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The Importance of the Biotechnology Industry and Venture Capital Support in Innovation
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House Small Business Committee
Subcommittee on Rural Enterprises, Agriculture, and Technology
Wednesday, July 27, 2005
Prepared Remarks of Mr. David N. Duncan, Ph.D.
President & CEO Chlorogen, Inc.
Good afternoon. My name is Dr. David Duncan. I am the President and Chief Executive Officer of Chlorogen, Inc. Chlorogen is a venture-backed, privately-held biopharmaceutical company located in St. Louis, MO. We are considered an early-stage company having raised a first or Series A round of financing only two years ago.
Chlorogen is using its proprietary technology to develop and manufacture therapeutic proteins for high-mortality diseases such as ovarian and pancreatic cancer. Our "enabling technology" also has application for agriculture and food biotechnology and for bio-defense vaccines.
I would like to thank the members of the Subcommittee for this opportunity to comment on the current obstacles to participation in the Small Business Innovation Research (SBIR) program. As the Subcommittee is undoubtedly aware, due to a recent interpretation by the Small Business Administration's Office of Hearing Appeals, small biotech companies that are majority-owned by venture capital companies are no longer eligible to participate in the SBIR program.
Mr. Chairman, I would like to offer my comments in support of H.R. 2943, Save America's Biotechnology Innovation Research Act, introduced to remove the barriers to participation in the SBIR program facing numerous small biotechnology companies. This very worthy legislation will reverse a misguided SBA interpretation and return the SBIR eligibility standards to where they had been for 21 years prior to 2003.
Early-stage biotech companies must rely on risk capital and, increasingly, federal grant sources for funding of research and development activities. Certainly, Chlorogen is no exception. While we have received venture funding, that funding is inadequate for even our primary therapeutic drug programs.
Small biotech companies often rely on SBIR Phase I and II grants to fund research and/or development in areas that most venture capitalists would consider either too early-stage to fund; or simply too risky from a market opportunity standpoint.
Mr. Chairman, on behalf of Chlorogen and from first-hand experience, I could cite numerous examples of the detrimental effects of not being able to participate in the SBIR program as a venture-owned company. Most recently, we had to cancel the development of our bio-defense vaccine program. Chlorogen's technology, with additional development, could deliver massive quantities of vaccines against anthrax, cholera, and other afflictions at an attractive cost to the Department of Homeland Security and the American public. Sadly, with no incremental federal grant funding this program had to be shelved.
I believe Chlorogen embodies Congress' original intent with respect to the SBIR program. We employ highly educated and skilled scientists and other associates. Our lead clinical product, Mullerian Inhibiting Substance (MIS), is a novel solution for ovarian and other gender-specific cancers. But MIS is an early-stage as well as an orphan drug candidate. Thus, the VC companies are reluctant to fund the program until we can demonstrate pre-clinical and Phase I clinical efficacy. As Congress intended, SBIR grants would support this early proof-of-concept and prove persuasive to additional funding by venture capitalists.
I would like to address the concern, raised by some, that biotechnology companies majority-owned by venture capital companies are somehow no longer small businesses. Nothing could be further from the truth. My company, with 12 employees, is a small business regardless of whether I get funding from a bank or from venture capitalists. What separates biotechnology companies from less capital-intensive industries is the sheer amount of money required to bring a product to market. The development of a new biotech drug or therapy requires years of research and testing, and tens of millions - perhaps hundreds of millions - of dollars. As such, venture capital funding is not an option, it is a necessity.
But let's be clear: venture capitalists invest in biotechnology companies because they hope to realize a return on their investment, not because they want to run or control the biotech company. In fact, most venture capital companies are very small organizations, usually operated by 4 to 6 managers. These managers invest in a wide range of companies so as to diversify their risk. Their job is managing money; not running a business.
To further reduce risk, most venture capital firms invest as members of a syndicate with other venture firms. As such, venture firms typically acquire only minority interests in, and do not control, their portfolio companies. In the biotech industry, this tends to be between a 10 to 25 percent interest in any one company. Venture firms do not have the time, staff, or desire to engage in the day-to-day operations of their portfolio companies.
Some will argue that a majority venture-backed company must be a large, well-established company. In fact, the opposite is usually the case. In our industry, even the first round of financing - generally raising $5 to $8 million - will often result in the new investors owning 50 percent of the company. Under the SBA's current interpretation, a start-up biotech company with 10 employees and a first round of financing can find that it is suddenly ineligible for SBIR funding. Certainly this policy is not consistent with the goal of the SBIR program - to bring innovative new products to market.
In fact, as I read the SBIR statute, Congress intended to encourage venture financing of SBIR awardees, because it lists a company's ability to attract investment and to commercialize its product as a factor to be considered by the contracting agencies in awarding SBIR grants.
Finally, I would like to say that in my estimation, there is room for both venture capital investors and federal grant funding in the same entity. Such a co-mingling of funding sources is not only a good thing, but necessary to continue the United States resurgence, indeed global dominance, in biotechnology. And, as global competition increases and the cost of drug development escalates, what's good for biotech is certainly good for our healthcare system and the United States economy at large.
Thank you for your time and attention to this matter.
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