An article in the July 29 Montgomery Extra misstated the name of a District-based group lobbying for changes in a federal research grant program. The name of the group is the Biotechnology Industry Organization, not the Biotechnology Industry Alliance. (Published 8/26/04)

Local biotechnology entrepreneurs are seeking to overturn a Small Business Administration ruling that prohibits companies backed by venture capital from receiving federal grants for early-stage research. In May, Sens. Olympia J. Snowe (R-Maine), Edward M. Kennedy (D-Mass.) and Christopher S. Bond (R-Mo.) cosponsored a bill that would reverse the Small Business Administration's action.

The focus of the lobbying effort is the Small Business Administration's 21-year-old Small Business Innovation Research (SBIR) Program. The program requires certain federal agencies to set aside about 2 percent of their research and development budgets for competitive grants to U.S. companies with 500 or fewer employees that are owned by individuals, not institutions or companies. Federal agencies award peer-reviewed grants of about $75,000 for six months to test the feasibility of an idea and grants of $750,000 over two years to evaluate a product's commercial potential.

Last year, the Small Business Administration ruled that to qualify for a grant, a company must be at least 51 percent owned by "individuals," defined as excluding venture capitalists, said agency spokeswoman Tiffani Clements.

Small Business Administration officials said they are merely restoring the program to its original intent: to help startup companies develop innovative technologies.

But since the ruling took effect, local biotechnology entrepreneurs and investors said, it has exacerbated a shortage of capital for biotech companies, and agencies have applied the policy unevenly.

The Biotechnology Industry Alliance in the District and the National Venture Capital Association in Arlington are leading the lobbying effort. Local executives have written members of Congress outlining their concerns. Rep. Chris Van Hollen (D-Md.) is a cosponsor of the House version of the legislation to repeal the Small Business Administration ruling.

Many local biotechnology and information technology companies survive on SBIR grants dispensed by the National Institutes of Health. Some agree with the Small Business Administration's decision to limit research grants to companies without venture capital funding. The grants "should be for companies with basically friends-and-family funding," said Chris Charuhaus, president of Frederick-based Visibooks, which makes computer textbooks for the learning disabled. "If you've got an institution behind you . . . you've had your shot, you don't need SBIR funding. Leave some for the rest of us who couldn't get funded any other way."

David Krausman, vice president and chief executive of Individual Monitory Systems, a 14-year old company in Arnold that makes monitoring equipment for people with sleep disorders, agreed. "It should be a small company that doesn't have the external resources of venture capital" that receives SBIR grants, Krausman said. "Venture capital is awfully hard to get. Companies that get it, I'm not sure they need" federal grants.

However, biotechnology entrepreneurs said venture capital is often not enough to keep their companies alive until a product is ready to go to market. "Discovery to commercialization takes 12 years," said John Holaday, founder of Rockville biotech firm EntreMed and HarVest Bank, a specialty lender to small biotech companies. "When you can't get venture capital, you rely on [federal grants]. It's hard to build a biotech company without them."

Uneven application of the ruling has produced a dog-eat-dog atmosphere among biotech companies, said Linda F. Powers, managing director of Toucan Capital Corp., a Bethesda venture capital fund that specializes in financing early-stage biotech companies. Powers recalled a Salt Lake City company that had received funding from Toucan as well as a federal SBIR grant. The company lost the federal grant after a competitor filed an administrative action.

"We've created carnage and chaos and exacerbated a capital shortage problem in a sensitive stage of development" Powers said.

Powers added that leaving investment of early-stage technologies to venture capitalists may produce a shortage of innovative treatments in the long term because venture capitalists tend to be "me, too" investors who see early-stage technologies as risky investments.

Carol Nacy, founder and chief executive of Sequella, a Rockville company developing a tuberculosis diagnostic test, said half of her company's $13.6 million annual budget comes from federal SBIR grants. She said the ruling will prevent companies from using the competitive application process to evaluate their work.

"I'm just appalled we're going to lose that opportunity to have good, peer-reviewed science as a consequence of this ruling," Nacy said. "There are not a lot of opportunities to have your work blessed by the scientific community."

Local biotechnology entrepreneurs said federal officials needn't worry that companies will take advantage of looser criteria. The process "is based on the science," said Gerald McGarrity, president of Intronn, a Gaithersburg company that is developing gene therapies. "I'm willing to compete with anyone on the science and peer review."