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Venture Funding and the NIH SBIR Program Appendix E Analysis of the Evidence Submitted by BIO In response to requests from the NRC, BIO has submitted testimony about the impact of the SBA venture capital ruling on its membership. The testimony summarizes several surveys conducted by BIO as well as information about six company cases. SURVEYS BIO conducted telephone and Internet surveys of its “emerging company” membership—defined as firms with fewer than 350 employees and no marketable products. A 2006 Internet survey indicated that 50 of 267 responding firms had been refused SBIR funding at NIH based on the venture capital exclusion.1 Of these, nine were able to find alternative funding. A smaller telephone survey in 2007 indicated that about two-thirds of the respondents2 would use SBIR awards for preclinical or discovery work; 84 percent indicated that they would apply for SBIR funding if they were eligible. The latter of course is no indication either of the importance of the funding or its strategic value to the company. Finally, another 2007 survey indicated that about half of respondents3 would not use SBIR funding to support their lead product, and a further 18 percent 1 BIO provided no additional background information about the surveys; however, it appears that the merging company membership totals 650 companies, about 85 percent of BIO’s total membership. We can assume that all surveys attempted to contact all 650 firms. For this survey, the response rate was about 41 percent. 2 n=144, or about 22 percent of the total emerging company population. 3 n=167, or about 26 percent of the total emerging company population.
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Venture Funding and the NIH SBIR Program would use it to discover other applications for their lead product. This supports the case study analysis which suggests that venture capital-funded companies tend not to use SBIR for lead product support. CASE STUDIES BIO provided six case studies. We can summarize this evidence as follows: Two are now apparently funding the excluded research from venture capital or other funds. One of these received substantial funding from the venture arm of Novartis, a large pharmaceutical company. Two have been acquired (and hence may no longer be eligible for the SBIR program on other grounds). Two reflect only the information provided by BIO, which claims that the NIH-funded research has been abandoned. It is worth noting that for both, the abandoned research was not the primary product line. ANALYSIS OF BIO EVIDENCE The Case Studies The six case studies are all designed to show that promising lines of early-stage research have been abandoned or delayed as a result of the ruling. They do not provide counterfactual evidence based on products that were funded prior to the SBA ruling, which would have been excluded by the ruling. This would have added power to the cases. The six companies do not provide a clear picture of the ruling’s impact. Two firms appear to be using venture capital funding to continue the research—in one case, funds were at least partly provided by Novartis Venture Funds. Two have been acquired. The remaining two did not appear to be working in the affected areas any more—which may be a direct result of the ruling. As BIO claims, it also appears to be true that for five of the firms, the affected research did not involve their lead product. This raises questions about the likelihood that this research would have led to any commercial result, if only because data from the NRC survey and NRC case studies indicates that such outcomes are less likely than commercialization of lead products. The Surveys The surveys provide a somewhat more compelling picture. They suggest that a large majority of responding biotech companies would apply for NIH funding absent the ruling, and that most would not use the funds for their lead product.
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Venture Funding and the NIH SBIR Program Two-thirds of the proposed research was reported to be focused on preclinical or discovery stages. Limitations of the survey data. The surveys themselves were all limited to BIO members—a membership more likely on average to have received venture capital funding. This is, therefore, necessarily not a representative sample of the industry (nor was it presented as such). This point is buttressed by a comparison between the BIO survey and the NRC Non-participant Survey. About 18 percent of BIO respondents—or 8 percent of BIO’s emerging company membership—reported that they had been excluded as a result of the SBA ruling, while about 2 percent of NRC respondents indicated that venture capital ownership was the primary cause of their non-application to the program.4 Moreover, details of the surveys and the methodologies used for them have not been provided by BIO, so it is not possible to determine whether the survey process itself inadvertently introduced biases into the results. Conclusions. Overall, it seems fair to conclude on the basis of the BIO testimony that for a limited but still substantial number of firms, the SBA ruling has blocked access to a source of NIH funding that was in the main used for research on potential new products and applications that were not the company’s lead focus. In some cases, this led to delays or to the abandonment of the research. The testimony did not however provide compelling evidence that the size of the problem was substantially greater than estimated by the NRC survey. It did show that some research had been negatively impacted, and in some cases eliminated altogether. However, BIO provided no evidence to suggest that this research was more valuable than the research supported through the diversion of SBIR funds away from venture capital-funded companies to other companies. Nor did BIO present any evidence that SBIR supported research at venture capital-funded companies was more likely to reach the market than other SBIR-supported research at NIH, or more likely to have a major impact. 4 It is worth noting that according to the third quarter 2007 PWC Moneytree survey, approximately 100 investments per quarter are made in the biotech sector. <https://www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=notice&iden=B>.