Anesta Corporation, No. 3891 (March 9, 1994)
Docket No. SIZ-94-2-15-10

                    UNITED STATES OF AMERICA

                  SMALL BUSINESS ADMINISTRATION

                 OFFICE OF HEARINGS AND APPEALS

                        WASHINGTON, D.C.
                                
SIZE APPEAL OF:               )
                              )
Anesta Corporation            )
                              )
     Appellant                )
                              ) Docket No. SIZ-94-2-15-10
08-SD-94-006                  )
Department of Health          )
  and Human Services          )
Food and Drug Administration  )
Rockville, Maryland           )

                             DIGEST

The presumption stated in Section 121.401(e) that minority shareholders
owning substantially equal blocks of stock each control the firm
has not been rebutted by an allegation that one of the minority
shareholders has not exercised its voting rights under the
warrants it owns since, pursuant to Section 121.401(f), such options are
deemed to have present effect.

                            DECISION
                                
                          March 9, 1994

BLAZSIK, Administrative Judge, Presiding:

Jurisdiction

This appeal is being decided under the Small Business Act of
1958, 15 U.S.C. 632 et seq., and the regulations codified at 13
CFR Part 121.

Issue

Whether the challenged firm is controlled and thus affiliated
with its minority shareholders.
Facts

On November 16, 1993, the Department of Health & Human Services,
Food and Drug Administration (FDA), Rockville, Maryland,
requested the Denver Regional Office of the Small Business
Administration (SBA) to make a formal size determination of
Anesta Corporation (Anesta or Appellant) pursuant to 13 CFR
121.1501. 1/ Anesta has requested a deferral and reduction of the
fee it owes the FDA for reviewing its new drug application under
the Small Business Exception to the Prescription Drug User Fee
Act of 1992, 21 U.S.C. Section 379h(b)(2). Accordingly, the FDA has
requested that Anesta's size be determined as of May 24, 1993,
with a statutorily-mandated size standard of 500-or-fewer
employees.

According to the information provided by Anesta to the Regional
Office, including its SBA Form 355, its corporate charter and
bylaws, and a breakdown of the number of persons employed full-
time, part-time, or temporary, for the 12 months preceding May
24, 1993, Anesta was incorporated in 1985 and its primary
business is pharmaceutical research. Anesta operates under a
license agreement with the University of Utah Research Foundation
to develop and manufacture pharmaceutical products and to license
and sell the products it develops. Alone, Anesta has less than
500 employees.

Anesta's SBA Form 355 shows that its stockholders as of May 24,
1993, are the following individuals or entities:

     Stockholder                        Stock Ownership

     Morgan Holland Fund                     28.73%
     William Moeller                         12.65%
     Theodore Stanley                        12.65%
     Stanley Research Foundation             1.67%
     Univ. Of Utah Research
       Foundation                            0.12%
     Abbott Laboratories (Abbott)
     warrants [2/]                           24.47%
     Other                                   19.39%

Anesta's bylaws state that it may have a maximum of five
directors and that the business of the corporation shall be
managed by its Board of Directors. The officers and directors of
Anesta are as follows: Theodore H. Stanley, Director and Chairman
of the Board; William Moeller, Director and President; James
Morgan, Director; Ed Kania, Director; Emanuel Papper, Director;
Michael Busch, Vice President Clinical and Regulatory; and Dennis
Coleman, Vice President Research & Development.

The Regional Office file shows that Mr. Stanley is a Professor of
Anesthesiology and a Research Professor of Surgery at the
University of Utah. He certified to the Regional Office that he
is not an officer of the University of Utah and holds no
administrative position there.

The file also shows that the Morgan Holland Fund, the owner of
the largest single block of Anesta's stock, supra, has two
individuals, Mr. James Morgan and Mr. Ed Kania on Anesta's Board
of Directors. Mr. Morgan and Mr. Kania, together, own 41.8% of
Morgan Holland Ventures, which is the management company for the
Morgan Holland Fund. The latter is a venture capital limited
partnership consisting of thirty-three Limited Partners. The
Morgan Holland Fund has well under 500 employees.

As noted above, Abbott's warrants in Anesta (24.47%) constitute
the second largest single block of stock ownership in the
company. Additionally, the record shows that Anesta and Abbott
have executed several contracts regarding current and future
products. The contractual agreements are more specifically shown
in Anesta's 1992 Annual Report as follows:

     Anesta continues to work in close collaboration with both
     Abbott's Hospital Products Division and Abbott
     International. We have several relationships:
     
     o    Marketing partner (Abbott licensee) for fentanyl
     ORALET.
     
     o    Contract manufacturer (Abbott) for ORALET and potentially
     other products.

     o    Through warrants, Abbott has an equity interest in Anesta's
     success.
     
     o    Support for future oral transmucosal products with potential
     for development in collaboration with either Abbott or with other
     companies depending on areas of marketing interest.

On January 10, 1994, the Regional Office issued its
determination, noting that

     [i]n addition to the warrant options of Abbott, Anesta and
     Abbott have a close relationship as described in the 1992
     annual report. Other instances of this close relationship is
     that both Anesta and Abbott jointly presented an overview of
     the manufacturing process for fentanyl ORALET to FDA, both
     have participated in the creation of an educational
     videotape about fentanyl ORALET, and have jointly sponsored
     an educational and research conference devoted to fentanyl
     ORALET.

In consequence, the Regional Office found Anesta affiliated with
both the Morgan Holland Fund and Abbott under the regulation set
forth at 13 CFR 121.401(e), rendering Anesta an other than small
business under the applicable size standard.

Anesta received the Regional Office determination on January 13,
1994, and by letter postmarked February 11, 1994, filed a timely
appeal from that determination. See 13 CFR 121.1705(a)(1).

In its appeal, Anesta asserts that, while Abbott's warrants
represent 24.47% of Anesta's shares, such warrants carry no
voting rights or other shareholder rights until exercised and
that Abbott has never exercised its warrants. Anesta asserts that
Abbott has no representatives on its Board of Directors as of May
24, 1993, the controlling date for size determination purposes,
nor at any time prior or subsequent to that date. Accordingly,
the management and control of Anesta is in the hands of the Board
of Directors and officers of Anesta, and there is no overlap
between Abbott personnel and Anesta personnel on the Board or
among the officers. Thus, argues Anesta, Abbott is not its
affiliate.

Discussion

The pertinent regulations for resolving this appeal are set forth
at 13 CFR 121.401(e) and read as follows:

     Affiliation through stock ownership. (1) A person is
     presumed to control or have the power to control a concern
     if he or she owns or controls or has the power to control 50
     percent or more of its voting stock.
     
     (2)  A person is presumed to control or have the power to control
     a concern even though he or she owns, controls or has the power
     to control less than 50 percent of the concerns voting stock, if
     the block of stock he or she owns, controls or has the power to
     control is large as compared with any other outstanding block of
     stock.
     
     (3)  If two or more persons each owns, controls or has the power
     to control less than 50% of the voting stock of a concern, such
     minority holdings are equal or approximately equal in size, and
     the aggregate of these minority holdings is large as compared
     with any other stock holding, the presumption arises that each
     such person individually controls or has the power to control the
     concern; however, such presumption may be rebutted by a showing
     that such control or power to control, in fact, does not exist.

Additionally, the regulation at 13 CFR 121.401(f) states:

     Affiliation arising under stock options. convertible
     debentures and agreements to merge. Stock options,
     convertible debentures, and agreements to merge (including
     agreements in principle) are generally considered to have a
     present effect on the power to control the concern.
     Therefore, in making a size determination, such options,
     debentures, and agreements are generally treated as though
     the rights held thereunder had been exercised....

Further, the regulation at 13 CFR 121.401(k) states as follows:

     Affiliation through contractual relationship. Affiliation
     generally arises where one concern is dependent upon another
     concern for contracts and business to such degree that its
     economic viability would be in jeopardy without such
     contracts/business.

The Morgan Holland Fund and Abbott, by virtue of the aggregate of
their ownership of stock in Appellant, are presumed to control
the latter pursuant to 13 CFR 121.401(e)(3), supra, and, accord
ingly, are deemed affiliates for size determination purposes
since the presumption of control has not been rebutted on this
record. Moreover, Appellant's argument that, inasmuch as Abbott's
warrants have not been exercised, Abbott does not have an equity
interest in Appellant, has little merit in view of the language
of 13 CFR 121.401(f) requiring that stock options, such as
warrants, for example, must generally be considered to have a
present effect on the power to control the firm. See, for
example, Size Appeal of Bishop Pipeline Corporation, No. 3422
(1991). Thus, the presumption of control of Appellant by Abbott
has not been rebutted by this argument nor any evidence in the
record. Further, as reflected in Appellant's annual report,
supra, there are numerous continuing contracts extant between
Appellant and Abbott whereby they have combined their efforts,
skill, and knowledge in the creation and marketing of fentanyl
ORALET, as well as future products. The extent of this
cooperation and contractual relationship between the two firms
further buttresses the view that Appellant is dependent upon
Abbott for future business to such a degree that Abbott is
affiliated with Appellant through contractual relationship
pursuant to 13 CFR 121.401(k).

Since Appellant is affiliated with both the Morgan Holland Fund
and Abbott, the total number of employees must be aggregated.
While the Morgan Holland Fund has only a few employees, it is
uncontroverted that Abbott is a large firm under the applicable
size standard. Thus, when Appellant's employees are combined with
those of Abbott and the Morgan Holland Fund, Appellant's number
of employees exceeds the 500-employees size standard.

Conclusion

The Regional Office determination finding Anesta Corporation is
AFFIRMED, and the appeal is DENIED.

This constitutes the final decision of the Small Business
Administration. See 13 CFR 121.1720(a), (b), and (c).

                        ___________________________________
                        Gloria E. Blazsik (Presiding)
                        Administrative Judge
                    
                        ____________________________________
                        Elwin White (Concurring)
                        Administrative Judge
                    
                        ____________________________________
                        G. Stephen Wright (Concurring)
                        Administrative Judge
                    

_______________

1/   The text of the regulation at 13 CFR 121.1501 states:

          SBA will provide size determinations, under its rules,
          standards and procedures, for the purpose of compliance
          with small business requirements of statutes,
          regulations or programs of other government agencies.
          These size determinations are provided upon request by
          the other agencies and have binding effect

2/   Abbott is an undisputedly large company under the
applicable size standard.