i want to welcome everyone to this more this afternoon's hearing on the small business innovative research s v r and small business technology transfer or s t t r programs this is the third hearing that this subcommittee has held on these very important programs both of them were created over twenty five years ago designed to support and encourage small high tech entrepreneurial firms and play a more important role than are in the economy that we live in today almost a year ago the house passed an f b i reauthorization bill h r fifty eight nineteen which included the first significant changes to the program since its inception this bill reflected not only the cost of research today but also reflected the international competitive market american high tech firms face and the recommendations of various research bodies that had input about f b i are much has changed over the past twelve months today we're looking to small high tech firms to create the new products  services and technologies that can reach of an eight our economy and make us more competitive internationally when the f b i r and s t t r programs were created we didn't fully appreciate fully the power of small entrepreneurial high tech firms to create economic growth companies such as amgen apple janetta tech and microsoft all started as small entrepreneurial firms and now employ thousands or tens of thousands other companies started small and stayed small all were innovators and drove economic growth when f d r and s t t are were created these companies were either in their infancy or didn't yet exist in part because of f b i or n s t t r today the united states is a world leader in i t and in biotech r expires at the end of july and given the current economic situation we need to ensure that we structure these programs to reflect the current economy and the globalization of r and d we can't afford to think we're the only country with first class science and engineering talent we need to foster the innovation that creates economic growth jobs and new products and services right here at home maintaining the status quo of programs created a quarter century ago makes neither good business nor policy sense we must always keep in mind that the american taxpayer who pays for these programs in these difficult economic times we need to ensure they would receive the highest return on their investment we have a very panel of witnesses here today representing small business and the and i h which provides the second largest amount of s p r funding of any federal agency i hope they can tell us more about the economic colleges facing that those firms and their thoughts on the program at over two billion dollars per year the s p i r n s t t r programs  and away the largest technologic developer development programs to transfer programs in the federal government i want to thank our witnesses for appearing before us today and now i'd like to turn to our ranking member the gentleman from illinois for her opening statement thank you mr chairman and thank you for holding this hearing today on the role of f b i r n f t d r programs and in stimulate innovation at small businesses as you know ranking member smith was on and unable to be here at this moment he might be in a little bit later but he had an immovable conflict but i'm pleased to have the opportunity to take his place as we examine this important program today on this committee we are of course well aware of the importance of innovation to economic growth and improve quality of life particularly as we work our way through this recession we recognize that advances in science and technology will help to enable short term economic recovery as well as sustained prosperity over the long term to this and the f b i are in the s t t our programs play a key role as an important part of overall federal r and d portfolio serving to facilitate facilitate increased private sector commercialization of promising ideas while leveraging the unique capabilities of small business to help the government advance meet its technological needs today's hearing represents a continuation of the f b i our reauthorization efforts undertaken by this committee and the house small business committee during the hundred tenth congress as such it will focus on two primary changes under consideration last year one is whether or not to increase the research set asides that fund this and as to t r and to whether or not to relax restrictions on participation by venture capitalist backed small  small businesses these are very important issues that this hearing provides an opportunity for us to hear from the key stakeholders involved with respect to the set aside is important to remember the unique funding structure through which the  our programs are funded through an assessment on extramural national extramural federal research that is carried out by our universities and national labs as a result in an increase set aside it comes at the expense of basic and applied research performed at universities and the national labs and because of the large base from which the funding is derived and even what might appear to be a minor increase in the set aside from two point five to three percent for f b i and from point three two point six that would be zero point three and zero point six percent for us t t r would result in a rough reduction of roughly sixty six hundred fifty million dollars to core agency research programs for this reason and because s b i r n s d t r budgets have grown substantially over the last ten years i'm strongly opposing strongly opposed to increasing the set aside the issue of eligibility of majority venture capitalist back small businesses it's six significantly more complicated but no less important the origin of the dispute over this eligibility is due to lack of clarity in and changing interpretations of the existing statutory definition of a small business regardless of what side of this issue one aside i think we could agree that the solution is to define small business in a manner that maximizes the eligibility  and small businesses while minimizing the inappropriate eligibility of large businesses to this and i'm concerned that the current f b i our rules may unreasonably exclude many legitimate small business businesses particularly in the biomedical sector due to its high dependence on venture capital to advance drugs and therapies through the regulatory approval process i hope this is something that we will address in this upcoming legislation this committee in the full first expiration however i hope and expect that we can do so through regular order so the committee members have an opportunity to review any changes to the legislation from last year and offer him put amendments as necessary and i thank our witnesses for being here today and waiting for us we had those pesky votes as you know and i look forward to a productive discussion back i thank the gentleman and would just add that it is fully my intent to move legislation on this very important subject through regular order but as to generally fully understand sometimes we have our intentions changed for us if there are members who wish to submit additional opening statements your statements will be added to the record at this point i just want to note that i will be stepping away for a few minutes at about three o'clock and i believe that gentle lady from maryland will be available to step in the chair for a while thank you very much at this point it is my pleasure to introduce our witnesses dr robert byrd all is the president of the american association of american universities and i to add a proud former doc for almost many years the honorable jim greenwood is the president and o of the biotechnology industry organization and well represented pennsylvania for a dozen years and i always thought that was such a long long time but i'm hitting the dozen mark soon myself and it's amazing how perspective changes dr sally rocky is the acting and i h deputy director for extramarital research at the national institutes of health and  finally mr jerry glover is the attorney and executive director of the small business technology counsel welcome one and all your full written testimony will be included in the record of this subcommittee please if you will pricier summarize your written testimony you will each have five minutes for your spoken testimony and when you complete your testimony we will hopefully have plenty of time for questions and each member will have five minutes to answer questions dr berdahl please proceed good afternoon chairman were congresswoman bigger than congresswoman edwards it's a great privilege to present our associations views on the small business innovation research program and the small business tech transfer program i have to note in the outset that i had the privilege of being a faculty member an administrator of both the university of oregon and the university of illinois and so i have some familiarity of the role that those universities play in the economies of those respective states and your a academies assessment of these programs as being sound in concept and effective in practice in the early years of f b i are many of our campuses were critical of the program viewing it is coming at the expense of funding that would otherwise supported university based basic research in recent years however as our universities and faculty have become have they have become much more interested in commercialising new technologies and our universities have come to support s b r and s t t r programs as they currently exist to drive this point home i would like to highlight an f b i success story from chairman whose home state of oregon and my former university the university of oregon electrical geo dess ics incorporated a g i was a university of oregon spinoff company it was founded by you a bone or neuroscientist don tucker to develop advanced noninvasive ways to visualize brain activity over the last decade s b i our grants have played a key role in fueling a g i s maturation growth and expansion as a direct b i r firms it is clear that the f b i are in s t t our programs have played an important role in stimulating innovation at small high tech firms throughout the country the specific degree to which these programs are responsible for innovation however is not easy to assess due to a lack of sufficient data according to the national institutes of standards and technologies more than twenty six bill he and has been spent on f b i are an s t yielding eighty four thousand patents and attracting more than thirty six billion dollars in venture capital from more than seventeen thousand f b i are funded companies despite the success of these programs  report makes significant record recommendations about the need for better data collection and systematic assessment of f b i our n s t t r programs and we commend those recommendations to you in your letter of invitation us to assess the current f b i are an s t t are set aside percentages while supportive of the current set aside we oppose any increases in the f b i are set aside because there is no indication the highly qualified s p r proposals are currently being rejected for lack of sufficient funding moreover we question whether there is enough small business research and of sufficient quality to a merit an increase in the f b i are set aside especially if such funding were to come at the expense of peer reviewed basic and applied research programs where success rates have hit all time lows in recent years our view is that the best way to increase the amount of funding available to these programs is to provide steady and sustained funding increases for federally supported basic research as research funding increases the dollars of a level to these programs will also increase at this point the only modification we would encourage would be the slight increase recommended by the n r c in the percentage of set aside that would be used for program management from the point zero three percent to point zero five percent you also asked our views about venture capital an f b i are a use supports the subcommittees view that firms with significant venture capital funding should be allowed to compete for f b i are in s t r war however the current regulation effectively disqualify small companies that have received significant venture capital or are owned by another company with significant venture capital investment from competing for from competing for s b t r funds the a you shares the view that the n r c with the n r c that venture capital investment in companies seeking s b i r confirms the quality of those projects and would raise the quality of the applican pool altogether we are also asked for thoughts concerning ways to improve the effectiveness of these programs in responding to this request i'd recommend to you the the commendations made by the national research council in it two thousand and eight report there is one related issue that we would ask the subcommittee to examine in reauthorizing f b i our mr chairman even today's existing f b i our program with those programs there is a funding gap that often prevents universities from new being moving new research discoveries and technologies quickly into the marketplace this bridge funding often covering a crossing the valley of death as it's called would be very very important let me conclude i see my time is up here let me conclude my remarks with the statement that i made earlier in my testimony that these are sound and effective programs it is clear that these programs are at their core good programs that help foster successful entrepreneurial opportunities for our nation's scientists engineers and innovators these programs were created well over twenty years ago they can be improved by adopting some of the n r recommendations and i also believe that it might be time to consider supplementing these programs with a new program aimed at providing additional gap funding mr chairman and members of the subcommittee once again i thank you for the opportunity to chairman wooing congresswoman biggert and members of the committee i am jim greenwood president and c e o of the biotechnology industry organization bio and i am privileged to be here this morning on behalf of bio's more than twelve hundred member companies academic institutions state biotechnology centers and related organizations in all fifty states involved in health care agricultural environmental and industrial biotechnology congress created the s v r program  eighty s because it recognized that all too often promising early stage scientific research lacked adequate funding and as a result perished in the valley of death the importance of advancing science through the valley of death has never been more important than it is right now in fact in just the last several months at least twenty five of our companies have to place drug development programs on hold or cut programs altogether include therapies for hiv aids cervical cancer multiple sclerosis and diabetes roughly a third of small publicly traded biotechnology companies are now operating with less than six months of cash on hand which is  ninety percent increase relative to this time in two thousand and seven the total capital raised by the industry in two thousand and eight is down fifty five percent compared to last year as such it is more important than ever th government funding opportunities such as f b i are are made more accessible to america's cutting edge companies my recommendation to strengthen and improve the f b i our program can be grouped under the following three general goals first increase competition and foster innovation and commercialization by the best small companies for twenty years domestic biotechnology companies competed for s v r grants however in two thousand and the small business administration's office of hearings and appeals ruled that a biotechnology company cognitive acts did not meet the f b i are size standard because multiple venture capital investors in the aggregate and that's more that's important in the aggregate owned more than fifty percent of the company's stock the ruling which is not based on the statutory language ignores the reality of the marketplace where small biotechnology firms must raise tens of millions of dollars to conduct incredibly capital intensive research the s b s two thousand and three rolling to exclude majority venture backed companies inhibits the s p i r s programs access to the most competitive pool of applicants possible and it stifles the ability of s p i are to carry out its mission to fund projects that will have the most commercial potential is acting director recently reported that the number of s p r applications has dropped over forty percent since two thousand and four which is about the same time the f b i or participating agencies implemented the new a restriction and majority v c finance companies by respectfully request that the committee reinstate the eligibility of small d c backed by technology firms to compete for  awards this will ensure the most competitive pool of applicants and that grants will be awarded based on projects that show the most promise in bringing breakthrough therapies to the public second congress should clarify the i eligibility rules to make the application says more straightforward and more user friendly is equally important the authorization clarify s b a affiliation regulations and the current s b a regulations when determining the size of a business the s b a considers the number of direct employees at the business as well as affiliated business employees these affiliation rules create a situation where a small company with fifty employees could be affiliated with hundreds of other employees of companies with which the small company has no relationship whatsoever simply because the company's share a common investor even where the investor owns a minority stake in the business in question by a recompile recommends the authorization bill provide language to clarify that minority investment by a venture capital investor does not make the company an affiliate of another company for the purposes of determining size this is a commonsense measure that will provide clarity and peace of mind for small business entrepreneurs looking to participate in the f b i our program third congress should maintain adequate agency flexibility within the s v r program one of the great strengths of the f program is that congress has provided participating agencies with flexibility in how they administer the program maintaining flexibility is supported by a national research council two thousand and seven report which states quote flexibility is a positive attribute in that it permits each agency to adapt its s p r program to the agency's particular mission scale and work and culture by or does not believe that a hard dollar cap should be applied to the f b i or grant counts amounts agency should be the best agency should be the best judge of how to use their f b i our funds to advance science and to commercialize new innovations by making necessary reforms to the f b i our program congress can continue to support the u biotechnology community by allowing the government to partner with small biotechnology companies that have prominent promising science but need additional resources a key stages of development thank you thank you mr greenwood dr rocky please proceed good afternoon chairman woo congressman biggert and other members of the subcommittee thank you for the opportunity to discuss the and i h s b i r s t t r programs and the role they play in stimulating innovation at small high tech businesses and i as the one of the largest funders of the s p r s t r programs and the largest supporter of biomedical research that focuses on extending healthy life and reducing the burdens of illness and disability the f b i are s programs are poised to fund early stage high risk high quality research from which important medical advances can be developed in fiscal year two thousand and nine the total s b r s t a t r set aside will be about six hundred seventy two million dollars i'd like to begin by highlighting several s v r innovations that have made differences and can make differences in people's lives and l t s therapeutics in georgia can georgia company developed a needled us infusion patch called the passport system for a painless and controlled delivery of drugs such as an insulin or a vaccine such as have titus be an agenda through the skin three rivers holding in arizona company focused on assistive technology developing better wheels for wheelchairs the smart will optimize wheelchair route to a route out the cause of chronic pain in the shoulder hand or wrist wheelchair users s i g technologies inc in oregon developed a small molecule inhibitor of smallpox virus replication while smallpox is essentially been eradicated it remains a formidable bio warfare threat of and finally biopsy sciences in florida developed hydro mark a novel water containing site marker used in breast cancer procedures this technology is helping patients by replacing lengthy mammogram guided localization wire procedures with a quick and accurate and more comfortable ultrasound localization as a breast cancer survivor i have personally experienced the excruciating procedure that this new technology can replace i find it very satisfying that the and i in the small business community contribute to helping women who are battling a life threatening disease have one less painful procedure and what can be a grueling treatment regime stories such as this come from companies all over the united states and underscore the importance of f b i f b i our to our mission in support of the goal to increase commercialization of federally supported r and d and i design programs such as the phase one phase two fast track program and competing renewal award to help our awardees negotiate the agonizing period between discovering commercialization or as we heard mention the valley of death in addition and i each office commercialization assistance by facilitating matchmaking at our partners licensing partners or investors or vest years to find them on this on this virtual space and currently we have over one hundred technologies in this big database and i just pleased that a recent study conducted by the n r c the national research council found that forty percent of and i each f b i are funded projects are commercialized further using a dynamic monitoring system that enables and eyes to document the continue achievements of its f b i or awards over time we have found that about fifty percent have achieved sales other factors such as f d a approval strategic partnerships and investments also demonstrate our program success we attribute the success and effectiveness of the program to several factors the most significant of this is the existing the program to address the changing nature of biomedical research and accommodate the needs a multiple industry and diverse product outcomes examples include the ability of companies to propose their own project ideas and an opportunity to resubmit unfunded applications and the ability to exceed the award guidelines in justified cases simply stated one size does not fit all flexibility is critical at a time when science is changing rapidly becoming much more complex than ever more expensive despite these programs flexibilities in a hansom and as you already heard and what we have observed as there have been some troubling chant trends specifically the numbers of our applications have declined from two thousand and four through two thousand and eight by nearly forty percent though the reasons are not fully understood for this decline it's disconcerting trends this disconcerting trend may be related to certain distance incentives that are either rendering worthy companies ineligible or driving them away for other reasons for some the award amounts or the current phase structures are not sufficient incentives for applying for others the process appears to competitive new companies may find the process daunting or are unsure how to match their skills with our research areas some firms have lost their eligibility or may be confused by the eligibility criteria for many buyout medical technology technology companies the f b i our program is an important source of seed funding for early stage ideas of unproven proven fizzy feasibility the venture capital financing is the only realistic way that there innovative product launch of the marketplace research in public health and biotechnology is characterized by high and intense capital needs as you know and to see these products from idea to market usually very long development times exceptionally high burn rates for investment funds and often multiple rounds of financing to fund the extensive and essential clinical research individuals alone simply cannot finance the hundreds of millions of dollars are necessary clinical phases to bring the product to market the n r c study of the s p r program note that the synergies between s p r funding and venture capital are useful as the innovative process is not linear even small business benefiting from venture funding may well see s p r funding as a means of exploring a new idea for example a new drug candidate keeping a pipeline full of new ideas is important because in today's high risk biomedical research environment the reality is that fewer than one percent of the innovative promising projects reach the marketplace therefore i believe appropriate incentive strength can strengthen the role of small businesses in stimulating technological innovation in conclusion i wa supporting small businesses and maintaining the integrity of the f b i our programs we look we look to small businesses to stimulate technological innovation help us face new challenges and to produce benefits for the public we look forward to working with congress on ways to reinvigorate the program incentivize america's small businesses to participate and create an environment and they have a link commercialization of health related products and services that will sustain our national economy that concludes my state and i look forward to committee i want to thank you for opportunity to glover exactly director the small business technology council of the national small business association we represent the seven thousand s p r companies that are active in the program today america is certainly not doing enough to promote innovation especially given the state of competition from foreign countries that are graduating more distant engineers than we are and the state of our economy today our share of the global technology market is declining ten foreign countries have copied the s b a our program major countries witness after witness study after g a o study report after report say the program is working remarkably well and has for twenty six years please don't mess it up the s b a our program isn't broken it doesn't need fixing please make changes that are limited and monitored carefully and that make sure the agencies the g a o and the national  academy of sciences report fully on those changes and how they affect the program and how they affect the technology community asking small business to trust the government to allow the agencies to be flexible to their allowed the government to change or modify the program that is small businesses only real portal or access to the federal r and d dollars is like waving a red flag in front of small business thirty years of experience with the government has proven that small business will come out in the short end a little has changed in the federal r and b marketplace in the past thirty years small business share the federal r and d market was three point five percent in one thousand nine hundred seventy eight it is now increased to four point three percent in thirty years but the technology marketplace has changed and changed significantly one teen seventy eight it's a small business employed only six percent of the scientist in a new engineers in america today according the national science foundation science indicators that number has gone up to thirty eight percent small businesses receive thirty eight percent of all u s patents and s b a our companies have received over sixty thousand patents and are pending at the rate of basically five thousand patents per year eighty one the brady two when the program started to now having twenty five percent of all american innovations at the same time large firms have dropped from forty innovations per cycle down to under ten so small business is where it's where the job creation is really happening let me just mention that there's a lot of discussion of where the s v r program should be focused it is always focused on the first three basic parts of this race it research applied research and development the commercialization has always been beyond the s b a program and it should be not even fund one we have to be realistic when you get in the commercial rayna this program and the federal government simply don't have the funds to pick anough winners to make it work the economic impact of the  program the job creation just as a small business if you look at this indication small business has led us out of every recession and they are doing a continue to do that the economic impact of the s program if you look in the back of the testimony you'll see green pages and they have information on each specific congressional district or the states of the various members what is important to point out is that this s b a our program using a random selection of states that was represented on this subcommittee have received six and a half billion dollars of s b a our awards currently in the last five years there are almost two billion dollars involved and those companies have created over one hundred thousand jobs are maintained i should say created maintain two hundred thousand jobs and fourteen pounds just for the members in the states that are represented on the subcommittee it's a wonderful program i worked extremely well the universities and small business have worked well together and that is improve have been improving and working well we are starting the most productive sector of the small business economy the high tech small business companies and underfunding the most prolific scientist and engineers that in a nutshell ladies and gentlemen is why we are losing in the international market market share and what we need to do to improve our economy we need to continue it we can't continue down this road with small business receiving less than five percent of the federal the r and d dollars and expect x technology innovation to lead us out of the recession and into a larger share of the global technology market thank you thank you very much mr glover while i may not completely agree with all your substantive points i sure do wish that i could talk like you i've always wanted to have a southern and we have agreement that the hearing may continue in the absence of any republican members and mr we look forward to mr smith joining us and i just want to reiterate that this edwards will be stepping in for me momentarily and i aspire to return to continue some of the discussion now it is appropriate for us to open to questions and the chair recognizes himself for five minutes mr glover makes a point in both oral and is written testimony for a five percent set aside and i am sympathetic to some set aside increase but i'd like to get the views of  all even though you have stated your preference and mr greenwood and dr rocky first of all dr when you say you like the program stay the same i simply mean that you want to set aside to stay the same and that you are not stating that you want every aspect of the program to stay the same microphone place we favor the current set aside provision we also favor greater flexibility in the agency's ability to  apply as many of my colleagues here at the table have also recommended but we believe that the current set aside is sufficient and that in many instances clearly nd i would like to see that arrive having said that i served in the congress when we doubled the budget it was it was a good and noble thing that we did i think many of us failed to understand why providing level funding at best after that was a mistake we sort of took the attitude that you know doubling nobody gets their budget doubled so stop complaining about lack of growth as a prop but it isn't it was mistake and we really need if we we need to continue to grow the n i m h a budget at a reasonable least inflationary factor annually i would presume that that and the effort to get much small business community terrific thank you very much dr rocky and i just want to say that i think everyone that i can think of in this is situation is a fan of it and for good reason it's because you all do really really good work and i'm also happy to hear that you do support a two point five percent set aside for f b i are going to zero point three set aside for s t t r so that leads to my next question in the american recovery act era better known as the stimulus originally when we were discussing the methodology that i was going to use to find the use to use the our funds was to take existing applications both in the s p r program and all of our programs and to fund those to get that door those funds out the door immediately because of the decreasing numbers of s t r applications and the increasing success rate and the applications that we would have had at hand where the two thousand and applications and we simply would not have had how the process was the negotiation with with with congress the congress as indicated that they asked questions of if there were any concerns with the one i volunteered that yes i expressed my concerns how the process for the point to make if i may mr chairman i've spoken with both senator specter and his staff on this and as we all know senator specter was instrumental in this and my understanding is that the language while it may not require the and i h to set aside two point eight percent nor does it prohibit them from setting up to that is my interpretation the statutory language also is a pretty clearly crafted car about things like that don't ha accident but it does seem quite permissive with that i'd like to recognize the ranking member for five minutes thank you mr chairman and thank you to all the witnesses for your testimony i have argonne national lab in my district and i have a lot of spin off companies and what happened so many times is that they have a product that they're working on and they get through  the the original the first couple of steps until they get to the day they get through the demonstration project and then they want to get to the commercialization so they might have gotten the loans and whatever and then this is something either venture venture capital funding is necessary or more than one earmark which obviously is a lot of money which set kind of out of the question but what and you don't want to expand the program what can we do to that valley of death that can bridge the gap there is really there was some talk about gap report which discusses the importance of venture capital is significant in this case particularly for for biomedical research projects that may be very long term very expansive take a long time between that for the clinical portion of it and so we recognize that this is a serious issue and i would like to look at ways to provide some flexibility for that more more extensive research development the need to be going on do you see also it with this economic situation that we're in the venture capitalists are in is just as a don't have the ability to fund two are there some really projects that you see that are going you know that are going to go through because they don't have that i think that's a possibility i think what you may be see venture capitalists are not taking on new ventures and they're digging into the the current investments that they've made and if we had a way also to allow them to also take on new ventures well i think that would be very beneficial to the whole small business community gibbered all why do you think that that this was put in with the affiliation if a venture capitalist company that had to include those members of that venture companies not to be able to get the funding as well as venture camp i think that obviously the availability of venture capital is harder to come by in the current in the current  climate it's more difficult for young scientist or investigators who have developed something that has commercial value to be able to move to the proof of concept and scaling up phase of this and the modeling that's required to to assure venture capitalists that it has commercial value and potential commercial success and although the current p r program partially recognizes this issue it often falls short of being able to reach the level of development necessary to assure investors that that a product has commercial viability and so i think that we should be thinking very hard about how we can push these new technologies over this valley of death or across the gap however one wants to describe it and that certainly i think is in the interest of of the nation and in the interest of the scientists developing these these these products we'd welcome the opportunity to think with the committee about and explore ways in which it might able our universities which also are pretty hard hit by this economy and don't have the resources in many cases to assist or the ability to assist in driving this these developments over this gap so there should be i hope some way in which we can extend the horizon for development of research advances in new program of some sort i don't favor increasing the set aside as as a means of doing that because i'm not sure that that we have a an indication think it would reflect the original intent of the congress and i think that what this affiliation rules really were interpretations made by the bureaucracy and doesn't reflect it reflects neither the original congressional i would think current congressional intent but certainly changing the rules with regard to the majority back vcs is critical that companies who are doing important biomedical research that have huge potential to release leave human suffering in premature death face the valley of death whether they are are or are not backed by a fifty percent plus one a majority of venture capital dollars and keep in mind that what's important here is that these companies if you are a drug discovery company you cannot get very far down the road without v c funds and talking about here is not it's very very rare that one venture capital firm comes in and and and provides more than half of the funds for one of these companies it's usually the case that several of them in the aggregate do so maybe this one is providing ten percent this is providing ten percent and so forth and none of that alters either the fact that these are still small companies and b that they're making as judged by the n h reviewers they're making important contributions to research that has great potential for humanity thank you thank you and thank you to the witnesses i to explore if we could for a bit the implementation of the s v r program because it seems to me that obviously we have one agency in front of us the big one to be sure but there are wide variances in the implementation across the agencies of the program and i understand your testimony with regard to flexibility and nimbleness across the agencies but it makes it really tough to gauge from one agency to the next  whether there is consistency in terms of the implementation of the program and whether we're getting to the targeted targeted need and so i wonder if you would comment about the possibility or explore the possibility of some way that we can aggregate data that we have some way across agencies of analyzing the effectiveness the relative effectiveness i mean if and i was doing it in the right way that makes sense for that age what is the cross fertilization with with other agencies so we have of course we have a number of ways as you mentioned congressman edwards regarding and analyzing our own data and also through the a we have some data available the lease will give you information on firms and we can do some analysis i think the issue about how the f b i our program is implemented is an important one and it becomes particularly important in reauthorization because i think it's it's good to look at best practices and what has has worked well for each agency i will say that the sectors that are being supported by each agency are quite different and th ultimately the flexibility that is allowed does help promote the particular type of program that is necessary to support that kind of sector that for example bio medical field and i would be working with as opposed to some of the more in the physical sciences or we have the national academy of sciences five year study that went into this at some length and they did a very good job of analyzing what the agencies are doing the conclusions were that the program is remarkable that it's working this is a data driven last a lot of information is there there is flexibility within the programs the couple of basic things that are important to realize is it has the most remarkable rate of success of any of the federal r and d programs approximately half of the technologies make it to the marketplace in some for shape or form or fashion and that is quite successful just mentioned you're close to fifty percent of the department of defense is close to fifty percent the other agencies are not quite that good but are still in there so the program is quite good that's why i say we have to be very careful on how we change it allowing large size awards much bigger awards for example and talks about the number of applicants have dropped well quite frankly the number of awards dropped to which one came first the chicken egg i don't know but they both went down together so we've got to be careful that we don't crowd out good innovations by giving a few large super jumbo or germ ultimate awards crowds out a lot of other technologies that may be coming along this be our program was designed to fill the earliest stage one of the things i looked at for each of the states represented on this committee is whether seed and angel financings to your states were bigger than s b r wards the answer is they're not that early stage they're really the only source of money p r and that's why i think you've got to be careful about watching what you're doing it's working remarkably well across all the agencies well let me just ask this because it gets to this question around i think that there was some suggestion that the the changes that essentially screened out the venture capital base program back to programs contributed to the decline the decline i don't know what analytical data we have that suggests that that's true but if we do have it i'd be interested and in seeing you know what i wonder the environment the current economic environment that is bigger talked about i think you know one could make an analysis that perhaps contributed as well to the decline in applications and come out of doing private sector nonprofit grant making and i always know that you always get many more applicants th you can ever ever fund at the same time there's always a percentage of those that are just not worth along at all no matter how much money you ever had but my experience has been there's always you know a sector of them maybe even it's above the two point eight percent that you go you know if we just had some more we actually might want to do that and so i question you know what seems like a really for most of you a very sort of clear  indication that there's no need to increase the the set aside and then we have testimony from mr glover that you know four or five percent that it's not and i'm not even sure why five percent why not two point nine percent or three percent and so there must be you know some room in there both from the agency and small business standpoint but also you know looking at the present and set aside numbers it says well maybe there is at least some room the first thing i would say is that first reflecting on your comment that you get a certain number of applications and not all of them are the best almost by definition but if you think about what we're trying to accomplish here in the big picture it is it is all about advancing the mission of the national institute in terms of our industry advancing the mission of the national institute of health and making sure that the particular  particular alacrity the particular level of entrepreneurship in risk taking that small companies can take involved in because they don't have large overhead they don't have large bureaucracies that that those skills are applied to the search for treatments  diseases and the best way to make that happen i think in to get the boat to the greatest number of very qualified applications is to expand the application pull back to just what it was prior prior to two thousand and four and that's to really allow these venture back companies to participate you will undoubtedly get a significant number of very qualified applications making the process more i think all the members and the witnesses for keeping a lively discussion going well i had to step away from another commitment just momentarily  rework any territory that has already been explored or thoroughly explored please apprise me and we will move on  i came back in during this discussion of the set aside and i very much understand and appreciate that this is a delicate balance and it is a difficult balance one can pick one point  percent two point zero percent two point five percent three point five percent five percent and it is basically a value judgment about the appropriate role of tech transfer and tech  development versus fundamental research there's no getting away from that but that's the line drawing that this institution engages in on a continual basis mr glover i emphatically want to help small business in this endeavor and it is it is an effort to help small business that we looked at increasing the set aside so that although the total amount of funds is going up because if increased research funds we wanted to grow the pie for everybody so that no one would be left out as we try to get more people in applicants again and at the same time increased the size of grant so i'm very sensitive to your concerns i just know that there is some significant resistance to changing set asides and and i think i understand  those concerns also dr rocky there was approximately forty percent drop in applications to and i h starting in two thousand and four and that is roughly correlated with the date of the ail j decision banning venture capital investment which came down in two thousand and three is that correct that's right now we want to work out something that helps this program remain in innovation as well as a small business program and it's in that spirit mr glover that i'm asking you to the extent that you know  ld you say that a substantial percentage perhaps even a majority of your paying membership to if you have paying membership are in the defense industry or funded through d capital structure as a proxy for either domestic ownership or as a proxy for the character of small business because i think five hundred employees is quite crisp on that front it seems to me that a lot of mr greenwood's issues have to do with biotechnology and they're also software and hardware companies that burn a lot of cash but if it is the case that d o d s uses s p i are in a fundamentally different way as an adjunct to its research as a spur to innovation by the large defense contractors then perhaps what we can do if we can't get away with an intellectually pure solution of getting away from capital structure as a proxy for size of at least taking a substantive approach of perhaps exempting d o d from the new statute and that is the avenue that i'm trying to explore with you as a as an alternative which may be even more palatable to your membership than than than the generous concessions which you made in negotiation in the last congress to take to take into consideration the very real concerns that your pass it certainly solves the problem for approximately half of our members of those members who are in the the the health sciences about tech there are a lot of very good important small biotech companies who are working very hard to survive the only source of the fund those small biotech companies not have venture capital investment absolutely many of them down and it will not have ten years off and they are six out of what you would you characterize those companies quietly well some are here today the maryland state of maryland has a wonderful program for angel investors that's making some of our biotech companies in maryland grow very nicely you get a fifty percent tax credit for investing in those companies and they've gone to that source they've been able to there's a very clear distinction mr greenwood has said many times that it takes eight hundred million dollars to take one drug through the f d a approval process there are an awful lot of technologies that don't have to go through that eight hundred million dollar do want to respond to one thing you said earlier i was very care about about believing the information and data that i provided i did footnote virtually everything i said so that you can at a time take a chance to look at that we're very careful about that i read your i read your subcommittee with great interest and in detail thank you sir and i but i did footnote as much as i could because quite frankly that kind of information is shocking to the innovation community thank you very much mr glover i companies that i'm here to represent are fundamentally drug discovery companies they're companies that patent molecules to some extent they're their platform companies but for the most part they are moving forward trying to get drugs into clinical trials and into the f d a approval process and that of course is a challenge that takes hundreds of millions of dollars and you cannot get very far down that down that path without having to rely on venture capital investment in fact without having to rely on a majority of your funds coming from venture capital so companies that can do well year after year on f b i are grants are not companies that have as their core competency drug discovery and development i'm not frankly quite sure what these companies are doing i'm not suggesting that it's not valuable sometimes i wonder if the core competency  succeeding in getting s p r grants but but they're certainly not companies that are moving down the path towards drug discovery which which is largely what the end is is trying to accomplish saying thank you m greenwood i just want to return for a moment to what are very legitimate concerns of the different parties to this discussion  mr greenwood is addressing small biotechs which i think share some characteristics with software and hardware start ups frequently they are funded they are looking a hockey puck growth where hopefully if they succeed they will rocket up in size and employment and revenues and the v c investor fundamentally wants his or her money  back time sixty if possible what i was trying to encourage mr glover to think about and this i only learned recently that there there's a there's been an unfortunate bitterness between the different sides of this debate and i am familiar with high tech startups i was unfamiliar until very recently with an entire industry which is very very important which is primarily concentrated in defense which does have repeat s v r grants but for good policy reasons frequently there are only a few large defense contractors left in a given field and not only as mr glover covered the small entrepreneurial companies have wait for await more research going on and the small companies not only innovate new products and and in spur the big companies because d o d s able to come to the big contractors and say look those guys came up with better body armor why can't you now that is a very legitimate use of decision is made by one person in boston ironically but it has excluded majority v c owned companies or companies that in the aggregate have many minority the c e o s but in the aggregate have majority v c ownership and the aggregation rules also are a problem for these companies and as dr rocky points out there is a problem with the drop off in applications to and i h and we can all count on positive outcomes or cures from these many companies but i believe that they are very very important and we should have a crafted balance to bring that process back into harmony mr glover i want to give you another opportunity to talk about the relative weights of your membership versus mr greenwood's quite frankly we do have members who are involved in both organizations some of our members cannot afford to be and mr greenwood's organization is simply can't afford to do's but they share many of the common characteristics and there is a lot of overlap between the two organizations i think we feed to his organizations our folks get bigger and grow they probably do end up with his his organization there are many parts of n i that are not related to drug development and i think that you have to be a little careful in that you are looking at an eight hundred million dollars solution to a problem that s p r is not designed to fix there's no way that this program is big enough to fund drug approval process to the f d a but i think that there is probably some way to shape a compromise that goes along that way but we have to keep a whole variety of bow to companies that have succeeded and been affective in the program and we can allow a few large giant companies with a large awards money lots of money not companies but with lots of backing to crowd out all the other companies and what we've seen is in some large awards have in effect crowded out the number of awards that are could be could be given if you for example give a ten million dollar award then you've foreclosed a lot of other companies that could have competed so there's a balance here and  i have to tell you that my membership is far more concerned about competing with well funded venture capital companies than i was when i first got involved in this process they are genuinely concerned about the process remember the company that started this at s b a that decision was the administrative law judge looked at it and said a swiss venture capital company and a canadian venture capital company own this company we don't want money to go to that company that's what it was it was not local u s venture capital company it was a swiss company and a canadian venture kept company with it and he looked at it and said this program is designed to help american businesses know well mr glover i see that you have spent some time in this organization and on this hill but i recommend to you two things the next time you want to engage in canadian bashing think first about their actions in saving our folks in the tower on embassy and and in the longest undefended border between any two countries the world has ever seen secondly  i think that a few organizations get away with no no never never we're not going to bend one inch for whatever reason the n r a comes to mind although i'm a loyal firearm owner but most organizations can't get away with that and i'm glad to hear mr glover that your organization is willing to bend and reach reasonable compromises which take care of the legitimate interests of your membership and all the other folks out there and as well as the technologic needs and employment needs of this country we will return momentarily but i think mr lew hon the gentleman from  aki why do you think the number of applicants has dropped it's been like it's been almost like the perfect storm we really don't understand the entirety of why the applications have dropped we ha mentioned the question about eligibility with the venture capital companies as being perhaps a component we also mentioned about the complex complexity of determining eligibility and whether or not a company is eligible there's a number of companies because of the linear the linear fashion of this program which is a phase one and phase two perhaps there their model does not fit within the f b i our phase one phase two approach and in addition there's just some companies i think feel about the complexity of this issue and really if we had in the actual data that would support our understanding we really don't i mean there's a number of things that have come together and we really would have to tease out all of those different aspects to be able to  stand anything specific with venture capital we're just patient well as we said the ruling at the same time we saw a drop in applications whether or not that's a direct correlation we can't say but we did see that job ok and mr glove along the question i think that the chairman was pursuing isn't sure that a small business can be disqualified where multiple venture firms each have a minority stake but in the aggregate on a majority of the company shares that's gave us an analysis and they said that i think after the first two or three years they looked at it only fifty companies had been excluded a number of those were foreign owned companies a number of those had grown beyond five hundred employees and that turned out to be very few actually had been excluded based on the analysis and i did at the time clearly there are companies that have been excluded i'm not saying they're not i don't think there's a huge number of them  should be considered over that would increase the effectiveness of these programs certainly we've suggested that the award size needs to go up it hasn't gone up s b a has proposed to go raising it it certainly should be raised inflation and we think that there are some additional suggestions for example there needs to be some additional commercialization and i think everybody recognizes we need to find some way to move the technology readiness level from where it comes out of i our program closer to commercialization the founder the program rolling to bits in his paper is an analysis is attached to my testimony very specific this program is not a commercialization program but moving it closer to commercialization doing some testing and evaluation some additional funding there are good programs like that that to program the old a t p program that's designed to move technology further down there clearly needs to be something else done in that area whether it's part in addition to the s b a our program or whether it's something freestanding we really do have a problem where trying to get small business up to the valley of death to look in everybody else says we've got to get across i'm just saying we need we need to get more up to it but we also need a bridge across that valley of death so there needs to be something extra i'm flexible on how that works and i but i think it clearly needs to be something that goes beyond but i don't think we want to take away from the base program that we have now i think that is that and lastly mr greenwood dr i mentioned this in the first response to my question you also brought this to to our attention to your testimony with the application process what can be done to increase of the effectiveness or awareness participation competition within the program and to get your thoughts on that mr chairman the night that i make sure that we would yield back any excess time that i consume today that would be fine thank you going to sound like a one trick pony because i am on this subject and it has to do if you want to get more competition and more excellence in the program you have to points conjectures that need to be put to rest this idea that somehow when allowing these companies to participate crowds out the other applications the national research council study found no evidence that participation of companies with multiple v c ownership was harmful to the program or that small businesses have ever been crowded out by the participation of small businesses that are majority owned by the sea so that is that is not a concern at all another think it's important here is that no one is suggesting the f b i our money is what gets companies through the process multiple hundred million dollar process of moving to f d a approval what really happens is a biotech company will have a molecule that its thinks might cure brain cancer and venture capital will look at that look at the intellectual property and say you know what we think you're right and we want to invest ten million or fifteen million dollars in that and that program becomes might become eligible for the f b i or grant now meanwhile back in the laboratory the scientists are saying you know this this molecule might also cure prostate cancer breast cancer might have another application and they want some seed money to get that process started in the venture capital to say no no no no we put our money on the brain cancer application so then it's because perfectly appropriate for that company to come back with an application say this is secondary project that holds great potential to cure human disease as well and we think it makes perfect sense even though that company has venture capital funding to come back to the n h and say what about this is this look like a never was it the intent of congress and nor is it rational to make financial structure a proxy for smallness mr greenwood i didn't interrupt while you're quoting me with approval i have a request from the minority to adhere more closely to the five minute time limit which is somewhat unusual but i intend to abide by that request so if you could draw your comments to a close and when mr rouhani is ready to yield back that i have thank you mr greenwood thank  chairman i would just close with you know we had a phenomenal conversation with secretary chu this visit to los alamos national laboratories in mexico talking about the importance of r and d science and technology innovation looking to see what kind of projects we should be supporting recognizing that eight of the ten may fail but it's those two that succeed and the breakthroughs that we would yield from them with solving domestic problems and global problems and that's why we need to be supporting projects like this so we can get this products to market things from mr lew how and you had secretary chu at a national lab and you didn't invite me and all this time i just always talk you up as a very valued contributing member of the subcommittee mr chairman next time we'll make sure we invite you but mr chairman we had a twenty four hour notice not sure we could have gotten many more people to those national labs has done remarkably well that's the biggest increase in innovations qian ovations is the national labs really quite a remarkable success story thank you mr glover the general fund of brasco five minutes thank you very much gets thank you i apologize this might be begging for a long answer but if you could be as brief as possible could you comment on the national academy of sciences review that of s p r the found the program is not sufficiently evidence based and in need of improved data collection on program outcomes and performance meant metrics to measure its impact could you respond to that go ahead in my in my testimony i mentioned the fact that that is a recommendation of the national academies and certainly one that we endorse indeed perhaps much of the discussion that has been conducted here in this hearing today could have benefited from some more rigorous data that we might have acquired if we had really done the kind of analysis as between agencies and so forth that that would yield some evidence that would help shape policy anyone else wishing to respond but i would just comment that there is a lot more information about the s p r program than virtually any other federal r and d program it's quantified it's been studied by  number of times in the national academy study is a five year five million dollars study them off a lot of information about it we can never get enough information when we're trying to evaluate make decisions but there's a lot more here than there is almost other programs  there is we also have our own pods database which is a really a way to look at commercialization what happens in addition the s b a has a database called tech net which also can help us with some evidence base but we would agree that there should be and could be more evidence based analysis of this program thank you mr greenwood if you could give an example of the kind of companies that bio believes should be made eligible for s p i our funding a change in eligibility rules and how such a company might compare to others that are currently eligible in terms of employees revenue and other things well thank you mr smith first off we think is important is that companies who are engaged are small and because they are small and are not burdened by the huge overhead and bureaucracy of say large pharmaceutical companies they are much more willing to take risk and to go into areas that for which there are no cures right now no treatments that are unknown territory if you will and these are the kind of companies that we think can contribute the most to advancing the science around solving beginning when the human genome was was first sequence in about two thousand and eight biotech company that emerged was pretty quick to get venture capital funds because it was assumed that there was going to be quick solutions it's turned out that the problem of using the human genetics understanding of genetics d n a is more complicated than it was first thought so so venture capital seed being skeptical so when the venture capitalist came in and say we're going to bet on this company it's it's much more likely than it ever has been that companies really going somewhere that this is going to be a new breakthrough invention and so the fact of venture capital investment should be and at times in the program programs history it was an indication that they should merit additional grants not that they should be turned away and so we've had a perversion of the of the original process in which a company that's good enough the science is good enough and smart enough and making important breakthroughs to the point where the venture capitalists are willing to risk their money i think those should be the companies that minimally should be able to compete for s p r funds because they obviously have demonstrated the ability to build the talent pool necessary to advance science thank you and what about the impact of the recession have you seen a change in pattern of application for funds and otherwise well i don't know that we've had enough time to see that but we are in trouble small most of our companies don't have any products on the market they rely entirely on investor capital for their revenues and they do so for a very long period of time and in this credit crunch right now we're in a position where there's just no money for those and so we as i said in my opening statement when you were able to be with us  fully a third of our companies are down to their last six months in capital and something like forty percent are down to their last down the last twelve months and forty percent under six months so we're going to our companies with the majority of e c backed or not are going to be more in need of help in the in the next twelve months or so than they ever have before and much will be lost if these companies dissolve thank you thank you mr chairman mr smith you  commercialization and dr rocky and mr greenwood when i hear from small businesses especially these sort of number all technology and research firms what minority and business and of business what they say is they do need that first push that's why we have the program but then you know a lot of them are not able to get that venture capital at the beginning but they need something that helps them get there and so i want to know actually within the context of the program you know what ability the program allows to even you know sort of see whether it's consultants or some assistance to get the business plan together then you know move into that next phase and then out to real commercialization because i think if you're going to go ahead and make an investment in seeding the research and the technology and then you just kind of give it away at the time it which it needs to be spurred on that's a particular dilemma for small women and minority owned businesses and while we have invested greatly in this we do have a number of programs that i called cap and tap which are commercialization assistance programs and some of them are designed specifically for the smaller programs that really need help and just even understanding the process under which they can commercialize so we we have two programs one of which greenwood we relate to many companies is getting on to that further step if i may as valuable as the f b i our program is and it has been central to the development of biotechnology in this country  is not the only source of revenue for early stage companies and one of the things that i do is travel from state to state talking to governors and and state legislators about what they can do to help these companies as well every every state in the union in fact virtually every country in the world right now wants to be a big biotech because they see both the opportunity to advance the health of their citizens as well as to advance the economy because this is a growth industry so we courage dates to do  initiate their own programs we have in my state of pennsylvania we took tobacco settlement money and created greenhouse incubation centers for small biotech knology companies to get some of that help as you suggest with business plans and that sort of thing to bring minorities into this into this industry young people people of all ages to demonstrate that this is a real growth field an opportunity for for diversity thank you and dr rocca you do feel the current structure of the program you have the flexibility to be able to assist with some of that as well and i would say my my my own home state of maryland you know does a tremendous job of leading this because we have you like other states this is definitely a growth industry at least on the biotech and a farm and we have as i pointed out considered a technical assistance in this area for commercialization a very appropriate i will point out two programs specifically designed to help bring people in and understand what was happening at the state federal level so while those programs live on by the wayside there are we have also have extraordinary efforts and outreach we attempt outreach i would thank you very much mr smith do you have any further questions i understand that mr lew hon has further comment to make mr chairman yes and it's to extend an invitation to the chairman to name of southwest science is inside of the new mexico is an example of how this program can work and another example of a small business that is asking for support from the congress to be able to support the reauthorization bill making sure that the program is made available to other small businesses southwest sciences has now been issued twenty united states patents all of them on inventions made through the support of s d i r or s t t r programs they license many of the parents to manufacturers who are actively making and selling products in the semiconductor industry natural gas pipeline industry environmental monitoring and atmospheric research applications and so we just continue to see mr chairman not only with us reaching out to businesses but them reaching out back to us that shows a job that can be created progress that can be made and the importance of making sure that capital is going to be made available to especially a lot of these small companies who need that little boost to be able to make great things happen things for and would you like to enter any of those materials on the record mr chairman we will request without any objection to submit a letter from south of sciences into the record without objection so ordered as i said the gentleman from new mexico is a valued member of the committee and has now worse still gently and now has also invited me to new mexico i think i thank the gentleman  noted that in the very thorough materials prepared by mr glover that there is a tremendous concentration of s p r companies and employees in the lovely state of competition real wards i would call it dr rocky could you describe that program to us because i think we share an interest in getting folks over the valley of death  innovation in protecting legitimate small business interests and this may be an interesting tool for us to follow up on as a method of getting over the valley of death although there are some  downsides to it too perhaps so the competitive renewal phase two is really a phase two point five which allows us to to support company that have successfully completed their face or in the midst of their face to come back in for competition to further their project towards the ultimate goal of commercialization i would say that in the case of clinical research  we're still pulling pre clinical at that stage but it is it is taking the projects for them align we do support these projects for three years three for three years at a million dollars per year so it's a substantial support and we do think it's been effective at getting closer to the valley of death although as i said it's usually still pre clinical but we find this is a way to successfully try to navigate this next step which they otherwise would not have funding for but i do want to point out that it is competitive renu all day they are not guaranteed the renewal they must come and compete for it and so they're judged against others who are competing for us as well but we found it to be thing we think that's a positive we think that because it's a gated process force they have to compete again for the additional money that's important we also think that it can't be too big because if you get too much money going into that  crowding out you're eating your seed corn you're not getting enough new ideas coming forward but we think that so far that seems to be balanced and it's a positive and i think that as long as congress puts a gated process fan and provide some additional funding for this kind of activity it's a great idea well mr glover i just want to point out that you and your organization might feel that our two point two million face to award was way too high last go round  and with that i guess there are not going to be comments from any other members of the subcommittee if our witnesses are not going to volunteer  anything for the good of the order then i want to thank you all for being here this afternoon and spending a decent chunk of time with us it has been i think edifying for all members a i hope that it is part of a collaborative process as we go forward to have an f b i our program that helps stimulate innovation stimulate small business and employment and the production of new products new services and lifesaving therapies and and also helps keep our defense and other industries strong the wrecker remain open for additional statements from members and for answers to any follow up questions that committee may ask the witnesses again i want to thank that witnesses and you are excused and thank you profusely for your participation in the meetings