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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE Role of the Department of Defense in Building Biotech Expertise* Maryann P. Feldman The Johns Hopkins University EXECUTIVE SUMMARY Typically, whenever we think about the source of funding for research and development in biotechnology, or bioscience more broadly, the National Institutes of Health (NIH) is the agency that comes to mind. Indeed, NIH is an important source of funding for research in biology, chemistry, medicine, molecular biology, genetic engineering, and the related fields that provide the scientific basis for this emerging sector. What often is overlooked is that the Department of Defense (DoD) has played an important, and largely unappreciated, role in funding and shaping the development of this important technology. At first glance, the idea that DoD is a major funding agency for biotech research may conjure up sinister images of biological warfare or bionic warriors. In truth, however, DoD is a task-oriented agency, and biotechnology, as an emerging broad-based technological platform, offers novel solutions that enhance DoD’s mission. These include applications related to disease prevention and mitigation, rapid emergency medical response and trauma management, environmental remediation, and advanced materials. The role of DoD in the development of emerging industries such as micro-electronics, software, and computers has been documented previously by other authors. This paper demonstrates that the DoD Small Business Innovation Research (SBIR) program has played a substantial role in financing bioscience research. This paper documents over $240 million in SBIR awards for bioscience- * Prepared for the May 5th SBIR Symposium sponsored by the Board on Science, Technology, and Economic Policy of the National Research Council, National Academy of Sciences (NAS).
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE related research by small companies from Fiscal Year (FY) 1983 to FY 1997 based on an examination of biotech keywords contained in the project abstracts. This was allocated as $194 million in Phase II awards and $47 million in Phase I awards. This amount represents about 4 percent of DoD’s annual SBIR budget. In addition, through a series of structured case studies, this paper demonstrates the role that the DoD SBIR program has played in entrepreneurship and technological innovation in biotechnology through a structured series of case studies. Many of the DoD projects have obvious dual use in the civilian sector and DoD-SBIR recipient companies have used the awards to advance their scientific and commercial objectives. All of the DoD SBIR-funded companies that we interviewed have developed commercial products. Two companies that were interviewed, MedImmune and Martek, had a strong DoD legacy and the SBIR awards helped the companies to convert to commercial, civilian applications. The case studies further demonstrate that DoD and NIH funding are complementary for small start-up biotech companies. It appears that DoD has an interest in funding different applications than NIH, but it is common for firms that received DoD funding to subsequently apply to NIH.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE INTRODUCTION Typically, when we think about the source of funding for research and development (R&D) in biotechnology, the National Institutes of Health (NIH) is the agency that comes to mind. Indeed, NIH is an important source of funding for research in biology, chemistry, medicine, molecular biology, genetic engineering, and the related fields that provide the scientific basis for this sector. What often is overlooked is that the Department of Defense (DoD) has played an important, and largely unappreciated, role in funding and shaping the development of this important emerging technology. DoD oversees the largest budget for R&D of all federal agencies. In contrast to other agencies that have a mission dedicated to a specific topic area, such as health or the environment, DoD’s research is mission-oriented and encompasses a wide range of topics and applications. Both the size and the scope of DoD’s R&D budget enable the agency to make significant contributions to technology development. The idea of coupling DoD and biotechnology may evoke images of biological warfare, the creation of bionic warriors, and other sinister applications. The truth is that military goals related to disease prevention and mitigation, rapid emergency response and trauma management, environmental remediation, and advanced materials are furthered by scientific advances in the biotechnology and its underlying disciplines. The role of DoD in the development of emerging industries such as microelectronics, software, and computers has been recognized (Tirman, 1984; Alic et al., 1992; National Research Council, 1999). Biotechnology generally is believed to be a similar type of enabling platform technology that has the potential to transform a variety of applications in medicine, agriculture, and the environment, and to produce a new generation of biochemical processes and synthetic materials. In this regard, many DoD projects have obvious dual use in the civilian sector. One of the findings of this pilot research project is that DoD provided over $240 million in Small Business Innovation Research (SBIR) awards for biotech-related research in small companies from Fiscal Year (FY) 1983 to FY 1997. This included $194 million in Phase II awards and $47 million in Phase I awards. 1 This paper investigates only one aspect of DoD biotech funding: the SBIR program. In this way, it underestimates the role of DoD because no consideration is given to dedicated research facilities, such as the Walter Reed Army Institute for Research (WRAIR), sponsored research at universities or nonprofit institutes, or other initiatives and expenditures made by DoD divisions. This paper has two modest objectives: first, to document the dollar amount that DoD has invested in small start-up companies, and second, to demonstrate how DoD SBIR recipient companies have used the awards to advance their scientific and commercial objectives. 1 Phase I data were available for FY 1990 forward. All amounts are reported in 1997 real dollars.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE Biotechnology presents a unique opportunity to study the emergence and development of a radical new field that has a strong science base and great commercial potential. Indeed, we can date the beginning of the modern biotech industry with the Cohen-Boyer patent application in 1974. This patent provided a means to manipulate, or recombine, genetic material into useful, commercial products that are more naturally acceptable to the human body and its environment than synthetic chemical products. Most important, this patent provided a precedent that created propriety value for intellectual property and, in turn, enabled the formation of new firms. The majority of biotech firms are entrepreneurial start-ups. Powell and Brantley (1992) argue that the commercialization of biotechnology requires the formation of new firms because biotech originates from a radically new scientific knowledge base that does not fit with the existing technological practices of established firms. In this way, entrepreneurial start-ups in biotech are a vehicle to commercialize new ideas and to take radical scientific discoveries out of the laboratory and into the marketplace. The next section provides data on DoD SBIR awards related to bioscience applications.2 This analysis is based on a database constructed for this project. A comparison is made to NIH SBIR funding because NIH is the largest dedicated federal funder of biotech research. To understand how firms use DoD SBIR awards, how DoD SBIR funding differs from NIH funding, and the effect that DoD projects have on the company’s development and progress in commercialization, this paper examines five case studies in detail. The paper concludes with some suggestive reflections and some ideas for further research on this topic. DOD SBIR DATABASE To estimate the financial contribution of DoD SBIR awards to biotech, we developed a systematic database of projects that were funded by DoD through the SBIR program.3 Using a set of terms that define commercial biotechnology applications provided by the Institute for Biotechnology Information (IBI), we conducted a search of the titles, keywords, and abstracts in the database of all DoD SBIR Award Abstracts. This database provides information for all DoD Phase I Awards for FY90-FY97 and Phase II for FY83-FY97.4 A project that contained a match to the IBI keywords is defined as a DoD biotech award for this analysis. 2 Biotechnology may be narrowly defined as the use of recombinant DNA methods or broadly defined as anything related to life sciences. The definition used here is broadly inclusive of the spectrum of disciplines that utilize modern biology in their work. Thus, biotechnology is defined as any activity that substantially involves research, development, or manufacture of (1) biologically active molecules, (2) devices that employ or affect biological processes, or (3) devices and software for production or management of biological information. 3 Details of the database construction are provided in the Appendix. 4 The searchable database is available at http://www.sbirsttr.com/Awards/Default.asp.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE Our analysis revealed 906 projects that could be classified as biotech applications. This is out of a total of 21,211, or about 4 percent, of the projects that were funded by DoD during this 14-year time period. There were 551 Phase I Awards over the seven-year period from 1990 to 1997 and 275 Phase II Awards. This is out of a total of 15,517 Phase I awards and 5,694 Phase II awards. Again, this accounted for approximately 4 percent of the total number of awards granted. The average award for Phase I, in 1997 dollars, was $78,403 while the average Phase II award was $628,024. The total amount spent by DoD on SBIR biotech research was $240,866,001, in 1997 dollars, over the 14-year period for which we have data. Table 1 provides an overview of DoD funding to SBIR biotech projects from 1984 to 1997.5 For every year, the number of awards, the total amount awarded, and the average amount of the award is listed, by Phase and for the total. Phase II data are available for the entire time period; Phase I data are available from 1990 onward. We were able to identify two biotech projects in 1984. The number of projects funded has grown steadily and 143 projects were funded in 1997. The total amount allocated to these projects also has increased. In 1990, $13 million was awarded to biotech projects. In 1997, the amount awarded had increased to $39 million. The biotech projects were funded by a variety of agencies within DoD, as demonstrated in Table 2. The largest funding agency was the Army, which awarded $106,116,285 for Phase I and Phase II projects that related to biotech applications over the 14-year period. Many of the Army projects have funded medical applications. Agencies such as the Ballistic Missile Defense Organization (BMDO) have funded a broader range of activity. Biotech, as a scientific knowledge base, has applications in other rapidly evolving technologies. For example, BMDO sponsored Phase I and Phase II awards for Astralux of Boulder, Colorado, to develop a biotechnology-based process to make nanostructures for semiconductors. The result was a technology that allowed for a uniform array of replicable silicon quantum boxes of identical dimensions that may be important to the next generation of optoelectronic products. There are other examples of this type of adaptation of biotech knowledge to a broad array of commercial applications. Some of these are explored later in the case studies. One question of interest is how DoD SBIR biotech funding compares with SBIR funding from NIH. Table 3 provides a comparison of DoD biotech projects and the total projects funded by NIH. The implicit assumption here is that all NIH-funded projects have a biotech application, which we know is not very likely. Given the data available at this time, this is the best assumption. In this case, the numbers presented here overestimate the contribution of NIH to the development of biotechnology but we cannot be sure of the magnitude of the overestimation. 5 The years reported refer to the DoD fiscal year.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE TABLE 1 DoD SBIR Biotech Awards FY1984-FY1997 (1997 real dollars) Year Awarded Type of Award Count Total Amount Awarded Average Award 1984 Phase II 2 1,291,690 645,845 Total 2 1,291,690 1985 Phase II 8 4,958,783 619,848 Total 8 4,958,783 1986 Phase II 9 5,520,467 613,385 Total 9 5,520,467 1987 Phase II 12 7,975,713 664,643 Total 12 7,975,713 1988 Phase II 14 8,929,105 637,793 Total 14 8,929,105 1989 Phase II 12 4,372,354 364,363 Total 12 4,372,354 1990 Phase I 46 3,103,910 67,476 Phase II 20 10,028,279 501,414 Total 66 13,132,190 1991 Phase I 64 3,804,775 59,450 Phase II 15 12,044,014 802,934 Total 79 15,848,790 1992 Phase I 43 2,503,535 58,222 Phase II 21 12,543,755 597,322 Total 64 15,047,290 1993 Phase I 51 3,166,938 62,097 Phase II 27 15,072,733 558,249 Total 78 18,239,671 1994 Phase I 102 8,863,993 86,902 Phase II 26 15,692,876 603,572 Total 128 24,556,869 1995 Phase I 100 8,058,951 80,590 Phase II 48 33,839,580 704,991 Total 148 41,898,531 1996 Phase I 92 8,139,534 88,473 Phase II 51 32,258,781 632,525 Total 143 40,398,314 1997 Phase I 99 9,164,828 92,574 Phase II 44 29,531,407 671,168 Total 143 38,696,235 Total Phase I 597 46,806,464 78,403 Phase II 309 194,059,537 628,024 Total 906 240,866,001
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE TABLE 2 Biotech Research as Funded by Different DoD Agencies (1997 real dollars) Agencya Type of Award Count Total Amount Awarded Average Amount Awarded Air Force Phase I 139 10,874,782 78,236 Phase II 71 49,578,088 698,283 Total 210 60,452,870 Army Phase I 219 16,201,582 73,980 Phase II 144 89,914,702 624,408 Total 363 106,116,285 BMDO Phase I 34 2,287,882 67,291 Phase II 10 6,071,791 607,179 Total 44 8,359,674 DARPA Phase I 111 10,361,175 93,344 Phase II 37 21,768,252 588,331 Total 148 32,129,427 DSWA Phase I 8 767,699 95,962 Total 8 767,699 Navy Phase I 76 5,320,411 70,005 Phase II 45 25,222,782 560,506 Total 121 30,543,193 OSD Phase I 8 823,795 102,794 Phase II 2 1,503,921 751,961 Total 10 2,327,716 SOCOM Phase I 2 169,137 84,569 Total 2 169,137 Total Phase I 597 46,806,464 78,403 Phase II 309 194,059,537 628,024 Total 906 240,866,001 aBMDO = Ballistic Missile Defense Organization; DARPA = Defense Advanced Research Projects Agency; DSWA = Defense Special Weapons Agency; OSD = Office of the Secretary of Defense; SOCOM = Special Operations Command. numbers presented here overestimate the contribution of NIH to the development of biotechnology but we cannot be sure of the magnitude of the overestimation. One difference between NIH awards and DoD awards lies in the range of application areas. Whereas NIH is charged to fund health applications, DoD’s charge allows it to fund research in a greater variety of application areas.6 Table 4 provides an overview of the applications that DoD awards supported. The 6 Data on application area were not collected for NIH for this project. We can expect NIH funding to fall into the general/other area in addition to medical applications.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE TABLE 3 Comparison of DoD Biotech and Total NIH Awards (1997 real dollars) DoD NIH Phase I Awards Phase II Awards Phase I Awards Phase II Awards Year Number Total Amount Number Total Amount Number Total Amount Number Total Amount 1991 64 3,804,775 15 12,044,014 488 23,815,606 281 64,776,947 1992 43 2,503,535 21 12,543,755 561 27,605,144 297 69,663,613 1993 51 3,166,938 27 15,072,733 615 30,674,368 382 90,302,755 1994 102 8,863,993 26 15,692,876 563 41,768,637 358 86,063,359 1995 100 8,058,951 48 33,839,580 642 60,674,775 387 114,394,241 1996 92 8,139,534 51 32,258,781 554 53,596,678 403 131,256,640 1997 99 9,164,828 44 29,531,407 749 73,124,474 487 173,055,595 Total 551 43,702,554 232 150,983,146 4,172 311,259,682 2,595 729,513,150
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE TABLE 4 Distribution of Awards by Application Area Application Area Number of Awards Percent of DoD Awards Agricultural/food related 37 4.1% Industrial 117 12.9% Medical 401 44.3% General/other 351 38.7% Total 906 100.0% awards are classified by the application associated with the keyword that matched our subject classification criteria.7 The largest number of DoD awards, 401 (44.3 percent), were for medical and human health applications. The next largest number of awards were for general and other applications. These are applications that are basic in nature or are more difficult to classify. There were 37 awards (4.1 percent), in the agricultural, crop, or food application area and 117 awards (12.9 percent) that were classified as industrial applications. Industrial applications include the development of biosensors, environmental applications, and waste remediation. On average annually, in comparison with the NIH SBIR program, DoD funded 13 percent of the total number of Phase I projects that NIH funded. On average though, DoD awards were 5 percent higher. DoD funded 9 percent of the Phase II projects that NIH funded; however, on average, DoD Phase II SBIR awards were 57 percent higher. The probability of receiving a Phase II award from NIH after a Phase I award was 62 percent whereas it appears that DoD SBIR projects had a lower probability, 42 percent, of continuing with a Phase II award. In summary, DoD SBIR awards have funded a significant amount of biotech R&D. Of course these aggregate data do not reveal how individual companies use SBIR awards to develop technology. This is explored through detailed case studies in the following section; an overview of the case studies is presented in Table 5. CASE STUDIES To explore how companies have used DoD SBIR awards to develop new biotechnologies, we conducted five in-depth case studies. Most biotech commercialization is conducted by small, start-up companies and, in this regard, the SBIR program is especially beneficial. These case studies illustrate how the DoD awards helped to launch the new start-up companies. Two companies that we interviewed, MedImmune and Martek, had strong DoD legacies and the SBIR awards helped the companies to convert to commercial, civilian applications. 7 See the Appendix for a description of the keywords.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE TABLE 5 Overview of Biotech Case Studies Company Name DoD-Funded Application Area Location Phytotech Industrial—environmental remediation Monmouth Junction, NJ Integrated Diagnostics Medical—test kits for emerging diseases Baltimore, MD MedImmune Medical—vaccines Gaithersburg, MD Martek Industrial—products from micro-algae Columbia, MD HT Medical Medical—virtual reality training systems Gaithersburg, MD Most of the case study companies are located in Maryland, which is the geographic home base of the author. These case studies, in this regard, were chosen for ease of gathering information and conducting interviews and in no way represent a random selection of companies. Phytotech Phytotech has the distinction of being the only biotech company, to date, that has received a DoD Fast Track Award. The award, made in 1997, was for phytoremediation—the use of plants to treat contaminated soil and water. Phytotech is a biotech firm that focuses on environmental remediation. Specifically, the SBIR award allowed Phytotech to develop technology to mitigate the metal accumulation from firing ranges. The company has developed an in-situ treatment that preserves topsoil, minimizes environmental disruption, and produces significantly less waste than other site remediation technologies—all at significantly lower cost compared to conventional technology. Phytotech was started in April 1993 around research conducted at Rutgers University by Ilya Raskin, Professor at the Center for Agricultural Molecular Biology, and Laura Meagher, Associate Dean of Research at Cook College and Associate Director of the New Jersey Agricultural Experiment Station. Burt Ensley, a veteran of early employment at Amgen and previously Director of Scientific Affairs at Envirogen, was the third founder of the firm, complementing the scientific expertise of Raskin and Meagher with business experience. Ensley raised over $3 million in private-placement venture seed money, which allowed the company to hire essential expertise in agronomy, plant physiology, soil chemistry, engineering, and biochemistry. These funds were used for early-stage company financing and to fund a $1.3 million phytoremediation research project at Rutgers. Phytotech works on the development of two types of phytoremediation: phytoextraction and rhizofiltration. Phytoextraction uses specially selected and engineered plants to treat soil and water contaminated with toxic metals such as lead and cadmium, as well as radionuclides from uranium. Phytotech also works on rhizofiltration, which is the use of plant roots to absorb, concentrate, and pre-
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE cipitate toxic metals from aqueous streams. The idea is that the plants are grown in situ on contaminated soil and harvested after toxic metals accumulate in the plant tissues. After the plants are harvested, the contaminant metals are disposed of. However, the amount of disposable biomass is a small fraction of the amount of soil treated. As a result, site cleanup costs are less than those associated with traditional technology and environmental disturbances are minimized. The company was catapulted into worldwide attention in 1996 when its sunflowers proved effective in reducing the level of radioactivity in the ponds of Chernobyl, Ukraine. The technology is appropriate for use in environmental remediation on firing ranges, which contain high concentrations of noxious materials. As might be expected, the Army was very interested in Phytotech’s technology and the company has benefited from Army SBIR Fast Track funding of Phase I and Phase II projects: 1996, Army, $111,404 (Phase I), for heavy metals phytoextraction and uranium radionuclides phytoremediation; 1997, Army, $560,000 (Phase II), for phytoremediation of uranium-contaminated soils. The company used its own funds for the match or co-investment. As a first-time awardee, the company benefited from a federal match equal to four times its investment. It is uncertain whether the company would have pursued the project without the funding. The project, which will be completed in August 1999, will result in a commercial service on which the company expects to realize sales within the next 3 to 6 months. Phytotech is currently negotiating a contract to license the technology that resulted from the project. The company attempted an initial public offering (IPO) in 1998 but withdrew because of an unfavorable market. Presently, the company is negotiating to merge into a currently traded public shell corporation. The technology developed during the DoD SBIR project provided knowledge that has opened new commercial avenues. Recognizing that the technology used to remove and accumulate unwanted soil contaminants could be used to extract and concentrate nutritionally valuable minerals, Phytotech created a nutraceutical division in 1998. By concentrating pure forms of minerals into edible plants, Phytotech has developed and patented a unique and highly bioavailable form of mineral supplements that can be delivered as a nutraceutical in a capsule, tablet, drink powder, or sports bar and can be formulated to be applied as a cosmeceutical cream or lotion. For this technology, Phytotech is increasing production capacity to meet demand as well as identifying commercialization partners and appropriate distribution channels. It is possible that this division may be spun off in the near future. Phytotech has established itself as a commercial leader in phytoremediation services. Burt Ensley estimates that the company has spent $8 million to date to develop its technology. This includes $1 million in venture capital, $600,000
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE and have had successful commercialization results. The silent partners from Maryland Medical Lab are interested in selling their interest in the company and Paxton is currently negotiating to bring in new partners or to be acquired by another firm. The 1997 Phase II award allowed the company to collect samples from a variety of locations around the world. These samples have been invaluable as a research tool and have helped the company in other product development efforts. Paxton mentioned that the company has found it difficult to sell products to the Army, specifically in negotiating the purchasing system. This is indeed ironic since the Army has contributed to the realization of these products that are benefiting customers around the world. MedImmune MedImmune, headquartered in Gaithersburg, Maryland, is the eighth largest dedicated biotechnology company in the world. The company has deep roots with DoD. MedImmune was formed in 1988 by Wayne Hockmeyer, a former chairman of the Department of Immunology at WRAIR, and Franklin H. Top, a physician and former director of WRAIR. In its first 10 years, the company has built a pipeline rich with products and drug development projects for infectious diseases, transplant medicine, cancer prevention therapy, and autoimmune disorders. The company currently has three commercial successes: CytoGam®, an intravenous immune globulin that prevents cytomegalovirus, a viral infection common after solid organ transplants; RespiGam™, also an intravenous immune globulin, which prevents respiratory syncytial virus (RSV), the leading cause of pneumonia and bronchiolitis in infants; and Synagis™, a sister drug to RespiGam™ but more potent and easier to use. DoD funding played a small role in the MedImmune story. The DoD research project allowed MedImmune to explore a risky research program that was one of several technological approaches explored in the early stages of the company ’s development. Although it was ultimately not a technology that the company pursued to commercialization, the project was knowledge creating. The DoD funding allowed Mark Collett to continue his research in synthetic peptide, which he ultimately pursued via the formation of another company. MedImmune’s first two years of operation were financed largely through government CRADAs and research grants. One of its first grants was a Phase I and Phase II Army SBIR for the development of vaccines based on synthetic peptides. The principal investigator was Marc S. Collett, Director, Virology & Antibody Engineering, and Director, Biochemical Virology at MedImmune, Inc. The project resulted in one scientific article but did not result in any commercial products. Although the research project was abandoned in 1993 when Phase II ended, it should not be considered a failure. MedImmune had gone public in 1991, the same year that it began to market
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE CytoGam®. Going public gave the young company greater access to capital and a better public image. On the downside, however, it also meant dealing with disclosure risks and the potential for greater negative fallout in reaction to bad news. Despite the success that the company was enjoying in the stock market, CytoGam® was not faring well because of a license with a distributor who was not aggressively marketing the product. In 1992, MedImmune reacquired the marketing right to CytoGam® and launched an expanded marketing program through its own sales force. The strategy worked—resulting in a 30 percent compounded sales growth and building a presence within the transplant community. MedImmune spent tremendous amounts of time and resources readying the next product—RespiGam™—for submission to the Food and Drug Administration (FDA). This drug was being developed to provide significant protection against RSV, a potentially life threatening infection that hospitalizes over 90,000 infants and kills 4,500 annually. Striking most frequently in the late fall, winter, and early spring, it is an especially serious risk for the smallest and most medically fragile infants, such as those born prematurely or with a chronic lung disease known as bronchopulmonary dysplasia. When the FDA rejected the company’s application to market RespiGam™ in 1993, just as the SBIR Phase II was ending, Hockmeyer faced some very tough decisions about the future of MedImmune and its people. One option would be to transform the company into an “R&D boutique, ” identifying a variety of promising drug candidates and then licensing them to other companies to develop and market. A second option was to rely on data from previous trials to support an application to market RespiGam™ only for infants with congenital heart disease, and downsize the company. The third possibility, and the strategy Hockmeyer chose, was to “bet the farm” and devote all of the company’s resources to executing a new clinical trial of RespiGam™. It was an all or nothing strategy for MedImmune. Hockmeyer’s plan succeeded. The development team regrouped, scrutinizing every aspect of RespiGam™’s clinical studies. They faced tight time constraints, designing and commencing a new trial within 90 days. On the business development side, the company worked hard to raise over $30 million from sources such as Baxter Healthcare Corporation, who entered into an exclusive, royalty-bearing licensing agreement to commercialize RespiGam‘ outside North America. It also sealed codevelopment and copromotion agreements with American Home Products Corporation. After two years of tireless dedication to RespiGam™ by the company, the FDA approved it for the prevention of RSV disease in certain high-risk infants. Once again, the company rode the wave of a bull market, experiencing a substantial increase in its share price. The following year—1996—proved to be a banner year for MedImmune. It saw a record level of sales for CytoGam®, the beginning of a Phase III clinical trial of Synagis™, the second-generation product for RSV disease, and the start of construction on a $50 million manufacturing facility. Along the way, the company raised another $125 million in capital.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE At the end of 1997, MedImmune announced a comarketing agreement for Synagis™ with Abbott Laboratories and, once again, its stock price skyrocketed. In June 1998, MedImmune received FDA approval to market Synagis™, a monoclonal antibody product that was both easier to use and more potent than RespiGam™. Making the picture even rosier for MedImmune, the FDA approved the drug’s usage for any pediatric patient at risk for the disease (such as infants with low birth weight or children with lung or heart problems), expanding the U.S. market to about 325,000 children annually. RespiGam™ was marketed only to prevent RSV disease in severely premature infants and infants with lung disease (about 100,000 annually). The approval of Synagis™ brought MedImmune a $15 million licensing payment from Abbott. Many industry analysts predict Synagis™ will become a blockbuster drug, with global sales of $500 million or more once regulatory approvals in overseas markets are obtained. Strong revenues are anticipated because the drug is cheaper and easier to administer than RespiGam™, there are no competing products, and it provides a higher level of protection against RSV infection. MedImmune has faced severe adversity and emerged a stronger, more focused company. It has proven sales and marketing capabilities in addition to its product development expertise, a rich product pipeline, strong commercial alliances, and near-term prospects for profitability and revenue growth. Although the future is never assured, at least for now, the red ink for MedImmune has turned black. Marc Collett went on to be a founders of ViroPharma Incorporated, 9 a firm headquartered in Exton, Pennsylvania, near Philadelphia. The company was started in December 1994 and went public in 1996. The company received the 1997 Enterprise Award for being the best start-up company from the Eastern Pennsylvania Technology Council. Collet, Vice President for Discovery Research, has focused his research on RNA antiviral diseases such as viral meningitis, viral respiratory infection, pneumonia, hepatitis C, and influenza. ViroPharma currently has eight products in various phases of clinical trials. The MedImmune SBIR award was useful in evaluating the early-stage feasibility of the synthetic peptide technology. The technology did not work as intended and did not appear to have direct commercial potential. The project was useful, however, in providing research experience for Marc Collett to transfer to the formation of his new company, ViroPharma Incorporated, and for providing information as to where the company MedImmune might better focus its product development efforts. Martek Biosciences Martek is a recognized leader in the development of products for health and nutrition from microalgae, a diverse group of microplants that produce many 9 http://www.viropharma.com/
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE different and unusual fats, sugars, proteins, and bioactive compounds of great potential value to humans. Starting with 5 scientists in 1985, Martek now employs 120 people. It has raised over $80 million in equity capital and obtained approximately $6 million from over 40 small business innovation grants, primarily from NIH. The first funding for this radical and experimental technology was from non-NIH sources, with DoD SBIR awards playing a role in the developing company. Martek Biosciences Corporation started as a spinoff from the giant defense contractor Martin Marietta Corporation. In 1985, Martin Marietta, after successfully battling a takeover bid by Bendix Corporation, decided to focus on its primary defense business. The algae research group was one of the units that was divested. The research group was composed of five scientists working on the genetic engineering of algae. They decided to form their own company and the name Martek was chosen to represent their research focus on Marine Technology. 10 Martek is unique in the application of biotechnology to algae. The Martin biosciences research group had begun studying microalgae under a National Aeronautics and Space Administration (NASA) contract to explore the use of microplants as a source of food and oxygen for astronauts in space in the 1980s. Martek, which incorporated in May 1985, started operations with $325,000 worth of contracts with DOE, DoD, and NASA.11 In addition, Martin Marietta traded the group’s specialized lab equipment for a 7 percent equity stake in the new company. The DoD SBIR Phase I grant allowed Martek to further its expertise by developing a deuterated oil made by the fatty acids of microalgae. The deuterated oil was intended for use with industrial bearings that required a long-lasting lubricant. Martek’s scientist also discovered other unusual fats made by microalgae that are identical to those found concentrated in the gray matter of human brains, the retina, the heart and nervous tissue, and basically wherever there is electrical activity in the body. Most critically, the breakthrough came with the realization that one of the acids, docosahexaenoic acid (DHA), is provided by human breast milk, but was not available in infant formula. Martek started development work on manufacturing technology to ferment mass quantities of algae for DHA production. As the technology was developing, so was the business. Martek’s earliest rounds of financing—a total of about $ 700,000—came from venture capital subsidiaries of three former local banks, D.C. National, Suburban, and American Security. In 1988, Martek hired Pete Linsert, one of three nonscientists in the company, who helped position the company for potential commercial success. Linsert, a venture capitalist, had invested in the company while he was head of the Suburban Bank’s venture capital operation. He recognized the commercial 10 Biosciences accounted for 7 percent of the corporate research budget, with the rest devoted to more aerospace-related work in areas such as computer science, semiconductor physics, and advanced materials. 11 Martin Marietta subcontracted with the new company to continue its prior work.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE potential of DHA, which experimental research had indicated is crucial to brain and eye development. Martek developed DHA into the commercial product Formulaid®, an additive for infant formula. Formulaid® may help to close gaps that researchers have found exist between the cognitive development of breast-fed and bottle-fed infants, differences that a study published in Lancet found persist in 9-year-old children. The market potential is astounding: Infant formula has more than $2 billion a year in wholesale sales in this country and about $5 billion worldwide. In 1992, Martek, which then had 50 employees, also was able to supplement $9 million raised from private investors with more than $5 million received from 32 federal SBIR grants from the NIH. In 1994, Martek, went public, selling 2.3 million shares at $7 a share to raise about $14.5 million after expenses. Typically, biotech companies eat up large amounts of cash before they can develop commercially viable products. Up until Martek had its public offering, the company had raised $8.8 million in four rounds of private financing. When it went public, the company had an accumulated deficit of $6.3 million. In 1995, Martek purchased a fermentation plant for $10 million. The Winchester, Kentucky, plant has two 40,000-gallon fermentation tanks, which are used to make Formulaid® with a patented process. The ability to grow commercial quantities of microalgae allows Martek to license the use of Formulaid® to three of the world’s top infant formula manufacturers. The three companies are Mead Johnson & Company (a subsidiary of Bristol-Myers Squibb Company), American Home Products Corporation, and Nutricia B.V. In the fall of 1994, Formulaid® was introduced to the market in Belgium, as an additive in baby formulas made for prematurely born babies and sold by Nutricia, the second leading formula maker in Europe. The agreement was that Martek would receive a flat fee to cover production costs, plus a royalty of about 3 percent of the sales of formula containing Formulaid®. Formulaid® is currently sold in formulas in 50 countries around the world. Martek’s nutritional oils have other uses. IAM Co., the pet food manufacturer, has agreed to begin including Martek’s nutritional oils as an additive in its Eukanuba brand of puppy and kitten nutrition formulas for orphaned puppies and kittens and other young pets in need of supplemental nutrition. Neuromins®, a dietary supplement for DHA for adults, is sold over the counter and distributed by such retail giants as Rite Aid and GNC. For the future, the company believes that microalgae may prove useful as ingredients in new medicines that would fight drug-resistant bacteria. HT Medical Systems, Inc. HT Medical is a medical software company headquartered in Rockville, Maryland, that specializes in computer-assisted, virtual reality (VR) medical training systems. The company, which currently employs 50 people, focuses on de-
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE veloping VR technology to train medical practitioners. HT Medical produces two categories of products: (1) hardware platforms and (2) software programs that run on the hardware platforms. HT currently has four products on the market: T-Vox, a VR software development toolkit; CathSim, which trains health care workers to practice injecting needles for procedures such as giving vaccinations, drawing blood, and inserting intravenous catheters12; PreOp Endoscopic Simulator, a computer-based VR system that trains doctors to perform endoscopic procedures; and PreOp Endovascular Simulator, a computer-based VR system that trains doctors to perform endovascular procedures such as inserting pacemakers. In 1987, straight out of Western Maryland College, Gregory L. Merril founded HT Medical, then named High Techsplanations. Merril was interested in enhancing the communication of medical information. The company ’s early work was in medical videos and displays. A breakthrough came in 1992 when the pharmaceutical firm, Merck, hired High Techsplanations to develop a presentation that would guarantee a high volume of traffic through its kiosk at the American Urological Association convention. Merril suggested a VR simulator that would allow doctors to practice endoscopic surgery. The advantage was the ability to experiment on technique without the pressure of preforming on an actual patient. Merril developed a high-tech training system that would duplicate the look and feel of actual procedures. Merril was able to talk Sun Systems into providing workstations to the fledgling company. The presentation was a success. Afterward, Merril redirected his fledgling company as a high-tech R&D firm. HT Medical has benefited from Navy SBIR funding13 of Phase I and Phase II projects14: 1995, NAVY, $114,680 (Phase I), for virtual environment training for trauma management; 1996, NAVY, $748,521 (Phase II), for virtual environment training for trauma management; 12 CathSim improves on prior training techniques in which medical practitioners practice on oranges, plastic models, or each other. 13 Contract Number N00014-95-C-0098. 14 In addition, HT Medical has benefited from four NIH SBIR grants, including: 1993, Department of Health and Human Services (DHHS), $49,919 (Phase I), for VR surgical simulation for hemicholectomy; 1994, DHHS, $500,000 (Phase II), for cholesterol education using novel interactive multimedia; 1995, DHHS, $80,244 (Phase I), for visualization and dissemination of embryonic data; and 1997, DHHS, $49,781 (Phase I), for benchmark VR innovative procedural tool.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE The idea was to apply VR to the treatment of traumatic wounds in order to train medical personnel to manage battlefield injury. During the DoD SBIR project, HT Medical produced a Trauma Simulation Suite, which contained prototype simulators for central venous access, endotracheal tube placement, and chest tube placement. Surgical computer simulations —VR systems—allow practice on a computer model with the physical and physiological characteristics of a living human patient. The idea is similar to the flight simulators and battle simulators that have been used with great success by the airline industry and the military. HT Medical ’s idea was to extend this concept to creating realistic VR surgical simulations that would allow physicians to train for battlefield trauma. Greg Merril is a master at building partnerships. To commercialize the VR technology that resulted from the NAVY SBIR project, the Maryland Health Care Product Development Corporation (MHCPDC) invested $400,000 in HT in 1996.15 In return for the investment, MHCPDC negotiated royalties for 14 percent of HT’s annual net profits. MHCPDC’s total return is expected to be 25 percent per year. The MHCPDC investment required a private match of $400,000, which HT received from Cook, Inc., a medical device company in Bloomington, Indiana. HT Medical also received $250,000 from Maryland’s Enterprise Investment Fund.16 Additional state funding has come from the Maryland Industrial Partnerships (MIPs), which provided $35,000 to the University of Maryland to work with HT on the development of a tactical robotic arm.17 To further develop the medical simulator technology, HT Medical has received two awards from the Information Infrastructure for Healthcare Competition of the Advanced Technology Program (ATP) of the National Institute of Standards and Technology. The first award was in 1995 for the development of TELEOS, an authoring system for virtual reality surgical simulations. The amount of this award was $560,000. HT Medical ’s second ATP award, in 1997, was for $2,000,000 for the development of a Preoperative Decision Support System (PreOp). Under this project, HT Medical Systems is designing a VR system that will enable physicians to use patient-specific data for diagnosis, selection of medical devices, rehearsals for operations, and remote consultations. Despite several attempts, HT has been unable to secure venture capital. However, it has raised funding through two private stock placements. The first round 15 MHCPDC is a nonprofit public/private venture funded by Maryland’s Department of Business and Economic Development and the DoD Technology Reinvestment Program. It provides equity funding for companies involved in developing technologies of importance to national security and the national economy. Private cofunding is required. It generally invests $300,000 to $500,000. 16 Enterprise Investment Fund, Maryland Department of Business and Economic Development, makes direct equity investments of up to $500,000 in emerging high-technology businesses. 17 The MIPs program, based at the University of Maryland at College Park, shares the cost with companies of having University of Maryland System faculty collaborate on research on new products or processes.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE netted $1 million; most investors were angels—high-net-worth individuals—some of whom Merril contacted through Maryland’s Private Investors Network (PIN).18 The second round brought $2 million and was solicited through an investment bank. HT is currently arranging a third private placement, targeted at institutional investors. The company is waiting for a favorable opportunity for an IPO. HT has entered joint ventures with universities and established companies to develop and market its VR technology. For example, to develop and market its Intravenous Training System, which runs on the CathSim platform, HT partnered with the State University of New York (SUNY) at Plattsburg and Beckton-Dickinson & Co. Nurses at SUNY’s medical school, learning about HT’s doctor-training VR software products, wanted a similar product to train nurses on how to catheterize a patient properly. The school contacted HT and agreed to develop the software, at a cost of $300,000. Under this project, HT Medical authored a prototype VR simulation of the placement of a central venous line in the subclavian vein. This simulation incorporates visual and tactile realism of the actual surgical procedure, providing a genuine scenario for teaching physicians central line placement. In return, SUNY receives a 5 percent royalty deal. Additionally, the U.S. Health Care Financing Administration is working in cooperation with HT Medical Systems to incorporate features into CathSim that allow hospital administrators to benchmark their nurses’ performance in placing intravenous catheters. To sell the product, HT arranged a comarketing agreement with Beckton-Dickinson, a medical supply company that sells catheters. HT gets the marketing strength of Beckton Dickinson’s sales force while the medical supply company hopes to benefit from the synergy of selling a product that requires the purchase of catheters. Finally, not unlike other emerging research-centered, high-technology companies, HT contracts out the manufacturing of its products. Merril applied for Fast-Track funding at NIH. Fast Track allows a company to begin processing the application for a Phase II SBIR grant while it applies for Phase I. Securing Phase I practically guarantees the company will get Phase II, but HT’s experience exposed a frustrating Catch-22: to get Phase II funding. HT had to provide technical specifications that it would obtain only after completing work funded by the Phase I grant, but NIH had not approved the Phase I grant because Phase II was held up. After several attempts to project what the required specifications would be, HT gave up. Merril knows of no company that has successfully used the Fast Track SBIR program at NIH. 18 PIN, of the Baltimore-Washington Venture Group, brings together accredited investors and growing companies in the mid-Atlantic region. It currently services Maryland, Washington, D.C., Virginia (as far as Richmond), and Delaware (unfortunately at this time the network cannot consider deals outside of this region). The Baltimore-Washington Venture Group is part of the Michael D. Dingman Center for Entrepreneurship, University of Maryland at College Park.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE REFLECTIVE CONCLUSIONS Government R&D support may have many indirect, and often unintended, effects on technological innovation. Indeed, the idea that DoD makes a significant contribution to the nation’s developing expertise in biotechnology may, at first glance, appear counterintuitive. The contribution of DoD to the development of biotech knowledge and the realization of commercial products is an aspect has received little attention in the analysis of science and technology policy. This pilot research effort on the role of the DoD SBIR awards in building the nation ’s biotech industry has revealed some patterns and conclusions. First, and perhaps most significant, DoD has made a significant financial contribution to the funding of biotech R&D. Although NIH, because of its mission, is the premier agency in funding biotech, DoD, in seeking novel solutions to advance its task-oriented mission, has funded biotech applications. Both the size of the DoD R&D budget and the scope of the agency’s mission have allowed the it to make significant contributions to the development of knowledge-intensive technologies. The findings of this paper indicate that biotech is another instance in which DoD funding has played an important role. DoD has funded biotech R&D in a variety of applications that appear to have dual uses in the civilian sector. This was further demonstrated in the case studies. All of the DoD SBIR-funded companies that we interviewed have developed commercial products. Two companies that were interviewed for this paper, MedImmune and Martek, had a strong DoD legacy and the SBIR awards helped the companies to convert to commercial, civilian applications. Finally, the case studies demonstrate that DoD and NIH funding are complementary for small start-up companies. Although DoD has different interests from NIH, it is common for firms that have received DoD funding to subsequently apply to NIH. ACKNOWLEDGMENTS I would like to thank Charles Wessner and John Horrigan (NAS) for useful comments on an earlier version of this paper, Peter Cahill and Christina Villa (BRTRC) for help with DoD SBIR data, and Robert F. Moore for help with the NIH SBIR data. I would also like to thank JoAnne Goodnight of the NIH and Morrie Ruffin of the Biotechnology Industry Organization for their comments. This project would not have been complete without public policy graduate student Mike Vincellette who provided technical assistance in constructing the database and Merry Perry who provided document preparation assistance. The views expressed are those of the author and do not represent the views of the Institute for Policy Studies of Johns Hopkins University.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE REFERENCES Alic, John A., Lewis Branscomb, Harvey Brooks, Ashton B. Carter, and Gerald L. Epstein. 1992. Beyond Spinoff: Military and Commercial Technologies in a Changing World. Boston: Harvard Business School Press. National Research Council. 1999. Funding a Revolution: Government Support for Computing Research. Washington, D.C.: National Academy Press. Powell, Walter W., and Peter Brantley. 1992. “Competitive cooperation in biotechnology: Learning through networks? ” pp. 366-394 in: N. Nohria and R. G. Eccles (eds.), Networks and Organizations: Structure, Form and Action. Boston: Harvard Business School Press. Tirman, John. 1984. The Militarization of High Technology. Cambridge, MA: Ballinger.
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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE APPENDIX Construction of the Database We used subject terms from the Institute for Biotechnology Information (IBI), which is an independent research and consulting firm that provides comprehensive information on commercial biotechnology. The firm has been in existence since 1986 and is headed by Mark D. Dibner, who holds a Ph.D. in neurobiology and pharmacology and an MBA in strategic planning. Dibner has written over 75 articles and 6 books on commercial biotechnology. He has served on the boards of directors of three biotechnology companies: the Association of Biotechnology Companies, the Council of Biotechnology Centers, and the Emerging Companies Section of the Biotechnology Industry Organization (BIO). One of the services that IBI provides is the U.S. Companies Database, which provides, for our purposes, a listing of subject terms that define company research expertise and topic areas. We used this as an independent source to define the subject terms that would be used in biotechnology or, more broadly bioscience, research abstracts 19. We eliminated common terms that IBI listed that are not specific to bioscience, such as food, cosmetics, energy, equipment, imaging, and services. In addition, we condensed some categories. For example, whereas IBI lists 11 types of cancers, such as colon or skin cancer, our search used the main term cancer. Finally, we read the abstracts of all of the awards that matched our search terms in order to ensure that the projects were appropriate. We eliminated projects that did not substantially involve research, development, or manufacture of (1) biologically active molecules, (2) devices that employ or affect biological processes, or (3) devices and software for production or management of biological information. We excluded projects that focused on health information management systems, test batteries, and training methods. TABLE A-1 Examples of the Most Common Terms from IBO Human Health/Medical Agriculture Industrial General/Other Antidote Additives Biomass Biotechnology Blood Flavors Biosensors Reagents Leukemia Food enzymes Environmental testing Combinatorial Lymphomas Food microbiology Environmental treatment Chemistry Cardiovascular Food safety testing Bioremediation Diagnostic tools Heart Failure Industrial enzymes Genetic screening Hypertension Laboratory enzymes DNA probes Stroke Fermentation Imaging Cytokines Speciality chemicals Drug abuse screening 19 The listing of the subjects can be found at http://www.biotechinfo.com/company_wizard/subject_terms_list.htm.
Representative terms from entire chapter: