Summary

I.
INTRODUCTION

The Small Business Innovation Research (SBIR) program was created in 1982 through the Small Business Innovation Development Act. As the SBIR program approached its twentieth year of operation, the U.S. Congress requested the National Research Council (NRC) of the National Academies to “conduct a comprehensive study of how the SBIR program has stimulated technological innovation and used small businesses to meet Federal research and development needs” and to make recommendations with respect to the SBIR program. Mandated as a part of SBIR’s reauthorization in late 2000, the NRC study has assessed the SBIR program as administered at the five federal agencies that together make up some 96 percent of SBIR program expenditures. The agencies, in order of program size are the Department of Defense, the National Institutes of Health, the National Aeronautics and Space Administration, the Department of Energy, and the National Science Foundation.

Based on that legislation, and after extensive consultations with both Congress and agency officials, the NRC focused its study on two overarching questions.1 First, how well do the agency SBIR programs meet four societal objectives

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Three primary documents condition and define the objectives for this study: These are the Legislation—H.R. 5667, the NAS-Agencies Memorandum of Understanding, and the NAS contracts accepted by the five agencies. These are reflected the Statement of Task addressed to the Committee by the Academies leadership. Based on these three documents, the NRC Committee developed a comprehensive and agreed set of practical objectives to be reviewed. These are outlined in the Committee’s formal Methodology Report, section on “Clarifying Study Objectives.” National Research Council, An Assessment of the Small Business Innovation Research Program—Project Methodology, Washington, DC: The National Academies Press, 2004, accessed at: <http://www7.nationalacademies.org/sbir/SBIR_Methodology_Report.pdf>.



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Summary I. INTRODUCTION The Small Business Innovation Research (SBIR) program was created in 1982 through the Small Business Innovation Development Act. As the SBIR program approached its twentieth year of operation, the U.S. Congress requested the National Research Council (NRC) of the National Academies to “conduct a comprehensive study of how the SBIR program has stimulated technological innovation and used small businesses to meet Federal research and develop- ment needs” and to make recommendations with respect to the SBIR program. Mandated as a part of SBIR’s reauthorization in late 2000, the NRC study has assessed the SBIR program as administered at the five federal agencies that to- gether make up some 96 percent of SBIR program expenditures. The agencies, in order of program size are the Department of Defense, the National Institutes of Health, the National Aeronautics and Space Administration, the Department of Energy, and the National Science Foundation. Based on that legislation, and after extensive consultations with both Con- gress and agency officials, the NRC focused its study on two overarching ques- tions.1 First, how well do the agency SBIR programs meet four societal objectives 1Three primary documents condition and define the objectives for this study: These are the Legis- lation—H.R. 5667, the NAS-Agencies Memorandum of Understanding, and the NAS contracts ac- cepted by the five agencies. These are reflected the Statement of Task addressed to the Committee by the Academies leadership. Based on these three documents, the NRC Committee developed a compre- hensive and agreed set of practical objectives to be reviewed. These are outlined in the Committee’s formal Methodology Report, section on “Clarifying Study Objectives.” National Research Council, An Assessment of the Small Business Innoation Research Program—Project Methodology, Wash- ington, DC: The National Academies Press, 2004, accessed at: . 

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 SBIR AT THE NATIONAL INSTITUTES OF HEALTH of interest to Congress: (1) to stimulate technological innovation; (2) to increase private sector commercialization of innovations (3) to use small business to meet federal research and development needs; and (4) to foster and encourage participation by minority and disadvantaged persons in technological innovation.2 Second, can the management of agency SBIR programs be made more effective? Are there best practices in agency SBIR programs that may be extended to other agencies’ SBIR programs? To satisfy the congressional request for an external assessment of the pro- gram, the NRC conducted empirical analyses of the operations of SBIR based on commissioned surveys and case studies. Agency-compiled program data, pro- gram documents, and the existing literature were reviewed. In addition, extensive interviews and discussions were conducted with program managers, program participants, agency ‘users’ of the program, as well as program stakeholders. The study as a whole sought to answer questions of program operation and effectiveness, including the quality of the research projects being conducted under the SBIR program, the commercialization of the research, and the program’s con- tribution to accomplishing agency missions. To the extent possible, the evaluation included estimates of the benefits (both economic and noneconomic) achieved by the SBIR program, as well as broader policy issues associated with public- private collaborations for technology development and government support for high technology innovation. Taken together, this study is the most comprehensive assessment of SBIR to date. Its empirical, multifaceted approach to evaluation sheds new light on the operation of the SBIR program in the challenging area of early stage finance. As with any assessment, particularly one across five quite different agencies and departments, there are methodological challenges. These are identified and discussed at several points in the text. This important caveat notwithstanding, the scope and diversity of the report’s research should contribute significantly to the understanding of the SBIR program’s multiple objectives, measurement issues, operational challenges, and achievements. This volume presents the Committee’s assessment of the SBIR program at the National Institutes of Health. 2These congressional objectives are found in the Small Business Innovation Development Act (PL 97-219). In reauthorizing the program in 1992, (PL 102-564) Congress expanded the purposes to “em- phasize the program’s goal of increasing private sector commercialization developed through Federal research and development and to improve the Federal government’s dissemination of information concerning small business innovation, particularly with regard to woman-owned business concerns and by socially and economically disadvantaged small business concerns.”

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 SUMMARY BOX S-1 Special Features of the NIH SBIR Program A Major Grant-based Program The NIH SBIR Program is the second largest program after the Department of Defense. In 2005, the program expended approximately $562 million. NIH employs grants for almost all its SBIR awards, unlike the Department of Defense, which relies on contracts. Highly Decentralized Organization SBIR operates in 23 different Institutes and Centers (ICs) at the National Insti- tutes of Health. Each is an independent, grant-making authority, with coordination provided by a small central office in the Office of the NIH Director. The program is called on to meet a wide variety of needs ranging from early stage support for drug development to medical diagnostics and devices to health related instructional material. A Core Research Mission and SBIR The NIH has a different mission and structure than other agencies with large research budgets. The NIH is focused on the pursuit of fundamental knowledge to extend healthy life and reduce the burdens of illness for the nation’s citizens. Most NIH programs generally do not seek to develop products and services for the marketplace. The SBIR program does. SBIR at NIH As a government grant program intended to support science and the com- mercialization of biomedical applications for the public good, NIH SBIR does not focus on a return on investment the way a private sector investor would. Unlike most commercial, venture, or angel investors, NIH SBIR funds research projects, not companies as a whole. Procurement Is Not a Goal The NIH SBIR program differs fundamentally from those at DoD and NASA, where the primary objective of the program is to develop technologies for use by the agency, via the procurement process. At NIH, the vast majority of projects have no proposed utilization within the agency. As a result, definitions of and metrics for “commercialization” and “agency mission” are quite different, reflecting these different missions.

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 SBIR AT THE NATIONAL INSTITUTES OF HEALTH II. SUMMARY OF KEY PROGRAM FINDINGS • The SBIR program at the National Institutes of Health is meeting most of the four legislative objectives of the program. These are to: 1. Stimulate technological innovation; 2. Use small business to meet federal research and development needs; 3. Foster and encourage participation by minority and disadvantaged persons in technological innovation; and 4. Increase private sector commercialization of federal R&D. In doing so, the NIH SBIR program is: • Expanding knowledge. The NIH SBIR program is contributing to the nation’s stock of knowledge and supporting products that contribute to the nation’s health. 3 • Supporting the NIH Mission. NIH’s SBIR activities are aligned with the agency’s mission, which “is sci- ence in pursuit of fundamental knowledge about the nature and behavior of living systems and the application of that knowledge to extend healthy life and reduce the burdens of illness and disability.” The SBIR program funds projects that are aligned with this mission.4 • Supporting small business. The SBIR program at NIH supports a diverse array of small businesses, which in turn contribute to achieving the NIH mission.5 SBIR-funded research projects appear to help small businesses develop new technologies, processes, and products that support the NIH mission of im- proving the nation’s health. Awards to woman-owned businesses have increased, and their share of all awards is trending upward. However, the declining trend in the percentage of Phase I and Phase II awards made to minority-owned firms is a matter of concern. In FY2006, these firms accounted for 5.6 percent of Phase I awards and 3.3 percent of Phase II awards.6 Data collection on these groups (described below) has been problematic.7 3 See Finding H in Chapter 2. 4 See Finding C in Chapter 2. 5 See Finding D in Chapter 2. 6 See Finding E in Chapter 2. See also Figures 4-18 and 2-1. 7 Note: Following discussions with the NRC staff, the NIH made an effort to recalculate the data for woman and minority owners’ participation in the SBIR program. In September 2007, the NIH provided corrected data, which is shown in Appendix A and in several figures in this report. However,

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 SUMMARY • Achieving Significant Commercialization. A variety of metrics shows that a meaningful percentage of NIH SBIR proj- ects enter the commercial market. NRC Phase II Survey data shows that 40 percent of SBIR-funded projects reach the marketplace. This is an impressive figure for such early-stage re- search. Data from NIH indicates that this figure is likely to rise significantly over time.8 A smaller number (3-4 percent) of projects each generate more than $5 mil- lion in revenues, a skew not atypical of early-stage technology funding. 9 To facilitate commercialization further, NIH has undertaken a series of ini- tiatives to help awardees develop effective commercialization plans.10 • Attracting third-party funding. SBIR awards help small companies to create products and the expertise needed to attract third-party funding. This additional funding is derived from a variety of sources, including Angel and venture funding. SBIR awardees at NIH have attracted the interest of private equity investors. Initial NRC research suggests that some 50 of the 200 NIH SBIR awardees with the highest number of awards have received venture funding totaling more than $1.5 billion.11 Acquisition. In some cases, the technology developed through an SBIR award demonstrated sufficient commercial potential to attract investors in- apparent anomalies in the NIH data on the participation of women and minorities in 2001-2002 could not be resolved by the time of publication of this report. 8 See Figure 4-1. 9 See Figure 4-2. Of the 496 projects recently surveyed by the NRC Phase II Survey, one firm gener- ated revenues of more than $50 million. This type of “skew”—in which a majority of projects fail or are modestly successfully while a small proportion earns large revenues—is not atypical of early-stage finance and has been noted in previous research. See National Research Council, The Small Business Innoation Research Program: An Assessment of the Department of Defense Fast Track Initiatie, Charles W. Wessner, ed., Washington, DC: National Academy Press, 2000. See also Joshua Lerner, “’Public Venture Capital’: Rationales and Evaluation,” in National Research Council, The Small Business Innoation Research Program: Challenges and Opportunities, Charles W. Wessner, ed., Washington, DC: National Academy Press, 1999. 10To implement the Commercialization Assistance Program, NIH procured the services of Larta Institute, a business-consulting firm located in Los Angeles, CA. To implement the Niche Assess- ment Program, NIH procured the services of Foresight Science and Technology of Providence, RI. To implement the 2007 Pilot Manufacturing Assistance Program, NIH has procured the services of Dawnbreaker of Rochester, NY. The NIH Commercialization Assistance Plan (CAP) is described in more detail in Chapter 4. 11 See Figure 4-7. See the discussion of the relationship between SBIR awardees and venture funds in Finding G in Chapter 2. To better understand the ramifications of the ruling, NIH has commissioned additional NRC research to identify the impact of the 2004 SBA ruling excluding majority venture backed firms from the program.

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 SBIR AT THE NATIONAL INSTITUTES OF HEALTH terested in acquisition of the company receiving the award. For example, in 2000, Philips bought out SBIR recipient Optiva for a reported sum of more than $1 billion.12 Other private investment. A significant number of awardees have received additional funds from a wide range of sources, notably angel investors and non-SBIR government support. Fifty-eight percent of the NRC Phase II Survey respondents attracted additional investment, not including additional SBIR awards.13 • Encouraging commercialization. NIH is encouraging commercialization through the NIH SBIR Technology Assistance Program, utilizing limited pro- gram funds to enhance the commercialization efforts of small businesses. 14 • Developing an assessment culture. Following the congressional mandate for this study, the NIH program management launched its first major assessment of the SBIR program at NIH.15 The results of this analysis proved useful for the NRC review of the program. The commissioning of this research, coupled with the support and close en- gagement of the program management with the NRC assessment, suggests the growth of a positive assessment culture at NIH with regard to the SBIR program. III. SUMMARY OF KEY RECOMMENDATIONS The Committee’s recommendations are designed to improve the operation of an already effective SBIR program at NIH.16 A. The NIH should retain its distributed management structure for the program while increasing evaluation efforts, improving data collection, obtaining additional resources, and encouraging upper management attention. 12 See Box 4-3 in Chapter 4 for a description of the Optiva case. Paradoxically, the acquisition of a firm can sometimes limit reporting of commercialization success. The acquired firm normally does not respond to surveys even if it previously had a positive sales record. Not all nonrespondents, of course, are successful; many have gone out of business, yet acquisition of successful firms does constrain the ability of the survey to capture what are often significant sales. 13 See Table 4-9. Data reflects information from the NRC Phase II Survey. 14 See Finding B in Chapter 2. 15 National Institutes of Health, Office of Extramural Research, “National Survey to Evalu- ate the NIH SBIR Program: Final Report,” July 2003. Available online at: . 16The recommendations below are drawn from analysis of the data, review of program operations, and discussions with program participants.

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7 SUMMARY 1. Flexibility. It is most important that the program retain the flexibility and experimentation that have characterized its recent management. The SBIR program is effective across the agencies because a “one-size fits all” approach has not been imposed.17 This flexible approach may well be extended, subject to careful monitoring, across the Institutes and Centers of the NIH. 2. Evaluation. Much greater effort is required to evaluate current out- comes, collect relevant data, and document the impact of changes to the program.18 i. Efforts to identify outcomes should be improved. ii. Regular evaluations should be undertaken to enable managers to as- sess program performance and the results of management initiatives. 3. Innovation. Efforts to initiate program innovation by NIH should be sub- stantially strengthened and encouraged. Pilot programs are one mechanism that allow for the efficient implementation and subsequent assessment of new initiatives.19 4. Annual report. Program accountability should be improved through the development and publication of a much-expanded annual report on the NIH SBIR program, in order to supplement current reporting to the SBA and to provide a more complete picture of the program for the NIH man- agement, Congress, awardees, and applicants.20 B. The NIH SBIR program is focused on commercialization and has seen meaningful achievement. However, the limited number of highly success- ful commercial projects suggests that continued management attention and additional efforts to facilitate commercialization are needed. 21 1. Commercialization programs. NIH should continue to experiment with commercialization programs, monitor their result, and adopt them for general application when they show signs of success. 2. Funding for commercialization programs. Congress should consider expanding funding, if only to account for inflation, and relaxing the current restrictions on spending for this purpose. C. The program should be provided with additional management funding to 17 See Recommendation H in Chapter 2. 18 See Recommendations A and I in Chapter 2. 19 See Recommendation I in Chapter 2. 20 See Recommendation C in Chapter 2. 21 See Recommendation B in Chapter 2.

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 SBIR AT THE NATIONAL INSTITUTES OF HEALTH develop and maintain a results-oriented program with a focused evalu- ation culture.22 1. Effective oversight relies on appropriate funding. A data-driven program requires high quality data and systematic assessment. As noted above, sufficient resources are not currently available for these functions. 2. Increased funding is needed to provide effective oversight, including site visits, program review, systematic third-party assessments, and other nec- essary management activities. 3. To enhance program utilization, management, and evaluation, addi- tional funds should be provided. There are three ways that this might be achieved: i. Additional funds might be allocated internally, within the existing budgets of the services and agencies, as the Navy has done. ii. Funds might be drawn from the existing set-aside for the program to carry out these activities. iii. The set-aside for the program, currently at 2.5 percent of external research budgets, might be increased, with the goal of providing ad- ditional resources to maximize the program’s return to the nation. 4. These recommended improvements should enable the NIH SBIR managers to address the four mandated congressional objectives in a more efficient and effective manner. D. Possible areas of improvement and experimentation. The NRC study iden- tified a number of areas where improvements in the program would make it significantly better. While some of these may require NIH-wide initiatives, others might be addressed initially through carefully designed and evaluated pilot programs. Such a capability would need to be developed, and could also be used to address some recent developments that have already occurred within the program. Key areas for potential improvement include: 1. Improving selection procedures. Chapter 5 of this report outlines a num- ber of areas where the selection process could be improved. These include more attention to possible conflicts of interest and addressing difficulties in evaluating commercialization plans.23 2. Speeding cycle time. Fairly minimal management changes focused on reducing the cycle time for awards could substantially accelerate innovation.24 22 See Recommendation J in Chapter 2. 23 See Section 5.5. 24 See Recommendation H in Chapter 2.

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 SUMMARY 3. Developing a rationale for large awards.25 i. The NIH program has recently experimented with a limited number of substantially larger awards. In itself, this could be a positive step, reflecting the flexibility in experimentation that characterizes an ef- fective SBIR program. ii. Assessing the impact of the larger awards is challenging insofar as NIH has not developed a clearly articulated rationale for these awards, and no systematic effort has been made to determine the impact of extra large awards. iii. Thus while flexibility remains a laudable characteristic of the pro- gram, deviations from established program boundaries should be based on clear rationales and followed by equally clear assessment programs to determine whether such initiatives have been effective. This is especially important in this case because larger award size necessarily implies a smaller number of awards. 4. Understanding the impact of program change, e.g., the limits on ven- ture funding. NIH is the agency most affected by the SBA ruling barring firms with 51 percent venture funding (or other nonindividual) ownership from the program. To better understand the ramifications of the ruling for the NIH SBIR Program, the NIH recently commissioned an empirical analysis by the National Academies. Timely assessment of the impact of major changes in the program should be a standard practice.26 5. Improving monitoring of awards to women and minorities. Program management resources to do not appear sufficient to permit effective moni- toring of the program on a consistent basis, nor the development of appro- priate databases to underpin this effort. These difficulties have been most apparent in relation to collecting data and monitoring the participation of women and minorities, one of the four primary congressional mandates for the program.27 25 See Recommendation I-4 in Chapter 2. 26 See Finding G in Chapter 2. 27 See Recommendation D in Chapter 2.