An Assessment of the SBIR Program at the National Institutes of Health (2009)

Robin Gaster

North Atlantic Research

ABM is a small company whose research has been funded almost entirely by a series of successful SBIR awards. Currently, ABM is poised to enter Phase III, and is seeking the funding needed to do so successfully.

The company was founded on SBIR awards in 1997, and expanded based on Phase II awards in 1999. It received additional SBIR awards in 2002, and some additional funding from DARPA, during the development of two complementary products: home sleep diagnosis products, and an initial sleep disorder screening product for use in office or other settings.

ABM has received six Phase II NIH awards, and seven Phase I NIH awards, and has been supported almost entirely by $6.3 million in SBIR awards and $700,000 from DARPA.

Primary Outcomes:

• One product with FDA clearance and a second that has been submitted for clearance, both entering Phase III.

• Six patents.

• Publications.

• Additional employment.

• Partnerships: Possible pilot program with Waste Management, Inc.

Key SBIR issues:

• Failure of Fast Track.

• Better program manager accountability.

• Commercialization/Phase III support.

• Commercialization review.

• Review quality and oversight.

Key recommendations:

• Optional training program for reviewers.

• Accelerate shift to electronic submissions. Consider using DoD submission system.

• Improved program manager assessment using report cards during the Final Report and/or Edison submission processes.

• Review. Improve commercialization reviews, possibly by instituting two-phase screening system.

• Phase III. Improve electronic matchmaking by improving online tools at NIH Web site.

Advanced Brain Monitoring, Inc., was founded in January 1997 to create low cost, easy-to-use, portable systems to monitor and interpret physiological signals indicating brain activity, and has developed patented data acquisition technology with automated analysis software to measure the brain’s electrical activity (EEG), oxygen levels in the blood and cardiac activity.

ABS used a Phase I award as a founding grant. It opened in 1997 with two full-time and two part-time employees. Phase I awards took the company to January 1999, when it received three Phase II awards. This allowed all three founders to go full time, funded the company’s move to Carlsbad, and paid for three EEG technicians who were hired in June 1999.

The founders have invested about $400,000 on the company, funding primarily used for FDA 510k filings and patent filings, which cannot be delayed while more funding is found. Overall, the company has received more than $6 million

FIGURE App-D-1

SOURCE: Advanced Brain Research.

from NIH in SBIR awards and an additional $700,000 from DARPA under the Augmented Cognition program. ABM has worked with Honeywell and Lockheed in the context of its DARPA-sponsored research.

All current awards will end in March 2005. Company is currently seeking ongoing capital for product rollout.

ABM is currently focused entirely on bringing products to market. It has two products that are ready for pilot sales:

1. The Apnea Risk Evaluation System (ARES™) intgrates physiological data acquired in-home with clinical history and anthropomorphic data to quantify level of risk for Obstructive Sleep Apnea (OSA). ARES has three components:

   • ARES Unicorder: a battery powered, self-applied, single site (forehead) physiological recorder that acquires and stores nocturnal data for use in the diagnosis of OSA.

   • ARES Questionnaire (ARES Q): designed to assess pre-existing risk factors for OSA, including age, gender, body mass index (BMI), neck circumference, daytime drowsiness, frequency and intensity of snoring, observed apneas, and history of hypertension, diabetes and cardiovascular disease.

   • ARES Insight Software: automated software to recognize and quantify abnormal respiratory events.

The ARES received FDA clearance in October 2004, and its CE mark in February 2005. It must be ordered by a prescription.

ABM sells the AREA system through two channels:

• Directly to primary care physicians and industrial customers (employers) (as prescribed by a physician).

• Licensed to larger users. This service includes the technology and training for user staff, and is designed for larger facilities such as hospitals or other bulk purchasers.

2. Alertness and Memory Profiling System (AMP™).The AMP simultaneously acquires data on brain function and cognitive performance during vigilance, attention and memory tests. Its components can be used together or separately:

   • The patented Sensor Headset addresses many of the technical concerns with EEG recordings, including ease of use, comfort, cosmetic acceptability for the workplace, and high quality data acquisition in challenging environments.

FIGURE App-D-2

SOURCE: Advanced Brain Research.

• B-Alert^®Software. The patented B-Alert software identifies and decontaminates artifacts, monitors changes in the EEG on a second-by-second basis, and classifies each second of brain activity on a continuum from highly vigilant to sleep onset.

• Neurocognitive test battery. A battery of vigilance, attention, and memory tests that assess and quantify alertness and memory.

The Sensor Headset has been submitted for FDA clearance in March 2005, and it received its CE mark in February 2005. The medical application must be ordered by a prescription. There are numerous nonmedical applications for the EEG system.

ABM is addressing two markets:

• The traditional market for sleep diagnostics, where its lower cost and easier to use system has competitive advantages.

• New industrial markets for undiagnosed OSA, where companies need better knowledge about employees operating critical equipment.

According to NHLBI, approximately 20 million (6.6 percent) Americans who suffer from OSA, approximately 90 percent are currently undiagnosed.² The general market is therefore substantial. More specifically, companies whose employees operate critical machinery—e.g., trucks, air traffic controls, trains, etc.—are a very likely market.

ABM faces some significant challenges in marketing its products, even though they address important problems. The ARES system is essentially designed to replace current sleep diagnosis procedures, substituting inexpensive and relatively convenient home diagnosis for expensive and inconvenient sleep studies currently performed in hospitals.

Existing sleep diagnosis labs—potentially a major source of customers—are firmly opposed to in-home studies because it will reduce their own income. Insurance reimbursement for in-home unattended studies is inconsistent. Managed care groups reimburse. The PPOs follow CMS’ lead and either don’t reimburse or at a very low rate. CMS had a review of in-home unattended studies, and—according to ABM—after substantial lobbying of the sleep labs, chose not to categorically reimburse for these studies.

ABM is in discussions with two sleep labs to establish pilot projects that augment rather than cannibalize the sleep labs revenue. ABM has a meeting scheduled with CMS at the end of April to present the results of its study that was funded by NIH (the largest study of its kind for in-home unattended studies).

The AMP system also faces substantial marketing challenges. ABM has established a relationship with Waste Management, Inc., one the country’s largest employers of commercial truck drivers. The pilot—which was to be implemented using a Fast Track since rejected by NIH—involved using the ARES and AMP on Waste Management drivers to 1) determine the level of undiagnosed OSA, and 2) develop a model for incorporating sleep apnea screening into the biannual fitness for duty physicals. The rejected application defunded the pilot, and ABM is now seeking other mechanisms to implement this program. More generally, addressing the problem of undiagnosed sleep apnea potentially opens companies such as Waste Management to significant liability issues. This problem has not yet been resolved.

Despite these difficulties, it is clear that ABM has successfully completed the initial research phase for two complementary products, and is now entering Phase III with both. Its current emphasis is acquiring the funding necessary to implement its marketing strategy.

The company has been awarded 6 patents, funded primarily from founder’s investment and the 7 percent fixed fee received from SBIR awards. All the patents are based on work developed under the NIH SBIR program.

Both of the company’s products have received the FDA CE mark after completing FDA clinical trials.

ABM has had dramatically different experiences at different ICs, which it believes are entirely due to the capabilities and approaches of the different program managers. ABM has had a very positive experience with one program manager, but had problems with another who they believe has been, at best, unsupportive, and does not provide the support that reflects NIH guidelines on collaboration between program managers and companies. Short of changing its products and research goals, ABM has not found a way around this program manager, and no way to generate improvement.

ABM’s experience highlights the problem of using program managers as gatekeepers without any tools in place to monitor their effectiveness, or in some cases apparently to train them in relation to new programs.

ABM was encouraged by presentations made by Jo Anne Goodnight and started submitting Fast Track applications almost from the start of the program, but has had very mixed experiences at best:

1. Fast Track Application 1. The application received a very high quality review, which recommended splitting the application into Phase I and Phase II. ABM agreed and did so, receiving first a Phase I and then $1.2 million for Phase II, where ABM noted the extensive help from the relevant program manager in preparing a justification for the extra-sized funding.

2. Fast Track 2. This award ran into major administrative problems. The Fast Track was approved in March 2003. The Phase I work was completed in August and a “streamlined noncompeting award process” (SNAP) report was submitted (a short version report designed for projects that are not subject to further competition). This is standard procedure for a Fast Track award and was provided by the program manager in his/her instructions to ABM. However, several problems developed:

   • The total amount of the award was reduced by 5 percent by the review committee because of their opinion that a key consultant was not needed. After discussion with the program manager, the company submitted justification for the payment but the program manager said the review committee’s suggestion was final. If the company needed to pay the consultant, they would have to rebudget form other areas.

   • Even though the program is designed to avoid a gap in funding between Phase I-Phase II, review of the Phase I report was delayed until after October because the Institute needed the new fiscal year to begin in order to have funds for Phase II.

• According to ABM, the program manager and the Institute conducted an internal review of the Phase I and turned down the Phase II award due to insufficient detail on what was accomplished in Phase I. (The investigators could easily have written a full Phase I final report but instead provided the amount of information required by the SNAP submission as instructed.) This notification occurred in November, approximately 2.5 months after ABM had notified their program manager that they began the Phase II work that that the pre-award authorization would be used to recapture the funds. The program manager felt that was appropriate because at the time the only delay was due to the new fiscal year. The company wanted to push forward toward commercialization and since the award was noncompetitive and because the company had met its Phase I goals, there was no reason to expect this financial commitment might jeopardize the company’s future.

• After much negotiations with the NIH program coordinator (which included reviewing with the program coordinator that he/she provided instructions to the company to submit the SNAP, preparation of a full Phase I report, and subsequent re-review), this error was eventually reversed. Because the company had to stop work in November, approximately 12 of the subjects being studied had to be dropped and there was a gap in funding from August when the Phase I ended until the following February.

• Although the funding was delayed and it interrupted some of the studies, there was no compromise on the part of the program officer about the number of subjects and other research issues. The net result was money was allocated in a manner that reduced the benefits of the large study and reduced the power of the data needed for commercialization.

3. Fast Track 3. An application to take the technology developed during earlier SBIR awards and apply it in to the needs of the trucking industry. An agreement for a pilot implementation program was made with Waste Management, Inc., one of the largest operators of commercial trucks.

   • An initial score of 320 meant substantial revisions were needed.

   • ABM resubmitted and was awarded a priority score of 274. Key criticisms included some scientific objections, privacy concerns, issues to do with drivers (social issues), and the lack of women in the study. To address the concern of inadequate female representation, the company had to rewrite the proposal to impose enormous potential costs on ABM including test sites right across the country to increase the number of women in the study. The percentage of female drivers at Waste Management is less that 2 percent of 35,000 drivers. This stringent guideline applied to this unique situation was, in the company’s view, mindless adherence to new

guidelines designed to ensure that projects are not based on male-only research (guidelines which ABM supports in general).

• ABM resubmitted the application a third time, but in a new year and with an entirely new panel. This time ABM’s review was so poor, it did not receive a priority score at all. One of the lead reviewers simply said that he did not believe that sleep apnea was a widespread medical problem. Because this was the third submission of the application, ABM was forced to give up on this SBIR application.

The lessons from this experience seem to be that the Fast Track application is not very well implemented, or at minimum people were not trained prior to implementation. ABM endorses the concept of the Fast Track program. Given the likelihood of obtaining a Fast Track award vs. Phase I and II, the fact that the Phase II dollars are not set aside at the beginning, and misunderstandings about the Fast Track, the company has decided to avoid this program in the future.

ABM identified some substantial problems in the review process. The company has noted apparent changes at NIH in how priority scores are calculated, and in the nature of reviewers—notably a pronounced shift toward quasi-commercial concerns. Specifically—

• Beginning in 2003, the company noticed that reviewer comments (“pink sheets”) no longer tracked closely with the scores.

• ABM believes that in recent panels, business people may have been over-influencing panel reviews, even when they are not the primary reviewer. The impact of business-based reviews may help to explain the apparent disconnect betweens cores (generated form the panel as whole) and pink sheets (generated primarily from lead reviewers).

• Study sections often suffer from substantial confusion between the functions and objectives of RO1s and R44s (SBIR awards). Section members who are used to reviewing RO1s are often not prepared for the application-heavy focus of ABM’s applications.

• Reviewers are sometimes not properly briefed. In one case, for example, a Phase I proposal was sharply criticized for not having a commercialization plan—even though no such plan is required for Phase I.

• Lead reviewers are sometimes not properly monitored. There appears to be no process for assessing major biases (e.g., the second resubmission on the pilot study).

• Panel memberships. Letters seeking to affect participants in study sections do not work. ABM knows that in one case it explicitly asked for specific

reviewers to be excluded for conflict of interest—and two of those reviewers was the lead reviewer for their application.

• In a recent review, of both RO1s and R44s, the Committee gave ABM the third highest priority score of 270. The best score was less than 200 and the second highest score was between 200 and 270, both R01s. ABM had the highest R44 score. Over 65 percent of the grants received no priority score.

ABM has been a long-time participant in the San Diego Regional Technology Alliance (SDRTA), and is now participating in the NIH commercialization program operated by LARTA. Initial events were not especially helpful, but ABM will be participating in a major technology showcase organized by LARTA in May 2005, for which it has substantial expectations.

LARTA is currently funding a few hours a month from three business consultants, all of whom are viewed fairly positively by ABM, and they have provided some useful market research as well as a contact with Innovex, which provides turn-key national sales forces to sell to physicians, although none has yet provided a real potential partner—which is their primary assigned role.

ABM has also presented posters at the NIH annual conference twice, but in neither case did any business connections result.

SBIR does not permit use of funds for marketing or market research, which makes the transition to Phase III very difficult. ABM did receive CAL-TIP (state) funding of $175,000, which the company said was crucial for the market research necessary to get toward product launch.

ABM’s experience is that applications for more than $1 million get reduced during review.

ABM believes that funding can be delayed when submitting in the April funding cycle: This inevitably means getting caught up in delays in the review process due to summer vacations and the end-of-fiscal year problems at NIH. From a standpoint of counting on an SBIR grant to meet payroll, delay of funding until October can be a significant disruption to a small company that is reliant on the SBIR program as a primary funding source.

However, this contradicts points made in interviews at other companies, who noted that while funding is delayed to October, it does become available as soon as the appropriation is passed, in contrast to funding allocated toward the end of the fiscal year where there may be a liquidity crunch.

ABM has experienced mixed reviews of its SBIR awards from venture capitalists. Some write it off, others view the peer review process as a prohibitive indication of research quality. Receiving more than $6 million in funding from NIH gives ABM immediate legitimacy in discussions with funders, although VCs always discount this funding in the course of valuation.

• Training program for reviewers (e.g., one-day, on a regional basis). This would not only encourage a more standardized approach, perhaps based on a standard curriculum. It could also encourage some potential participants who might otherwise feel unqualified to become reviewers (e.g., Mr. Levendowski, an MBA with scientific training).

• Accelerate shift to electronic submissions. ABM is very favorably impressed by the DoD electronic submission process, in comparison to NIH.

• Improved program manager assessment. ABM felt strongly that final reports and/or Edison submissions should include a report card for the program manager concerned, and that NIH should have review processes in place to improve or eliminate underperforming managers.

• Review. Commercialization reviews are a problem.

  • ABM suggested that an online questionnaire might help companies answer key commercialization questions, and would also highlight obvious problem areas.

  • ABM supported two phase reviews, with an initial screening by study sections focused entirely on science, and a second level screening of commercialization plans for Phase II. Problems at the second level could then be fixed within a single funding cycle, or applicants could be asked to resubmit for commercialization review only, substantially shortening the entire application process for many awards while improving quality and eliminating many of the current problems with commercialization review.

• Commercialization. NIH could do much more electronic matchmaking. Recommended in particular that NIH implement technology that would permit companies to update their own listings and identify information that is available for review (e.g., business plans, results from Phase I or II, patent applications, etc). Current listings are usually out of date and hence not used much by potential partners.

Robin Gaster

North Atlantic Research

ATS is a small biotech company located in San Diego. Unusually, it has had a strong product line since inception in 1994, and currently offers more than 40 products for sale on its Web site.

The company is based on the application of targeted toxins to neuroscience, where the selective approach offered by what the company calls Molecular Neurosurgery offers obvious advantages if successful.

Initial products have been sold to other research companies, but the company is now reaching the clinical trials stage for products aimed at addressing chronic pain. The American Chronic Pain Association (ACPA) estimates that one in three Americans (approximately 50 million people) suffers from some type of chronic pain.

Future research will focus on ways of enhancing the company’s current approach, so as to permit cell modification via cytotoxins, beyond the current tools which allow selective elimination of cells only.

ATS is currently seeking partnerships/funding for clinical trials of chronic pain technologies, partly through participation in the commercialization assistance program operated for NIH by LARTA.

ATS has used SBIR since its inception. It has received two long running Phase II awards, one new Phase II in 2003, and also one of the first CCAs in 2003. ATS has received three additional Phase I awards.

ATS has funded its research primarily through SBIR awards. New funding is now being used for the toxicology/safety testing phase of FDA approval process.

Outcomes:

• Numerous products (more than 40).

• Current research supported by SBIR: focused on chronic pain, a major quality of life issue for one in three Americans.

• Many scientific papers.

• Two patents.

• Partnerships with major medical research centers and academics.

• “Profound addition” to knowledge in the field of chronic pain.

  Key issue/concern: resolving the Phase III funding problem.

Recommendations:

• Phase III: the neuroscience-funding institutes at NIH should collectively fund a research hospital for clinical trials, similar to that funded by NCI.

• Size/duration. No additional funding for Phase I.

• Funding cycles. Eliminate the 2-year window for Phase I winners to apply for Phase II.

• Direct to Phase II. Companies should be allowed to compete directly for Phase II without previous Phase I.

ATS was founded in April 1994 by Douglas Lappi, Ph.D. and Ronald Wiley, M.D., Ph.D. (Scientific Advisor), initially for commercial development of ideas and products developed in their academic labs.

ATS is located in an R&D hub (San Diego), is not woman- or minority-owned, is small (9 employees), has been funded internally and by SBIR, has won several SBIR awards but is not a top-20 award winner, and has reached market with its products. ATS has received SBIR awards only from NIH.

Douglas Lappi began work in the field in the 1970s. He worked on targeted toxins focused on cancer, but could not interest previous employers in his ideas for targeting toxins on the brain. He has extensive experience in laboratory work. His two partners are Ron Wylie, Chief of Neurology at the Veteran’s Administration Medical Center, and Professor of Neurology and Pharmacology at Vanderbilt University, Nashville, TN, and Denise Higgins (VP Business Development), previously at the Salk Institute with Lappi.

Wylie’s key insight, according to Lappi, was that “cancer people could learn nothing from us, but we could learn a lot from them.” Essentially, there were many possibilities for applying the science of targeted toxins from cancer to neu-

rological research. The field of targeted toxins and the brain was largely ignored by mainstream research, and the company was started in 1994 with a specific focus on selling targeted agents, especially for neurological research.

Company products were immediately well received by biotech companies. In 1994, at the Society for Neuroscience annual meeting, the ATS poster and booth showed the first use of the 192-Saporin by an independent researcher Dr.Waits at Rutgers University. Lappi says that this was a “thunderbolt” in the field, as researchers had been waiting for this capability for years.

As a result, the first month of product release in 1994 generated “huge” sales, which the company surpassed on a monthly basis only recently.

ATS does not disclose revenues.

ATS is focused on implementing known techniques in neuroscience by means of new mechanisms. Lesioning of a region by surgical means and observing the effects is a well known and widely used technique in neuroscience research and medicine. ATS aims to provide similar outcomes by application of specific cytotoxins (essentially, using chemistry instead of surgery, with—if successful—much greater specificity and control).

ATS calls the new technique Molecular Neurosurgery (MN). The first ATS MN product (192-Saporin) is now in use in laboratories world-wide.

The ATS product line includes targeted toxins, antibodies, and custom services for assisting neuroscientists in studying nervous system function, and brain-related diseases and disorders.

ATS has had products on the market from its first month of operation, and was first to market with cytotoxin research reagents, which are sold to other biotech researchers primarily in the neurosciences. This is a niche market, and as presumably of limited interest to larger companies, although ATS understands a larger company could enter the market at any time. Its original partner, Chemi-Con did compete for a while but has left the market. ATS has protected its position through two patents.

ATS currently offers a large number of products through its online catalog, which lists 20 targeted toxins, four control conjugates, six secondary conjugates, eight proteins and peptides, and four fluorescent conjugates, and more than 25 other neuroscience products, as of March 2005.

The company began with one full-time employee. The first Phase II award allowed ATS to hire one additional person. Currently, ATS has nine staff members.

ATS is emphatically not a pharmaceutical company. It is too small, and the company does not intend to grow rapidly into a large enough company to pursue drug development on its own.

Accordingly, ATS is seeking development partners, a process in which it has been supported by CAP and the NIMH program officer.

The general research strategy is to identify a target cell type, place a bioactive molecule inside the cell, determine whether it functions, and then track the results. This is the basis for all products to date.

FIGURE App-D-3 Substance P and targeted cell death.

SOURCE: Advanced Targeting System.

The company is working on SP-SAP—a patented chemical conjugate composed of the neuropeptide Substance P, and the ribosome-inactivating protein saporin. The project is aimed addressing the problem of chronic pain, a very difficult area to understand, with high levels of complexity and multiple areas of research, including the spinal cord and neuron receptors within the brain.

ATS research has addressed a central question in chronic pain research, namely whether chronic pain can be defined in terms of a unique pathway within the nervous system, or whether it results from some characteristic of the system as whole. ATS determined that chronic pain is related to specific and unique pathways, which could be both identified and disrupted. Lappi claims that this was an enormous breakthrough in the field of chronic pain, and that it is at a minimum a “profound addition” to the field.

Initial research in this area was followed by more work on other screens starting in 1999, developing more chronic pain models in rats. All of these were successful.

This work has potentially profound implications for millions of people who currently endure chronic pain. On the ATS Web site, Lappi notes that—

Researchers at UCSD have now completed preliminary toxicology studies with SP-SAP in one of the FDA-required large animal models (funded under 2001 SBIR award from NIMH), and will carry out the full toxicology studies required to address safety issues.⁴

ATS has submitted its work on chronic pain to the FDA, and its preclinical data have been accepted. Clinical trials are the next step. Toxicology/safety testing will be funded by the SBIR CCA award, and ATS is now actively seeking partnerships or venture funding for this expensive stage of development.

The FDA has advised ATS that SP-SAP may best be developed as an orphan drug for treatment of pain in patients with terminal cancer.

So far, the company’s lead compound, 192-Saporin, has been used to kill selective cells. ATS is now interested in seeing whether a similar delivery mechanism can be used to modify the behavior of cells, instead of just killing them.

Working with an academic—Bob Solveter—the company is working on epilepsy-related problems. Epilepsy is triggered by reduced activity/loss of inhibitor neurons in the hippocampus. This is a fairly well established hypothesis. Animal experiments have shown that the destruction of inhibitor neurons does result in status epilectucus.

The problem then is to increase the activity of inhibitor neurons. ATS is working on using its established delivery systems for inducing enhanced activity among inhibitor cells.

ATS was bootstrapped on the basis of its products and SBIR funding, with no outside funding and minimal investment from founders. It formed an initial partnering agreement with Chemi-Con, which both marketed the first product—192-Saporin—and provided ATS with office and laboratory space.

Subsequently, ATS rented space on favorable terms from Invitrogen, which was seeking further intellectual cross-fertilization at the time.

ATS sought venture capital funding in 2003, but the timing was too difficult. The company is now seeking funding or a corporate partner under NIH auspices via the LARTA program. It is however too soon to tell whether this will lead to anything substantive.

ATS does not see a significant halo with respect to private funding. It believes that while an SBIR award with peer review may help a company get through the door to see a venture capitalist, the latter are focused on economics, not science, and an SBIR award says little about that.

ATS applied for its first SBIR immediately after being founded in 1994, received a Phase I in 1995, and another in 1996. Both became long-running Phase II awards, with the second running all the way to the first round of CCAs in 2003—the fifth year of support for this project. Three of the six ATS Phase I awards have resulted in Phase IIs.

ATS received one of the first CCA awards in October 2003—providing $2.4 million over three years—designed to allow ATS to complete toxicology studies and to prepare clinical-grade material for use in human trials.

This CCA award was part of a Program Announcement at NIMH, “Competing Continuation Awards of SBIR Phase II Grants for Pharmacologic Agents and Drugs for Mental Disorders.” ATS notes that “For small businesses like Advanced Targeting Systems, this latest expansion of the SBIR program provides important support at a time when alternative funding is expensive and difficult to find.”

Without SBIR, ATS says that it would have followed much the same development and research trajectory, but at a much slower pace. The existence of markets for its first products would have generated the funding necessary for this lower level of effort. However, the path itself would probably have been different, especially in relation to its relationship with outside academics, who would have been much harder to fund, and whose work with ATS has clearly been critical to the company’s strategy and to its success so far.

SBIR suits ATS for several reasons, according to Lappi:

• Competition is fair because only other small companies are involved.

• Many of the other applications are not all that good.

• SBIR is focused on the same goal as ATS—making a product.

• Overall, a “tremendously appealing program. SBIR has been a great help, and we appreciate it tremendously.”

ATS staff have a long history of publications. Lappi himself has more than 70 scientific publications to his credit, and Lappi and Wiley have a book on targeted toxins due out in March 2005.⁵ However, ATS prefers to focus on the publications generated by other researchers—especially academics—who are using their tools.

The ATS Web site cross references more than 65 papers for 2004 alone that used technologies sold by ATS. Lappi sees scientific publications as “the highest form of advertising.”

Publications have also had an important impact on the company. In the course of its research on chronic pain, ATS submitted a Phase II application that was originally not funded with a score of 220. After publication of the first article on 192-Saporin in Science, the resubmitted application scored 121 (the highest score so far encountered in NRC research at NIH). Reviewers also increased the budget above that originally requested. This research has subsequently received

several additional rounds of funding from NIH under this SBIR award, leading to the CCA award described above.

ATS has received patents on its first two molecules, and has several other patent applications pending. However, applications are expensive (ATS estimates $25,000 per patent), and the company is careful in selecting targets for patenting. Both current patents are based on work funded by SBIR.

Partnerships appear to have a played a very important role. Academics have acted as first adopters for ATS technology. Subsequent academic/scientific publications then provide the validation necessary for market acceptance, and for further funding from NIH.

This approach is demonstrated in the context of the research on chronic pain currently under way at ATS. Initial pain model studies showing efficacy in rats were performed in the laboratories of University of Minnesota pain expert Dr. Patrick Mantyh. Results from these studies were published in Science in 1997,⁶ providing enormous validation to the ATS approach. Mantyh’s laboratory published a second Science article in 1999,⁷ demonstrating the long-term elimination of chronic pain with SP-SAP.

Dr. Tony Yaksh, Professor of Anesthesiology and Pharmacology at the University of California, San Diego, is a leading expert on the administration and pharmacology of drugs in the spinal cord and spinal fluid. His associate, Dr. Jeff Allen, completed preliminary toxicology studies with SP-SAP in one of the FDA-required large animal models. UCSD will carry out the full toxicology studies with funding from the grant awarded to Advanced Targeting Systems.

Phase I-Phase II Gap. Acknowledged by ATS, Lappi notes that, “you can’t run a company on SBIR awards.” He does not see this as a criticism. In fact, he suggests that the gap acts as a kind of guarantee that there is a real business here: that the government is not supporting a business, but is helping an established business do product development.

Differences between ICs. ATS sees significant differences, but based more on scientific prejudices than program management. ATS simply cannot get funded at NCI, despite its strong track record at NIMH. Lappi sees this as stemming from scientific bias—targeted toxicology has not historically worked well in cancer, and as a result reviewers are biased against this approach.

Commercialization assistance program (CAP). ATS is currently involved in the new CAP being operated by LARTA. The company was present at a February 2005 meeting with potential funders in Newport Beach.

• Size/duration (Phase I): No additional funding for Phase I, even though current levels mean that no business can afford the risk of hiring someone just on the basis of a Phase I Award.

• Funding cycles. Eliminate the 2-year window for Phase I winners to apply for Phase II. Serves no useful purpose, and sometimes a Phase II application must wait for more data (Lappi has examples).

• Build a hospital for clinical trials. ATS suggests resolving the Phase III problem in neurological sciences by building a hospital for clinical trials, with the costs shared by multiple ICs. Claims that this approach has been adopted at NCI.

• Direct to Phase II. Companies should be allowed to compete directly for Phase II without previous Phase I.

Paula Stephan

Georgia State University

Bioelastics Research, Ltd. (Bioelastics) was founded by Dan W. Urry, Ph.D., at the University of Alabama (UAB) Birmingham in 1989. The company suspended operations October 31, 2004. At the time the firm was founded, Dr. Urry was a professor of molecular biophysics at UAB. Dr. Urry currently is on the faculty of University of Minnesota (department of chemical engineering and material science) teaching courses from January to April each year, having retired from UAB. After retiring from UAB, and prior to the suspension of operations, Dr. Urry continued to spend time in Birmingham each year. Before it suspended operations in the fall of 2004, the firm had four employees. Its average annual revenue was under $700,000. At its largest, the firm employed eight people. The firm resided in incubator space at UAB. During the first few years, the firm paid rent that was under market but in subsequent years the firm paid the market rate.

The company’s technology evolved around polymers made from elastic sequences in the body. This technology provided a basis for producing materials that would prevent adhesion, deliver drugs, and provide acoustic prevention (sound deadening) as well as a number of other applications including tissue reconstruction that is applicable to urinary incontinence and spinal injuries. Initial work on this technology was done at University of Alabama Birmingham in the lab of the founder, Dr. Dan W. Urry.

The firm received an initial investment of $333,000 from three local investors. UAB provided funding for initial patent applications before Bioleastics was founded. The firm was required to pay back the amount UAB spent and Bioelastics has born all the patent cost forward since then. In addition, Bioelastics was required to pay a $50,000 per year due-diligence payment to UAB. Patent costs are still being generated and are to be paid by the current holding company or whoever eventually acquires the technology.

The initial impetus to found the firm was the availability of cost-sharing funds for small businesses from the Office of Naval Research (ONR) which Dr. Urry found out about while working on research funded by ONR in the late 1980s at UAB. The firm was started using the $333,000 investment money noted above to set up the firm and then applied to ONR for a project directed towards wound repair technology.

The firm had 18 SBIRs from NIH: 12 Phase I and 6 Phase II. Almost all of the SBIR awards were to facilitate the development of products based on bioelastic material. Examples include: ingestible implants to correct urinary incontinence; materials for strabismus and retinal surgery, development of an artificial pericardia.

SBIRs did not play a role in the founding of the company, but the company began applying for SBIR awards at an early stage, and from 1991 on “SBIRs were very important to the company’s financial position.” The company received no funding from the state of Alabama. In addition to the SBIR awards, and the ONR award referred to above, the company received federal funding from DoD and DARPA as well as some other, non-SBIR funds, from ONR.

The only angel/VC money that the company received was the initial $333,000 noted above. The inability to attract other funding arguably relates to the Birmingham location of the firm. There was very little VC money in Birmingham at the time and what was available had been invested in several high profile companies that “soaked up the local money and provided no return.” This hindered Bioleastics ability to raise local venture funding. Moreover there was little interest at the time Bioleastics started up from VC companies operating out of state. “You don’t get the interest from the Carolinas and Atlanta to come over here. They [VCs] didn’t really like having it in Birmingham.” Moving, which could have opened up the opportunity for VC, was problematic for the company. Some of the primaries did not want to leave the Birmingham area and the initial investors wanted the company to stay. There was, to quote Mr. Parker, a hometown spirit of “make this benefit Alabama.”⁸

The SBIR awards helped the company to raise many of the contracts that the company had with firms, allowing the company to expand the research that it was doing and grow the research to a particular application. By way of example, one of the SBIR awards dealt with adhesions. As a result of this research, Bioelastics established a research contract with a firm to develop a product in which the firm was potentially interested. While they were able to do that successfully, the stumbling block was the lack of a production facility. This “chicken-and-egg” problem plagued the company throughout its entire tenure and eventually played a key role in causing the company to suspend operation. In essence, the contracting companies did not want to take on the initial expense, estimated at approximately $10 million, of creating a facility to produce the polymers but would have readily bought the polymers if they were available and reasonably priced for the application.

The company had four employees when it received its first SBIR award in the early 1990s. At its largest, the company employed eight individuals. SBIR

awards impacted company hiring in the sense that in several instances individuals were hired on after the grant was awarded. For example, Dr. Asima Pattanaik was hired as a result of an SBIR award and remained with the company for eight years, becoming a PI on several SBIR awards. To quote Mr. Parker, “SBIR funding allowed the company to maintain a “core group.”

The company never had a product that generated revenue. It did, as noted above, have research contracts with commercial companies to explore the development of bioelastic material and viable products were produced. The key constraint in producing a viable commercial product was the lack of a production facility capable of producing the material. According to Mr. Parker, the initial investors did not believe that they needed to have a production company. They “expected someone to walk up and pick it [the company] up for a big chunk of change and move on with it but no one wants to put that type of capital into a company that … needed a production company and a huge initial investment.” Stated somewhat differently, as long as the firm focused on research it was successful. But when the initial investors pushed for commercialization and got control of the company, problems emerged. “The firm was good at doing research, but when they [the initial investors] turned it over to someone else to move it from a research company to a production company the transition was not successful.”

The company never licensed a product but in several instances option payments were obtained from firms interested in taking a look at the company’s technology.

The company has been awarded ten patents. The last patent was awarded in March of 2004; it had been applied for in April 2001. A few of these patents were based on research that was funded by SBIR grants. Most of the SBIR grants furthered the advance of technology for which a patent had already been applied.

Scientists working at the firm published a considerable number of papers. A list of publications is provided at the end of this paper, representing the scholarly work accomplished during the existence of Bioelastics. A number of these papers can be attributed to SBIR awards. Some of the publications represent basic research papers; some proposed the basis for what became an SBIR proposal from work done with other agencies and some resulted from work done with other companies.

Dr. Urry has established a considerable scientific reputation based on his

work in the field of bioelastics and is a frequent speaker at international conferences and symposia. The SBIRS helped open up a whole new frontier: “We now believe we can understand how the body works—the reactions of how proteins change in the body. How they will release, conform and reattach and the nanoscale processes they undergo. Also, Dr. Urry can now explain how the internal motors work and describe the forces that drive them. No one else in the world developed or conceived of this. It’s really a Nobel Prize type application.”

The SBIR program was very important to the company’s financial position from 1991 on. It provided a good deal of the funding for the research that the company did. The SBIR program also influenced the research direction of the company to the extent that the company would respond to special SBIR initiatives. The SBIR program allowed the company to hire additional researchers and maintain a core group. But the company could only maintain a core group and that was a problem. “You cannot go out and hire new people if there is only six months of funding; for two years you can afford to go out and hire people but there is not a six-month job market. If you are going to grow on a Phase II you better have a clear exit strategy.”

Participation in the SBIR program affected the firm’s commercialization strategy by allowing the firm to take a longer view of commercialization. “A problem the company had from inception is that it didn’t have a rock solid business plan. It was a spin out—first company to spring out from UAB. In so doing, the university put a lot of restrictions on the inventor…. It required an annual due diligence payment in order to keep the technology of $50,000 at minimum; it held a 7 percent ownership stake and a 50 percent stake in any patent that developed in the company.” This made it more difficult to commercialize. “SBIRs were not a constraint; the business plan, the structure of the company were the big constraints.”

The firm first became aware of SBIRs as a result of a program solicitation that was distributed in the early 1990s. At the time, Mr. Parker was working in Dr. Urry’s lab at UAB.

The firm managed the delay between Phase I and Phase II awards by having multiple concurrent ongoing projects.

Mr. Parker found the size of the SBIR awards to be “decent.” But the time frame to be “short.” Unless you are working on a project full force, for example, it is hard to accomplish Phase I research in a six month period. They learned to live with the lag time between submission and receipt of funding. But, if it “took a year for a project to be funded it could be hard to keep all of that [personnel and

equipment] together. It really takes an established company that has a product to support bringing in money during that period of time.”

Mr. Parker answered affirmatively in terms of whether it would be beneficial to increase the duration of the award, adding that if “not increasing duration, being careful when you fund people with a broad scope, which has trouble fitting in a six month period.” He added that broad scope projects also have difficulty fitting into the time allowed for a Phase II. “Six month SBIRs turned into a year; Phase IIs turned into three years.”

The company did not find the paperwork to be severe. “It took some time but it was not overly demanding.” Mr. Parker went on to say that “I think it would be useful if they provided a few more guidelines as to what they want in reports. It might be helpful to them to have more uniform reporting.”

The primary recommendation for change that Mr. Parker offered was to demand a better plan as to how the research will be commercialized. “If a company goes in with the sole purpose of doing research and getting the information, that’s fine … but also need to have a plan of what to do with it once they get it. Will they be able to market it? Will they be able to get additional funding? Is additional funding available?” He believes that one would see a higher success rate coming out of SBIR funding if the agency paid more attention to the business plan.

Mr. Parker also recommended that NIH consider requiring grantees to submit an annual report that is directed at sharing information with other SBIR awardees. He compared the current NIH reporting requirements to reporting required by DoD for certain non-SBIR awards. “DoD requires a PowerPoint presentation, summing up your program and stating where you are going…. This is presented and you have to at least develop it to the point where you can get somebody’s attention with it.” These DoD reports, presented annually, brought people up to speed concerning what was going on and drove collaborations. The experience made participants aware that they were “part of a group; you all are striving to overcome something. It brings the community together.”

Firms are inhibited from getting an SBIR award if they are not well established, having neither facilities, equipment, nor personnel in place. He saw a number of companies in the incubator space at UAB that were not as established as Bioelastics. “One person in one room with one piece of equipment. They got a Phase I and they scaled up. But there was no way to survive beyond except to enter into the Phase II.”

One benefit that a firm gains from an SBIR award that is not available through many other programs is the ability to “take advantage of connections with other people” by going to meetings organized for SBIR recipients at NIH. The company found attending such meetings and interacting with other researchers to be helpful in building collaborations that helped to move projects forward.

“Especially in small companies it is the collaborations that strengthen you and builds you … it’s these meetings that really bring you together.”

Note: the interview was conducted February 18, 2005 by Paula Stephan, with Tim Parker, in Pell City, Alabama. Mr. Parker was Manager of Research for Bioelastics and had worked with the company for thirteen years. Prior to joining the company, Mr. Parker worked for five years in Dr. Urry’s lab at the University of Alabama Birmingham.

Alkalay, Ron N., David H. Kim, Dan W. Urry, Jie Xu, Timothy M. Parker, and Paul A. Glazer. 2003. “Prevention of Postlaminectomy Epidural Fibrosis Using Bioelastic Materials.” Spine. 28:1659-1665.

Daniell, H., C. Guda, D. T. McPherson, X. Zhang, and D. W. Urry. 1996. “Hyper Expression of a Synthetic Protein Based Polymer Gene.” Pp. 359-371 in Methods in Molecular Biology Vol. 63: Recombinant Proteins: Protocol Detection and Isolation. R. Tuan, ed. Totowa, NJ: Humana Press, Inc.

Gowda, D. Channe, Timothy M. Parker, R. Dean Harris, and Dan W. Urry. 1994. “Synthesis, Characterizations and Medical Applications of Bioelastic Materials.” Pp. 81-111 in Peptides: Design, Synthesis, and Biological Activity. Channa Basava and G. M. Anantharamaiah, eds. Boston: Birkhäuser.

Gowda, D. C., T. M. Parker, C. M. Harris, R. D. Harris and D. W. Urry. 1994. “Design and Synthesis of Poly-tricosapeptides to Enhance Hydrophobic-induced pKa Shifts.” Pp. 940-943 in Peptides: Chemistry, Structure and Biology. R. S. Hodges and J. A. Smith, eds., Proceedings of the Thirteenth American Peptide Symposium, Edmonton, Alberta, Canada.

Gowda, D. Channe, Chi-Hao Luan, Raymond L. Furner, ShaoQing Peng, Naijie Jing, Cynthia M. Harris, Timothy M. Parker, and Dan W. Urry. 1995. “Synthesis and Characterization of Human Elastin W₄ Sequence.” International Journal of Peptide and Protein Research. 46:453-463.

Guda, C., X. Zhang, D. T. McPherson, J. Xu, J. H. Cherry, D. W. Urry, and H. Daniell. 1995. “Hyper Expression of an Environmentally Friendly Synthetic Polymer Gene.” Biotechnology Letters. 17, 745-750.

Herzog, R. W., N.K. Singh, D. W. Urry, H. Daniell. 1997. “Expression of a Synthetic Protein-based Polymer (Elastomer) Gene in Aspergillus Nidulans.” Applied Microbiology & Biotechnology. 47:368-372.

Hoban, Lynne D., Marissa Pierce, Jerry Quance, Isaac Hayward, Adam McKee, D. Channe Gowda, Dan W. Urry, and Taffy Williams. 1994. “The Use of Polypenta-peptides of Elastin in the Prevention of Postoperative Adhesions.” Journal of Surgical Research. 56:179-183.

Jing, Naijie. Kari U. Prasad, and Dan W. Urry, “The Determination of Binding Constants of Micellar-packaged Gramicidin A by 13C and 23Na NMR,”Biochem. Biophys. Acta, 1238, 1-11, 1995.

Jing, Naijie and Dan W. Urry. 1995. “Ion Pair Binding of Ca⁺⁺ and C1⁻ Ions in Micellar-packaged Gramicidin A.” Biochem. Biophys. Acta. 1238(1):12-21.

Kemppainen, B. W., D. W. Urry, C.-X. Luan, J. Xu, S. F. Swaim and S. Goel. 2004. “In vitro skin penetration of dazmegrel delivered with a bioelastic matrix.” International Journal of Pharmaceutics. 271:301-303.

Kemppainen, B., N.-Z. Wang, S. Swaim, D. W. Urry, C.-X. Luan, J. Xu, E. Sartin, R. Gillette, S. Hinkle, and S. Coolman. 2004. “Bioelastic Membranes for Topical Application of Thromboxane Synthetase Inhibitor for Protection of Skin from Pressure Injury: A Preliminary Study.” Wound Repair and Regeneration. 12.

Luan, Chi-Hao and Dan W. Urry. 1999. “Elastic, Plastic, and Hydrogel Protein-based Polymers.” Pp. 78-89 in Polymer Data Handbook. James. E. Mark, ed. New York: Oxford University Press.

Manno, M., A. Emanuele, V. Martorana, P. L. San Biagio, D. Bulone, M. B. Palma-Vitorelli, D. T. McPherson, J. Xu, T. M. Parker, and D. W. Urry. 2001. “Interaction of processes on different time scales in a bioelastomer capable of performing energy conversion.” Biopolymers. 59:51-64.

McPherson, David T., Jie Xu, and Dan W. Urry. 1996. “Product Purification by Reversible Phase Transition Following E. coli Expression of Genes Encoding up to 251 Repeats of the Elastomeric Pentapeptide GVGVP.” Protein Expression and Purification 7:51-57.

Nicol, Alastair, D. Channe Gowda, Timothy M. Parker, and Dan W. Urry. 1994. “Cell Adhesive Properties of Bioelastic Materials Containing Cell Attachment Sequences.” Pp. 95-113 in Biotechnol. Bioactive Polym. Charles G. Gebelein and Charles E. Carraher, Jr., eds. New York: Plenum Press.

Nicol, Alastair, D. Channe Gowda, Timothy M. Parker, and Dan W. Urry. 1993. “Elastomeric Polytetrapeptide Matrices: Hydrophobicity Dependence of Cell Attachment from Adhesive, (GGIP)_n, to Non-adhesive, (GGAP)_n, Even in Serum.” J. Biomed. Mater. Res. 27:801-810.

Patkar, Anant, Natarajan Vijayasankaran, Dan W. Urry, and Friedrich Srienc. 2002. “Flow Cytometry as a Useful Tool for Process Development: Rapid Evaluation of Expression Systems.” Journal of Biotechnology. 93:217-229.

Strzegowski, Luke A., Manuel Bueno Martinez, D. Channe Gowda, Dan W. Urry, and David A. Tirrell. 1994. “Photomodulation of the Inverse Temperature Transition of a Modified Elastin Poly (Pentapeptide),” Journal of the American Chemical Society. 116:813-814.

Urry, D. W., A. Nicol, D. C. Gowda, L. D. Hoban, A. McKee, T. Williams, D. B. Olsen, and B. A. Cox. 1993. “Medical Applications of Bioelastic Materials.” Pp. 82-103 in Biotechnological Polymers: Medical, Pharmaceutical and Industrial Applications. Charles G. Gebelein, ed. Atlanta: Technomic Publishing Company, Inc.

Urry, D. W., D. C. Gowda, S. Q. Peng, T. M. Parker, and R. D. Harris. 1992. “Design at Nanometric Dimensions to Enhance Hydrophobicity-induced pKa Shifts.” Journal of the American Chemical Society. 114:8716-8717.

Urry, Dan W., Larry C. Hayes, D. Channe Gowda, Cynthia M. Harris, and R. Dean Harris. 1992. “Reduction-driven Polypeptide Folding by the ∆T_t Mechanism.” Biochem. Biophys. Res. Comm. 188:611-617.

Urry, Dan W. 1993. “Bioelastic Materials as Matrices for Tissue Reconstruction.” Pp. 199-206 in Tissue Engineering: Current Perspectives. Eugene Bell, ed. New York: Birkhäuser Boston, Div. Springer-Verlag.

Urry, Dan W., Larry C. Hayes, Timothy M. Parker and R. Dean Harris. 1993. “Baromechanical Transduction in a Model Protein by the ∆T_t Mechanism.” Chem. Phys. Letters. 201:336-340.

Urry, Dan W., ShaoQing Peng and Timothy M. Parker. 1993. “Delineation of Electrostatic-and Hydrophobic-Induced pKa Shifts in Polypentapeptides: The Glutamic Acid Residue.” Journal of the American Chemical Society. 115:7509-7510.

Urry, Dan W., D. Channe Gowda, Betty A. Cox, Lynne D. Hoban, Adam McKee and Taffy Williams. 1993. “Properties and Prevention of Adhesions Applications of Bioelastic Materials.” Mat. Res. Soc. Symp. Proc. 292:253-264.

Urry, Dan W., ShaoQing Peng, Timothy M. Parker, D. Channe Gowda, and Roland D. Harris. 1993. “Relative Significance of Electrostatic- and Hydrophobic-Induced pK_a Shifts in a Model Protein: The Aspartic Acid Residue.” Angew. Chem. (German). 105:1523-1525; Angew. Chem. Int. Ed. Engl. 32:1440-1442.

Urry, Dan W., D. Channe Gowda, Cynthia M. Harris and R. Dean Harris. 1994. “Bioelastic Materials and the ∆T_t-Mechanism in Drug Delivery.” Pp. 15-28 in Polymeric Drugs and Drug Administration. Raphael M. Ottenbrite, ed., American Chemical Society Symposium Series 545:15-28.

Urry, Dan W., D. Channe Gowda, ShaoQing Peng, Timothy M. Parker, Naijie Jing, and R. Dean Harris. 1994. “Nanometric Design of Extraordinary Hydrophobicity-induced pKa Shifts for Aspartic Acid: Relevance to Protein Mechanisms.” Biopolymers. 34:889-896.

Urry, Dan W., Shaoqing Peng, D. Channe Gowda, Timothy M. Parker, and R. Dean Harris. 1994. “Comparison of Electrostatic- and Hydrophobic-induced pKa Shifts in Polypentapeptides: The Lysine Residue.” Chemical Physics Letters. 225:97-103.

Urry, Dan W. 1994. “Conversion of Available Energy Forms into Desired Forms by a Biologically Accessible Mechanism.” Pp. 629-636 in Nondestructive Characterization of Materials VI. Robert E. Green, Jr., ed. Proceedings of the Sixth International Symposium on Nondestructive Characterization of Materials, Oahu, Hawaii. New York: Plenum Press.

Urry, Dan W. 1994. “Biophysics of Energy Converting Model Proteins.” Mat. Res. Soc. Symp. Proc. 321-332.

Urry, Dan W., Alastair Nicol, David T. McPherson, Jie Xu, Peter R. Shewry, Cynthia M. Harris, Timothy M. Parker, and D. Channe Gowda. 1995. “Properties, Preparations and Applications of Bioelastic Materials.” Pp. 1619-1673 in Encyclopedic Handbook of Biomaterials and Bioengineering—Part A—Materials, Vol. 2. New York: Marcel Dekker, Inc.

Urry, Dan W., David T. McPherson, Jie Xu, D. Channe Gowda, and Timothy M. Parker. 1995. “Elastic and Plastic Protein-based Polymers: Potential for Industrial Uses,” Pp. 259-281 in Industrial Biotechnological Polymers. Chas. Gebelein and Chas. E. Carraher, Jr., eds. Lancaster, PA: Technomic Publshing Co.

Urry, D. W. 1994. “Postulates for Protein (Hydrophobic) Folding and Function.” International Journal of Quantum Chemistry. 21:3-15.

Urry, Dan W. and Chi-Hao Luan. 1995. “A New Hydrophobicity Scale and Its Relevance to Protein Folding and Interactions at Interfaces.” Pp. 92-110 in Proteins at Interfaces 1994. Thomas A. Horbett and John L. Brash, eds. American Chemical Society Symposium Series: Washington, DC.

Urry, Dan W. 1995. “Elastic Biomolecular Machines: Synthetic chains of amino acids, patterned after those in connective tissue, can transform heat and chemical energy into motion.” Scientific American. January, 64-69.

Urry, Dan W., Larry C. Hayes, and D. Channe Gowda. 1994. “Electromechanical Transduction: Reduction-driven Hydrophobic Folding Demonstrated in a Model Protein to Perform Mechanical Work.” Biochemical and Biophysical Research Communications. 204:230-237.

Urry, Dan W., Chi-Hao Luan, and ShaoQing Peng. 1995. “Molecular Biophysics of Elastin Structure, Function and Pathology.” Pp. 4-30 in Proceedings of The Ciba Foundation Symposium No. 192. The Molecular Biology and Pathology of Elastic Tissues. Sussex, UK: John Wiley & Sons, Ltd.

Urry, Dan W., D. T. McPherson, J. Xu, H. Daniell, C. Guda, D. C. Gowda, Naijie Jing, and T. M. Parker. 1996. “Protein-Based Polymeric Materials: Syntheses and Properties” Pp. 7263-7279 in The Polymeric Materials Encyclopedia: Synthesis, Properties and Applications. Boca Raton, FL: CRC Press.

Urry, D. W., C.-H. Luan, C. M. Harris, and T. Parker. 1997. “Protein-based Materials with a Profound Range of Properties and Applications: The Elastin T_t Hydrophobic Paradigm.” Pp. 133-177 in Proteins and Modified Proteins as Polymeric Materials. Kevin McGrath and David Kaplan, eds. Birkhauser Press.

Urry, D. W., Cynthia M. Harris, Chi Xiang Luan, Chi-Hao Luan, D. Channe Gowda, Timothy M. Parker, ShaoQing Peng, and Jie Xu. 1997. “Transductional Protein-based Polymers as New Controlled Release Vehicles,” Part VI: New Biomaterials for Drug Delivery. Pp. 405-437 in Controlled Drug Delivery: The Next Generation. (Kinam Park, ed. Am. Chem. Soc. Professional Reference Book.

Urry, Dan W., D. Channe Gowda, ShaoQing Peng, and Timothy M. Parker. 1995. “Non-linear Hydrophobic-induced pKa Shifts: Implications for Efficiency of Conversion to Chemical Energy.” Chemical Physics Letters. 239:67-74.

Urry, Dan W., Larry C. Hayes, D. Channe Gowda, ShaoQing Peng, and Naijie Jing. 1995. “Electrochemical Transduction in Elastic Protein-based Polymers.” Biochem. Biophys. Res. Commun. 210:1031-1039.

Urry, Dan W. and ShaoQing Peng. 1995. “Non-linear Mechanical Force-induced pKa Shifts: Implications for Efficiency of Conversion to Chemical Energy.” Journal of the American Chemical Society 8478-8479.

Urry, Dan W. and Chi-Hao Luan. 1995. “Proteins: Structure, Folding and Function.” Pp. 105-182 in Bioelectrochemistry: Principles and Practice. Giorgio Lenaz, ed. Basel, Switzerland: Birkhäuser Verlag AG.

Urry, Dan W., Asima Pattanaik, Mary Ann Accavitti, Chi-Xiang Luan, David T. McPherson, Jie Xu, D. Channe Gowda, Timothy M. Parker, Cynthia M. Harris, and Naijie Jing. 1997. “Transductional Elastic and Plastic Protein-based Polymers as Potential Medical Devices.” Pp. 367-386 in Handbook of Biodegradable Polymers. Domb, Kost, and Wiseman, eds. Chur, Switzerland: Harwood Academic Publishers.

Urry, Dan W., Larry C. Hayes, and Shao Qing Peng. 1996. “Designing for Advanced Materials by the T_t-Mechanism.” SPIE—The International Society for Optical Engineering Smart Structures and Materials. San Diego, CA: Smart Materials Technologies and Biomimetics 2716, 343-346.

Urry, Dan W. 1996. “Engineers of Creation.” Pp. 39-42 in Chemistry in Britain.

Urry, Dan W., ShaoQing Peng, Jie Xu, and David T. McPherson. 1997. “Characterization of Waters of Hydrophobic Hydration by Microwave Dielectric Relaxation.” Journal of the American Chemical Socitey. 119:1161-1162.

Urry, Dan W. 1997. “On the Molecular Structure, Function and Pathology Of Elastin: The Gotte Stepping Stone.” Pp. 11-22 in The Structure, Function and Pathology of Elastic Tissue. Potenza, Italy: Tip. Mario Armento & Co. Publisher.

Urry, Dan W. and Asima Pattanaik. 1997. “Elastic Protein-based Materials in Tissue Reconstruction.” Annals of the New York Academy Sciences. 831:32-46.

Urry, D. W., S. Q. Peng, L. C. Hayes, D. T. McPherson, Jie Xu, T. C. Woods, D. C. Gowda, and A. Pattanaik. 1998. “Engineering Protein-based Machines to Emulate Key Steps of Metabolism (Biological Energy Conversion).” Biotechnology and Bioengineering. 58:175-190.

Urry, Dan W. 1997. “Physical Chemistry of Biological Free Energy Transduction as Demonstrated by Elastic Protein-based Polymers.” J. Phys. Chem. 101:11007-11028.

Urry, Dan W. 1999. “Five Axioms for Protein Engineering: Keys for Understanding Protein Structure/Function?” Pp. 75-78 in Proceedings of the Fifteenth American Peptide Symposium, Peptides: Frontiers of Peptide Science. James P. Tam and Pravin T. P. Kaumaya, eds. Boston: Kluwer Academic Publishers.

Urry, Dan W., ShaoQuing Peng, Chi-Hao Luan, Chi-Xiang, Luan, Asima Pattanaik, Jie Xu, David T. McPherson. 1998. “Hydrophobic Hydration in Protein Models for Muscle Contraction: Calcium Ion, Thermal, Stretch and pH Activation.” Scanning Microscopy International.

Urry, Dan W. 1998. “Five Axioms for the Functional Design of Peptide-Based Polymers as Molecular Machines and Materials: Principle for Macromolecular Assemblies.” Biopolymers (Peptide Science) 47:167-178.

Urry, Dan W., Asima Pattanaik, Jie Xu, T. Cooper Woods, David T. McPherson, and Timothy M. Parker. 1998. “Elastic Protein-based Polymers in Soft Tissue Augmentation and Generation.” J. Biomater. Sci. Polymer Edn. 9:1015-1048.

Urry, Dan W. 1999. “Elastic Molecular Machines in Metabolism and Soft Tissue Restoration.” TIBTECH. 17:249-257.

Urry, Dan W., Larry Hayes, Chixiang Luan, D. Channe Gowda, David McPherson, Jie Xu, and Timothy Parker. 2001. “∆T_t-Mechanism in the Design of Self-Assembling Structures.” Pp. 323-340 in Self Assembling Peptide Systems in Biology, Medicine and Engineering. Amalia Aggeli and Neville Boden, eds. Netherlands: Kluwer Academic Publishers.

Urry, D. W., T. Hugel, M. Seitz, H. Gaub, L. Sheiba, J. Dea, J. Xu and T. Parker. 2002. “Elastin: A Representative Ideal Protein Elastomer.” Phil. Trans. R. Soc. Lond. B. 357:169-184.

Urry, D. W., T. Hugel, M. Seitz, H. Gaub, L. Sheiba, J. Dea, J. Xu, L. Hayes, and T. Parker. 2002. “Ideal Protein Elasticity: The Elastin Model.” In P. Shewry and A. Bailey, eds. Cambridge: Cambridge University Press.

Urry D. W. and T. M. Parker. 2002. “Mechanics of Elastin: Molecular Mechanism of Biological Elasticity and its Relationship to Contraction, Special Issue: Mechanics of Elastic Biomolecules.” Journal of Muscle Research and Cell Motility, 23, 543-559, 2002.

Urry, D. W., T. C. Woods, L. C. Hayes, J. Xu, D. T. McPherson, M. Iwama, M. Furuta, T. Hayashi, M. Murata, and T. M. Parker. 2004. “Elastic Protein-Based Biomaterials: Elements of Basic Science, Controlled Release and Biocompatiblity.” Pp. 31-54 in Tissue Engineering and Novel Delivery Systems. New York: Marcel Dekker, Inc.

Urry, D. W., J. Xu, W. Wang, L. Hayes, F. Prochazka, and T. M. Parker. 2003. “Development of Elastic Protein-based Polymers as Materials for Acoustic Application.” Mat. Res. Soc. Symp. Proc. 774:81-92.

Wang, N. Z., D. W. Urry, S. F. Swaim, R. L. Gillette, C. E. Hoffman, S. H. Hinkle, S. L. Coolman, C.-X. Luan, J. Xu, and B. W. Kemppainen. 2004. “Skin concentrations of thromboxane synthetase inhibitor after topical application with bioelastic membrane.” J. Vet. Pharmacol. Therap. 27:37-43.

Zhang, X., C. Guda, R. Datta, R. Dute, D. W. Urry, and H. Daniell. 1995. “Nuclear Expression of an Environmentally Friendly Synthetic Protein-based Polymer Gene in Tobacco Cells.” Biotech Letters. 17(12):1279-1284.

Zhang, X., D. W. Urry, and H. Daniell. 1996. “Expression of an Environmentally Friendly Synthetic Protein-based Polymer Gene in Transgenic Tobacco Plants.” Plant Cell Reports. 16:174-179.

Paula Stephan

Georgia State University

Cambridge NeruoScience (CNS) was incorporated in Delaware in December 1985 and began operations in January 1986 in Cambridge, MA where it remained until 2000, when the firm relocated to Norwood, MA.

The company’s focus involved the discovery and development of pharmaceutical products to treat a variety of severe neurological and psychiatric disorders. Product development was focused in three areas: neuroprotective compounds for the treatment of acute neurological disorders such as stroke and traumatic brain injury, novel antipsychotic compounds for the treatment of mental illnesses such as schizophrenia, and growth factors for the treatment of neurodegenerative diseases such as diabetic peripheral neuropathies, and ALS (Prospectus, Initial Public Offering, June 6, 1991, page 10). As the company grew and advanced its technology, research and development programs in multiple sclerosis and neuropathetic pain were added to the portfolio.

The company had a number of collaborations with academic institutions at the time that it went public in 1991. These included, for example, the Ludwig Institute for Cancer Research in London, the University of Oregon, Cornell University, the Medical College of Virginia, the University of Toledo, Columbia University and the Massachusetts Institute of Technology.

The company raised venture capital from Warburg, Pincus Capital Partners and Aeneas Venture Corporation and, as noted above, made an initial public offering in 1991 which generated $22,320,000 in proceeds for the company. Warburg, Pincus provided the initial funds (approximately $5 million) to start the company.

The company states in its prospectus that it had 44 full-time employees at the time of its initial public offering in 1991; 36 of these employees were engaged in research and development.

The company faced considerable competition both from start-ups and from fully integrated pharmaceutical companies in the neuroscience pharmaceutical market. At the same time, the neurological market has significant growth potential. For example, the number of cases of Alzheimer’s disease is rapidly growing

as life expectancy increases; and the population of individuals suffering from strokes is large and growing. Moreover, there are virtually no products that successfully treat strokes. Strokes are, according to Dr. Marchionni, “a graveyard for compounds in development.”

The Cambridge location was chosen because of the location of the three co-founders: Joe Martin, M.D., Ph.D., Chairman of Neurology, Massachusetts General Hospital and Professor of Neurology at Harvard Medical School at the time the company was founded; Howard M. Goodman, Ph.D., Chief of the Department of Molecular Biology at Massachusetts General Hospital and Professor of Genetics at Harvard Medical School; and Rod Moorhead, of Warburg, Pincus Capital Partners. Dr. Goodman was a board member of Warburg, Pincus Capital partners at the time the company was started.

Cambridge NeuroScience was acquired by CeNeS Pharmaceuticals, Inc., a company listed on the London Stock Exchange, in December of 2000; CeNeS closed operations of Cambridge NeuroScience in January of 2002.

The company received at least 13 SBIRs during its 15 years in existence. With but one exception, the company followed up each Phase I with a successful Phase II. In one instance, the company chose not to follow up with a Phase II application due to the limited success in demonstrating feasibility of the approach in Phase I. The first SBIR award was applied for soon after the company was founded. The company was in the process of being awarded an SBIR Phase II at the time that it was acquired by CeNeS but did not receive the actual funding because, by the time it received the Notice of Grant Award, it had been acquired by a foreign-owned company.

Although SBIRs played no role in the founding of the company, “right off the bat” the company applied for SBIR funding. This was facilitated by the fact that from the beginning, with seed money from venture capitalists, the company was able to hire a team of fairly experienced staff scientists. While none had SBIR experience, all had worked in postdoc positions and understood something about the culture of grant writing.

The company received no funding from the state of Massachusetts. In addition to receiving SBIR support from the federal government, one of its scientists, Dr. Stanley Goldin, was able to transfer an R01 from NIH to Cambridge NeuroScience when he came to Cambridge NeuroScience from Harvard Medical School. Since his area of research was of interest to the company, this arrangement was of mutual benefit and he was able to continue his research program with the aid of NIH support.

SBIRs played a role in external partners’ decisions to provide funding in two ways. First, the award of an SBIR was treated by the company as a marketing tool, with the company issuing a press release at the time of the award. Second,

and more meaningfully, SBIR grant proposals were often given to potential partners through confidentiality agreements to provide a detailed description of the science that was being done at Cambridge NeuroScience, allowing the potential partner to do due diligence on scientific elements. A funded grant, according to Dr. Marchionni, “says here is a group of disinterested reviewers who have decided to say we are going to invest tax payers money to try to move this forward; we think it has a reasonable chance of success. The independent endorsement carries some weight. It’s probably worth more than what you get paid to do the research.” It should also be noted that SBIR funding was discussed in the prospectus for the IPO as a source of revenue.

The company had an extremely aggressive hiring plan when it started, and had 16 to 18 staff scientists by the time it received its first SBIR award.

SBIRs definitely helped the company grow in terms of hiring. Dr. Marchionni, for example, was able to add people to his group because of the grant. “It helped fortify a group that would have been half the size if it did not have the grant.” Moreover, the grants allowed for “growing” a work force, not only in size, but also in skill, by permitting the company to bring individuals on board and then invest in training them. “Because they were on board I could train them in advanced molecular skills.” This meant that when they came to another project in which the company had a greater corporate investment and which went beyond the grant, “these people were ready to go.” As a result, “we were able to compete in a high-stakes game; we were able to compete against Genentech in essence. If I had had to wait until the time that we got into the growth factor work to hire people, the whole project would have been taken over by Genentech before we were ever able to get into it.”

The hiring and training that result from SBIRs allow the company to take a longer-run view than it would have taken without such funding. While company management focuses on immediate returns to shareholders, SBIRs permit the company to focus on things that don’t necessarily have an immediate return to shareholders. The grant allows the company to “hire on new employees who will have an impact that goes long beyond the period of the grant.” It provides the company enough flexibility to hire individuals and create a critical mass of a sort.

The company never had a product that generated revenue through sales. However, the ion channel patents were bought by Scion and, as part of the deal, an SBIR Phase II award relating to ion channels moved, with the PI, from Cambridge NeuroScience to Scion. Scion also bought the chemical library of CNS.

The company had one drug that made it to Phase III Clinical Trials for the

treatment of stroke and TBI. The drug (CERESTAT, or aptiganel hydrachloride) did not show efficacy during Phase III and the trials were terminated, both for the treatment of stroke and for TBI. “It was really close … it is possible that if the trial were rerun and using more narrow inclusion criteria, it might work.” SBIR funding was involved at some early stage of the work that developed CERESTAT.

Many biotech companies choose to focus on niche markets. The stroke market, by way of contrast, is not a niche market and if the trials had proved successful the company could have anticipated considerable commercial success. “We appeared on local television news; we were on the verge of making a major breakthrough in treatment for stroke. It really looked like it was going to work.” The company’s stock fell by something like 80 percent when the trail was discontinued. “Once that happened, the company died a slow death.”

A consistent theme during the interview was that SBIR awards are not appropriate for the “front runner of the company.” Those projects should be funded primarily by the company. But SBIR awards permit the company to enhance the projects it is doing, providing the opportunity for greater depth, thus improving the chances of success. SBIRs also allow a company to diversify. Stated somewhat differently, companies are under pressure to convert their dollars to a profit; the pace of research on the “front runner” is too fast to permit for the grant approach. The SBIR program is relatively slow: eight months at least before the money comes in. “You can’t wait that long; things happen too fast; you risk losing out to your competition if it is the lead program in the company.”

Dr. Marchioni elaborated on this theme, saying that SBIRs provide a relatively successful company two specific benefits. First, SBIR awards allow a company to round out research on the lead program that it cannot fully support. “You write a grant for something you will be needing six months from now; that will require adding things; you can round out your effort through the grant by making it a fuller program with a greater chance of success. But the grant funding is not the main source of support. The grant is not driving the company. You have to have other sources of funding to make it work. You use the grant to embellish and enhance the effort, but it’s not the sole source of support.” Second, the SBIR program allows relatively successful companies to explore alternatives that the company might otherwise not be able to explore, providing for diversification. For example, the company acquires an option to technology from a university; the university researchers continue to work on it in the laboratory. The company then can begin to participate directly in this technology by applying for SBIR funding. If successful in obtaining this grant support, then the company is in a strong position to convert the option into a license and start working on it internally in a new area. This approach will grow the scientific base of the company’s technology and accrue benefit to the university as well—technology originally discovered there can be developed further and eventually be commercialized. Diversification provides the company some hedge against risk and creates jobs.

Venture capitalists, to paraphrase Dr. Marchionni, cannot necessarily fund the complete diversification of a company that needs to diversify. Neither do they want to. “Venture Capitalists want you to be extremely focused and often give you one chance to succeed.”

Cambridge NeruoScience had many patents; it is difficult to determine which ones specifically related to SBIR grants. An example of a patent that was clearly based on SBIR research is patent 6,232,061 issued May 15, 2001 for homology cloning. Scientists working at CNS published a considerable number of scientific papers; some were based on research funded through the SBIR program.

The SBIR program clearly contributed to the research productivity of Cambridge NeuroScience. It allowed the company to hire and train additional researchers, engage in more in-depth research for front runner programs and diversify its research efforts.

Although none of the scientific staff had prior SBIR experience, from the time the company started the research scientists were aware of the SBIR program.

The company did not experience problems related to the delay between Phase I and Phase II awards. Dr. Marchionni indicated that they were aware that the SBIR grant did not pay for everything and that they realized they had to have other sources of income to support research. He also noted that once the project took on “front burner” status in the company, the company was no longer interested in using grants to support the research because the time required to write the grant application detracted from the research effort.

He expressed the view that the perfect SBIR company is a Series A company or a company with angel backing. Such companies have sufficient funds to take advantage of the grant and make full use of it, but not be overly concerned about what is going to happen when they lose it for a period of time. “If SBIR income is the only income you have, SBIR money is being wasted.”

Dr. Marchionni viewed much of the review and selection process to be fair. The company chose a strategy of including detailed data in the grant applications. They knew they were competitive and they didn’t want to provide an excuse for not getting funding. They also thought that the chances that disclosure would cause a problem were “pretty minimal.” “In the end, there was never a single thing that we disclosed that someone else took over and started working on.”

Dr. Marchionni saw serious problems in two aspects of the review process:

the composition of the panel, which is largely made up of academics, and the panel’s interest in the proposed budget. Academic reviewers often employ criteria that apply to RO1 proposals in reviewing SBIRs, which is not appropriate. Second, many of them fail to fully appreciate the entire process of (bio)technology development, even though many serve as consultants to industry. Many have expressed concerns that were completely out of sequence with standard industry practices. For example, some issues that might come into play in the design of clinical studies simply do not need to be addressed until you begin to get there by overcoming many other, more immediate, hurdles along the way. To use a baseball analogy, a first-base coach does not have to be concerned about whether a runner should slide into third on a triple. As the runner approaches third base, he will get instructions from the third-base coach.

Moreover, some academics have a bias towards SBIR proposals that are written by fellow academics and try to “create the rules so that the funding goes to academics.” Dr. Marchionni recommends including more individuals from industry in the review process. While he recognizes that this could create a potential conflict of interest, in today’s world it is reasonably common for academic reviewers to have ties to industry and thereby they, too, could have a conflict of interest. He noted that there is not that big a divide between what it takes to be a successful scientist in a company and a successful scientist in academe.

A second concern that Dr. Marchionni expressed relates to the fact that it is not uncommon to get comments back from review relating to the appropriate size of the submitted budget. He argues that this is inappropriate. Just as only the direct portion of the budget is subject to review for R01 grants, only the direct portion of costs should be considered for review in the SBIR proposal. The other costs should be made “invisible,” just as indirect costs are made invisible on R01 proposals.

Dr. Marchionni had two specific recommendations for changes to the SBIR program. The first concerns the recent VC rule which states that a company that is majority-owned by VC is not eligible for SBIR awards. This rule excludes firms that, in his view, are strong candidates for SBIR awards, not needing to rely exclusively on SBIR awards for funding, but using the SBIR awards to enhance and diversify the research of the company. Both activities result in the creation of new jobs. Dr. Marchionni points out that if the VC rule had been in effect at the time that Cambridge NeuroScience was founded, the company would never have received an SBIR award. (See comments by Dr. Marchionni at <http://www.zyn.com/sbir/articles/vc/vc-8.htm> and reprinted in the annex.) Neither would it have created the number of research jobs that it did during the late 1980s and early to mid 1990s.

He also questions the ruling that the company was ineligible for SBIR funding once it had been bought by a British firm, noting that the proposed research was to be done in the United States. In his view, SBIR funding contributes to

the employment of life scientists who, especially in recent times, have found it difficult to find employment in research environments.

Dr. Marchionni sees the SBIR program as providing a “signal” to external players, such as firms that the company may be working with to form an alliance. He consistently made the case that the SBIR program affects firm performance through the enhancement of its front-burner programs and the ability to diversity its research portfolio. Moreover, it allows the firm to hire new scientists, thereby creating jobs and providing training consistent with the firm’s research agenda. He also noted that certain research areas within the firm were not appropriate for SBIR funding, moving at too fast a pace to write a grant for the research.

I wish to submit the following comments on the SBIR eligibility requirements pertaining to company ownership by individuals.

The SBIR program has made possible the growth and survival of emerging companies for decades. In helping to create new jobs and advance innovative technology this program has been an essential part of growing and maintaining a vibrant and competitive economy in the United States.

The National Institutes of Health has administered an SBIR program for decades, and this source of funding has been instrumental to emerging companies in a growing biotechnology industry. Many of these companies have been owned in part or were started by venture capital firms. From my personal experience, I was one of the first scientific staff members to join Cambridge NeuroScience, Inc. (CNSI) in 1987, shortly after the company was started by the venture capital firm Warburg Pincus. Prior to the initial public offering, Warburg retained majority ownership of CNSI and we submitted and were funded for more than 10 NIH SBIR grants (five Phase I and five Phase II). I was the Principal Investigator on two such grants. These funds were critical in creating the jobs to grow the company from 18 (when I joined) to more than 60 at the time of the IPO. By virtue of this SBIR support, several product candidates advanced into clinical trails or were partnered with major pharmaceutical companies as part of Phase III commercialization. Thus, not only has it been accepted practice for the NIH SBIR program to support the growth of emerging biotechnology companies, but it has helped to accomplish the mission of the NIH and create new jobs as well.

At the current time, I submit that the Small Business Administration and the NIH need to support the growth of new jobs in this essential economic sector—biotechnology. Many have lost their jobs in the recent economic decline

and tax revenues need to be spent wisely to stimulate job growth. Biotechnology represents a sector of the economy where the U.S. has a clear competitive advantage, and provides an important opportunity to revitalize economic growth. Further, a very sizeable percentage of all drugs produced in the past decade have been discovered at small companies. Since companies that are controlled by venture capital firms often represent some of the more innovative and competitive start-ups, policies that support collaboration between these companies and government agencies would represent prudent and productive use of tax revenues. It is these very companies that have the greatest chance of advancing their technology through to commercialization. Therefore, I offer my very strong support for producing a wording of the eligibility requirements that would enable the NIH to include in the SBIR program emerging companies that are majority owned by venture capital firms.

Paula Stephan

Georgia State University

CryoLife was founded in 1984 by Steven G. Anderson and Robert McNally. Prior to founding the company, Anderson worked at Intermedics, which is now Guidant. CryoLife was founded to commercialize the cryopreservation of human allograft heart valves. The initial technology was “out there,” coming from the University of Alabama Birmingham, which had a cryopreservation lab for allograft heart valves, but was not trying to distribute valves or make the technology widely available. The company has had revenue almost from its inception and had a profit beginning around 1986. Anderson serves as Chairman, President and Chief Executive Officer of the company; McNally is no longer with the company.

CryoLife is located in Kennesaw, Georgia. It is situated in a dedicated building, the second phase of which was completed approximately three years ago. The firm, though incorporated in Florida, has only operated in Georgia. A major factor in the decision to locate in the Atlanta area was the need to be near a large, busy airport, given that the firm deals with human tissue.

CryoLife employs approximately 325 individuals, 10 of whom have a Ph.D. Sales for the year ending 2003 were approximately $60 million; sales had been approximately $88 million for the year ending 2001 (see discussion below).

The firm has developed proprietary processes for the preservation of human heart valves, veins and connective tissue. The firm has developed a tissue engineered heart valve and vascular graft replacement called SynerGraft^® Valve and Synergraft^® Vascular; the firm also has developed a bioadhesive product, BioGlue^® Surgical Adhesive (hereafter referred to as “BioGlue”).

The firm faces some competition in the human tissue business, from both the profit and the not-for-profit sector. BioGlue^® is approved for sales in approximately 50 countries. “In August of 2002 the firm received an order from the Atlanta district office of the FDA regarding the nonvalved cardiac, vascular, and

orthopedic tissue processed by the company since October 3, 2001.”¹¹ Nonvalved cardiac and vascular tissues processed after September 5, 2002 were not subject to the FDA order. Revenue from tissue declined subsequent to this order.

The firm has received an undetermined number of SBIR awards. One database (which counts awards since 1993) says 13; another indicates 12 and excludes awards after 1997. The company reports that they have received several awards with dates subsequent to 1997. Of the 12 in the NAS database, seven were Phase I and five were Phase II. The last SBIR award that the company received was in 2002; the company currently has a Phase I award application pending. Two of the awards have been to the company’s subsidiary, AuraZyme. All SBIR awards have been from NIH although not all awards have come from the same institute at NIH.

The SBIR program did not play a role in the founding of the company. The company was six years old and had 50 to 70 employees at the time that it received its first SBIR award. The current Director of Tissue Technologies, Dr. Steven Goldstein, was hired in 1991 to work on the first SBIR award. It is unclear how the company initially found out about the SBIR program, although it is thought that the Director of Research at that time knew about the program. He is no longer with the company.

The company has received funding from several sources in addition to the SBIR program. Specifically, prior to going public, the company had private investors. It has also received a contract from the Office of Naval Research and NIST funding through the ATP program. The company has received no support from the State of Georgia.

The firm went public in 1993, raising approximately $15,500,000 at that time. The company currently trades on the New York Stock Exchange. SBIR funding contributed to the success of the public offering in the sense that it helped the company initiate development of a diversified product mix by the time the company went public. For example, SBIR funding helped in the development of the vascular product that the company had at the time it went public.

The company reports that the SBIR program has proven key to funding the research and development behind almost all new products of the company, and the company continues to see SBIR funding as an important source of research funding. To quote one of the scientists, “SBIR funding has basically been our external source of funding when we want to build a new product.”

The company has used the SBIR program to develop proprietary property that it has purchased. BioGlue^® is a case in point. The BioGlue^® patent was purchased but CryoLife used SBIR funds to develop concepts from the patent. AuraZyme provides another example. While the patents for AuraZyme technologies were filed before the SBIR grants were awarded, the grants have provided resources to solidify the technology and provide in vivo testing results for proof of principle.

The company holds a number of patents. While some were received subsequent to receipt of SBIR funding, in other instances SBIR funding provided the resources to “solidify the technology” and verify the facts, as noted above. The company currently has at least one pending patent application related to an SBIR award.

Company scientists have a history of publishing. Examples of articles and presentations that have been published as a result of SBIR funding include:

• Paper: Gilbert CW, McGowan EB, Seery GB, Black KS, Pegram MD. Targeted prodrug treatment of HER-2-positive breast tumor cells using trastuzumab and paclitaxel linked by A-Z-CINN Linker. J. Exp. Ther Oncol. 2003, Jan-Feb: 3(1), 27-35; supported by NCI grant 1R43CA95937-01.

• Poster: from 1R43CA95937-01; Proceeding of the American Association for Cancer Research 43, #2061, pg. 414, 2002, Gilbert CW, McGowan EB, Black KS, Pegram MD, Seery GB. “Efficacy testing of targeted drug delivery using A-Z-CINN Linker in vivo: a model for a single treatment cancer cure; supported by NCI grant 1R43CA95937-01.

• Poster, American Heart Association 4th Annual Conference on Arterio-sclerosis, Thrombosis, and Vascular Biology, Washington, DC; May 8-10, 2003, Poster P112. McGowan EB, Gilbert CW, Black KS. AZ-Plasmin, a Novel Thrombolytic Agent for Treatment of Vascular Occlusions.

A list of published scientific papers and abstracts presented related to SynerGraft SBIR grants are given in an annex at the end of this paper.

The company holds four trademarks (BioGlue^®, Synergraft^®, AZ-CINN™, AuraZyme™). In three instances the trademarks are associated with products for which SBIR funding has been received. In no instance was SBIR funding used for the initial research. The fourth trademark is the name of a wholly owned subsidiary of CryoLife.

The company estimates that SBIR funding has provided 20 percent to 25 percent of all research revenue from external sources. Alternative sources for research include revenue from company sales and NIST ATP awards. The company sees SBIR awards as a continuing source of research and development support.

The company has not always chosen to follow up a Phase I with a Phase II application. In the case of BioGlue^®, for example, it was decided not to apply for Phase II because the application might have required the company to disclose too much. In another instance, the research objective changed in the middle of the Phase I award. In still other instances, the aggressive timeline of the company requires that they get the project finished before a Phase II grant would become available. As was noted several times in the discussion, the company has a revenue stream from sales which helps to support research and development. It was also noted that there have been instances where the company has submitted a Phase II grant that has not been funded.

Research scientists expressed reasonable satisfaction with the way in which the SBIR program is currently structured, which now allows for larger and longer Phase Is. They see these changes as a significant improvement. A concern was expressed, however, by one scientist that Phase I awards involving animal studies are difficult to accomplish in a short period of time given the amount of paper work that is required to conduct animal studies. Another scientist stated that the duration of Phase I awards, while generally not a problem for a company the size of CryoLife, was really too short for a one or two-person company. AuraZyme is a two-person company that is fortunate to be “nested” within CryoLife’s corporate structure, but still suffers from these restraints. The short time frame “pushes them to the edge.” Small companies simply don’t have the time to get the space and the equipment and perform the research in the traditional Phase I time frame of six months. Another scientist expressed frustration over the amount of time required between submission and the time of the award. To quote the scientist, “You can have a baby in the amount of time it takes.”

One of the PIs indicated that she had benefited from the advice, and Web site, of Dr. Gregory Milman, Director, Office for Innovation and Special Programs, National Institute of Allergy and Infectious Diseases, NIH. Dr. Milman has developed a video entitled “Advice on SBIR and STTR Applications” that one can access at: <http://www.niaid.nih.gov/ncn/sbir/advice/>. The video takes about an hour to listen to. He also provides annotated examples of outstanding Phase I and Phase II applications at: <http://www.niaid.nih.gov/ncn/sbir/app>.

At least one of the PIs has had RO1 experience in the past and commented that the SBIR program would be enhanced if one could receive extension funds like one could with RO1s.

The interviewees viewed the award process as fair; on the other hand they are aware that one is at a disadvantage in writing grants that relate to proprietary information in the sense that the grant application must be vague. Reviewers pick up on this and the scores reflect this. This can be especially a problem in moving forward from a Phase I award to a Phase II application.

Finally, some frustration was expressed that the SBIR program is becoming increasingly competitive as the number of applications from university faculty

members’ labs increases. The hypothesis expressed was that faculty are increasingly creating companies to apply for SBIR funding to support the research of postdocs and research scientists working directly with the faculty on research. Applications from these “garage-model firms” more closely resemble RO1 grant applications and receive higher scores than do SBIR applications from established companies that are working to develop proprietary information. While it was recognized that some successful companies start out as “garage-model firms,” the argument was that in many instances the SBIR program is providing funding for the faculty member’s lab, rather than for a viable commercial enterprise.

Issues related to disclosure can inhibit a firm’s participation in the SBIR program, or can affect the prospects of a favorable review. The firm also recognizes that at times the SBIR program is too slow to accommodate the aggressive timeline of the firm. As noted above, the SBIR program has proven key to funding the research and development behind almost all new products of the company and the company continues to see SBIR funding as an important source of research funding.

IN PREPARATION

10 Year Results with the CryoLife O’Brien Valve. The Journal of Heart Valve Disease. Prof. Hvass.

2004

A Cautionary Case: The Synergraft Vascular Prosthesis. Eur J Vasc Endovasc Surg. 27:42-44. M.A. Sharp, D. Phillips, I. Roberts, L. Hands.

Cellular Remodeling of Depopulated Bovine Ureter Used as an Arteriovenous Graft in the Canine Model. Journal of the American College of Surgeons. 198(5):778-783. J. Matsuura, K. Black, C. Davenport, C. Goodman, N. Pagelsen, A. Levitt, D. Rosenthal, E. Wellons, M. Fallon, J. Ollerenshaw

2003

Congenital Abdominal Aortic Aneurysm: A Case Report. Journal of Vascular Surgery. 38(1):190-193. P. Bell, C. Mantor, M. Jacocks. [Article featuring use of a SynerGraft allograft.]

Decellularized Pulmonary Homograft (SynerGraft) for Reconstruction of the Right Ventricular Outflow Tract: First Clinical Experience. Z Kardiologie. 92(1):53-59. H. Sievers, U. Stierle, C. Schmidtke, M. Bechtel.

Early Failure of the Tissue Engineered Porcine Heart Valve SYNERGRAFT in Pediatric Patients. Eur J Cardiothorac Surg. 23(6):1002-1006. P. Simon, M. Kasimir, G. Seebacher, G. Weigel, R. Ullrich, U. Salzer-Muhar, E. Wolner.

Evaluation of the Decellularized Pulmonary Valve Homograft SynerGraft™ The Journal of Heart Valve Disease. 12:734-740. J. Bechtel, M. Muller-Steinhardt, C. Schmidtke, A. Brunswik, U. Stierle, H.H. Sievers.

Immunogenicity of Decellularized Cryopreserved Allografts in Pediatric Cardiac Surgery: Comparison with Standard Cryopreserved Allografts. J Thorac Cardiovasc Surg. 126(1):247-252. J. Hawkins, N. Hillman, L. Lambert, J. Jones, G. Di Russo, T. Profaize, T. Fuller, L. Minich, R. Williams, R. Shaddy.

Mechanical Heart Valve Prosthess: Identification and Evaluation (Erratum). Cardiovasc Pathol. 12(6):322-344. J. Butany, M. Ahluwalia, C. Monroe, C. Fayet, C. Ahn, P. Blit, C. Kepron, R. Cusimano, R. Leask.

2002

Decellularized Pulmonary Homograft (SynerGraft) For Reconstruction of the Right Ventricle Outflow Tract: First Clinical Experience. Z Kardiol. 92:53-59. H. Sievers, U. Stierle, C. Schmidtke, M. Bechtel.

Decellularized Cadaver Vein Allografts Used for Hemodialysis Access Do Not Cause Allosensitization or Preclude Kidney Transplantation. American Journal of Kidney Diseases. 40(6):1240-1243. R. Madden, G. Lipkowitz, B. Benedetto, A. Kurbanov, M. Miller, L. Bow.

Tissue Restoration and Repair—Application of Cutting-Edge Technologies to Surgical Products. Business Briefing: Medical Device Manufacturing & Technology (Reference Section) [CD-Rom]; K. Black.

2001

Cardiac Tissue Engineering: New Life for Ailing Hearts. The Cardiovascular Watch. 1(8). Remarks by K. Black. March 16.

Decellularized Human Valve Allografts. Ann Thorac Surg. 71:S428-432. R. Elkins, P. Dawson, S. Goldstein, S. Walsh, K. Black.

Humoral Immune Response to Allograft Valve Tissue Pretreated with an Antigen Reduction Process. Seminars in Thoracic and Cardiovascular Surgery. 13(4—Suppl 1):82-86. R. Elkins, M. Lane, S. Capps, C. McCue, P. Dawson.

Recellularization of Heart Valve Grafts (SynerGraft) by a Process of Adap-

tive Remodeling. Seminars in Thoracic and Cardiovascular Surgery. 13(4—Suppl 1):87-92. R. Elkins, S. Goldstein, C. Hewitt, S. Walsh, P. Dawson, J. Oller.

2000

Advances in Heart Valve Surgery. Cardiac Surgery. November-December. [Article featuring SynerGraft Heart Valve.] Source: John E. Mayer, Jr., M.D.

Tissue Engineered Heart Valves. The Journal of Biolaw & Business. 3(2). K. Black.

Transpecies Heart Valve Transplant: Advanced Studies of a Bioengineered Xeno-Autograft. Ann Thorac Surg. 70:1962-1969. S. Goldstein, D. Clarke, S. Walsh, K. Black, M. O’Brien.

1999

The SynerGraft Valve: A New Acellular (Nonglutaraldehyde-Fixed) Tissue Heart Valve for Autologous Recellularization First Experimental Studies Before Clinical Implantation. Seminars in Thoracic and Cardiovascular Surgery. 11(4—Suppl 1):194-200. M. O’Brien, S. Goldstein, S. Walsh, K. Black, R. Elkins, D. Clarke.

1998

Tissue Modifications. Transplantation Proceedings. 30:2729-2731. K. Black, S. Goldstein, J. Ollerenshaw.

1997

Acellular Porcine Pulmonary and Aortic Heart Valve Bioprostheses (book chapter). Pp. 225-233 in Stentless Bioprostheses Second Edition, Isis Medical Media. D. Ross, J. Hamby, S. Goldstein, K. Black.

1994

Tissue-Based Heart Valve Grafts—New Developments. Cardiac Chronicle. 8(3). S. Goldstein, S. Harris.

2005

Superior Durability of Synergraft Decellularized Pulmonary Allografts Compared to Standard Cryopreserved Allografts (poster presentation). Soci-

ety of Thoracic Surgeons. Z. Tavakkol; S. Gelehrter; C. S. Goldbert; E. L. Bove; E. J. Devaney; R. G. Ohye.

2004

Aortic Root Replacement with a Novel Decellularized Cryopreserved Aortic Homograft: Postoperative Immunoreactivity and Early Results [poster presentation]. Advances in Tissue Engineering and Biology of Heart Valves. K. Zehr, M. Yagubyan, H. Connolly, S. Nelson, H. Schaff.

Biomechanical Properties of SynerGraft Treated Human Heart Valves and Vascular Grafts [poster presentation]. Advances in Tissue Engineering and Biology of Heart Valves. S. Walsh, P. Dawson, K. Black.

Clinical Outcomes of a Depopulated Bovine Ureter (SynerGraft Vascular Graft Model 100) Used as an Arteriovenous Access Graft [poster presentation]. Advances In Tissue Engineering and Biology of Heart Valves. C. Darby, A. Cornall.

Decellularized Allograft Heart Valves (CryoValve SG)—Early Clinical Results from a Multicenter Registry. Advances in Tissue Engineering and Biology of Heart Valves. D. Clarke, R. Elkins, D. Doty, J. Tweddell.

In Vivo Remodeling and Tissue Engineering of a Novel Decellularized Bovine Ureter Following Implantation as an Arteriovenous Graft [poster presentation]. Advances in Tissue Engineering and Biology of Heart Valves. C. Hewitt, S. Marra, A. DelRossi.

Mid-Term Findings on Echocardiography and Computed Tomography After RVOT-Reconstruction: Comparison of Decellularized (SynerGraft) and Conventional Homografts. Third EACTS/ESTS Joint Meeting. J. M. Bechtel, J. Gellisen, A. W. Erasmi, M. Petersen, U. Stierle, H. H. Sievers.

Multicenter Clinical Outcomes with a Decellularized Porcine Pulmonary Heart Valve (SynerGraft Heart Valve, Model 700) for Reconstruction of the Right Ventricular Outflow Tract. Advances in Tissue Engineering and Biology of Heart Valves. R. Chard, G. Gargiulo, U. Hvass, H. Lindberg, I. Mattila, M. Redmond, L. Segadal, P. Simon.

Performance of Decellularized Bovine Ureter as a Peripheral Vascular Graft in the Dog [poster presentation]. Advances in Tissue Engineering and Biology of Heart Valves. S. Goldstein, J. Matsuura, C. Ponce, K. Sylvester, D. Fronk, K. Black.

2003

A Xenograft for Vascular Access: A New Start to An Old Idea? [poster pre-

sentation]. 3rd International Congress, Vascular Access Society. A. Cornall, C. Darby.

An Underestimated Resource for Difficult Patients. The Lower Limb A-V Fistulas. 3rd International Congress Vascular Access Society. L. Berardinelli, C. Beretta, M. Carini.

Bovine Ureter Grafts: Our Intial Experience. The European Society for Cardiovascular Surgery 52nd Congress. G. Esposito, T. Castrucci, A. Nicoletti, G. Canu, M. Fusari.

CryoLife O’Brien Stentless Aortic Porcine Valve at 10 Years. Society for Heart Valve Disease 2nd Biennial Meeting. U. Hvass, F. Baron, A. Elsebaey, D. Nguyen, E. Flecher.

Early Performance of CryoValve SG Pulmonary Heart Valve Used for the Ross Procedure. Society for Heart Valve Disease 2nd Biennial Meeting. J. Oury, P. Wojewski, D. Doty, D. Oswalt, R. Elkins.

Up to 8 Years Experience with the Pulmonary Autograft in Subcoronary and Root Inclusion Technique. Society for Heart Valve Disease 2nd Biennial Meeting. H. Sievers, U. Stierle, G. Dahmen, C. Schmidtke.

2002

Cellular Remodeling of Depopulated Bovine Ureter Used as an Arteriovenous Graft in the Canine Model. American College of Surgeons 88th Annual Clinical Congress/Surgical Forum. J. Matsuura, E. Wellons, K. Black, J. Ollerenshaw.

CryoVein^®SG & CryoArtery^®SG: Tissue Engineered Vascular Allografts for AV Access [poster presentation]. American Association of Tissue Banks 26th Annual Meeting. K. Sylvester, S. Capps, D. Fronk.

Depopulated Femoral Vein Allograft as an Arteriovenous Graft in High Risk Patients for Infection. European Society for Cardio-Vascular Surgery. J. Matsuura.

Depopulated Venacaval Homograft: A New Venous Conduit. American Association of Thoracic Surgeons. M. Malas, C. Baker, S. Quardt, M. Barr, W. Wells.

Early Clinical Experience with SynerGraft^®for Hemodialysis Access and Peripheral Vascular Disease. European Society for Cardio-Vascular Surgery. B. Yoffe, E. Harah, Y. Leonty.

Immunogenicity of Decellularized Cryopreserved Allografts in Pediatric Cardiac Surgery: Comparison with Standard Cryopreserved Allografts. American Association of Thoracic Surgeons. J. Hawkins, J. Jones, N. Hillman, L. Lamberg, G. DiRusso, T. Profaizer, T. Fuller, R. Shaddy.

In Vivo Resistance to Calcification of SynerGraft Tissue Engineered Heart Valve Grafts. American Association of Thoracic Surgeons. R. Elkins, S. Goldstein, S. Walsh, K. Black.

Use of a Bioengineered Vascular Tissue Graft for Use in Battlefield Injuries. 23rd Army Science Conference. K. Black, J. Matsuura, C. Davenport, C. Goodman, N. Pagelsen, J. Ollerenshaw.

2001

A Tissue Engineered Heart Valve: In Vitro Performance of the SynerGraft Heart Valve. The Society for Heart Valve Disease First Biennial Meeting. S. Walsh, S. Goldstein, C. Bair, K. Black.

Humoral Immune Response to Allograft Valve Tissue Pretreated with an Antigen Reduction Process. Stentless Bioprostheses 4th Annual Symposium. R. Elkins, M. Lane, S. Capps, C. McCue, P. Dawson.

In Vivo Performance of an Unfixed Composite Aortic Xenograft [SynerGraft] as Aortic Root Replacement in the Sheep [poster presentation]. The Society for Heart Valve Disease. R. Elkins, S. Goldstein, S. Walsh, K. Black.

New Technologies in Heart Valve Surgery. Scandinavian Association for Thoracic Surgery 59th Annual Meeting. S. Goldstein.

Recellularization of Heart Valve Grafts [SynerGraft] by a Process of Adaptive Remodeling. Stentless Bioprostheses 4th Annual Symposium. R. Elkins, S. Goldstein, S. Walsh, J. Ollerenshaw, C. Hewitt, K. Black, D. Clarke, M. O’Brien.

Results of 13-Year Follow-Up Study on Aortic Heart Valve Replacements Utilizing the Ross Procedure. Western Thoracic Surgical Association. R. C. Elkins, M. F. O’Brien.

SynerGraft: The First Successful Reconstruction and Regeneration Tissue Products. Tissue Engineering for Heart Valve Substitutes Symposium. K. Black.

SynerGraft Vascular Conduit as a Hemodialysis Access Graft in the Canine Model. 2nd International Congress Vascular Access Society. J. Matsuura, K. Black, E. Wellons, C. Davenport, C. Goodman, K. Greene, J. Ollerenshaw.

SynerGraft Vascular Conduit as a Hemodialysis Access Graft in the Canine Model. Eastern Vascular Society 15th Annual Meeting. J. Matsuura, K. Black, E. Wellons, C. Davenport, C. Goodman, K. Greene, J. Ollerenshaw.

SynerGraft Vascular Conduit as a Hemodialysis Access Graft in the Canine Model [poster presentation]. SVS/AAVS Joint Meeting. J. Matsuura, K. Black, E. Wellons, C. Davenport, C. Goodman, K. Greene, J. Ollerenshaw.

2000

Advances in Tissue Processing. 24th Annual Meeting American Association of Tissue Banks. K. Black.

Decellularized Human Valve Allografts. VIII International Symposium Cardiac Bioprosthesis. R. Elkins, K. Black, P. Dawson, S. Goldstein, S. Walsh.

In Vivo Arterialization of SynerGraft Processed Non-Vascular Xenogeneric Conduit. 2nd International Meeting of the Onassis Cardiac Surgery Center. R. Hanley, R. Lust, Y. Sin, K. Black, J. Ollerenshaw.

In Vivo Arterialization of SynerGraft^®Processed Non-Vascular Xenogeneic Conduit. American Heart Association Scientific Sessions.

Successful Use of Natural Revitalizing XenoGraft Connective Tissue Matrices in Animal and Human Heart Valve Replacement [poster presentation]. International Society for Applied Cardiovascular Biology. S. Goldstein, S. Walsh, K. Black, M. O’Brien.

SynerGraft Heart Valve: Reconstitution of an Unfixed Acellular Xenograft In Vivo [received AHA Citation]. American Heart Association. R. Elkins, K. Black, M. O’Brien, S. Goldstein, S. Walsh, D. Clarke, S. Bode, J. Hamby.

SynerGraft Tissue Conduit is Adopted by Host in Aortic Reconstruction. VIII International Symposium Cardiac Bioprosthesis. D. Clarke, R. Lust, Y. Sun, K. Black, J. Ollerenshaw.

SynerGraft^®Treatment of Valve Allografts [poster presentation]. 24th Annual Meeting American Association of Tissue Banks. P. Dawson, S. Goldstein, S. Walsh, K. Black.

SynerGraft Vascular Tissue Conduit is Rapidly Recellularized Following Peripheral Bypass. European Association for Cardio-Thoracic Surgery 14th Annual Meeting. D. Clarke, M. Tillson, K. Black, J. Ollerenshaw.

Tissue Heart Valve Engineering: Experience with an Autologous Engineered Xenograft. Peripheral Vascular Surgical Society. M. O’Brien.

Transpecies Heart Valve Transplant: Advanced Studies of a Bioengineered Xeno-Autograft. The Society of Thoracic Surgeons 36th Annual Meeting. S. Goldstein, D. Clarke, S. Walsh, K. Black, M. O’Brien.

Use of Decellularized Cadaver Allograft (SYN) Does not Cause Allosensitization in Hemodialysis Patients and is Safe for Use in Potential Transplant Recipients. 2001 ASN/ISN World Congress of Nephrology. G. Lipkowitz, B. Benedetto, R. Madden, A. Kurbanov, L. Bow, M. Miller, J. Matsuura.

1999

A New Era in Health Care. Cambridge Health Care Institute Meeting on Tissue Engineering. S. Goldstein.

A Simple Tissue Implant Model to Study Xenogeneic and Allogeneic Rejection [poster presentation]. Association for Academic Surgery. H. Tran, M. Puc, N. Patel, S. Goldstein, J. Ollerenshaw, K. Black, A. DelRossi, C. Hewitt.

Acellular Porcine Heart Valve Leaflets Do Not Mineralize in the Ovine RVOT; Stentless Bioprosthesis Third International Symposium. S. Goldstein, K. Black, D. Clarke, E.C. Orton, M. O’Brien.

Advanced Tissue / Cellular Engineering. European Medical & Biological Engineering Conference. K. Black.

Advances in Tissue Processing. 24th Annual Meeting American Association of Tissue Banks. K. Black.

Decellularized Human Valve Allografts. VIII International Symposium Cardiac Bioprosthesis. R. Elkins, K. Black, P. Dawson, S. Goldstein, S. Walsh.

In Vivo Arterialization of SynerGraft Processed Non-Vascular Xenogeneric Conduit. 2nd International Meeting of the Onassis Cardiac Surgery Center. R. Hanley, R. Lust, Y. Sin, K. Black, J. Ollerenshaw.

In Vivo Arterialization of SynerGraft^®Processed Non-Vascular Xenogeneic Conduit. American Heart Association Scientific Sessions.

Inflammatory Responses to Uncrosslinked Xenogeneic Heart Valve Matrix. World Heart Valve Disease Symposium. S. Goldstein, K. Black, D. Clarke, E.C. Orton, M.F. O’Brien.

Performance of an Acellular, Composite Porcine Heart Valve Bioprosthesis in the Ovine RVOT. 34th Congress of the European Society for Surgical Research. S. Goldstein, S. Walsh, K. Black, E.C. Orton, D. Clarke.

Successful Trans-Species Implant of a Tissue Engineered Heart Valve. First Satellite Symposium on Tissue Engineering for Heart Valve Bioprostheses. K. Black.

Transpecies Heart Valve Transplant: Advanced Studies of a Bioengineered Autograft. The European Association for Cardio-Thoracic Surgery. S. Goldstein, S. Walsh, K. Black, D. Clarke, E.C. Orton, M.F. O’Brien.

1998

Meniscal Transplantation to Tissue Engineering: CryoLife’s Vision of Orthopedics. Osteochondral Autograft Transfer System 1998 Meniscus and Cartilage Transplantation Study Group on Meniscus Reconstruction. K. Black.

1997

Acellular Porcine Pulmonary and Aortic Heart Valve Bioprostheses. 2nd Intl Stentless Bioprostheses Symposium. D. Ross, J. Hamby, S. Goldstein, K. Black.

Effects of Cryopreservation on Biomechanical Properties of Tissue Engineering Matrices. Workshop on Biomaterials and Tissue Engineering. S. Goldstein, J. Hamby.

The Ross Operation in Children: 10-Year Experience. 33rd Annual Meetingof the Society of Thoracic Surgeons. R. Elkins, C. Knott-Craig, K. Ward, M. Lane.

1995

Age-Dependent Alterations in Collagen Cross-Links in Porcine Aortic Heart Valve Leaflets. American Society for Biochemistry and Molecular Biology. S. Goldstein, M. Yamauchi.

Modulation of Human Dermal Fibroblast Remodeling of Porcine Heart Valve Leaflet Matrix. American Society for Artificial Internal Organs. S. Goldstein, D. Fronk.

1994

Development of a Chimeric Heart Valve: Effects of Cell Removal upon Leaflet Mechanics and Immune Responses in a Xenogeneic Model. VI International Symposium Cardiac Bioprostheses. S. Goldstein, K. Brockbank.

Localization of Epitopes Involved in Hyperacute Rejection in Porcine Heart Valve Xenografts. Strategies for Xenotransplantation. S. Goldstein.

1993

Effects of Cell Removal Upon Heart Valve Leaflet Mechanics and Immune Responses in a Xenogeneic Model. 2nd Intl Congress on Xenotransplantation. S. Goldstein, K. Brockbank.

Robin Gaster

North Atlantic Research

Illumina is a successful venture funded biomedical company selling tools for researchers in genomics. Located on a new campus in the San Diego biomedical cluster, the company was expected to reach break-even in 2005.

Illumina is a classic example of a venture-funded biomedical company, one that has gone public and appears poised to reach profitability in 2006, while providing cutting edge technology in an area of critical importance for the large-scale analysis of genetic variation and function. Because Illumina received venture funding during its first year in existence, and subsequently received further rounds before a successful IPO, SBIR was never the primary source of research funding.

However, according to its founder and one of its key initial researchers, Dr. Mark Chee, SBIR did provide funding for projects that would not have been funded in the normal course of company business—and these projects turned out to be of critical importance for the development of core Illumina product lines.

The Illumina case therefore shows that even where companies are well funded, SBIR can have an important impact in funding alternative or complementary lines of business that might not fit within a company’s top research priorities, or might not meet projected internal hurdle rates.

Comments from Dr. Chee about the SBIR program focused on the extended funding cycle and time lags, and selection and review procedures.

Illumina was founded in April 1998 by David Walt, Ph.D., CW Group (Larry Bock), John Stuelpnagel, D.V.M., Anthony Czarnik, Ph.D. and Mark Chee, Ph.D., based on core technology developed at—and then exclusively licensed from—Tufts University. The first substantial venture capital funding (about $8.6 million) came in November 1998.

Illumina completed a $28 million Series C financing in December 1999, and an IPO at the end of July 2000, raising just over $100 million.

Illumina’s mission is to develop tools for the large-scale analysis of genetic

FIGURE App-D-4

SOURCE: Illumina.

variation and function, which in turn will support an understanding of variation and function at the cellular level, critical for achieving the broad social goal of personalized medicine.

Illumina’s tools convert data generated from human genome sequencing into medically relevant information, linking genetic variation and genetic function to specific diseases, improving the community’s ability to discover drugs, and permitting diseases to be detected earlier, and with greater accuracy and specificity.

Massive quantities of raw genetic data have flowed from the successful sequencing of the human genome. This has driven demand for tools that can assist researchers in processing the billions of tests necessary to convert raw data into medically valuable information. Such tools must perform functional analysis of highly complex biological systems. Illumina’s technology platform has been developed into a line of products that can address the scale of experimentation and the breadth of functional analysis required.

Illumina has developed a proprietary array technology that enables the large-scale analysis of genetic variation and function. BeadArray technology combines microscopic beads and a substrate in a simple proprietary manufacturing process to produce arrays that can perform many assays simultaneously.

This approach provides a combination of high throughput, cost effectiveness, and flexibility:

• High throughput is achieved by using a high density of test sites per array, and by formatting arrays in either a pattern arranged to match the wells of standard microtiter plates or in various configurations in the format of standard microscope slides, allowing throughput levels of up to 150,000 unique assays per plate. Laboratory robotics are also used to speed processing time.

• Cost effectiveness is maximized by reducing consumption of expensive reagents and valuable samples, and through low-cost manufacturing processes that exploit cost reductions generated by advances in fiber optics,

FIGURE App-D-5 Bead-based technology on a chemically etched fiber optic strand.

SOURCE: Illumina.

digital imaging, and bead chemistry technologies. Per-sample running costs, including labeling, will typically range between $80 and $200, comparable in cost to just the sample labeling steps using other microarray platforms.

• The flexibility needed to address multiple markets segments is provided by varying the size, shape, and format of the well patterns, and creating specific bead pools or sensors for different applications.

BeadArray technology is deployed by Illumina in two different array formats, the Array Matrix and the BeadChip. Illumina’s first bead-based product was the Array Matrix, which incorporates fiber optic bundles, manufactured to Illumina specifications, cut into lengths of less than one inch. Each bundle contains approximately 50,000 individual fibers.

Ninety-six bundles are placed into an aluminum plate which forms an Array Matrix. BeadChips are fabricated in microscope slide-shaped sizes with varying

numbers of sample sites per slide. Both formats are chemically etched, to create tens of thousands of wells for each sample site.

In a separate process, Illumina create sensors by affixing a specific type of molecule to each of the billions of microscopic beads in a batch. Different batches of beads are coated different specific types of molecule. The particular molecules on a bead define that bead’s function as a sensor. For example, Illumina creates a batch of SNP sensors by attaching a particular DNA sequence to each bead in the batch. Batches of coated beads are combined to form a pool specific to the type of array. A bead pool one milliliter in volume contains sufficient beads to produce thousands of arrays. This technology permits the creation of universal arrays for SNP genotyping. By varying the reagent kit, users can still use the array to test for any combination of SNPs.

To form an array, a pool of coated beads is brought into contact with the array surface where they are randomly drawn into wells, one bead per well. The tens of thousands of beads in the wells comprise individual arrays. Because the

beads assemble randomly into the wells, a final procedure called decoding is used in order to determine which bead type occupies which well in the array. Decoding also validates each bead in the array—a further quality control test. By using multiple copies of each bead type, the reliability and accuracy of the resulting data is improved via statistical processing of results from identical beads.

An experiment is performed on the Array Matrix by preparing a sample, such as DNA from a patient, and introducing it to the array. The Matrix is dipped into a solution containing the sample, and molecules in the sample bind to matching molecules on the coated bead. The BeadArray Reader detects the matched molecules by shining a laser on the fiber optic bundle. Measuring the number of molecules bound to each coated bead, results in a quantitative analysis of the sample.

Genomic applications require many different short pieces of DNA that can be made synthetically, called oligonucleotides (single-stranded DNA). For example, SNP genotyping typically requires three to four different oligonucleotides per assay. An SNP genotyping experiment analyzing 10,000 SNPs may therefore require 30,000 to 40,000 different oligonucleotides, contributing significantly to the expense of the experiment.

Illumina’s Oligator technology is designed for the parallel synthesis of many different oligonucleotides. Each synthesizer can produce up to 3,072 oligos in parallel, using very small amounts of material.

In 2001, Illumina launched its commercial genotyping service product line, combining BeadArray technology with an automated process controlled by a laboratory information management system to provide high throughput identification of the most common form of genetic variation, known as single nucleotide polymorphisms, or SNPs.

In 2002, Illumina launched BeadLab, an integrated turnkey system built around BeadArray technology. The BeadLab can routinely produce up to 1.4 million genotypes per day.

In 2003, Illumina launch several new products, including 1) a new array format, the Sentrix BeadChip; 2) a gene expression product line on both the Sentrix Array Matrix and the Sentrix BeadChip that allows researchers to analyze a focused set of genes across 8 to 96 samples on a single array; and 3) a benchtop SNP genotyping and gene expression system, the BeadStation, for performing moderate-scale genotyping and gene expression using our technology.

As of end-2004, nine BeadLabs were in use, along with 42 BeadStations.

In 2005, Illumina bought CyVera, whose digital-microbead platform is highly complementary to Illumina products and services.

The systematic rollout of these technologies has provided a firm base for rapidly expanding revenues at Illumina. The 2005 annual report shows that revenues have increased dramatically in 2003 and 2004, and that the company seemed poised for profitability in 2005.

This strongly positive trend is reflected especially in revenue growth, as shown in Figure App-D-6.

Dr. Chee is the source for SBIR related activities at Illumina, as he was the principal investigator on most early SBIR awards, and has been a strong champion of the program within the company.

FIGURE App-D-6 Illumina revenue growth 2000-2004.

SOURCE: Illumina.

According to Dr. Chee, SBIR was a very positive experience for working with VCs, as it provided a significant technical validation of the technology. While the initial round of funding came before the first SBIR award, the latter was very important for the second round of financing a year later. However, it would not be accurate to say even here that SBIR made the difference between VC funding or not.

The real importance of SBIR at Illumina was that it provided flexibility in pursuing projects outside the mainstream of immediate research objectives. As such, it provided a key counter-balance to the tendency to over-focus, which is perhaps inevitable in a small company. At Illumina, SBIR definitely promoted a more diverse approach to R&D. And of course, additional funding is always useful to researchers.

The additional opportunities provided by SBIR almost all paid off in commercially successful, revenue-generating products.

There was a lack of demand from customers at that time—mainly because they were genotyping at a very much smaller scale (by a couple of orders of magnitude or thereabouts). Although this lack of immediate demand would probably not have blocked the project receipt of SBIR funding allowed this research to progress more rapidly.

The genotyping project became the technical foundations for a critical product line, which in turn became the base for Illumina’s work with The International HapMap Project, a highly prestigious international genotyping project. The Illumina technology has been enormously important for cutting end-user costs, which is especially important for some of the developing nations participating in the project—for example China, which is using the technology to meet its commitments to the HATMAP project.

SBIR funding was used to start work on the foundation research used to determine the best way to implement design of the array-based system. Positive results during the SBIR-funded research quickly led to substantial subsequent company investment. According to Dr. Chee, SBIR funding for this project lies somewhere between necessary and really useful.

The pyro-sequencing project was another nonmainstream project that would not have been attempted without SBIR support. In this case, while the technical results from the research were good, the project was eventually abandoned for business reasons.

This project constitutes an important SBIR success story, leading to significant Illumina products. The profiling project was a lower priority for Illumina, partly because this appeared to be an effort that would compete directly with the much better funded and established Affymetrix.

SBIR allowed the company to project its thinking into the next wave of technology, and this worked out very well. It took about 3 years to develop this tech to the marketplace. That technology created the base for Illumina’s product lines covering whole genome expression arrays. These arrays generate superb data, and are a highly successful commercial product. They would not have been possible without SBIR.

Overall, it is clear that SBIR was important at Illumina because it allowed Dr. Chee to successfully champion projects that would not normally have been funded by the company, projects with high-risk/high-return characteristics. SBIR funding was not needed for core company projects and research, but within the company—like any small company, even a well funded start-up, there was limited funding for projects outside the immediate research stream. As a result, the projects funded by SBIR would not have been funded in the normal course of business.

SBIR at Illumina should not be understood as focusing on peripheral research; instead, it allowed a focus on higher-risk research that was positioned further from the market projects that resulted in dramatic improvements in the core technology.

There has been a very big pay-off from SBIR projects at Illumina:

• Genotyping.

• Parallel arrays.

• Gene expression profiling.

The first two are integral parts of Illumina’s main product lines. They have returned many times the original investment in revenues for the company.

It is also worth noting that Illumina’s experience in some ways confirms the very short product cycle identified in many Phase II Recipient Survey responses. For example, Illumina’s parallel array processor, which addresses multiple arrays at the same time, was originally seen as developed of a technology platform. Research went very fast, and Illumina was able to start selling a commercial system before the end of Phase II.

The following comments are from the interview with Dr. Chee, as he has been the primary SBIR contact at Illumina.

Dr. Chee said that in general, he believed the SBIR program was highly successful. He had some observations about areas of possible improvement.

Like a number of other applicants in his experience, Dr. Chee said that he often received comments that reflected lack of understanding of the differences between commercial and academic R&D. One example of the differences could be found in his work on gene expression profiling

Because the company was building work in this area without a preexisting base, technology was at every stage of the project extremely crude. Initial results of the research were as a result “awful.” However, that research also suggested that the theory on which the research was based was valid, and there were some very preliminary indications that the technology would in the end work well.

Reviewer comments seemed to indicate expectations that by end of Phase I, there would be a system in place that was performing well. In Dr. Chee’s view, this indicated a very naïve understanding of how new technology gets invented in a company, as opposed to in an academic setting, where preliminary successful research results are usually required before substantial grants are awarded.

This misunderstanding of company-based research led to problems with overacademic reviews. Dr. Chee pointed out that RO1 applications typically came from universities with existing labs already in place for preliminary experiments, a system of research, and staff and grad students. The result was usually lots of good preliminary data.

In contrast, Illumina started with three people at a conference table. Work was literally conducted sitting on the floor, writing on notepads. Everything was built from scratch: the Illumina team wrote their own software, and mixed their own reagents. Nothing worked well during the initial period, and even later, good results often took significant amounts of time. As a result, Illumina’s applications “looked pretty sketchy” in the initial period. Reviewers of these early applications wanted an R01 type approach, and clearly did not understand the corporate research environment of a start-up.

Dr. Chee observed that academic review for commercial potential was likely to be a futile exercise for Phase I, and that pressure to develop a complete commercialization plan at this stage was likely to be more trouble than help to the company. He also noted that presenting more material on commercialization did not always work to the company’s advantage in review, as it presented more material for reviewers to criticize. Instead of the focus on commercialization

planning, Dr. Chee suggested that NIH focus on commercialization potential—commercialization track record and other funding.

In general, Dr. Chee thought that the concept of a commercialization consultant attached to the review section might be worth exploring, but he did not think that a separate two-stage review which separated commercialization and technical review would be a good idea, as it could add additional delays.

Dr. Chee emphatically noted that the primary problem with the SBIR program was the funding cycle and the long delays between application and funding. In his recent experience, applications were likely to be “in limbo for a year even if the application was eventually successful.”

Anything that could reduce the length of the funding cycle was worth exploring, and Dr. Chee was very positive about the possibility of offering applicants a chance to provide a short written “rebuttal” to the comments of the lead reviewer during the first. This in his view fit well with the new system implemented at CRS about 2 years ago whereby lead reviewers prepared comments before the meeting of the study section.

Similarly, Dr. Chee strongly favored “instant scoring”—the notion that the actual score should be developed very quickly after the meeting of the review panel, and also that scores once assigned should be released electronically to applicants immediately, well before final pink sheet comments could be available. He also favored any methods for accelerating pink sheet distribution itself.

Dr. Chee said that in the real world it is difficult to avoid conflicts completely and still get good reviewers. However, his approach was not to worry too much about potential conflicts, trusting to the system to sort that out. He has tried to point out direct competitors (e.g., for Illumina applications, Affymetrix) who should not act as reviewers.

However, Dr. Chee also recognized that the review process is intrinsically difficult, and that the SBIR program does this work reasonably well, in comparison with other NIH selection panels with which he has been involved.

In general, Dr. Chee noted that there was room for much better cost-benefit analysis by NIH, and that one size (award) did not and should not fit all applicants. He believed that if different size awards became the norm, it would be especially important for NIH to developed procedures for assessing the relative costs and likely benefits of applications.

Specially, he saw merit in testing approaches that would weight applications inversely for the funding required, so that applications that were especially expensive would have to provide correspondingly greater benefits.

He observed that the very small size of Phase I actually worked against startups that had no other resources on which to draw and possibly no infrastructure, while being required to present feasible and exciting projects. However, he believed that the current size of the Phase I award at NIH was appropriate and should not be increased.

Paula Stephan

Georgia State University

Inhibitex was founded in 1994 at Texas A&M where the co-founders, Dr. Joseph M. Patti and Dr. Magnus Höok, were on the faculty. The firm moved to Atlanta in 1998 when it received funding from Alliance Technology Ventures, which has a mandate to build biotech in Atlanta. Inhibitex hired its first employee soon after arriving in Atlanta. During its early years in Atlanta the firm worked out of lab space at Georgia State University; the firm got dedicated space after hiring its fifth employee. It currently has approximately 75 employees and will relocate to new space, financed in part by the state of Georgia, in 2005. Dr. Patti has been full-time with the firm since 1998. He currently serves as Vice President, Preclinical Development and Chief Scientific Officer. He is also a director of the firm. Dr. Höok remains on the faculty of Texas A&M and serves on the Scientific Advisory Board of the company.

The scientific platform for the company is MCSRAMM; the research underpinning this platform came out of Texas A&M. The company has two products in clinical trails: Veronate and Aurexis. Vernoate is in Phase III clinical trials as an anti-infectious drug to prevent hospital-associated infections in very low birth weight infants (VLBW infants). There are approximately 60,000 VLBW infants born each year in the United States and studies indicate that 30 to 50 percent develop at least one hospital-associated infection while in the neonatal intensive care unit, resulting in significant mortality and morbidity. Veronate has been awarded Fast Track and Orphan Drug status by the FDA. Clinical trials started in 2002. Aurexis is designed to combat S. aureus blood stream infections in hospitalized patients (staph). It is a leading cause of hospital-associated infections and related mortality. It is estimated that there were approximately one million cases of hospital-associated S. aureus infections worldwide in 2002. Aurexis is designed to be used in tandem with standard antibiotic treatments. Aurexis has recently completed a 60-patient Phase II clinical trial.¹⁴ The company has three additional product candidates in preclinical development. The company has a collaborative agreement with Wyeth for global development of vaccines targeting staphylococcal infections. The company also has a co-collaboration agreement with Dyax, a company based in Cambridge, MA, for the development of human monoclonal antibodies targeting enterococci.

The company has raised approximately $174 million since 1998: $85 from private funding, which includes venture capital from New Enterprise Associates and Alliance Technology Ventures, and $39 million from its IPO in June of 2004 and $50 million from a PIPE financing in November 2004. The company’s stock is traded on NASDQ under the ticker “INHX.”

Since inception the company has not generated any revenue from the sale of products and does not expect to until it receives regulatory approval for commercialization of products. Its current revenue (approximately $1 million in 2003) comes from the amortization of an up-front license fee, quarterly research and development support payments received in connection with a license and collaboration agreement with Wyeth and a grant received from the FDA’s Office of Orphan Products Development.

The company has had one SBIR, Phase I. It was awarded 9/15/1999, for $99,350; Joseph Patti was the PI. The company, according to Dr. Patti, applied for three other SBIR Phase Is which were unfunded. The funded study, according to Dr. Patti, was designed to look at the potential of a multicomponent S. aureus vaccine. The company had fewer than five employees at the time the SBIR award was received.

The co-founders of the firm were both affiliated with Texas A&M at the time the company was founded. Joseph M. Patti was assistant professor at Texas A&M Institute of Biosciences and Technology (1994-1998) and co-founder Magnus Höok was Regents Professor and Director for the Center of Extracellular Matrix Biology. Prior to his appointment as an assistant professor, Dr. Patti was a post-doc in the lab of Dr. Höok. The SBIR award played no role in the creation of the firm.

In addition to SBIR funds, the firm received government funds from the FDA as a result of Veronate being awarded orphan drug status. The company has a collaborative agreement, noted above, for the global development of vaccines against staphylococcal infections. The company received venture funding and had an initial public offering in 2004 (see discussion above).

The company does not see the SBIR program as playing a role in the decision of external partners to provide funding. Indeed, Dr. Patti expressed the view that SBIR funding could potentially be a drawback to the receipt of VC money because VCs might look unfavorably on the reporting obligations associated with an SBIR award. He also noted that disclosure can be an issue: “The IP people get kind of antsy when you start talking about some of these grants, whether they are considered confidential or not confidential. Who’s reviewing it? Do they have an alliance? Are they competitors?”

According to Dr. Patti, although preliminary, the data generated from the SBIR award were “interesting and prompted us to continue the work, albeit with a slightly different focus.” Dr. Patti went on to say that “one could argue that it [SBIR] helped get our Wyeth deal, although even in the absence of this funding, we would have pursued the vaccine approach.” The collaboration agreement with Wyeth was executed prior to the company going public and was described in the IPO prospectus.

The company has a number of patents, and Inhibitex scientists have published papers in scientific journals. None of the patents or publications relate directly to the SBIR award.

The company does not see the SBIR award as playing a key role in the company’s strategy and currently does not anticipate applying for further SBIR awards. “I have struggled with the applicability of this program to a growing firm; useful if you have a side project—useful to look at noncore areas—but how could you survive if you were asking SBIR funding for the core?” According to Dr. Patti, even the larger grants of several million dollars that are currently being awarded are too small to run a small Phase II clinical trial. The Inhibitex 60-person Phase II clinical trial for Aurexis cost approximately $5 million. SBIRs can be helpful in funding exploratory science, but “you can’t grow your organization based off of them.”

Dr. Patti expressed the opinion that SBIRs were not compatible with the life span of an early stage biotech company. He estimates the length of time between writing the proposal and receiving SBIR money to be approximately a year, while the life span of an early stage biotech company is at most two years. Moreover, the amount of money (at least when Phase Is were limited to $100,000) was insufficient to support research unless the firm is in an academic lab and does not have to pay overhead, etc. If the firm is in dedicated space, the amount of funding is insufficient and is “not compatible with the expectations of the investors that you are going after.”

The company sees the SBIR program as being well publicized. Other than venture capital and participation in the ATP program, “this is it.”

The company has not participated in any business/commercialization support activities sponsored by (a) the funding SBIR agencies, (b) the states related to SBIR opportunities.

The company clearly sees the size and duration of the SBIR awards (at least as they existed in the late 1990s and early 2000s) to be insufficient for a dedi-

cated biotech firm. The greatest drawback, from the company’s point of view, is the speed of the SBIR process. The 18 months that elapse between writing the proposal and receipt of the money is too long. Increasing turnaround takes precedence over increased funding: “Raising the amount is good but turning it around faster is really important.”

The company sees the award selection process as biased toward the NIH mentality of “show me the data and then I’ll fund it.” While this is a workable model for established PIs at universities, it is inconsistent with an early stage biotech company that is “pushing the envelope to find out what the data is.” Companies need the money before the study has been conducted; not after it has already been done. Yet the review process (and resulting priority score) is biased towards proposals that provide data and “have all the answers.”

Dr. Patti suggests that NIH have representatives from biotech companies as part of the review process. People who work in the biotech world on a daily basis understand the issues faced by a biotech company while university-based scientists appear to have less appreciation for such issues. NIH priority scores often reflect this lack of understanding.

There was a considerable amount of paperwork associated with the grants and at the time the company had the SBIR there was a fairly obtuse financial reporting system that required one to report via a dial in system. The reporting period extended for two-to-three years even though that grant was for one year.

The company expressed the view that two factors inhibit participation in the SBIR program: VC-related issues and the slowness of turnaround. The turnaround issue was discussed above. The VC-related issues cut both ways. First, as noted above, venture capitalists may see the reporting requirements associated with the SBIR award as detracting from the desirability of investing in the firm. Second, a company is now excluded if VC has more than a 50 percent stake in the company. This means that the most attractive companies with the most potential are now excluded from SBIR eligibility. If this rule had existed when Inhibitex applied, they would not have been able to get an SBIR award. “If you are successful, VC owns lots of your company.”

SBIRs provide peer recognition of quality science. SBIR awards are noted in BioWorld as well as trade magazines. The receipt of an award sends a signal comparable to that of having a paper published. In some cases one may be able to leverage this recognition and associated funding with an early investor. But there are also downsides, as noted above.

Andrew Toole

Rutgers University

JP Laboratories, Inc. is a privately-held research and development (R&D) company located in Middlesex, NJ. The company was founded by Dr. Gordhan N. Patel in 1983 to invent products based on his research experience and emerging knowledge in the fields of chemistry, physics, and biology. Dr. Patel founded the company using an initial $100,000 investment of personal funds. Over the last twenty-two years, he has implemented a successful business strategy that has allowed JP Laboratories (Labs) to remain a small—never more than five employees—but innovative firm. His business strategy focuses on inventing products and licensing them to larger firms for commercialization. According to Dr. Patel, his company has invented twenty products and successfully licensed ten of these for commercialization, SBIR funds, other governmental funds, and the royalty streams from these licenses have allowed the company to expand its R&D capabilities and continue the invention process.

In 2003, following the invention of their Self-indicating Instant Radiation Alert Dosimeter (SIRAD), Dr. Patel decided to expand the company’s business strategy to include manufacturing and sales for their SIRAD product. This product, which is described more fully in the next section, evolved from decades of Dr. Patel’s research and discovery activities related to various types of indicator devices. SBIR awards from DoD and NIH supported part of the research underlying SIRAD. JP Labs and Dr. Patel received several major awards and recognitions for developing SIRAD: (1) in 2003, Dr. Patel was invited to testify to a congressional subcommittee about SIRAD’s use in counterterrorism, <http://reform.house.gov/UploadedFiles/Patel%20Testimony.pdf>; (2) in 2004, JP Labs received the Frost & Sullivan Excellence in Technology Award in the field of homeland security for this product; and (3) in 2005, JP Labs received R&D-100 award (see the photo at the end of this document). Dr. Patel’s decision to expand the business strategy of JP Labs is likely to dramatically change their corporate profile going forward. The next several years will be a critical transition period involving additional private investment, facilities expansion, new hiring, and internal corporate restructuring.

Dr. Patel is a good example of a “scientist-inventor-entrepreneur.” Born and raised in Manund (Gujarat state), a small village in India, Dr. Patel developed a strong scientific background as a university student and research scientist. He earned undergraduate and graduate degrees in chemistry and physics from Sardar Patel University in Vidyanagar. In 1970, having just completed his Ph.D. in phys-

ics on the crystallization of polymers, he joined the research lab of Dr. Andrew Keller at the University of Bristol, UK. After three years at Bristol, he spent a short time in a research position at Baylor University in Waco, Texas. As a scientist, Dr. Patel published over 65 research papers in peer-review journals. From there, he joined Allied Corp. and worked as a bench-level scientist for nearly ten years. While at Allied, Dr. Patel was an inventor and co-inventor on numerous patents on polymers, crystals, and time-temperature indicators. According to the U.S. Patent and Trademark Office, Dr. Patel is an inventor on 38 different U.S. patents since 1975. In 1983, when he lost his job due to downsizing at Allied, Dr. Patel became an entrepreneur by founding JP Laboratories.

The SBIR Program provided vital financial support for product innovation at JP Labs from the very beginning of the company. Their first SBIR award, granted by the U.S. Army, was received in the year the company was founded, 1983. Since that time Dr. Patel has successfully won seventeen SBIR awards from a variety of agencies including the DoD, NSF, NIH, and EPA. Twelve of these awards were for Phase I feasibility studies and five were for Phase II product development. The awards total over $2.6 million (in nominal dollars) through 2005 (their last SBIR award was in 2001). Figure App-D-7 shows the time profile of awards to JP Labs.

FIGURE App-D-7 JP Labs SBIR awards, 1983-2004.

SOURCES: U.S. Small Business Administration, Department of Defense, National Institutes of Health, and National Science Foundation.

These SBIR awards have supported the R&D activities at JP Laboratories in four major research areas (SBIR funding agencies in parentheses):

1. Color changing indicators for perishable goods and sterilization (Army, NIH, NSF, USDA).

2. Radiation sensing devices (DARPA, Navy, NIH).

3. Synthetic lipids and blood (NIH).

4. Etching and metallization of plastics (EPA).

JP Labs has successfully licensed many of the products discovered in these four research areas. In the area of color changing indicators, Dr. Patel developed a sticker that is a time-temperature indicator for use with perishable items like foods and medicines. He licensed this technology to Rexam PLC, a UK-based firm focused on beverage and plastic packaging. In another example, the EPA supported research into a system for etching plastics for plating. The new method Dr. Patel developed is less expensive and environmentally safer than the prevailing technology, Chromic acid. Four of JP Labs’ U.S. patents are related to this technology and it was successfully licensed to Enthone, Inc., a specialty chemical firm in New Haven Connecticut. Six of the products, indicators for monitoring sterilization of medical supplies are licensed to NAMSA, Northwood, OH.

Research funded through the SBIR program also played an important role in the development of their Self-indicating Instant Radiation Alert Dosimeter (SIRAD) product. The last funding of almost a million dollars for development SIRAD for first responders was provided by Technical Support Working Group, Arlington, VA (funded in part by the Department of Homeland Security, the Department of State, the Department of Defense, and the Department of Justice). As shown in Figure App-D-8, SIRAD is a credit card sized badge that detects radiation levels instantaneously and indicates the radiation level using a color changing strip. It can be used as an inexpensive but accurate dosimeter in situations where radiation exposure is likely.

While the discovery of SIRAD draws on decades Dr. Patel’s research and experience, the SBIR program helped finance some the practical research underlying its invention. In 1985, DARPA funded a Phase I study into “monitoring radiation with conductive polymers.” At the end of 1988, the NIH funded a Phase I, and subsequently a Phase II, study into the use of a radiographic film dosimeter to examine the dose, dose rate, and energy of neutrons. Finally, the Navy funded a Phase II development study for a radiation dosimeter that evolved directly into the SIRAD product.

Dr. Patel was very positive about the role and contribution of the SBIR Program to the success of JP Laboratories. The key outcomes from SBIR participa-

FIGURE App-D-8 SIRAD.

NOTE: Photos of SIRAD badges before (left) and after (right) irradiation with 100 rads of 100 KVP X-ray. Dose is estimated by comparing the color of the sensing strip with the color reference bar printed on each side of the strip. The closest match indicates the dose in rad.

SOURCE: JP Laboratories Web site, <http://www.jplabs.com/html/what_is_sirad.html#SIRAD>.

tion are numerous new patents, several new products, and royalty payments from licensing agreements. Dr. Patel said SBIR is a “great program” and that JP Labs “would not have survived without SBIR.” Two of the most important benefits for JP Laboratories from participation in the SBIR Program were:

Dr. Patel used his personal savings to start JP Labs. At that time, he also worked as a consultant for his old employer Allied Corp. and this provided some cash flow. Nevertheless, additional investment was needed to keep the company going. Venture capital sources were either not interested or demanded control of the company, an option Dr. Patel did not find attractive. As he searched for funding sources, he learned about the newly started SBIR program and decided to apply. The Army funded his first SBIR feasibility study in 1983. The SBIR program became a critical source of R&D funding over the next twelve years and enabled a significant portion of the inventive activity that led to licensing revenue for JP Labs.

Having invented a potential product, Dr. Patel indicates that the SBIR Program serves as a recognizable source of credibility. Dr. Patel is more of a scientist

FIGURE App-D-9

SOURCE: JP Laboratories.

than a businessman. When searching for licensees, Dr. Patel found it helpful to let people know that the research was backed by a particular U.S. government agencies through the SBIR Program. This would draw the attention of firms and facilitate the licensing process.

Dr. Patel does not see any significant problems with the SBIR Program. His experience has been very positive. He noted two points. First, the funding gap between Phase I and Phase II awards was not a major problem. He was able to adjust largely because the licensing revenues from prior inventions began to flow. Second, his research focuses mainly on the chemistry and physics of materials, which is relatively less expensive and involves shorter research lags than product innovation related to biopharmaceutical medicines.

Andrew Toole

Rutgers University

Nanoprobes, Inc., is a privately-held research and development company located in Yaphank, NY. The company was founded in 1990 by James Hainfeld and Frederic Furuya to commercialize research products based on a new method for labeling biological molecules. The founders had discovered a new way to design gold labels to increase the label’s effectiveness as a molecular detection tool. Even before the company was fully operational, it had identified its first commercial product based on this technology, which was later introduced as Nanogold.

Over the past fifteen years, the managers of Nanoprobes have successfully grown the company. In 1990, Nanoprobes started with one full-time scientist and a business manager working in the basement of the life sciences building at the State University of New York at Stony Brook. In 1992, the company became one of the first occupants in a new facility constructed for the Long Island High Technology Incubator (LIHTI) at Stony Brook. Over the next few years, Nanoprobes expanded to eight full-time employees. In 2000, the company “graduated” from LIHTI and moved to its current research facility in Yaphank, NY. Today, Nano-probes has 15 employees, 13 of them full-time, engaged primarily in research and product fulfillment activities.

The business evolution of Nanoprobes reflects its scientific orientation. Nanoprobes’ product innovation and improvement depend heavily on successful laboratory-style research. An explicit part of its business strategy is to expand its scientific capabilities in order to broaden and deepen its scientific knowledge surrounding gold labeling technologies. This requires expertise in fields like chemistry, biophysics, biology, and microscopy. With over half its employees engaged in research activities, Dr. Powell notes that Nanoprobes has an “academic culture” that supports discovery, publication, and involvement in professional societies such as the Microscopy Society of America. In fact, it is commonplace for Nanoprobes to subcontract research with academic scientists at universities and other research institutions. This strategy has worked well. Nanoprobes currently offers numerous product variations within about ten separate product categories. Some of these categories are Nanogold conjugates, Nanogold labeling reagents, FluoroNanogold, Ni-NTA-Nanogold, Undecagold reagents, negative stains, silver and gold enhancers, etc.

Building an outstanding scientific reputation is also critical for marketing and sales at Nanoprobes. Researchers are the primary buyers of Nanoprobes’ prod-

ucts. Reaching these customers requires active participation in research networks and professional organizations. For example, Nanoprobes will be displaying and discussing staining procedures in a poster session at the United States and Canadian Academy of Pathology meetings in February 2006. Also, publishing in top journals is necessary for illustrating the value of their products and building credibility among researchers. Dr. Powell notes that their Nanogold probes have been cited in over 150 publications.

Gold labeling is the core technology at Nanoprobes. The company scientifically investigates, innovates, and markets a variety of forms of this labeling technology which have a number of potential uses. Most of the company’s revenue stream is produced by various forms and enhancements of its primary product, Nanogold.

Nanogold is a larger gold cluster compound (1.4 nm in diameter) that is an uncharged separate molecule in solution that does not interfere with antibody binding. When coupled with Fab’ fragments, it is the smallest gold-antibody probe commercially available. It offers improved labeling density and greater staining of hard-to-reach antigens. Visualization is further intensified when combined with visual enhancing methods such as immunogold silver staining. The pictures in Figure App-D-10 are pictures of Nanogold-Fab’ conjugate using a scanning transmission electron microscope (STEM) and a transmission electron microscope (TEM).

The SBIR program provides vital financial support for product improvement and innovation at Nanoprobes. Soon after the company was founded, it received its first SBIR award, granted by the U.S. Department of Energy in 1991. Since that time the scientists at Nanoprobes have successfully won thirty-five SBIR project awards, mostly from the U.S. National Institutes of Health (NIH). Twenty-five these awards were for Phase I feasibility studies, seven were for product development in Phase II, and three were Fast Track (combined Phase I and II). The awards total over $9 million (in nominal dollars) through 2005. Table App-D-5 lists the date, agency, topic, and phase for Nanoprobes’ SBIR awards (Fast Track awards are identified in the topic field).

According to Dr. Powell, the management at Nanoprobes decided to maintain a steady stream of SBIR grants. This steady stream has been valuable to the company’s success in a variety of ways. The grants have contributed to the firm’s patenting activity. Nanoprobes currently has ten patents and several patent applications pending approval from the U.S. Patent and Trademark Office. The grants have contributed to the maintenance of their academic research ties through subcontracting. They have contributed to the firm’s publication and conference activity, which is vital for establishing credibility with potential partners and investors, marketing, and sales. And, they have contributed to the firm’s

FIGURE App-D-10 (1) STEM darkfield micrograph of 1.4 nm gold particles (bright dots). Full width 128 nm, 500,000 X mag. Bar=20 nm.; (2) STEM darkfield micrograph of Fab’s (thick arrow) with 1.4 nm gold particles (thin arrow) attached. Full width 128 nm, 500,000 X mag. Bar=20 nm.; (3) TEM brightfield micrograph of 1.4 nm gold particles (arrows). 300,000 X. Bar=30 nm.; (4) TEM micrograph of human red blood cell (RBC) with Fab’-1.4 nm gold particles attached (arrow). Magnification=300,000 X. Bar=30 nm.

SOURCE: Nanoprobes Web site, <http://www.nanoprobes.com/MSA92ng.html>.

internal research capabilities by allowing Nanoprobes to broaden and accelerate its R&D process.

These SBIR contributions have impacted the company’s product offerings. Dr. Powell notes that SBIR funds supported modifications and reformulations of the company’s core product, Nanogold. SBIR funds supported part of its work on Undecagold reagents. For this product category, the company actually responded to an SBIR solicitation. For their FluoroNanogold product, Dr. Powell notes

that it “owes the most to the SBIR program.” In 1992, the NIH funded Phase I research into combined fluorescent and gold immunoprobes. This research was further supported by a Phase II grant with financing in 1994 and 1995.

SBIR has also enabled Nanoprobes to investigate the applications of its core technologies to improved public health. One such technology, “Enzyme Metallography” has proven to be a better detection method for pathological assessment of human biopsy material. In collaboration with the Cleveland Clinic, this has been used to develop a test for Her-2/neu breast cancer, an important marker for

aggressive malignant behavior that occurs in about 30 percent of breast cancer cases. Due to the improved detection, this technology was recently licensed to Ventana Medical Systems, Inc., which makes automated tissue staining equipment used in many hospitals and testing labs worldwide. This test is expected to be released in the next 1-2 years worldwide and should result in improved detection and management of this condition by helping to identify patients suitable for treatment with the very promising therapeutic, Herceptin. The SBIR program played a key part by enabling the research to be carried out for this development.

Nanoprobes is also investigating the use of gold nanoparticles in vivo (at the animal stage) as X-ray contrast agents for better visualizing coronary disease and tumors. Gold absorbs X-rays more strongly than current iodine agents and stays in the blood longer, allowing better images to be obtained and potentially enabling the noninvasive assessment of coronary arteries and earlier detection of tumors. In addition, Nanoprobes is investigating the use of gold nanoparticles to enhance radiotherapy. Since gold absorbs x-rays, its presence in tumors can increase the specific dose. This approach has yielded promising results in mice, where one study resulted in 86 percent long term (>1 year) survival, vs. 20 percent without gold. The SBIR program has been absolutely necessary to provide capital for these high-risk, early-stage studies.

Dr. Powell is very positive about the role and contribution of the SBIR Program to the success of Nanoprobes. He says it is a “tremendously good program” that has allowed the company to become “more sophisticated and successful.” Dr. Powell highlights the following three benefits of the SBIR program for Nanoprobes:

In the beginning, personal funds were used to get Nanoprobes started. However, for small science-intensive companies, it is important to achieve a critical mass of research personnel and equipment to sustain the firm going forward. SBIR funds are an important source of capital for this process, especially Fast Track awards. Fast Track awards decrease the uncertainty the firm faces by providing a longer period of continuous funding. They know in advance how much money will be coming and for how long and can plan more ambitious and longer-term projects.

SBIR funds are more flexible than other sources. Dr. Powell notes that these grants provide a “degree of creative freedom that one does not normally get with venture capital funding.” This is important since opportunities change as research moves forward. Another aspect of this flexibility is that SBIR projects allow the firm to explore higher risk research avenues.

Small firms, especially start-ups, must somehow achieve credibility in the marketplace. Potential buyers and business partners are skeptical about the capabilities of small firms and the claims they make about their products. Over time, the business strategy at Nanoprobes is shifting toward licensing and partnering. SBIR helps overcome the credibility barrier.

Dr. Powell does not see any significant problems with the SBIR Program. He made the following point about the current program.

Over time, the SBIR application process has become more complicated. A complete Phase I application can now be up to sixty-four pages long. It requires too much time to prepare. Further, the recent movement to the “grants.gov” online application system was very demanding.

Robin Gaster

North Atlantic Research

Neurocrine is a drug development/biotech company, and one of the largest companies in the study. Publicly traded on the NASDAQ, and with a market cap of about $1.5 billion, Neurocrine has approximately 450 employees, has been heavily backed by venture capital from inception in 1992, and recently moved into a brand new purpose-designed campus. It has no products on the market but several in the pipeline, two very close to market.

Neurocrine is located in an R&D hub (San Diego), is not woman or minority owned, was venture backed, and while a multiple winner generates only a small percentage or R&D funds from SBIR.

Since 1992, Neurocrine has received 22 Phase I awards and 14 Phase II awards, generating a total of just over $10 million in SBIR funding. (See annex.) In 2004, Neurocrine became ineligible for further SBIR funding in light of the recent interpretation of ownership regulations, as Neurocrine is 89 percent owned by institutional investors.

Neurocrine does not use SBIR for projects within the company’s critical development path. SBIR is however seen as an important source of discretionary funding that allows for more speculative or longer-term research, or research on alternative mechanisms for achieving critical path results. This research has in some cases subsequently led to internally funded research and to integration into Neurocrine’s primary product pipeline.

The new interpretation of SBA guidelines, which Neurocrine continues to vigorously contest (Neurocrine in fact continues to apply for SBIR awards). Also, Neurocrine is concerned about a perceived shift in the Phase II application process, where it believes reviewers now require much more detailed technical information, which constitutes a risk to critical company intellectual property (IP).

Outcomes:

• Products: none yet.

• Commercial pipeline: products on the way, some with significant input from SBIR.

• Knowledge: at least 30 papers and several patents based directly on SBIR.

• Employment: dramatic expansion, not directly related to SBIR.

Recommendations/Comments:

• Eliminate commercialization plans from review process from both Phase I and Phase II.

• Reconsider VC and large drug company participation on panels.

• Reconsider demands for increasingly detailed IP during Phase II application process.

• Increase size/duration of Phase I awards to $300,000, for one year.

• Increase size of Phase II to $1 million per year.

• Reduce duration of Phase II awards: two year maximum, with second year entirely conditional on meeting year one milestones.

Neurocrine’s story appears to indicate that there is considerable confusion at NIH and in reviewer panels about the focus of SBIR within the product development cycle. On the one hand, increased focus on commercialization inevitably means pressure to move downstream toward products; commercialization plans based on very early basic research are not defensible. On the other, Neurocrine had an otherwise high scoring proposal rejected as being too close to the market.

Neurocrine started with $5 million in venture funding in 1992-1993, raised $50 million though a series B offering in 1993-1994, made three major partner-

ship deals amounting to well over $100 million in funding in 1994-1995, and completed an IPO in 1996. Today, Neurocrine is a public company more than 89 percent owned by institutional investors, with a market capitalization of approximately $1.5 billion on the NASDAQ, and cash reserves of more than $300 million, against debt of approximately $66 million. The company recently moved to a large new custom built campus in San Diego.

Neurocrine has always been a much larger company than the norm for SBIR. By 1993, a year after founding, it already employed 25-30 people, reaching 100 in 1996. Currently, Neurocrine employs about 450 people, and will soon be above the SBIR limit of 500 for small companies.

To date, the company has no products that have reached market, although a recent filing problem with FDA is being resolved and Indiplon, a new drug for insomnia, is expected to reach the market in approximately 14 months. Indiplon has two formulations that have completed all clinical trials with apparent success.

The outcomes described above help to define both the importance of SBIR to Neurocrine and some limitations. Of the 11 programs now making their way toward or through clinical trials, 5 received significant support from SBIR. As Conlon noted, the primary pipeline is not dependent on SBIR, but at the same time SBIR has opened the door to research that is clearly now part of that primary pipeline.

SBIR never had a real financial impact at Neurocrine, where financial resources were substantial even in the mid-1990s.

Neurocrine’s use of SBIR changed over time, falling into three distinct time periods:

• Stage 1. Initial Use, 1993-1996. During this period, Neurocrine was at least initially still a relatively small company (about 25 employees in 1994), and was still seeking its intellectual way. While focused on the intersection of biology and chemistry at the cellular level, it had not yet tightened its focus on small molecule bioscience.

Neurocrine received ten Phase I awards between 1994 and 1997, of which eventually became Phase II awards. Paul Conlon, now VP research and development and Principal Investigator on the first awards, noted that they played a key role in allowing Neurocrine to test ideas and explore possible directions for the company.

They also gave Neurocrine valuable credibility when exploring partnerships with other much bigger and more established companies: “Validation was important—being able to say that our work was being funded by the National Institutes of Health, and that it had been approved by a peer review panel, provided tremendous credibility.”

That credibility may have a made a key difference for Neurocrine. In 1994-1995, Neurocrine made deals with three major pharmaceutical companies, including a $70 million agreement with Ciba Geigy. These deals in turn provided the evidence of progress on which to base Neurocrine’s public offering in 1996.

• Stage 2. Consistent Success. During 1997-2002, Neurocrine “figured out the SBIR application process.” They were now consistently putting together good applications, and their success rate rose substantially. They understood what review panels wanted to see, and they also found that their cutting edge work on small molecules was being well received. The result was a string of Phase I and successor Phase II awards.

These awards now filled a somewhat different function at Neurocrine. With the new focus on small molecules, the earlier search for scientific identity was largely concluded; now SBIR was being used much more directly to explore promising offshoots of core research. For example, awards for work on the GNRH receptor.

• Stage 3. Difficulties, 2003-2005. In 2003, Neurocrine suddenly found its long string of SBIR successes under pressure, from two directions.

  • First, the application process changed. Neurocrine found that work programs and descriptions that had been sufficiently detailed for success during stage 2 were now challenged by panel members seeking much more specific detail. Neurocrine strongly believes that this change accompanied changes in the composition of review panels, with the introduction of members from major pharmaceutical companies. Essentially, Neurocrine believes that this change puts its crown jewels of intellectual property at risk. (see box App-D-2). After substantial negotiations, a compromise was reached in the case of one application, but it became moot for reasons described immediately below.

  • Second, Neurocrine was ruled ineligible for further SBIR awards as a public company that was more than 50 percent owned by institutional investors (Neurocrine is in currently owned 89 percent by institutions). This resulted from the new interpretation of existing SBA statutes and regulations, implemented at NIH in 2003.

The changing application process is taken very seriously at Neurocrine, for which protection of its IP is central. Neurocrine notes that it makes no sense to jeopardize major potential partnership agreements for $50 million or more, to pursue a $1 million SBIR award. Neurocrine would walk away from SBIR altogether before risking its IP.

Clearly, Neurocrine is different from the majority of small and poorly funded SBIR companies, who may not have any alternatives to SBIR funding. However, even if smaller companies have little alternative to accepting these new demands from reviewers, they may still be unfair, and they may still pose long-term problems for the NIH SBIR program. Other interviews may help to determine whether this is an unusual case, or whether there has been a real change in requirements from review panels. Neurocrine is arguing from two cases in 2003.

Neurocrine has clearly used SBIR to its advantage. However, Neurocrine sees SBIR as filling a very specific function, and one that is not at the very core of Neurocrine’s research program. SBIR provides discretionary funding to allow research into promising offshoots and alternatives that likely would not otherwise get done.

But this funding is and must be unprogrammed within the company precisely because it is high risk. According to Conlon, no company can afford to place SBIR at the heart of its research program because the money is unpredictable (although of course many smaller companies do precisely that). So for companies

that do have other resources—and Neurocrine has many, not least $300 million in cash in the bank—SBIR is useful funding that allows interesting and sometimes important work (at least in retrospect) , but does not fund core research of critical strategic importance to the company.

Example 1: CRF research funding through SBIR allowed exploration of a range of possible applications, for anxiety, IBS, depression. And further SBIR funding allowed the company to explore R1 and R2 receptors, identifying ways to separate out the different R1 and R2 receptor sites. This exploration would not have been possible without SBIR.

Example 2. Neurocrine’s core MC4 program was focused on researching agonists for use in treating endometriosis. SBIR funding allows the company to explore an alternative mechanism—antagonists—which resulted in a new program focused on treating a related disease, Cachexia. Again, SBIR funding supported new research directions.

Example 3. SBIR funding paid for upgrading Neurocrine’s proprietary library of GPCR molecules. While core work is based on that library, its function is to provide better leads for small molecule efforts. However, even with better leads, it takes two years to turn a lead into a drug candidate.

In several cases, Neurocrine has made significant use of SBIR even when not receiving Phase II awards (and in one case, Neurocrine withdrew its application for Phase II funding after being given an award, as the company changed strategy), (e.g., Nonpeptide Antagonists of CCR-7 for Immunosuppression. The Phase II was funded, but not included in the list of awards, as Neurocrine declined the monies.

Legitimation Effects. Conlon believes not only that SBIR lent important legitimacy when talking to potential partners, but that receiving their first Phase II —after a number of awards ended at Phase I—provided important internal validation that the company was on the right track (and given the early involvement of venture capital, probably helped validate the company with funders as well).

Neurocrine is deeply dissatisfied with the actual impact of efforts to improve commercialization review at NIH, and in fact now recommends that on balance commercialization review should be eliminated, and NIH should return to simply funding the best science.

Neurocrine offered a number of objections to the current approach:

• Timing. Even Phase II is too early for an effective commercialization plan. For Neurocrine, Phase II is about narrowing down candidates for further drug development. At Phase II application, the market may be 8-12 years of further development away—a period which will require a

partnership with a major drug company and many millions of dollars. It is hard to see what value any commercialization plan might have at this stage.

• Reviewer Capacity and Conflicts of Interest. Few academic reviewers have any effective capacity to review commercial plans. And Neurocrine was clearly very perturbed about potential conflicts of interest stemming from the addition of reviewers from major drug companies.

• Less Focus on the Quality of Science. The new emphasis on commercialization means by definition that less attention is paid to the quality of the science.

• Phasing. If commercialization plans for Phase II are impractical, Phase I plans are even less realistic. Neurocrine thought they should be eliminated.

Neurocrine’s Phase I award to research development of TCR antagonists to MBP-reactive t-cells generated an extraordinarily high score of 131 at Phase I. After successfully completing Phase I, Neurocrine submitted a Phase II application. This was rejected primarily (according to Neurocrine) on commercialization grounds—reviewers claimed that the project was too development oriented, too close to market. However, within months, Neurocrine had reached agreement to develop the project further through a $ partnership worth approximately $70 million with Ciba Geigy. Neurocrine sees this as evidence that the commercialization assessment process is fatally flawed. However, it is also possible to argue that the reviewer was correct—and that the Ciba Geigy deal provides that the product was indeed sufficiently developed to receive fully commercial funding.

Neurocrine has also noted considerable confusion at NIH about the relationship of SBIR awards to product development cycles. In the example above, the product is still years away from the market, so it is hard to see how it could be too commercial.

In discussing SBIR with Conlon and Maki, it became apparent both that the company is very experience with and sophisticated about SBIR. Maki has served on NIH study sections, but only for RO1s, not SBIR. However, understanding of the new competing continuation awards was still limited.

Neurocrine saw no significant differences between the ICs from the perspective of applicants; had generally had excellent experiences with program staff at all ICs.

A final note. Neurocrine’s experience confirms once again that resubmis-

sion is a normal part of the NIH SBIR process; Conlon expects to resubmit on a regular basis.

Neurocrine had a number of recommendations for improving the SBIR program:

• Commercialization plan. Even though Neurocrine scores reasonably well on commercialization plans, as it has a large business development unit that writes these plans, it believes that they in the end simply randomize panel review results. The difficulties of getting good commercialization reviews in their view much more than outweigh the benefits, and Neurocrine believes that panels should go back to simply reviewing the science. This would also resolve important difficulties with the make-up of panels.

• Study sections. If commercialization reviews are not eliminated, Neurocrine believes changes should be made in the composition of review panels, and that venture capitalists should be excluded (and possibly representatives from large drug companies).

• Track record. Neurocrine rejected possible mechanisms for ensuring that past track record would be taken into account during panel discussions.

• Size/Duration (Phase I). Neurocrine would be willing to trade off significantly larger Phase I awards for significantly fewer of them: $300K awards, with 1/3 as many would be appropriate.

• Size/Duration (Phase II). Neurocrine is not at all convinced about the need for longer awards, but believes both in larger awards and in more pay for performance. It suggested that awards should be $1 million per year for two years, with the second year being completely conditional on achieving specific research milestones.

• Direct access to Phase II. Neurocrine strongly agreed that companies should be allowed to apply directly for Phase II awards, without going through Phase I first. They pointed out that by definition this would bring better quality projects now excluded into the program.

Robin Gaster

North Atlantic Research

Optiva was founded in 1988 by David Giuliani, an entrepreneur formerly in management at Hewlett Packard,¹⁷ and two faculty members at the University of Washington in Seattle, Drs. David Engel and Roy Martin.

The company (originally called GEMTech) was founded to pursue the idea of a dental hygiene device using a piezoelectric multimorph transducer that worked on sonic principles, using sound waves to dislodge plaque. Such an approach could have significant advantages, for example, in addressing plaque below the gum line.

Early financing came from the founders, and was used to develop the original technical ideas. However, three years of effort and prototypes convinced the team that the original technology could not be made into a commercial product. Instead, they adopted an alternative technology based on activating water in the mouth by use of sonic technology somewhat akin to a tuning fork. This approach was compatible with another objective—putting all the moving parts in the head of the toothbrush, so that the more expensive body could be sealed against water leakage.

After considerable experimentation, the team determined that when tuned to 520 vibrations per second, the vibrating brush head generated fluid dynamics that would erode plaque beyond the reach of the brush itself.

To commercialize the product, Giuliani raised $500,000 from 25 private investors, and also benefited from an NIH SBIR award which effectively doubled the size of the investment.

The company faced both very substantial opportunities, and significant challenges. Almost all Americans suffer from periodontal disease at some point, so the potential market was very large. Even the existing market was substantial—12 percent of Americans used electric toothbrushes, generating a total market of $125 million annually.

However, that existing market was dominated by very strong brands owned by large companies—Braun, Bausch and Lomb, Teledyne. Also, the Sonicare^® toothbrush was more expensive to make, and would have to sell for considerably more than standard electric toothbrushes ($129, vs. $50-70 for other brands).

Optiva therefore decided to focus on dentists as the critical intermediary between the company and consumers.

The Sonicare^® toothbrush was launched at a periodontal convention in Florida in 1992. According to the company history, the first dentist to visit the booth bought 36, and the company sold 70 altogether. Optiva hired a sales manager.

This approach proved very successful. Using studies (some funded by SBIR) that demonstrated the benefits of Sonicare^® technology, dentists proved interested; 98 percent of those who tried the product recommended it to their patients,

FIGURE App-D-11

SOURCE: Optiva.