A boost for biotech - Congress takes a step toward allowing VC-backed biotechs to apply for federal small-business grants

Baltimore Business Journal - by Kent Hoover and Sue Schultz Staff

Excerpt:

The U.S. House gave the biotechnology industry a long-awaited victory when it passed legislation that allows small companies majority-owned by venture capital firms to be eligible for federal small-business programs.

The legislation, part of a bill that expands the Small Business Administration's investment programs, passed the House by a 375-72 vote Sept. 27. Similar legislation is pending in the U.S. Senate.

The bill's supporters contend the legislation is necessary because current SBA rules make many small biotech companies ineligible for Small Business Innovation Research awards, a critical source of funding for early-stage development of new drugs.

Biotech companies often don't generate revenue "for a decade or more," said Dr. Scott Koenig, CEO of MacroGenics, a Rockville-based company that is developing monoclonal antibodies to treat patients with cancer or other diseases.

As a result, many biotech firms depend on venture capital.  Often, Koenig said, venture capital firms end up ownin more than 50 percent of a company.  Under the SBA's current rules, these companies are no longer considered to be independently owned and operated, and therefore aren't eligible for SBIR awards.

The new legislation would change that. Under the bill, venture capital funding wouldn't change a small company's size status as long as one VC firm doesn't own 50 percent or more of it.

"Private investment in small business is a good thing and should be encouraged, not discouraged," said Rep. Sam Graves, R-Mo., the bill's co-sponsor.

At least one Baltimore-area biotech would benefit from the change.

Despite being backed by $40 million in venture capital, Alba Therapeutics was unable to convince its investors to fund a "risky" development related to its treatment of healthy cells in patients with diabetes, said Dr. Blake Paterson, CEO of Baltimore-based Alba.  And because the firm is backed largely by venture funds, Alba was unable to apply for a federal small-business grant of $1 million to $2 million for the project.

The lack of funding forced Alba to put the research on the back burner.

"It closed the door to an important funding mechanism to the best biotech companies in the industry," said Paterson of the rule that didn't allow venture capital-backed companies to apply.

Before turning to venture capitalists for funds, Alba Therapeutics received about $200,000 from a SBIR grant to develop a treatment that protects healthy cells from being destroyed in patients with diabetes. If the legislation passes, Paterson said the company plans to apply for more federal money to support the tabled research.

"This represents a return to a state of rationale and normalcy for the industy," Paterson added.