixty percent were found to have 15 or fewer employees at the time of 1 National Institutes of Health, National Survey to Evaluate the NIH SBIR Program: Final Report, July 2003. *National Research Council Phase II Survey, An Assessment of the SBIR Program. At the Na- tional Institutes of Health, 2009. 27 the NRC survey. These data suggest that the SBIR program has positive employ- ment effects on small business job creation and growth. PROGRAM EFFECTIVENESS: BRINGING IDEAS TO LIFE The SBIR program seeks to fund the most scientifically promising projects for which private and public funds are not traditionally available. As noted from the few examples below, the program has shown that tangible scientific benefits can re- sult from a small investment in early-stage ideas with commercial potential. NIH SBIR projects are stories of discovery. Following are a few examples of how SBIR products are touching people's daily lives: • An anti-viral drug, Tyzeka, under the generic name of telbivudine, is used to treat chronic hepatitis B in adults. • A needle-less infusion patch called the PassPort TM System is capable of deliv- ering drugs such as insulin. This novel technology bypasses metabolism in the intestinal tract which typically results in low bioavailability of oral drugs. • A new cholesterol test, called the WAPTM (Vertical Auto Profile), can identify twice the number of people at risk for heart disease than traditional choles- terol tests developed in the 1970s. • The HydroMARKTM, a novel, visible marker used in ultrasound, is addressing an unmet clinical need and has helped patients by replacing lengthy mammo- gram guided wire localization procedures with quick, accurate ultrasound guided localization procedures that are more comfortable. • The LifelineTM, which is tissue engineered blood vessels comprised entirely of the patient’s own living cells, is targeted to help hemodialysis patients, lower limb amputation candidates, pediatric patients with cardiac defects and coro- nary bypass candidates. Examples such as these demonstrate ways the SBIR program is stimulating tech- nological innovation and underscore why the NIH SBIR program is important to our mission and to the entire innovation process. PROGRAM FLEXIBILITY IS KEY: ONE SIZE DOES NOT FIT ALL NIH is continually focused on ways to address the needs of a diverse business community, multiple industries, different technology sectors, and diverse product outcomes. NIH attributes the success and effectiveness of its program to several fac- tors, the most significant of which is flexibility in our proactive administration of the program to accommodate the changing nature of biomedical and behavioral re- search while increasing the efficiency and effectiveness of the program. Examples of program flexibility include the ability to propose research projects in fields that have the most biological potential; the ability for an applicant to resub- mit an unfunded application; and the ability to exceed the Phase I and Phase II award guidelines when the science proposed warrants such a deviation to produce successful outcomes. The SBIR median award size in FY 2008 was $151,440 for Phase I and $841,381 for Phase II projects. For STTR, the median award size was $149,711 for Phase I and $907,970 for Phase II. In addition, we have developed programs to help companies address funding gaps between Phase I and Phase II and programs to help them negotiate the agonizing period between discovery and commercialization. For example, the Phase I/Phase II Fast-Track award and Phase II Competing Renewal award are aimed at accel- erating research projects that have great potential to produce products; and, our commercialization assistance programs are targeted to the specific needs of small businesses funded by NIH. For many biomedical technology companies, the SBIR program is an important source of seed funding for early-stage ideas of unproven feasibility, but a venture capital financing strategy is the only realistic way that their innovative product will enter the marketplace. Research in public health and biotechnology is characterized by high and intense capital needs to see a product from idea to market (e.g., it takes an average of $1.2 billion to bring a drug to the market); unusually long develop- ment times (i.e., five to twelve years); exceptionally high “burn rates” for investment funds; investment by venture capital companies (VCCs), many of whom are not owned at least 51 percent by individuals; and often, the necessity for multiple rounds of financing to fund the extensive and essential clinical research. Individ- uals, alone, simply cannot finance the hundreds of millions of dollars for necessary . phases to bring products to the market that will improve the health of €T1C3I).S. 28 The NRC's study of the SBIR program noted the synergies between SBIR funding and venture capital are useful and their study underscored the notion that the inno- vation process often does not follow a linear path. So, even small businesses bene- fiting from venture funding may well seek SBIR funding as a means of exploring a new idea or, for example, a new drug candidate. Keeping the pipeline full of new ideas is important because, in today's high-risk biomedical research environment, especially in areas such as drug development, drug discovery, and therapeutics, the reality is that fewer than one percent of the innovative, promising projects reach the marketplace. Simply stated, one size does not fit all. Flexibility is critical at a time when Science is changing rapidly, becoming more complex, more interdisciplinary, and ever more expensive. Throughout the SBIR program's history, Small businesses, including those compa- nies with venture capital funding, have applied for and received SBIR funding in areas that help to advance our mission. The National Research Council's study found no evidence that participation of companies with multiple VC ownership was harmful to the program or that other small businesses have ever been crowded out by the participation of small businesses that are majority-owned by VCCs. KEY TRENDS - Overall, the SBIR program has complemented NIH’s mission to advance science while reducing the burden of illness on public health. In spite of our commitment to small businesses and our proactive enhancements to the NIH SBIR program, the program has not increased participation of applicants at the same rate observed for other sectors of the NIH extramural community at NIH. Specifically, the numbers of SBIR applications and new firms participating in the program declined from fis- cal years 2004 through 2008. Though the reasons for this near 40 percent drop in applications are not fully understood, this disconcerting trend appears to be the re- sult of disincentives in the program that are either rendering worthy companies in- eligible or driving them away for other reasons. CONCLUSION In conclusion, I want to reemphasize the NIH commitment to supporting small businesses, maintaining the integrity of SBIR program, and ensuring that tech- nology developments will help improve the health and extend the lives of all people. We are looking to small businesses, primarily through the SBIR program, to stimu- late technological innovation, help us face new challenges and to produce not only new knowledge but also tangible benefits that touch the lives of every individual. We are hopeful that our continuing outreach efforts and actions to modernize the SBIR program will be helpful in that regard. Finally, we continue to believe strongly that flexibility within the SBIR program is essential to achieving greater successes in these programs. This concludes my statement. I will be pleased to answer any questions you may have. BIOGRAPHY FOR SALLY J. ROCKEY Dr. Sally Rockey has spent the majority of her career in the area of extramural research administration and Information Technology. She received her Ph.D. in En- tomology (1985) from Ohio State University and held a post doctoral appointment at the University of Wisconsin. In 1986 she joined the U.S. Department of Agri- culture's extramural research arm, the Cooperative State Research Education and Extension Service (CSREES), as a program officer for entomological grant programs. She quickly moved up in the organization and became Deputy Administrator for the Competitive Research Grants and Award Management Unit where oversaw extra- mural competitive research, education and extension portfolio. In 2002, Dr. Rockey became CSREES's Chief Information Officer where she applied her breadth of gov- ernment knowledge to IT by aligning state-of-the-art information technologies with the goals and objectives of CSREES. In 2005 Dr. Rockey was appointed to the posi- tion of Deputy Director of the Office of Extramural Research (OER) within the Of- fice of the Director, National Institutes of Health (NIH). OER serves as the focal point for policies and guidelines for extramural research administration within NIH where Dr. Rockey applied her experience in research and grants administration to public health. She also served as Acting Director of the Office of Research Informa- tion Systems in OER where she again used her CIO experience to oversee the eRA (electronic research administration) and OER reporting activities. Among her many other responsibilities Dr. Rockey serves as the NIH Agency Extramural Research Integrity Officer managing research misconduct issues for NIH extramural pro- 29 grams and Directed the OER Office of Planning and Communications. In 2008 Dr. Rockey became Acting NIH Deputy Director for Extramural Research and Acting Director of OER and will again apply her many skills to leading the extramural ac- tivities at NIH. Rockey is a skilled public speaker and has given hundreds of presentations on ex- tramural research priorities and policies, grantsmanship, the competitive peer re- . view process, scientific integrity, and IT. She is active on a number of federal inter- governmental committees related to science, research, grants management and elec- tronic government and collaborates closely with academic and Scientific commu- nities. She has been honored by receiving the Presidential Rank Award in 2004. Dr. Rockey has actively participated in the science education of young children by giving presentations on insects to local elementary schools where she was known as the “Bug Doctor” coordinated her local pool's swim team, is an avid Bridge player and sings and plays the guitar. Chair WU. Thank you, Dr. Rockey. We are very grateful for NIH's continuing support for SBIR and STTR. - Mr: Glover, please proceed. STATEMENT OF ME. JERE N. GLOVER, ATTORNEY AND EXECU- TIVE DIRECTOR, SMALL BUSINESS TECHNOLOGY COUNCIL, WASHINGTON, DC Mr. GLOVER. Mr. Chairman, Congresswoman Biggert, other Members of the Committee, I want to thank you for the oppor- tunity to be here. I am Jere Glover, Executive Director of the Small Business Technology Council of the National Small Business Asso- ciation. We represent the 7,000 SBIR companies that are active in the SBIR Program today. America is certainly not doing enough to promote innovation, es- pecially given the state of competition from foreign countries that are graduating more scientists and engineers than we are and the state of our economy today. Our share of the global technology market is declining. Ten foreign countries have copied the SBIR Program. Major countries. Witness after witness, GAO [Government Accountability Office] study after GAO study, report after report say the program is working remarkably well and has for 26 years. Please don’t mess it up. The SBIR Program isn’t broken. It doesn’t need fixing. Please make changes that are limited and monitored carefully and make sure the agencies, the GAO, and the National Academy of Sciences report fully on those changes and how they affect the program and how they affect the technology community. Asking small business to trust the government to allow the agencies to be flexible, to allow the government to change or modify the program that is small businesses’ only real portal or access to the federal R&D dol- lars is like waving a red flag in front of small business. Thirty years of experience with the government has proven that small business will come out on the short end. Little has changed in the federal R&D marketplace in the last 30 years. Small busi- nesses' share of the federal R&D market was 3.5 percent in 1978. It has now increased to 4.3 percent in 30 years. But the technology marketplace has changed, and changed sig- nificantly. In 1978, small business employed only six percent of the scientists and engineers in America. Today, according to the Na- tional Science Foundation’s Science Indicators that number has gone up to 38 percent. Small businesses receive 38 percent of all 30 U.S. patents, and SBIR companies have received over 60,000 pat- ents and are patenting at the rate of basically 5,000 patents per year. - Where do innovations come from? One of the more surprising studies recently is looking at where the innovation comes from. Ac- cording to the R&D top 100 innovations, small business has gone from zero SBIR companies—from zero in 1980, '82, when the pro- gram started to now having 25 percent of all American key innova- tions. At the same time large firms have dropped from 40 innova- tions per cycle down to under ten. So small business is where the job creation is really happening. Let me just mention that there is a lot of discussion to where the SBIR Program should be focused. It has always focused on the first three basic parts of this; basic research, applied research, and de- velopment. The commercialization has always been beyond the SBIR Program, and it should be. For example, the entire HHS [Health and Human Services] budget would not fund one single drug going through their applica- tion [process at FDA]. My friend, Jim Greenwood, has pointed out that it takes $800 million. The HHS entire budget would not even fund one. We have to be realistic. When you get in the commercial arena, this program and the Federal Government simply don’t have the funds to pick enough winners to make it work. The economic impact of the SBIR Program, the job creation, just as a small business, if you look at this indication, small business has led us out of every recession, and they are doing a-will con- tinue to do that. The economic impact of the SBIR Program, if you will look in the back of my testimony, you will see green pages, and they have information on each specific Congressional district or the states of the various Members. What is important to point out is that this SBIR Program, using a random selection of states, those represented on this subcommittee, have received $6.5 billion of SBIR awards. Currently in the last five years there are almost $2 billion involved, and those companies have created over 100,000 jobs, or maintained, I should say. Created—maintained 100,000 jobs and they filed 14 times just for the Members in the states that are represented on this subcommittee. It is a wonderful program. It has worked extremely well. The universities and small businesses have worked well together, and that has been improving and working well. We are starving the most productive sector of the small business economy; the high-tech small business companies and underfunding the most prolific sci- entists and engineers. That in a nutshell, ladies and gentlemen, is why we are losing in the international market, market share, and what we need to do to improve our economy. We can’t continue down this road with small business receiving less than five percent of the federal R&D dollars and expect technology innovation to lead out of the recession and into a larger share of the global technology market. Thank you. [The prepared statement of Mr. Glover follows:] 31 PREPARED STATEMENT OF JERE N. GLOVER Chairman Wu, Ranking Member Smith, Members of the Subcommittee, thank you for the opportunity to appear here today to discuss the importance of technological innovation to the United States and the reauthorization of the SBIR and STTR Pro- grams. I am Jere W. Glover, Executive Director of the Small Business Technology Council (SBTC) of the National Small Business Association in Washington, DC. I have been involved in federal science and technology innovation programs since 1978, when, as Counsel to the House Small Business Committee, I helped convene the first joint House-Senate hearings on the subject.' I subsequently testified before Congress regarding small business and innovation on numerous occasions, as Dep- uty Chief Counsel for Advocacy at SBA during the Carter Administration and as Chief Counsel during the Clinton Administration.” An outgrowth of the White House Conference on Small Business in 1995, SBTC is the Nation's largest association of small, technology-based companies in diverse fields, and represents more companies that are active in the federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Pro- gram than any other organization. SBTC also serves as the Technology Council of the National Small Business Association, the Nation's oldest nonprofit advocacy or- ganization for small business, which represents over 150,000 small companies across the United States. I appear here today on behalf of both organizations. This hearing comes at a critical time. For more than a decade, other nations have been chipping away at the U.S. global leadership in technological innovation. Now a second powerful threat is upon us—the worst recession since the Great Depres- Slon. As the chart below shows, our global market share in this key economic area is declining: High-Tech Industry Exports: U.S. Is Losing World Share Emerging Asian other Economies- Emerging natiºn ºnomutº. China, South Kºrea, Taiwan. Singapore, Hºng Kong. India *1997 doºrs. High. tech includes ºutcraft, pharmaceuticals, ºffice and cºmputing machinery cºmmunication-equipment. medical precision and ºptical instruments sºut-ºs-Sºº and Engineerinº ºdºntº-ºxº $1,902B- While the pie is getting bigger, the U.S. share is getting smaller. Another way of looking at this is to plot the balance of trade. Our trade surplus in advanced technology exports has disappeared; we now have a deficit: *The 1978 hearings showed that, despite their demonstrated superior efficiencies at inno- vating, small companies received only 3.5 percent of federal R&D contract dollars. Today, with far more science and engineering talent at their disposal, and a far more widely acknowledged record of innovations, small companies still receive only 4.3 percent of those R&D contract dol- lars. And SBIR/STTR accounts for more than half of that. *See “Small Business and Innovation,” Report of the Joint House and Senate Small Business Committees, August 9 and 10, 1978. As an example of my testimony on the subject, see Testi- mony of Jere Glover, Chief Counsel for Advocacy, Small Business Administration, Senate Small Business Committee, August 4, 1999, http://www.sba.gov/advo/laws/test89-0804.pdf 32 U.S. Advanced Technology Trade Deficit Deepens 45. {} ... TS S^ -225 | {} —450 k- # 1990 1993 1996 *rum-Hº tº º *********** *** f. itsº-, *-*i- sº rº, fº itby .m. ... ** ser: diº *~~ ... The global challenge also shows up in U.S. patent statistics. Here again, the pie is getting larger, as more patents are issued each year. But here again, the U.S. share of the pie is shrinking. U.S. patents issued to Americans have fallen from two- thirds of all those issued in 1980, to less than half today. Over the past seven months, technological innovation has faced a new menace: a deep global recession that is drying up both the supply of capital and the demand for technological goods and services. Unemployment is increasing. To help restore our economy and strengthen our place in the world, we must en- courage the growth of technology and innovation. As I hope to show in my testi- mony, small business generally, and the SBIR Program specifically, offer extremely efficient ways to meet the challenges we face. Of course, SBIR alone cannot do all that is needed. Programs such as the Department of Commerce's Advanced Tech- nology Program (ATP) and the Technology Innovation Program (TIP) of the National Institute of Standards and Technology should be expanded, and new efforts to en- courage and commercialize innovation should be explored. Likewise, we need to pro- mote early-stage investments in technologies, like those provided by “angel” inves- tors. We should also provide assistance for small businesses in filing foreign patents. In this testimony, however, I want to concentrate on a few key themes: 1) Small business has a well-established track record of creating most new jobs in the U.S. economy, and particularly so when the economy is coming out of recessions. For purposes of today’s discussion, what's especially important about small business job creation is that small business has now become the largest single source of employment for U.S. scientists and engineers, out- stripping large business, universities and government. 2) Small business also has become the Nation’s leading source of technological innovations, particularly breakthrough innovations, as measured by several indicators. 3) As demonstrated by the recent National Academy of Sciences reports and an array of earlier analyses, the SBIR Program has become uniquely and power- fully effective in harnessing these small business scientists and engineers, as well as º breakthrough innovations, to the task of meeting federal agency R&D needs. 4) While some modest adjustments in the SBIR Program would be helpful— such as those recommended by the National Academy studies—overall Con- gress should renew the Program without major design changes. An increase in the Program’s allocation of federal funds would yield important benefits to the Federal Government and to the Nation's economy and global competi- tiveness. The STTR Program, while newer and smaller than SBIR, shows great prom- ise in uniting small business and university capabilities in innovation, and deserves to be expanded. 5 ) Let me expand on each of those points. 33 SMALL BUSINESS AND JOBS For the past 40 years, small companies have created 60–80 percent of all net new jobs, on average.” In other words, add up all the new jobs created, subtract the jobs lost when businesses close their doors, and you find that, year in and year out, small business supplies our country with two-thirds to three-quarters of all the new jobs. This tempo may even be increasing. Recent data from the U.S. Bureau of Cen- sus and the Office of Advocacy, U.S. Small Business Administration,4 shows that small businesses (with less than 500 employees) created 93 percent of the net new jobs in the U.S. during the period 1989 to 2005. Figure 4. Total Net New Jobs Created in The Sixteen Years From 1989 to 2005 by Company Size at Beginning of Year 30.0 : §4989 to 2005 SmaſſCompanies Käſſ employees; created 92.7% of net new jobs in the 16 years from 1989 to 2005 ſº 1.7 4.8 E. º #3% Industry Total <20 20 to 500 >{{ſ}{} Company $ize at Beginning of Year As striking as these figures are, the role of small business as a job creator during recessions is even more remarkable. The year-by-year table (based on the same data sources) shows the impact. *U.S. Small Business Administration, Small Business FAQ's, 2009. *SBA Office of Advocacy, from data provided by the U.S. Bureau of the Census, Statistics of U.S. Business. See: http://www.sba.gov/advo/research/dyn – b – d8905.pdf. This data series runs from 1989 through 2005 only. 34 Fig. 2, NetJob Creation and Elimination Per Year By Company Size (Number of Employees At Start of Year) For The Sixteen Years 1989-1990 to 2004-2005 (Only years full data available) 2 5 __, 1.5 ... [ſ] # # £ 3 1 £ a III ºn 0.5 sº 3 3 tº := 0 5 3. 92.93 93-94 94-95 95-96 96-97 97-98 98.99 99.00 : ; 0.5 & sº C} § -1 3 & Tº 4.5 £ompany Size -- Number of Employees -2 º “20 E20-500 ºf X.500 -2.5 Year (March to February) As Figure 2 shows, in the recession years of 1990–1 and 2000–2002, small busi- nesses created all net new jobs. In fact, one can say that small businesses created more than 100 percent of all net new jobs, since large companies were actually shed- ding jobs during these periods. In 2001–2, at the trough of the recession, more than two million net jobs disappeared at large companies. Moreover, this pattern of large business job loss persists until well after the coun- try has ended its recession by statistical measures. In 1992, large companies contin- ued to shed jobs. In 2002–3, they shed more than a million of them. Small busi- nesses offset all of these large business job losses in 1992 and again in 2002–4. For these years, small business created 124 percent of all net new jobs, by offsetting the 25 percent loss in large business employment. Figures: Total USA cumulative Net New Job creation 2002 to 2005 (In The Three Years After The 2001-2002 Recession) Elzºz-2003, 2003-2004E2004-2005 10-49 20-99 100-499 <500 Size of Company (Employees) at Beginning of Each Year (March) In other words, if recent history is any guide, we can look to small businesses to do most of the hiring in this recession for now and the foreseeable future. This strongly suggests that supporting Small businesses in stimulus legislation is likely to have the maximum short-term and medium-term payoffs on Main Street, and more broadly, on the population as a whole. (The population as a whole seems 35 to grasp this. According to a recent Zogby Poll, 63 percent of the public believes that “small business and entrepreneurs will lead the U.S. to a better future” while only 21 percent believe that “large corporations and business leaders” will do so.5) There are obviously many worthy objectives to be supported in the economic stim- ulus legislation. It's unfortunate, however, that much of the legislation seems to have overlooked this major point of economic leverage. SMALL BUSINESS AND SCIENCE AND ENGINEERING Our focus today is on one aspect of how small business supports the broader econ- omy—its role as a technological innovator. 1. SCIENCE AND ENGINEERING EMPLOYMENT One reason why small business seems to be getting better and better at techno- logical innovation is that it employs more and more scientists and engineers. The trend over the past generation is shown in the chart below.6 Percent of U.S. Scientists and Engineers Employed by Companies with Fewer than 500 Employees (Figure4) 1978 1993 2005 Strikingly, there are now more scientists and engineers working in smaller com- panies (38 percent) than in any other sector. Some 27 percent of U.S. scientists and engineers currently work for large companies, 16 percent for universities, 13 percent for government, and six percent for non-profits.” The SBIR Program, which may be at least partly responsible for small business’ growing science and engineering firepower, has deployed it to remarkable effect. 2. PATENTS Since a major consideration at today’s hearing is stimulating the economy through Science and engineering innovations, consider an important but often overlooked measure of wealth and poverty—patent productivity. For a striking illustration of the relationship between patents and wealth, we can turn to a recent economic study for the Federal Reserve Bank by Paul Bauer, Mark Schweitzer and Scott Shane.8 The authors measured eight determinants of personal income growth per capita, in the 48 contiguous states of U.S., from 1939 to 2004. By far the most important growth determinant for the 1939–2004 period proved to be knowledge stocks. For this, the authors used three indices: high school and college attainment rates, and patents per capita. Upon closer examination, the over- whelmingly dominant indicator of income growth proved to be patents per capita. 5WE Media Zogby Poll, 25 February 2009, http://www.zogby.com/news/ Read News.cfm?ID=1678 6 National Science Foundation, Science and Engineering Indicators, 2007. 7 Ibid. (For a very thoughtful and nuanced analysis of this shift, see the White Paper by SBIR Founder Roland Tibbetts that is attached as an annex to this testimony.) 8*Altered States: A Perspective on 75 Years of State Income Growth,” Federal Reserve Bank of Cleveland, Annual Report 2006. For more detail, see Paul Bauer, Mark Schweitzer, Scott Shane, State Growth Empirics: The Long-Term Determinants of State Income Growth, Working Paper 06–06, Federal Reserve Bank of Cleveland, May 2006. www.clevelandfed.org/research/ Workpaper/2006/wpo606.pdf 36 The chart” below shows the power of this indicator in each of the 48 states stud- ied: The Impact of Patents on Wealth and Poverty (Figure 5) - -- - | c + g;3523:535&22]&#######=#3:53:52:5 Patents _ Education Industry Structure Other º - cº Broadly speaking, the above chart can be read from left to right. States with lag- ging growth over the period studied are on the left; those with higher growth, on the right. Remarkably, the patent indicator is the top predictor of both wealth and poverty. States with low patents per capita tend to be poor. Those with higher pat- ents per capita tend to be affluent. Overall, patents are more closely associated with economic growth than education, industry structure, or any of the other variables tested. This finding underscores the importance of an earlier study of patent productivity, which showed that small technology-based companies produce 13 times more pat- ents per employee than larger technology-based companies, and that these smaller company patents are twice as likely to be among the most cited in other patent ap- plications.10 Firms in the SBIR Program are among the most prodigious producers of patents in the United States. Figure 6 below, provides a glimpse."1 9Ibid., p. 46. 10 Diana Hicks, Small Serial Innovators: The Small Firm Contribution to Technical Change, CHI Research, 2003, produced under contract to the Small Business Administration, contract SBA01C–0149. **Innovation Development Institute, 2009, from U.S. Patent and Trademark Office data. 37 + 3:303 - 2333 1983 1985 1987 1989, 1991 1993 1995 1997 1999 2001 2003 2005 2007 As of today, more than 60,000 patents have been issued to SBIR companies—de- spite the fact that the program is only 25 years old. A relatively modest program, representing only 2.5 percent of extramural R&D spending at 11 federal agencies, SBIR nevertheless is accounting for 40 percent more patents than all U.S. univer- sities combined, and is generating new patents at an average Speed of 13 a day. SBIR also does a remarkable job of spreading contract dollars, and therefore the resulting patents, around the country. By way of contrast, in 2005 about 70 percent of venture capital investments went to just five states—versus only 45 percent of SBIR contract dollars. The “middle 20° states—those ranked 15–25 in SBIR contract dollars—obtained 25 percent of SBIR dollars but only six percent of VC dollars. Al- though venture capital investments exceed SBIR funding by about ten to one, there were still 15 states that received little or no venture investment—and five states that received virtually none. SBIR dollars reach virtually every state.” 3. INNOVATION QUALITY Is the quality of SBIR innovation output matched by its quantity? Are these inno- vations really ground-breaking and economically significant? From the perspective of the Federal Government, for whom the SBIR research is performed, the quality would appear to be quite high. The U.S. Government Ac- countability Office has studied the SBIR Program on at least ten occasions since the program began, and offered positive assessments in each case.” So have several earlier reports by the National Academy of Sciences and the National Academy of Engineering.14 One indication of the importance of a patent is the number of times that it is cited in other patent applications. A study of companies that were “serial innovators” (with 15 or more patents over five years), found that over one-third were small com- panies, many of them SBIR companies. Patents from these small “serial innovators” were cited 28 percent more often by other inventors, were twice as likely to be *SBIR data from U.S. Small Business Administration, www.sba.gov/sbir/ 2004SBIRStateChart. ųļÁð sāļueduuſ13 Åſg þaļ2345 343ſ^ $ſqof £Ē"Z3ŪŮŰ'Ů8 [[eq0į Bų į0 %€g) $3 Béſ #-l qļae sāļueduuO3 Áq paſeadº auaſa sqof 198'ºg -|(800Z 01 ZDŮZŌŌŌ’OÙ į u U18s333] |[][]Ž 3ųļ daļļg SugaÁ 3341|| alį, Lį SCļūT ºpäRuhuſ: papalº Bigor Man ºf Hitlasgºprun; ŪŮŰ'ŮŽĮ, [5ŪZĀYĒĒĒĒĒĒĒĒĒĒĒĒĒĒĒĒĒī ſuoissaaa！! Looz sul dauw surak sauſųı ºùı uſ ! gūdzu, zodzuages， qør åæN ļaN ańſąeinuno pue|ſurſų MD 905 || 4,073 1,477 $1,301.997,446 Tº 18,073 81,139 31,416 |$27,227,402,761. 6920 22.80% 7,339 $7,683,664,597 contribution of SEEsi E involved Firms to High Tech Employment in State of Maryland 2006, Estimated SBR employment -- Estimated percentage ºf High Tech Jºbs; tıştate Residentin SER 17.38% Involved firms Tºlºurº Pºpºgrºm- º 67.359 Tºtal Patent in State 2.578 Life of Program: 1983-present tº include FY (9 announcements sº far made- # Awards whoſe program *There is a considerable time-lag between a Phase I and the onset of a Phase H.It is not unusual to see a Phase II begin 2,3,4 or even 5 years after the Phase I award. Similarly, especially in in NIH, Phase iſ award segments are awarded and reported incrementally (usually annually). Consequently, one can properly that Phase Source: Innovation Development Institute, Swampscott, MA. Copyright 2009, Al Rights Reserved º º ºfflº Total SBIR-STIR Dollars Total SBIR-STR. Dollars” . º 3. Michigan cumulative Net New Job creation 2002 to 2005 (In The Three Years. After The 2001 Recession) |E|2002-2003 E2003-2004 ET2004-2005 500[][] ... < 5 ºf created 9,268 jobs in 2003-2004; eliminated 99,923 jobs in -10000ſ, H- - NetJobs 4 ſops were cre Eliminated 99,38 94,990 59,233 Company size Irecession (2002 to 2005 eliminated 4334.jobs in SBIR-STTR Data by State of Member of House Science Sub-Committee. Technology and Innovation. Total Numbers of SBIR Awardees, Phase I-II and Total Dollars (Apºlº, Life of Program: 1983-present State to include FY 0% announcements sofar made-April 2009) * -º-º-º: Total # 1 fotal SºlR-STIRAwards ..., , , , º-º-º-º- Total # A.H. Tº T- totalsh*S*b* I a..., M. 449 1572 | 640 ssgs.gogºs I (98 || 542 Total º:- 18,073 81,139 31,416 S27,227,402,761 6,920 * There is a considerable time-lag between a Phase I and the onset of a Phase H.It is not unusual to see a Phase iſ begin2,3,4 or even 5 years after the Phase award. Similarly, aspecially in in NiH, Phage iſ award segments are awarded and teported incrementally (usually annually). Consequently, one can proparly assume that Phase totals and Phase H dollars on current prºjects will continue to increase, sometimes substantially. | Source: Innovation Development institute, Swampscott, MA. Copyright 2009.All Rights Reserved contribution of SER-STE Inveyed Firms to High Tech Employment in State of Michigan ºn ſeen Jobsºngs, 177,163 BR stºr firms having sºm the State-241% Patenting Activity in SBIR-STTF Prºgram * Estimated SBIR employment 10 ,683 Tºº!Nuºsº Pºntºpºgrº Estimated percentage of High Tech º ºriºs jºbs in State Resider tº SER 3.03% Tºtal Pºtºs in State 1,555 in wººd firrºs ====== º------- ºf---- - ############################# 3. 67 ſºziae ſuaeđuſº: -(§00Ð zſinz) sueak 33Jul auſ ul {ſelfſ auſ 40 %7-1 sqqÍ Zrin'z 40 ſë paſeu||u||3 (sā3Áūſduº Dūgueų auņu) (12404 &qį į0 %）. U JŪęs 141|^* są||Pr||Jnn Árſ nalºan alakº srințA06'g8 (jëļ043||ļ ģ0 %58) są DŽ> ųļae sāļuedu 103 Aqipēļ23.13 313， Sqūſ izgū"#8 |(1210|| alą įo ſūg) saaÁ. ſz-|| (!!!&&sgļueduut)? Äg p3ļē343 343&sqof Eſg').g (GUÌZ OļŽŪDĒĻutaessag.3.4 || [][]Ž 3ųļuāļļ2sleaÁ33 !! !! 3ų. Åēj| g- - - - [5ūEFEĪTĀTĒĒĒĒĒĒĒĒĒĒĒĒ] 000'úž- gūō'úſ Jūū'Uff QŪŮŰğ JŪŌ'OÙ Jūō'UQ ! tranuſuilä, paptain sqorman ºn mini aarmung ſubļssaasti katazaſ! L uagº sreak asukų, aql uſ godz eſzugz uagaesus qar （anſan angrinuno ſunessivų MO 160 423 137 $121,933,905 - Tºsº | 18,073 || 81,139 31,416 $27,227,402.761; 6,920 22,801 || 7,339 $7,683,664,597 Tºtal SBIR-STAR ºlars total SBIR-STAR pollars” . ºnt Information on R-STTR Awardees in the e of Missouri sº spir-stir firms having º ºn the State- 0.81% Contribution of SER-STR involved Firms to High Tech Employment in State of Missouri - 88,326 Estimated SBIR employment 4,039 Patenting Activity in SBIRSTTR Prºgram Life of Program: 1983-present invºkie Fºº sº far made- Awards whole program * There is a considerable time-lag between a Phase I and the onset of a Phaseſ.It is not unusual to see a Phase II begin 2,3,4 or even 5 years after the Phase I award. Similarly, especially in in NIH, Phase iſ award segments are awarded and reported incrementally annually). Cºnsequently, one can property Source: Innovation Development Institute, Swampscott, MA. Copyright 2009.All Rights Reserved Estimated percentage of High Tech Jºbs in State Resident in SER invºlved firms ºfessess 3. 3 30,000 25,000 20,000 15,00D 1D,000 5,000 -5,000 -1 C,000 -15,000 -20,000 Nebraska Nebraska Cunnulative Net New Job Crºatian 2（2 to 2005 (In The Three Years. After The 2001 Recession} Net gzodz2003 E2003-2004 E2004-2005 New J Obs 23,113 CrE3 IEC 3 s years (2002 to 2005) 14,419 jobs were created by Companies with 1-4 employees (62% of the total) 20,952 jobs were created by Companies with <20 employees (91% of the total) 26,906jobs were created by Companies with <500 employees (113% of the total) e Companies (more than 500 employees) eliminated a total of 3,794 jobs (-1.5% of the in the three years, but created 13,971 jobs in 2002-2003 Curripary Size SBIR-STTR Data by State of Member of House Science Sub-Committee: Technology and Innovation. Total Numbers of SBIR Awardees. Phase I-II and Total Dollars tº gº, Life of Program: 1983-present Current SE ity relevant data for the Five State (to include FY 0% announcements so far made-April 2009) º [ºtº - & s - ------ - - * - ** | ********* total self-strº polars "" AW arºses 128 51. $56,039,628 i Fº Tºtalsº 18,073 | 84,139 31,416 s27,227.402761|| 6,920 22.80ſ 7,339 sz.683661,597 whole prºgram * There is a considerable time-lag between a Phase and the onset of a Phase H.It is not unusual to see a Phase II bogin2,3,4 or even 5 years after the Phase award. Similarly, especially in in Miłł, Phase it award segments are swarded and reported incrementally (usually annually). Consequently, one can prºperly | assume that Phase totals and Phase II dollars on current prºjects will continue to increase, sometimes substantially, I Source: Innovation Development Institute, Swampscott, MA. Copyright:2009. All Rights Reserved TR Awardees in the # lebraska 93 SBIR-STTR firms having pºtents are from the State - 0.31% Contribution of SBIR-STR involved Firms to High Tech Employment in State of Nebraska on Tecnobsº 30,034 Eºssrººm 951 - Estimated percentage of High Tech Jºsiº Sºrºsidºr. Sºº Patenting Activity in SBIR-STIR Program Tºbe Patenºgram- wide 67.859 Total Patents in State 300 Fºrm-ºf-mººr º State Q_{4% as s New Mexico New Mexier, Gumulative Net New Job Creation 2852 to 2505 tin The Three Years After The 2001 Reesssign] ſºzdºzº: E2003-2004 Ezorºads; the three years after the 2001 recession (2002 to 2005) 18,953 jobs were created by companies with 1-4 employees riffhafnfal) 30,279 jobs were created by companies with <20 employees 35,599 jobs were created by companies with ~500 ermployees of the total) Companies (more than 500 employees) created a total of 4[]