Budget Cuts, Mismanagement Muddle SBIR Grants

A five-year-old boy playing with matches sets his pajamas on fire causing second or third degree burns over half of his body. Twenty years ago, the injuries would likely have been fatal. But today, patients with burns over as much as 90 percent of their bodies typically recover.

Many of two million people who suffer these injuries each year owe their survival to a trauma surgeon and a mechanical engineer, who developed an artificial skin at Integra LifeSciences, a small biotech company in New Jersey. Of significance, their research was supported by a Small Business Innovation Research (SBIR) grant from the National Institutes of Health (NIH). It's a matter of debate whether the company's Integra Matrix Wound Dressing would be available today -- or developed at all -- without early stage funding from the government.

But the clock is winding down on this program, which the Small Business Administration (SBA) administers through various federal agencies. Without congressional reauthorization, the 1982 law that created SBIR grants will expire in seven months, and there is no guarantee that Congress will act by then. It's already facing a legislative logjam created, in part, by partisan politicking and a preoccupation with the looming presidential election.

In an effort to get things moving, Rep. Jason Altmire, D-Pa., who chairs the Subcommittee on Investigations and Oversight in the House Small Business Committee, held a hearing last week on the role SBIR grants have played in medical breakthroughs. And there are many. But the program's renewal is uncertain, in part, because of a controversial bill pending in the Senate to make SBIR grants available to companies that are substantially owned by venture capital firms. And because it faces numerous other problems.

I broke the story about the bill last September in my column Contentious Debate Looms Over Small Business Venture Capital. I predicted back then that the measure would spark a heated debate because it repealed a key provision of the landmark 1958 Small Business Act. The provision contains specific language, requiring companies to be independently owned to qualify for SBA programs. Allowing VC companies with thousands of employees and hundreds of millions of dollars to compete for SBIR grants through subsidiaries would put truly small, independent firms at a huge disadvantage in the competition for scarce funding.

Sure enough, small business groups and the SBA strongly opposed the bill. But I was wrong about one thing. The measure rocketed out of the House Small Business Committee and was approved by the full House in a matter of a few weeks. Since then, however, the bill has languished in the Senate, where Republicans have the procedural clout to keep it bottled up.

Jo Anne Goodnight, who coordinates SBIR grants for NIH, told the Small Business subcommittee that the goal of program, administered through 23 different NIH research centers, is to fund "early stage, high-risk research." That includes research into so-called "orphan diseases" that major drug companies ignore because their potential markets are too small.

From the program's inception in FY 1983 through last year, NIH has awarded $637.4 million for orphan or rare disease projects, or about 10 percent of the $6.5 billion awarded for all NIH projects through SBIR grants, she noted. About 40 percent of NIH SBIR-funded projects reach the commercial market, which is considered a solid track record, according to a recent study by the federal National Research Council (NRC), an arm of the National Academy of Sciences.

The controversy of venture capital firms, however, is only one hurdle the SBIR program faces. Because of Bush administration budget cuts, which have slashed spending on research and development, the number of new small businesses participating in the program has been declining. Only about one-fourth of the awardees were new to the program in FY 2006 -- the lowest proportion in a decade, despite aggressive NIH outreach programs involving trade groups and state and local governments. As a result of budget cuts, NIH grants are mostly focused on primary research. So-called Phase II grants -- the kind of grants that companies such as LifeSciences have used to develop new products -- have been cut.

"Due to a lack of funding and in order to maintain basic research grants, NIH has not only not focused more on translational research, but has actually cut these programs," said Amy Comstock Rick, who heads the Parkinson's Action Network in Washington, D.C., a group that focuses on finding a cure for the disease. "It is disconcerting for people living with Parkinson's and other untreated or undertreated conditions to know that many potential drugs are languishing … simply because there is not enough funding to move basic research to product development."

Although there are numerous anecdotal success stories, the SBA has no effective database to measure whether the NIH or other government agencies are getting a sound return on the investment of taxpayer dollars in the program. In fact, the SBA is five years behind schedule on a project to create the database, according to a 2006 General Accountability Office (GAO) report. That would be a good place to start. You can't judge the success of anything without sound data to draw significant conclusions. Like many SBA programs, SBIR grants are a worthy endeavor, but years of mismanagement have clouded their original purpose.

Today, for example, the SBA and the grant program work at cross ends. The SBA's mission is to encourage small business growth and entrepreneurialism. The grant program's goal is to get promising technology into commercial production. Reconciling these competing interests would also go a long way toward increasing the effectiveness of the program. But clearly that's not going to happen in the next seven months. Congress should reauthorize the program on an interim basis. Then, it should create an independent task force to recommend a plan to increase accountability and clearly define the program's goals.

Hopefully, it will be ready shortly after the new administration takes office. That will give the next president the confidence to restore funds that the Bush administration has drained from the program, and pave the way for the next generation of medical breakthroughs.