Insights from Case Studies and Survey Responses
This chapter addresses a range of impacts as described by executives from case study companies (see Box 7-1) and as provided in textual responses to open-ended questions from the 2014 Survey fielded by the Academies. Highlighting some of the details of program operation and the various roles that the SBIR/STTR program play in the development of small innovative firms, the case studies and survey comments enable a broader qualitative understanding of the program, particularly from the user’s perspective, and are thus an essential part of the information gathered by the committee to assess whether the NIH SBIR/STTR programs are meeting their legislative goals.
ROLE OF CASE STUDIES
Case studies are an important part of data collection for this assessment, in conjunction with other sources such as agency data, the survey, meetings with agency staff and other experts, and workshops on selected topics. The impact of SBIR/STTR funding is complex and often multifaceted, and although these other data sources provide important insights, case studies allow for an understanding of the narrative and history of recipient firms—in essence, providing context for the data collected elsewhere.
A wide range of companies were studied: They varied in size from fewer than 10 to more than 500 employees and included firms owned by women and minorities. They operated in a wide range of technical disciplines and sectors. Overall, this portfolio of 15 case studies was designed to capture many of the types of companies that participate in the NIH SBIR/STTR programs.
BOX 7-1
NIH Company Case Studies
Case studies are included in this volume as Appendix E.a
23andMe
Advantagene, Inc.
ArmaGen Technologies
Auritec Pharmaceuticals
Avanti Polar Lipids, Inc.
Avaxia Biologics, Inc.
Conversion Energy Enterprises
Danya International, Inc.
GMSBiotech
Lpath Therapeutics, Inc.
NOVA Research Company
Sanaria, Inc.
Stratatech Corporation
Targeson, Inc.
TissueTech, Inc.
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a Two draft case studies included provisionally in the prepublication version of this report have been deleted from the final version, at the request of the companies.
Given the multiple variables at play, the case studies are not presented as any kind of quantitative record. Rather, they provide qualitative evidence about the individual companies selected, which are, within the limited resources available, as representative as possible of the different components of the awardee population. Given the multiple variables at play, and their small number, it is not possible to draw statistical inferences from the case studies. The case studies are presented in full in Appendix E of this report and highlighted in this chapter. The featured companies have verified the case studies and have explicitly permitted their use and identification in this report.
This chapter is organized in terms of the broad types of impacts of the NIH SBIR/STTR programs:
- Company impacts
- Support for agency mission
- Program management and company recommendations
Together, these sections provide the first wide-ranging publicly available feedback of the NIH SBIR and STTR programs from program recipients. We conclude this chapter with some views on the STTR program from recipients.
COMPANY IMPACTS
For many small companies—especially those that receive SBIR or STTR funding early in their history—receiving an award (especially Phase II) can be a highly positive or transformative experience. One-third of the respondents to the Academies’ 2014 survey indicated that program funding had indeed had a transformative effect on the company. Appendix E shows in detail how SBIR/STTR funding affected the trajectory of development for each of the 15 companies studied. This section describes some of these impacts.
General Comments
In general terms, the 15 companies that participated in this analysis are strong supporters of the SBIR/STTR programs. Comments from selected meetings include the following:
- “I love the SBIR program—I would still review and support it even if I never got another SBIR. It is critical to innovation in this country; without SBIR lots of innovation would die on the vine.” Dr. Robert Sabbadini, Lpath
- “SBIR is the lifeblood of the company. SBIR funding is the only conceivable way in which the company could have been founded and the technology perfected to the point of successful clinical trials.” Dr. Stephen Hoffman, Sanaria
- “The SBIR/STTR program at NIH has provided absolutely critical funding for Stratatech. I have no doubt that Stratatech and its associated products would not be in existence without SBIR/STTR funding.” Dr. Barbara Allen-Hoffman, Stratatech
- “ArmaGen has traversed the valley of death and our horse was SBIR.” Dr. William Pardridge, ArmaGen
The Valley of Death refers to the early stages of a startup, before a new product or service brings in revenue.
Company Formation
In a number of cases, the decision to form a company was driven in part or entirely by access to SBIR/STTR funding. This seems—at least at NIH—to have been particularly important for helping academics navigate the transition from the university to the private sector.
Dr. Allen-Hoffman at Stratatech said that an STTR award was instrumental in creating Stratatech to pursue technologies developed at her lab at the University of Wisconsin. Mr. DiFranco at Targeson noted that the founder’s original PhD dissertation research was directly picked up through an NIH SBIR Phase I
BOX 7-2
The 2014 Survey—Comments on Company Formation
“The company would not have started and would not have survived without SBIR funding to get off the ground. . . . We are now financially independent of the SBIR program.”
“SBIR funding has sustained the company since its inception. . . . The road to commercialization has included a clinical trial, peer-reviewed publications and navigation of the Medicare coding/coverage/payment process. This effort has taken many years; without SBIR support, the company would not have survived.” “Company was founded using SBIR/STTR to commercialize technology discovered in an academic laboratory. Would not have been founded otherwise (as an academic I had no prior interest in founding a company, but learned the process by serving on a panel review).”
“I would not have started this company without SBIR funding.”
“The experience that I gained from starting [this company] led me to founding another company, which has two FDA [U.S. Food and Drug Administration] approved products and employs some 40 employees plus many contractors.”
award. At ArmaGen, which commercialized research from Dr. Pardridge’s lab at the University of California, Los Angeles, SBIR funding was central from company formation until the first round of venture capital funding 10 years later (see Box 7-2).
Funding for Small Innovative Businesses
Providing seed funding for company formation is an especially important program function because other sources of such funding have become more difficult to find. This difficulty reflects the increasing preference of venture capital firms for supporting more established companies and technologies. The case studies (and survey responses) underscored the many types of project for which alternative funding sources are scarce.
Companies noted that in general there have been two shifts in the funding landscape in recent years: first, venture capital retreated downstream toward projects that are closer to the market and hence both more expensive but less risky. Therefore, funding for seed-stage companies is increasingly difficult to attract. Second, strategic partnerships with large biomedical companies are difficult to find and to sustain. At Lpath, for example, a project with Pfizer was well advanced when the company simply decided to leave the sector, with minimal warning. Funding dried up as a result. It may also be that larger companies are also becoming more risk averse and hence require more evidence of likely success (e.g., completion of Phase II or Phase III clinical trials).
Companies also pointed out that the SBIR program has a special role to play in funding projects that do not fit well with commercial imperatives facing some large markets and the need for relatively quick returns. Advantagene, for example, noted that larger companies are not especially interested in addressing prostate cancer because the market is not large enough. This obstacle is more prevalent in even smaller markets: for example, ArmaGen is developing enzyme replacement therapies that can cross the blood-brain barrier for a pair of lysosomal storage diseases called Hurler syndrome and Hunter syndrome. Fewer than 10,000 people have these diseases in the United States.
Many of the research projects described in the case studies require many years of research. Dr. Swift at Auritec has spent the past 20 years working on extended-release drug delivery. Dr. Pardridge at ArmaGen has been working on the blood-brain barrier since the 1970s and the enzyme replacement therapies he has developed are only now reaching the end of clinical trials. Dr. Sabbadini founded Lpath in 1997. These high-risk projects with a long and uncertain path to market depend on SBIR funding to reach a stage where other investors may become interested.
These comments are further supported by evidence from the responses to the 2014 Survey: more than three-fourths of the respondents did not expect to find alternative funding for a project if their SBIR application had been rejected.
Company Existence
Dozens of companies providing comments in the 2014 Survey stated quite bluntly that they would not be in existence without the SBIR program. As expected, these companies include many very small firms that had limited access to alternative funding both at the time and now. However, they also include companies that had successfully moved far beyond the SBIR program. Some of the companies are now publicly listed with market capitalizations in excess of $1 billion, and others have made major contributions to public health. Box 7-3 provides broad views on the SBIR program from survey respondents.
Profiles of individual companies provide a more nuanced view and illustrate both the difficulties of raising very early funding and the critical role of the SBIR program in filling this gap. For many biomedical companies, the road to a successful product is long and expensive. Private investors are often reluctant to assume the risks involved, which can be substantial even for companies that raise significant outside funding. One company, for example, raised about $300 million in private investment funding (along with a substantial investment from NIH through the SBIR program), only for its lead candidate to fail in Phase 3 clinical trials. In few industries is such an enormous and risky investment required before the product’s functionality is fully validated.
BOX 7-3
2014 Survey Responses—Company Existence
“The SBIR program is possibly the only source of funding that is available to support an idea that is not already supported with a prototype and a lot of validating data. . . . For an independent small company the SBIR program is the difference between existence and potential success and extinction.”
“We could not have done any development without the SBIR awards[.] There is literally no other funding available that a small company can realistically hope to receive on their own.”
“We wouldn’t have a company without the SBIR program. If we did have a company, its goals in innovation and technology development would be much less ambitious.”
“Without SBIR funding the company would not have survived its first year. Now we have been commercially active for nearly 30 years.”
“Funding enabled us to develop all products and services; recruit skilled employees; attract investment capital. The company would not exist if the program didn’t.”
“Without SBIR funding our company would not exist. The result of the company and innovation has been screening of over 100,000 children for autism thus far.”
Filling Funding Gaps
Many of the case study companies and a considerable number of survey respondents described major difficulties in raising funding before the end of clinical trials. The SBIR/STTR programs were designed to fill some of this gap, by providing funding that could be used for preclinical work, Phase 1 clinical trials, and in some cases work on Phase 2 trials.
Dr. Pardridge (ArmaGen) noted that, working with a well-connected lawyer, he initially approached 25 venture capital firms for funding and received one interview and no further responses. In 2010, ArmaGen again sought funding, armed this time with numerous papers explaining and validating its approach, as well as a growing record of research funded by the NIH SBIR program. However, none of the venture capital firms showed any interest. Eventually funding was raised from strategic investors, but throughout this process, the SBIR program provided irreplaceable funding.
Dr. Tseng said that for TissueTech, which has since become a highly successful $40 million/year company, NIH SBIR funding was especially important during the early 2000s when the company was still small and had very limited resources. At the time, SBIR funding paid for almost all of the development costs for TissueTech products.
Dr. Hoffman observed that absent SBIR program there was no possible source of funding for Sanaria’s work: the private sector would never fund high-risk investments in areas where potential rewards were uncertain and likely to be much lower than those for chronic diseases.
Validation Effects
The NIH SBIR program provides sufficient funding for product development in only limited circumstances. However, both case studies and survey responses illuminate the ways in which SBIR/STTR awards can provide the technological and commercial validation that underpins acquisition of funds from other sources (see Box 7-4). In particular, companies stressed that the SBIR program can provide the necessary confidence that peer review brings, while the provision of non-dilutive funding sets the stage for successful efforts to raise funds in the private sector.
It is apparent from both case study meetings and survey responses that the NIH peer-review system plays an important role in validating SBIR/STTR for investors. The peer review provides a technical assessment that even a well-established venture capital firm would be hard pressed to match and that lowers risks for investors.
Among the case studies, Ms. Wojcicki (23andMe) said that SBIR funding had a powerful validating effect for the company, underscoring its efforts to
BOX 7-4
2014 Survey Responses—Validation
“The SBIR program is critical to funding early stage technology that has been both scientifically and business-wise vetted by highly skilled individuals. The benefit to the individual companies and the society at large cannot be overstated.”
“Essential for our ability to attract private venture capital. It gave the company enhanced credibility. This is essential in pharmaceuticals given the current climate for VC funding.”
“NIH funding in the form of SBIR/STTR programs gave us the credibility that we needed as an early stage biotech company… [It] gave private investors some comfort that the science has been vetted by peers and experts in the field.”
“NIH funding is a critical indicator of the scientific value for a project, since applications are peer-reviewed by experts in the field. This helps reduce the perceived risk for potential investors.”
“SBIR truly cultivates innovations. Personally, the NIH peer review process is the best mechanism to nourish the best innovations. Companies and investigators do work hard when the awards are given primarily on merit judged by peer reviewers.”
present itself as a serious medical research organization as well as a direct-to-consumer genomics company. Dr. Sabbadini (Lpath) noted that the peer review undergone by SBIR projects and their eventual funding from NIH provided important validation when seeking other investments.
Staffing
Retention of high-quality technical staff is a perennial challenge for small innovative businesses. These businesses, particularly those in biotechnological fields, are challenged by the long periods encountered between the start of research and the eventual deployment of a product in the market. The need for approval by the U.S. Food and Drug Administration (FDA) in many cases adds many years to this timeline. In addition, because non-revenue status means that additional funding must somehow be acquired throughout that period, these small companies are constantly at risk of losing key staff simply through bumps in the funding timeline; a long gap can mean the elimination of key staff who may therefore not be available even if funding resumes.
The SBIR/STTR programs improve the certainty of funding over a period of at least 2 years (for Phase II), which provides small businesses with the confidence and means to hire and retain staff. (See comments on staffing in Box 7-5.)
BOX 7-5
2014 Survey—Comments on Staffing
“Our company has had 5 Phase I and 3 Phase II grants from different agencies since 1998. . . . They allow us to maintain R&D staff that were successful in producing both funded and other products.”
“SBIR funding . . . allows for employment of post-doctoral fellows, research scientists and research assistants and facilitate training of interns in the field of vaccinology.”
“Our company was also able to hire quality help to progress our company where additional technology can be developed, licensed, patented, and eventually commercialized.”
“For a small company that is providing a specialized technical service, it is a constant challenge to balance staffing with demand for services. Having a body of strategic research and development work that is funded . . . that can be accelerated or slowed, really helps . . . it reduces the risk associated with hiring good staff because there is a large pool of work that can be done at a (relatively) flexible pace.”
“Number of employees increased from 1 (founder/PI) to 5 with additional part-time consultants and university students as interns.”
AGENCY MISSION
The NIH mission is “to seek fundamental knowledge about the nature and behavior of living systems and the application of that knowledge to enhance health, lengthen life, and reduce illness and disability.” Within that very broad framework, essentially all SBIR-funded activities can be included—indeed, it is difficult to see how SBIR projects would not contribute in some way to that mission.
That said, it is worth highlighting some of the ways in which SBIR/STTR projects have made and could make a difference. This section draws in particular on the case studies undertaken for this report. Other examples of high-impact research can be found in the survey responses and in the success stories highlighted on the NIH SBIR/STTR website.1
The companies listed below are addressing major high-priority diseases or needs. If successful, then their work will be transformative and will illustrate the long-term effect of NIH funding on health and welfare.
- Stratatech has developed a substitute for human skin for use in grafts to treat burn victims and others with major skin requirements. Its Stratagraft™ technology is absorbed into the body over a period of weeks, and photographs comparing standard autograft and Stratagraft treatments (see Appendix E, Stratatech case study) clearly show the potential importance of this work. The company recently received a contract from the Biomedical Advanced Research and Development Authority (BARDA) to scale up its ability to address a mass casualty event.
- TissueTech has developed groundbreaking technology (CryoTek™) to solve ocular surface problems and to develop an ocular transplantation graft, a glaucoma shunt tube graft, and a range of corneal bandage devices. The company now generates $40 million in revenues.
- ArmaGen is working on overcoming the blood-brain barrier to deliver therapeutic molecules into the brain. Dr. Pardridge notes that this issue represents a huge and rapidly growing societal challenge: he estimates the cost of caring for Alzheimer’s disease and stroke victims at more than $500 billion by 2025, because the 65 and older population will grow by 50 percent during that period.
- 23andMe has made groundbreaking steps toward delivering lowcost ($100) genetic testing direct to individuals. The company had 700,000 individual customers as of October 2014. And even though it is still resolving regulatory issues with the Food and Drug Administration (as of April 2015), making such tests available has changed the way that individuals look at genetic testing.
- Conversion Energy has developed a biological adhesive system based on laser light curing of a biological compound fabricated from collagen as a
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biological adhesive for wounds and surgeries. Such biological adhesives reduce infection by eliminating foreign matter at the wound site. They also accelerate wound repair and reduce scarring of the healed tissue.
Other NIH SBIR/STTR awardees are working on some of the most difficult and challenging areas of the life sciences. Sanaria now has in clinical trials the first malaria vaccine. Avaxia has a contract with BARDA to deliver anthrax vaccine for first responders nationwide. Avanti Polar Lipids has a new treatment for cystic fibrosis in clinical trials.
Innovative Technologies and Product Development
For the majority of SBIR/STTR recipients, the program supports work on the company’s core technology. At least initially, few companies are large enough to advance multiple technologies, although in a number of cases companies are working on platform technologies that can then be further developed into a number of products that share a core technology. Over time, companies may grow to the point that they can support multiple projects, but are still small enough to qualify for SBIR funding, which can then be used more selectively.
For smaller SBIR/STTR companies in particular, funding for core technologies that are not yet proven is extremely difficult to acquire outside the SBIR/STTR programs. As noted elsewhere, the number of seed-stage venture capital investments has declined steadily over the past decade. In the fourth quarter of 2014, there were a total of 39 seed-stage deals in all industries. Overall, biotech accounted for 14 percent of all deals.2 And according to the Center for Venture Research 2013 report on angel funding, 11 percent of deals were in biotech, funding about 8,000 companies with an average amount of about $350,000.3
Many of the companies responding to the survey noted that the SBIR/STTR programs have provided critical support in developing core innovations and platform technologies (see Box 7-6). This was also the case for many of the case studies (see below).
Attracting Venture Capital
Although there are important advantages to an infusion of venture capital (VC) funding for small innovative businesses, there are costs as well. The need to relinquish equity and, in many cases, control is well known. However there are other potential costs. Dr. Aguilar-Cordova (Advantagene) noted that VC funding requires both a tight focus on a specific product and a specific timeline to a funding event that will allow for an exit. The SBIR program permitted his company
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2PWC MoneyTree™ Report, https://www.pwcmoneytree.com/, accessed April 24, 2015.
3Jeffrey Sohl, “The Angel Investor Market in 2013: A Return to Seed Investing,” Center for Venture Research, April 30, 2014.
BOX 7-6
2014 Survey—Comments on Core Technologies
“We made a brain monitor that has been shown to improve patient outcomes. Without the SBIR funding, we won’t be able to accomplish that.”
“This STTR grant supplied the resources for us to build prototype live cell . . . tools . . . which resulted in the sale of our first instrument and . . . services we’ve sold to pharmaceutical and biotechnology companies.”
“The technology developed under this program served as the cornerstone for development of [our] industrial metrology business . . . now responsible for about $5 million [in annual revenues.]”
“SBIR [funded] a novel ground-breaking platform technology that was used to develop a portfolio [of technologies] with high commercial value [which could] significantly reduce casualties in combat (KIA) and reduce mortality in emergency medicine following trauma.”
“SBIR funding has been critical in supporting the company’s vaccine research and development programs. . . . The SBIR program is vital for innovation in this field and should be expanded for its own value without sacrificing other federal research programs.”
to work on a platform technology that could have applications to several different kinds of cancer, and he observed that this profile did not match the requirements of venture capital firms.
Other companies reported similar challenges in attracting VC financing to develop platform technologies and highlighted the importance of SBIR/STTR funding in this regard. The case study of ArmaGen shows that the company’s technology to cross the blood-brain barrier can lead to a number of applications in high-priority areas such as caring for Alzheimer’s disease and stroke patients. Another company, Auritec Pharmaceuticals, owns two technologies for extended-release drug delivery and has tested them to improve treatment for a broad range of medical indications.
Niche and Small Commercial Markets
Innovation companies, especially small innovation companies, are often driven at least initially by the passion of the founders to make a difference. What they often find is a substantial gap between technical success and commercial success, and between meeting the needs of the technology users and creating a sustainable or successful business.
Niche Markets
This is especially true when the market being served is small either in numbers or resources. Outside investors are often less interested in investing where markets are small and lower revenues make it less economically possible to complete the necessary clinical trials. FDA has recognized this reality by permitting the registration of products targeted at rare diseases. Some of these circumstances are discussed in the case studies of SBIR/STTR companies and highlighted below.
- ArmaGen is developing enzyme replacement therapies that can cross the blood-brain barrier for a pair of lysosomal storage diseases called Hurler syndrome and Hunter syndrome; fewer than 10,000 people have these diseases in the United States. If successful, ArmaGen plans to apply its technology to other diseases with larger markets.
- Advantagene uses SBIR funding to support research in smaller or less remunerative markets, for example cervical cancer, which is a problem for some developing countries.
Serving the Research Community
Many SBIR/STTR companies do not work directly on patient diseases or dysfunctions. Instead, they serve the research community. The products and services they deliver are therefore rarely of the scale needed to deliver very large commercial successes. Nonetheless they are of enormous importance to the biomedical ecosystem as whole: they provide the tools that others use to address large-scale problems.
- GMS Biotech has developed a technology that turns high resolution DNA analysis into a benchtop test that can be performed with simple equipment and little training. The company believes this technology can in the medium term be a key facilitator for personalized medicine. It is currently targeted at the 4,000 ASHI-certified labs worldwide.
- NOVA Research provides its SBIRfunded QDS (Questionnaire Development System) for data collection and management to researchers worldwide. QDS is currently used by 13,000 researchers.
These are usually small and highly technical markets, although they can in some cases become very substantial: Illumina, an SBIR-funded company described in the 2009 assessment by the National Research Council4 of the NIH
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4Effective July 1, 2015, the institution is called the National Academies of Sciences, Engineering, and Medicine. References in this report to the National Research Council are used in an historic context identifying programs prior to July 1.
SBIR program, now has a market cap of more than $30 billion, from providing genetic testing services.5
Long Cycle Research
One of the challenges for biomedical research is that it takes a long time to reach the market. Several of the founders of the case study companies have been working on their projects for more than 20 years, and still have to reach the market.
This is challenging because of the very long period before revenue starts and because the core funders of biomedical research aside from the government (strategic partners, usually from large pharmaceutical companies, and venture capital investors) are increasingly reluctant to fund projects that are not well along the path to market.
The NIH SBIR/STTR programs therefore play a particular role in funding the early development of technologies that may have enormous social or even commercial value downstream, but which are too far from the market to be funded by other sources. (See Box 7-7 for survey respondent comments.)
Connections to Research Organizations
Although the STTR program is specifically designed to connect small companies to research organizations, this is also accomplished to a considerable degree by the SBIR program. Data from the survey is provided in Chapter 5, but case study meetings and survey comments underscored the closeness of the connection for many companies. (See Box 7-8 for comments on collaboration.)
- Advantagene has relationships with a number of universities and research organizations, such as Johns Hopkins University, the University of Pennsylvania, Dana-Farber Cancer Institute, Memorial Sloan Kettering Cancer Center, and Lurie Children’s Hospital (Chicago).
- Stratatech is commercializing technology spun out of the University of Wisconsin lab managed by its founder, Dr. Barbara Allen-Hoffman.
- ArmaGen’s innovative solutions to the bloodbrain barrier derive directly from the 3 decades of funding received by Dr. Pardridge at the University of California, Los Angeles.
For small companies, the capacity to attract the right collaborators is often a critical part of the process from initial idea to eventual product. Companies may need access to expensive equipment, often located in a university. They may
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5National Research Council, An Assessment of the SBIR Program at the National Institutes of Health, Washington, DC: The National Academies Press, 2009, Appendix D.
BOX 7-7
2014 Survey—Comments on Long Cycle Research
“SBBIR/STTR has allowed our company to pursue R&D of valuable technologies and products that are higher risk or take longer to generate a return on investment.” “The funding allowed us to pursue high risk software development that had a fairly long time to market and market adoption.”
“All founders spent significant life time [and] effort to develop and de-risk, translate the technology for industry partners and commercial markets.”
“[SBIR] allows for obtaining funds for development of innovative technologies with the pace that is not artificially skewed by short-term commercial interests.”
“This program allowed our core technology to incubate for a period of time that allowed us to advance the technology to the point where strategic partners became interested. Without SBIR funding we could not have gotten the technology to this point and the company would have likely failed.”
BOX 7-8
2014 Survey—Comments on Collaboration
“We would never have been able to develop this product, conduct the necessary clinical trials, solidify a strategic partnership, and get it to commercialization without SBIR funding.”
“The timeliness of the [SBIR] funding allowed us to form a partnership with the American Academy of Surgeons, which was extremely important for the content, credibility, and fidelity of the simulator.”
“The NCI SBIR funding allow us to bridge the “Valley of Death” resulting in a significant corporate partnership and other fundraising efforts. . . . We have nearly completed enrollment in the Phase 2 [clinical] trial.”
“SBIR funding bridged the ‘Valley of Death’ and allowed us to partner with our corporate partner as we received a Bridge Span award that . . . allowed us to obtain a partnership for the Phase 2 clinical trials.”
“Without these awards, we would not have reached our milestones, and would not have been able to partner 2 of our 3 drug candidates with a major pharma company.”
need technical help from experts. They may need help with funding and especially organizing clinical trials. In particular, they may need help with marketing their products and services. For NIH companies, links to universities and other research organizations may be especially important.
Yet meeting all of these needs requires that the small business overcome some substantial barriers. Some are simply financial—the SBIR/STTR programs
may provide the funding needed to access tools and equipment, or to hire the right consultants. But often, the SBIR/STTR programs provide a unique mix of validation and funding for the acquisition of preliminary data needed to persuade potential partners that the technology has value, that the management team is competent, and that the company is sufficiently stable to be worth partnering with.
The case study companies described not only partnerships with a considerable number of research organizations and commercial partners, but also partnerships to meet a number of different needs and objectives:
- Auritec partners with numerous research organizations, including the University of Southern California, Albert Einstein College of Medicine, Oak Crest Institute of Science, International Partnership for Microbicides (IPM), CONRAD, Centers for Disease Control and Prevention (CDC), The University of North Carolina, University of California, Irvine, Emory University, North Carolina State University, and The University of Massachusetts. Each provides different capabilities to Auritec. For example, Auritec looks to the Albert Einstein College of Medicine for expertise on HIV, The University of North Carolina for expertise in HSV, and the University of Southern California for expertise in pharmacokinetics.
- TissueTech maintains research relationships with organizations such as Bascom Palmer Eye Institute, the New York Eye and Ear Institute, Walter Reed National Medical Center, and Columbia University.
- Sanaria is undertaking clinical trials with a wide range of partners in the United States, Africa, Asia, and Europe, including a number of different stakeholders: African governments, Marathon Oil, nonprofit foundations, universities and research labs, and private companies. Sanaria recently signed a path-breaking agreement with Marathon Oil and the government of Equatorial Guinea to completely fund clinical trials through Phase III through $48 million in support. (Box 78 captures some of the survey response comments focused on collaboration.)
PROGRAM MANAGEMENT
Feedback from case study executives and the survey respondents indicate that issues related to project (or proposal) selection and review are of considerable concern. Many of the case study meetings were with scientists who also served on NIH study sections, so they could provide perspectives both as a reviewer and an applicant.
Innovation, Novelty, and the Challenge of Assessing Commercialization Potential
Executives of companies participating in the case studies were more concerned about review-related issues than any other aspect of the program, other than the limited funding available to support clinical trials. They were especially concerned about the preponderance of academic scientists in review panels and its effect on review outcomes.
Dr. Allen-Hoffman (Stratatech) noted that the alignment between topics and awards has changed significantly over the past 10 years. During her early years with the program, she was confident that a strong project would receive consideration and perhaps funding regardless of its connection to a topic described in the Omnibus Solicitation. That has changed, and Stratatech now only applies for awards where there was a clear alignment between the topic and the proposal. In her view this is not a positive development.
Dr. Aguilar-Cordova (Advantagene), who has held academic positions for nearly two decades at Harvard Medical School and Baylor College of Medicine, said that his experience as a reviewer had changed his perspective. Reviews used to be conducted primarily in person, with one primary reviewer per project, one secondary reviewer, and one reader. The group as a whole would listen to the discussion between the reviewers. The process is now conducted primarily via asynchronous review through the internet. Reviewers only see the comments of the primary and secondary reviewers, followed by a vote in which the group almost always follows the primary and secondary reviewer. He also observed that while the SBIR program provides funding for small business, the majority of reviewers are academics. This results sometimes in a misunderstanding of research and development (R&D) as conducted in the private sector. For example, a recent Advantagene proposal was criticized because “two key people were from the same company”—a comment not relevant to private-sector research.
Ms. Soltz (CEE) observed that the heavy preponderance of academic reviewers tends to tilt the playing field toward university-based applicants (her most recent panel had two small business participants out of a total of eight). Not only did these researchers have notable advantages through access to the huge base of university resources (including low cost labor in the form of graduate students, facilities, and sometimes university intellectual property), but also they were in her opinion less prepared to turn good ideas into commercially successful projects.
Several executives noted confusion in the review process between innovation and novelty. The former requires path-breaking research. The latter involves the long process of refining results to the point that a commercially sustainable innovation can be marketed. More widely, SBIR reviewers often misunderstand the relationship between innovation and novelty, and between novelty and product development.
Dr. Aguilar-Cordova (Advantagene) said that the long process of product development is sometimes criticized by academic reviewers as insufficiently
innovative. The entire project may be an innovative solution, but the grind of proving the concepts may not look much like innovative research. Another CEO contacted in the course of this study observed that the predominance of academics on study sections is unfortunate, in particular because they tend to take a narrow view when defining innovation. They tend to lower scores of projects that they see as insufficiently innovative, perhaps as compared with viewing them as an NIH Research Project Grant Program (RO1) application.
Dr. Swift (Auritec) focused on the role of Scientific Research Officers (SROs) who manage study sections. He noted that in general they subscribe to and support the focus on novelty. He identified a number of cases in which potentially important innovations were rejected by study sections on the grounds that they were insufficiently novel. He urged NIH to refocus the role of SROs so that they become defenders of innovation. In his opinion, this could be accomplished relatively easily once NIH decides that this shift would be appropriate. SROs could provide detailed instruction on the definition of innovation at the start of the study section and could also provide ongoing direction to ensure instructions are followed.
Dr. Hoffman (Danya) observed that, at the same time that SBIR has become more competitive and selective, the selection process has tilted further toward science rather than commerce. Commercialization reviews at NIH are “fairly generic,” that is, not a careful analysis of a product’s return on investment.
One CEO suggested that NIH ensure that the chair of the study section is a person with product development experience. He also said that more rotation of study section members, including in particular section chairs, would be a positive step toward ensuring that appropriate selections are made.
Box 7-9 provides some of the detailed comments on review offered by survey respondents.
Dr. Hoffman (Sanaria) said that proposal review panels largely include majorities of mediocre academic scientists who have little understanding of translational research. On the other hand, some of these scientists are also potential competitors, and Sanaria has in several instances asked for specific reviewers to be removed from panels addressing its proposals. Overall, the quality of reviews—especially of business reviews—was relatively poor.
Improving the Process
Rebuttal and a More Iterative Application Process
A number of executives from the case study companies shared their frustration with the inability to rectify minor problems with applications upon first submission, which forces them into resubmission and hence into lengthy delays. Several executives suggested different ways in which the connection between applicant and study section review panel could be improved.
BOX 7-9
2014 Survey—Comments on the Review Process
“Often review panels do not understand the FDA process and difficulties getting clearance or approval from the FDA. . . . Review panel members should be educated on the purpose of Phase IIBs before the review panel and proposal reviews take place.”
“Give proposal reviewer fewer proposals to review so they can do a better job. Insist that reviewers who do not understand what is proposed recuse themselves from being one of the three primary reviewers.”
“Most SBIR study sections are made up of academic investigators with little to no understanding of the FDA or the commercialization process. SBIR grants are handled as if they were R01 or R21 proposals.”
“(The) majority of the reviewers for SBIR/STTR are professors, who have no commercialization backgrounds or experiences. Good research proposal[s[ and idea[s] may not lead to good products to fit the market. I think the reviewer committee should add some reviewers with more marketing and product development background to evaluate the proposals in addition to the scientific reviews.”
“Stay transparent and fund grants based on a payline so that the scientific reviewers choose the grants to be funded based on the strength of the technology and the need it serves.”
“The NIH review process for SBIR/STTR has become more and more frustrating to all device companies. The funding repeatedly rewards proposals including complex biochemical research devoted to a new test or therapy that will be of little direct benefit to patients.”
Dr. Aguilar-Cordova (Advantagene) called for selection to be an iterative process. Reviews are already uploaded into the system a week or two in advance of the review panel meeting. It would require minimal additional effort to permit companies to read preliminary reviews and to offer additional information (perhaps only a page) for the record. This would be a “fantastic way to improve things,” according to Dr. Aguilar-Cordova, and would make the review process more like the peer-review process for scholarly publications.
Dr. Swift (Auritec) noted that a brief rebuttal process could accelerate review, reducing costs for companies and improving the efficiency of the review process for NIH. A response of less than one page could easily be generated before a study section meets, or indeed during the meeting itself. Dr. Swift also noted that this kind of interactive approach was standard at the FDA, where IND applications are generally subject to a number of rounds of correction and improvement.
Dr. Pardridge (ArmaGen) considered the idea of the ability to respond to initial reviewer comments to be promising, but he was concerned that it might not be practical.
White Papers
Dr. Swift observed that, in his experience, a majority of applications are very poor quality and that a white paper process in which applicants are required to submit a brief summary for review by program officers could lead to a sharp reduction in the number of eventual applications, which would reduce the workload for both companies and reviewers. He cautioned, however, that this process should not be used as a hard filter and that projects receiving negative responses to the white paper should still be permitted to apply.
Dr. Hogan (GMS) suggested that NIH explore the adoption of a white paper approach that could draw on the experiences at the National Science Foundation (NSF) and the Department of Energy (DoE). This approach reflects his strong belief that “study section should not be king—they should be viewed as important high level consultants, not decision-makers.”
Funding Gaps and Timelines
Many company executives indicated that funding gaps are a major concern. Ann Wojcicki (23andMe) argued that the slow pace of the application and award cycles made the SBIR program essentially untenable as a funding source in fast-paced sectors such as genetic testing.
Dr. Aguilar-Cordova (Advantagene) said that that SBIR awards process at NIH is very slow, especially in comparison with industry, even if resubmission is not required. An application made in May might eventually be funded in May of the following year. Resubmission currently causes a 2-year delay because comments are returned too late to meet the next submission cycle. Speeding up the delivery of comments by just a few weeks would save companies a year of time and expenses.
Dr. Swift noted that pink sheets, which provide the basis for resubmission, are delivered too late for the next submission deadline, imposing an 8-month delay on applicants. He observed that this was not the case for HIV/AIDS proposals and suggested that NIH work to make this more rapid process available to all applicants; for small companies, this kind of delay could be very serious.
Survey respondents raised a number of general concerns about timelines, which are summarized in Box 7-10.
Alongside the general concerns noted above, survey respondents had particular concerns about the gap between Phase I and Phase II. This gap is also addressed in Chapter 5, where survey data reveals it as a persistent problem. Box 7-11 summarizes some of the survey respondent comments on this issue.
BOX 7-10
2014 Survey—Comments on Timelines and Funding Delays
“Reduce delay between application and award decision and actual award (can stretch to 12 months or longer). Reduce administrative delays for non-competitive renewals (delays of several months are often encountered). Better communication, particularly in regard to F&A cost negotiation. Reduce delays in F&A negotiation. We experienced 12+ month delays in processing proposals.”
“Reduce time between application and award decision. This has taken more than 12 months in our case. Reduce administrative delays in funding release each year during phase II. This has taken greater than 4 months in our case. That is we have at times experienced a four month delay between years of Phase II.”
“Overall, the process of submission, review, & funding was fair, but agonizingly slow. One must start the Phase II proposal process almost as soon as Phase-1 funding is received in order to avoid funding gaps. Combined Phase-1&2 awards with clear milestones, prompt and rigorous review, and realistic deliverables would be a more efficient system.”
“Shortening the time between Phase I and Phase II, (re)balancing awards and the award process so that most of the Phase I’s awardees receive Phase II funding.”
“Faster review cycles. Currently it takes approximately 1 year between conception of a research project and funding. . . . Review feedback within a month or two after submission would be very helpful even if the actual funding comes later.”
BOX 7-11
2014 Survey—Comments on the Phase I-Phase II Gap
“Improved access to gap funding and/or ways to reduce the gap between Phases 1 and 2, since the odds of winning a fast-track NIH grant are close to zero.” “The funding gap between Phase I and II is difficult. Some thought needs to be given to gap funding. A reduction of time between Phase I and II would be very helpful.”
“Address the Gap between Phase I and Phase II. Create review cycles that allow for earlier re-submit of un-funded grant applications.”
“Opportunities for gap funding (with suitable milestones met) would help to retain valuable/trained staff used on the Phase I and would help to assure a smooth transition to Phase II.”
“Reducing the gap time between Phase I and Phase II would be most helpful, or providing some Phase I to Phase II interim funding, as this being an IT technology, others were filling the gap for the product while [our company] was waiting on the Phase II award.”
Innovative Funding Mechanisms
Phase IIB
Dr. Aguilar-Cordova (Advantagene) applied for a Phase IIB award from the NCI Bridge program, but found that the company’s proposed match of extensive in-kind contributions (in the form of expensive cancer-treating drugs, which would be provided free to the clinical trials conducted by a large pharmaceutical company) did not meet National Cancer Institute (NCI) requirements for matching funds. Ironically, if the pharmaceutical company donated cash to Advantagene, which then used the cash to pay the company for the drugs, NCI’s match would be satisfied. But the drug company did not have procedures in place to permit such a transaction.
Dr. Hogan (GNS) said that the Phase IIB program is an excellent idea. He noted that the valley of death is a large and growing problem and that such a program is critical given the absence of other NIH funding and declining interest in early-stage investments from venture capital firms and large pharmaceutical companies. In the current environment, he believes it is extremely difficult to attract outside funding if the company does not have a product ready to sell: it is not necessary to have substantial sales, but some sales have to be at least imminent. Dr. Hogan also noted that the timeframe of the Phase IIB program is somewhat unrealistic: moving from the end of Phase II to marketing a product (as a medical device or a drug) in 3 years is an extremely fast track to market.
At Lpath, Dr. Sabbadini, who sits as reviewer on Bridge awards, believes that other Institutes would be well served to follow NCI’s example with regard to Bridge awards.
Mr. DiFranco (Targeson) said that the NCI Bridge program is important given the difficulties in funding clinical trials but that it could be improved. In his experience, neither venture capital firms nor strategic investors believe that the program met their needs. It requires matching funds up front, while it provides money only on an annual basis ($1 million annually), and requires that the funding be fully committed before the award is made. It does not recognize contributions other than cash investments. As a result, potential investors are reluctant to commit before the award is made. Take-up of these opportunities has, as a result of these difficulties, been slow, and Mr. DiFranco urged NIH to find a way to make a preliminary commitment pending the completion of matching fund arrangements.
Dr. Hogan (GMS) also observed that Phase IIB does not provide sufficient funding to complete FDA review. Although $3 million is not insignificant, it is still considerably less than required to meet the program’s goals (he estimated that completion of FDA review would cost his company $6-9 million). Currently, Phase IIB provides enough money to enter the regulatory structure, hire consultants, put quality systems in place, and begin to pay for the start of studies. He therefore suggested that the maximum size of Phase IIB awards be increased to
$5 million and permit funding of business personnel to perform functions mandated by the required business plan. Dr. Rose (Auritec) also urged that Congress consider increasing the size of awards at NIH so that they could be used to fund Stage 1 and Stage 2 clinical trials. He believes that fewer but larger awards would be appropriate. In particular, he suggested increasing the size of Phase IIB awards to $1.4 million for 3 years.
Fast Track
Dr. Allen-Hoffman said that Stratatech participated in the Fast Track program in the early 2000s when working on developing cell-based clones. The company feared that the Phase I-Phase II gap would kill the project. Fast Track worked perfectly from the company’s perspective. It provided a seamless transition from Phase I to Phase II, allowing the company to retain key people. Continuity of staffing remains a key issue for small companies.
Direct to Phase II
Dr. Swift (Auritec) approved of the recent NIH decision to pilot a direct approach to Phase II awards: he noted that many companies already have feasibility data for projects and could therefore move forward without Phase I. This pilot will also have the effect of substantially accelerating the overall project by providing more funding more quickly. Dr. Swift noted, however, that this might squeeze out startups that rely on Phase I funding for early data.
Case Study and Survey Respondents Comments on Other Issues
The Relative Decline of Investigator-Initiated Proposals
In the view of some stakeholders, the rapid switch away from grants toward contracts at NCI reflects a wider shift toward tighter direction of funding by the Institutes themselves. Funding also now flows more through tightly-specified Funding Opportunity Announcements and correspondingly less through the standard omnibus solicitation. Dr. Aguilar-Cordova (Advantagene) suggested that NIH continue to support investigator-initiated proposals, which is a hallmark of the NIH program but is being steadily eroded by a push toward programs defined in advance by the Centers.
Support for Working with the Food and Drug Administration
Many survey respondents highlighted their difficulties in working with FDA to receive approval for required clinical trials. The following possible solutions were offered:
- Hiring and making available FDA consultants (as is the case with the National Heart, Lung, and Blood Institute)
- Better education for applicants starting at a relatively early stage through NIH-sponsored webinars and workshops
- Improved training and better processes for study section panelists, where there appears to be a an information gap related to FDA requirements
- Strategic review by NIH and FDA of NIH vision for innovation and FDA caution
- Advocacy for NIH projects at FDA
- Survey responses related to FDA approvals are summarized in Box 7-12.
Allowable Costs
Under current regulations, SBIR/STTR funding may only be used for research, and published guidelines define what expenditures are acceptable. Many awardees profiled in the case studies argued for more flexibility, particularly with regard to patenting costs and the need to spend on commercialization.
BOX 7-12
2014 Survey—Comments on FDA Approvals
“Small businesses are often inadequately informed about the requirements and process for obtaining FDA approval for products they envision. Efforts by the NIH to 1) educate and encourage small businesses to appropriately approach the FDA for regulatory approval and 2) encourage the FDA to work with and facilitate the regulatory process for medical devices arising from NIH-funded small business and academic grants would be enormously helpful.”
“There is a huge disconnect between NIH and FDA. FDA is looking for more simple solutions to problems (i.e. one drug delivery) and NIH reviewers are typically looking at extremely innovative solutions, which FDA does not look favorably upon. There needs to be a better connection between the two.”
“FDA process is very uncertain and heavily dependent on the particular reviewers assigned to the application. Any help with respect to helping small business to receive from the FDA more clear guidance with respect to the Agency’s expectations regarding the supporting clinical data needed would be of a huge significance and help avoid small companies going out of business due to uncertainty and long lead time associated with the FDA process.”
“It would be great if the NIH hosted a web site, webinar, handouts, etc. explaining more clearly how to approach and work with the FDA; these materials should be oriented to small firms with no prior FDA experience.”
“Small businesses are uneducated and intimidated by the requirements for obtaining FDA approval. NIH could assist by (1) facilitating appropriate timely communication between the small business and the FDA and (2) encouraging the FDA to reach out in a user-friendly way to small businesses.”
Dr. Pardridge (ArmaGen) said that patent costs represented part of the outcome from the grants and that protecting IP was likely to generate better commercial outcomes. It is therefore in the interests of the taxpayer to permit some use of SBIR funding for patent costs.
Dr. Hogan (GMS) noted that Phase IIB does not fund any commercial or marketing personnel, but these are absolutely necessary for a commercial venture capital, which is what Phase IIB is designed to help fund. He suggested that either NIH or Congress should consider changing these limitations to permit a more realistic approach, in which a limited percentage of Phase IIB funding (perhaps 30 percent) be used for commercial activities. He thought this could be a transformative change for Phase IIB companies: Phase IIB would not only provide funding for FDA review, but also would more broadly help fund the shift toward commercial activities.
Dr. Hoffman (Danya) said that even a great product needs marketing: Danya’s autism products are highly reviewed, but an extensive outreach campaign, for example through Google, would cost $100,000, and would be unallowable under SBIR awards.
Contracting Concerns
Dr. Allen-Hoffman (Stratatech) said that contracting has become more difficult at NIH because there is no longer an ability to develop a relationship with specific financial management officers. As a result, the advice received is more uneven, which matters in particular in relation to indirect costs, for which approved rates are published only 2 years or so after the costs are incurred, and hence good advice is especially important to a small firm trying to budget accurately.
Commercialization: Competition from Free Sources of Information
A closer focus on outcomes tracking and analysis would help NIH to fund projects, which would provide the best return on the investment (considering all aspects of “return”). The comments below from Danya illustrate how such an analysis could help guide NIH away from funding projects that are technically strong and address a clear need but nonetheless will never generate either commercial returns or even take-up and use.
Dr. Hoffman (Danya) believes that there are fundamental difficulties that essentially preclude commercialization of educational and support materials in the health care sector: competition from free sources is simply too great, particularly as other parts of the government (for example, the Centers for Disease Control and Prevention) continue to publish high-quality resources that are available at no
cost to the user. The Substance Abuse and Mental Health Services Administration (SAMSA) is another major federal source of free materials.6
Overall, Dr. Hoffman concluded that even generating substantial take-up when materials are free is a problem. Unless a product is adopted by a large organization, it is simply not feasible to expect that it will generate traction among users.
STTR
Dr. Allen-Hoffman (Stratatech) said that the STTR program was particularly important for her company. Once Stratatech was established as a functioning company, and the basic research was completed, other sources of funding became more available. But some of the initial work—such as work on genetically enhanced tissues—had to be completed in the university lab because the necessary equipment was not available elsewhere.
She believes that academic organizations continue to view STTR more favorably than SBIR, particularly with regard to issues related to the allegiance of faculty. University departments take a different view of projects where more of the work and most of the PI’s time is committed to the university as opposed to the private sector. Dr. Allen-Hoffman observed that despite some changes, tenure decision committees are still very conservative about the activities of junior faculty outside academia, and STTR provides a modestly useful mechanism for helping to resolve that tension.
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