Originally Published MX July/August
2002
FINANCE
Leveraging R&D Projects into Federal Funding
With skillful
planning, companies can tap into federal funding resources that can ease R&D
costs.
William Baron
Savvy medtech managers and directors know that some of the most cost-effective research and development funding available comes from the federal government. Millions of dollars can be obtained without giving up equity, paying interest, or relinquishing commercially significant intellectual property rights. In return, in order to stimulate the economy, the government wants a successfully developed product and a successful employer—clearly a win-win relationship. With the right expertise, medtech company leaders can successfully navigate the government’s formalized application process in an efficient and highly profitable manner.
Acquiring Government Funding
Strategic
project planning is essential to a productive and profitable government grants
and contracts program. Fundable projects may be self-contained or subprojects
of a larger effort. Projects or subprojects should be well defined. Funding
timetables vary among agencies. As a general rule, the application process should
be scheduled six or more months in advance of when the project funds will need
to be expended.
In many respects, acquiring government funding can be easier than acquiring private capital. The funding criteria for awards are preestablished and available from the funding agencies, as are the application response timelines. Government funding decisions are based principally on the importance of the project and the likelihood of technologic success. Moreover, most agencies provide timely feedback on the likelihood of an application being funded, as well as valuable feedback from the reviewers. The profit incentive that is associated with raising private capital is not a part of the government funding transaction.
Federal Funds in the Growing Company
Federal funds can
benefit companies in many growth stages. For companies with equity capital or
revenue streams, government funds can be used to advance mainstream projects
or to develop projects that could otherwise languish for lack of monetary resources.
In the latter case, a host of otherwise-dormant projects can be brought forward
and turned into revenue-producing assets. For example, a company with a core
technology for imaging myocardium could use government funds to advance a tangential
project aimed at imaging skeletal muscle; similarly, a company with a drug delivery
technology could use federal funding to test efficacy and safety at various
organ sites.
At the concept
stage of a venture, an entrepreneur can use government funds to demonstrate
the feasibility of a core technology or product in order to attract private
capital. Often, regardless of company size, management will leverage the credibility
gained from an award, as well as the progress made with the funds, into attracting
private capital.
Simply stated,
because funds may be used for any aspect of a research and development project—including
concept feasibility testing, prototype engineering, benchtop testing, in vitro
testing, animal testing, and clinical trials—there is a role for federal
funding at almost every stage of business development and for an extremely broad
range of research and development projects.
Given these options, companies with active research and development programs usually have many ways in which to configure a government funding strategy. How profitable and successful the program is depends on whether the underlying strategic planning includes insight into the administrative and review process, an understanding of the funding opportunities, and expertise in producing an effective application.
Funding Mechanisms
Small businesses
are eligible to compete for special set-aside funds as well as for projects
funded by conventional grant and contract mechanisms. For medtech companies,
the federal government’s Small Business Innovation Research (SBIR) and
Small Business Technology Transfer Research (STTR) funding programs are particularly
attractive. At the National Institutes of Health (NIH; Bethesda, MD) and the
National Science Foundation (NSF; Washington, DC), the SBIR and STTR programs
are the primary mechanisms for funding medical technology and pharmaceutical
R&D conducted by small businesses. In 2000, the federal government issued
over a billion dollars in SBIR awards, many of which were for medtech projects.
Congress enacted
the SBIR program in the early 1980s as a means to stimulate the development
of small businesses based on innovative technologies. The legislation requires
that federal agencies with extramural funds set aside a specified percentage
for projects to be performed by small businesses.
Every award has
a principal investigator, who is the named person responsible for the scientific
conduct of the project and has both technical as well as fiduciary responsibility
for the project. To qualify for SBIR funding, more than 50% of the principal
investigator’s employment must be at the applicant company.
The STTR program
was enacted after the SBIR program to facilitate collaborative efforts between
university faculty, who can serve as principal investigators, and small businesses.
Accordingly, in the STTR program, the principal investigator’s primary
employment does not have to be with the small business. However, STTR funds
comprise only a small percentage of the SBIR set-aside.
The size of the SBIR fund pool is contingent upon an agency’s budget and the percentage of set-aside funds dictated by the governing legislation. In recent years, the set-aside percentage has increased. When combined with the increasing budgets of many federal agencies, including NIH, such set-aside increases have resulted in attractive funding rates for well structured and competently presented projects.
Award Structure
The amount, staging,
and duration of SBIR and STTR awards depend on the funding agency. Generally,
SBIR awards are larger than STTR awards, but the staging is similar for both
types of awards. Each NIH SBIR award path secured by a company can be worth
about $850,000. Funding of SBIR and STTR awards is divided into three phases
(see sidebar).
The purpose of
a Phase I award is to demonstrate concept feasibility. Pilot data is not required
for the application, but if available, such data can help secure an award by
removing some of the uncertainty in the minds of the reviewers. Projects that
are past the concept stage may also be funded. Typically, NIH Phase I awards
are for about $100,000 and a six-month term. Once a Phase I award is made, the
door is open for a Phase II application. Only Phase I awardees can submit applications
for Phase II grants or contracts.
The purpose of
a Phase II award is to further the development of the project, including demonstrating
the efficacy and safety of the technology. NIH Phase II awards are typically
worth about $750,000 and have a two-year term. Research and development activities
may, for example, include engineering and fabrication of a beta-site prototype
(including devices, pharmaceuticals, or instruments) and preclinical or clinical
testing.
NIH Phase I and
Phase II funding amounts are guidelines, and not caps. When justified, larger
budgets can be funded. STTR awards at NIH have lower guidelines. Awards at other
agencies are comparable, with Phase I awards generally being between $70,000
and $100,000, and Phase II awards being between $500,000 and $750,000.
Fast-Track awards
are hybrids of the typical Phase I–Phase II sequence. Fast-Track awards
are designed to reduce or eliminate the funding gap caused by the review process
that would otherwise intervene between Phase I and Phase II awards.
The structure of
Fast-Track awards differs among the various awarding agencies. At NIH, a Fast-Track
application, worth upwards of $850,000, basically consists of the simultaneous
submission of both Phase I and Phase II applications. Both applications are
reviewed at the same time. Access to the Phase II funds is contingent upon an
administrative determination that the company successfully completed the feasibility
work specified in the Phase I application. Department of Defense (DoD) Fast-Track
applications require the company to provide matching funds and incorporate a
bridge financing stage between the issuance of Phase I and Phase II funds.
In Phase III, the
company is expected to complete commercialization of the technology, including
manufacturing and marketing. Federal funds are not typically available for Phase
III commercialization activities. An important exception is when the funding
federal agency needs the product. Then, an agency may fund manufacturing, and
may also become a primary customer.
The Defense Advanced Research Projects Agency (DARPA) and the National Institute of Standards and Technology Advanced Technology Program (ATP) offer an important but limited alternative to the SBIR/STTR route. DARPA and ATP often issue broadly defined solicitations for multimillion dollar awards that are designed for multidisciplinary, interinstitutional projects that carry substantial R&D risk, but could result in major and fundamental technological advances. To qualify for these awards, matching funds or in-kind resources are required. Any size company can participate in the competition. DARPA also sponsors an SBIR program through DoD’s solicitation.
Qualifications
Currently, to qualify
for an SBIR or STTR award, a small business must have fewer than 500 employees,
and more than 50% of the business must be owned by United States citizens.
As mentioned above, for SBIR awards, the principal investigator must be employed more than 50% of the time at the applicant business.
Funding Instruments
There are two basic
funding instruments, grants and contracts. Both are paid on a best-effort basis.
The principal difference between them is that grants are generally awarded in
response to broadly defined R&D solicitations, whereas contracts are generally
awarded via narrowly defined solicitations. Within the SBIR/STTR arena, DoD
awards are mainly contracts, and NIH and NSF awards are predominantly grants.
NIH often issues requests for applications addressing broadly defined, but specific
research areas that are funded as grants (e.g., early clinical trials of new
anticancer agents with Phase I emphasis). Projects that fall within the scope
of such solicitations tend to be evaluated by more-focused review panels (discussed
below) than applications submitted via the broader, mandate-level, solicitation
topics. Funding may be within the SBIR/STTR path or through other instruments.
Contracts will typically result in a product provided to the government. Grants do not require an end product. However, one of the review criteria is the commercial potential of the project.
Agencies
A broad array of
federal agencies fund medical technologies. NIH is the primary funding agency
for technologies addressing specific diseases as well as biomedical-related
core technologies that are important to medicine or public health. NSF has a
sizable grant program for biotechnologies and core medical technologies, especially
in genetic engineering and drug-delivery technologies.
Importantly, NIH
and NSF issue some of the broadest medtech-related solicitation topics, making
it easy for medtech companies to match their R&D goals and projects to an
agency mandate. DoD has many relatively narrow solicitations for healthcare-related
contracts specific to the military environment. While these are the major funding
agencies for medical technologies, other opportunities exist with the Department
of Energy, Department of Agriculture, FDA, the Environmental Protection Agency,
and—for information, education, and training technologies—the Department
of Education.
In short, two iterative tasks confronting a business seeking government funding are to define its technology to fit within the mandates of funding agencies, and to identify the agencies that are most likely to fund the technology.
NIH Review Process
At NIH, applications
are scored by a panel of about 20 scientific reviewers who are highly accomplished
in their fields of expertise. Usually, three primary reviewers are chosen to
critique each application. It is customary for the majority of the reviewers
to be university faculty. Successful applications will anticipate the perspectives
of the reviewers. Given the objective, scientific method of such reviews, an
award speaks well for the demand for the product, the technological validity
of the concept, and the company’s R&D approach.
Reviewers are asked to rank applications according to preestablished criteria. A successful application will address these criteria within essentially three document components that answer the following questions.
- What is the
significance of the project?
- Are the specific
aims of the research and development project scientifically and technologically
meritorious?
- Is the applicant company qualified to conduct the research?
Application Strategy
Obviously, focusing
the application on an agency’s mandate is critical. By submitting a research
topic to multiple agencies, funding success is improved in a cost-effective
fashion. If overlapping research is proposed in multiple applications, and more
than one application qualifies for funding, the overlapping effort can be funded
by only one of the awards. However, if the scope of the applications does not
overlap, the company can accept all the awards.
Frequently, a core
technology may be developed that can be used for the diagnosis or treatment
of multiple diseases. Such a technology may qualify for development under multiple
awards, provided that the scopes of the applications are properly defined. For
example, a company having a drug-delivery technology that could be used to treat
circulatory disease in the limbs as well as in the heart could obtain awards
for testing the technology in the treatment of each of the disease sites. Multiple
award paths are possible because each disease site will necessitate independent
testing, and the clinical research is not overlapping.
Alternatively,
a company may have several concepts for achieving a specific end, and may want
to develop all of them through a particular testing regime to assess their relative
efficacy or because they may have complementary clinical attributes. Since each
technology will require its own development effort, each technology may merit
its own award path.
Accordingly, defining
the scope of an application merits careful attention. Each award path that the
company qualifies for is worth upwards of $850,000 in SBIR funding, and multiple
awards can quickly add up to a sizable amount of operating capital.
Experience both
in planning a government funding strategy and in casting proposals will increase
funding and circumvent pitfalls. Applications that are too broad can preclude
multiple awards. Applications that are too narrow may be considered trivial.
Duplicate research proposals can result in administrative rejection of the applications
or a poor reception by the technical review committee. Accordingly, skillfully
defining a project’s scope can reap big benefits.
The Application and Budget
Communication with
the government reviewers is almost entirely by means of the submitted application.
To be competitive, this document must provide clear and succinct justification
for the project and present the technical team and development plan in a way
that convinces the reviewers that the R&D risk is reasonable and that the
project has a high probability of being brought to completion.
Each agency has
its own content, organization, and formatting requirements—all the way
down to typography—that must be strictly adhered to, or the application
can be rejected. The order of the content, the budget information, and form
pages are agency-dependent and the content must fit within the space limitations.
Understanding and adhering to these instructions can make or break an application.
This brings to
mind a company that presented me with an application it had submitted on its
own, but that had been rejected. As they put it, “Our competition has government
funding, why don’t we?” One of the answers was obvious as soon as
I looked at the document. In the section on significance, the company had explained
in detail how an award would help the entrepreneurs offset the personal financial
burden that had accumulated since starting the project. While this factor was
very significant to the entrepreneurs, it was irrelevant to the reviewers. (This
company eventually acquired several SBIR awards, and successfully went public.)
When an award is
made, the application becomes part of a contract between the small-business
recipient and the government. The proposal basically defines how the funds will
be spent. Should there be substantive divergence from the submitted application,
a revised development plan will need to be approved by the government project
manager.
As part of the
contractual agreement, the government will require assurances that the recipient
business is adhering to certain codes of conduct in the performance of the project,
including the manner in which human subjects and animals are involved in the
research.
Filing deadlines
vary between agencies. NIH has deadlines for its mandate-level broadly defined
solicitations every four months, with additional deadlines for more narrowly
defined research and development solicitations. NSF has annual deadlines for
specific topic areas that are staggered throughout the year.
All of the funds for NIH SBIR projects must be expended at United States performance sites. Foreign-made equipment and supplies may be purchased, but funds cannot be spent on foreign labor or travel.
Sources of Information
The Small Business
Administration’s Office of Technology hosts a Web site that provides background
information about the SBIR and STTR program, including a synopsis of issued
awards and their distribution by geographic region. Moreover, information is
posted about open solicitations at other federal agencies along with general
suggestions for submitting applications.
Each federal agency
that issues SBIR and STTR awards has information about its program on its Web
site, including application instructions and forms. It is important to thoroughly
review the instructions on a regular basis, since there are often significant
changes in the filing requirements and guidelines, including moved deadlines,
expanded and contracted content requirements, and revised formatting requirements,
all of which must be strictly adhered to. Otherwise, applications can be administratively
rejected or poorly received by review committees.
If in-house human resources are not available for developing a government funding program, engage a consultant who has been awarded federal grants or contracts in the medtech area and has served as a principal investigator. He or she should be able to provide support and guidance on the full spectrum of tasks associated with a government funding program specific to your company, including formulating the company’s strategy, implementing and facilitating the application process, guiding the application through the system, and assisting with administrative matters when an award is issued.
Award Rates and Limits
There is no limit
on the number of awards that a company can receive, but after a threshold number
of SBIR or STTR Phase II awards, agencies want to know the commercialization
history of the prior awards.
Award rates vary widely among agencies and depend upon fund availability versus the number of competitive applications. The single most important determinant of an application’s success is the quality of the application document. Even though a company may have a great R&D project and a highly capable team, if the application does not present the project well, an award is not likely to follow. One might say that the reviewers are not mind readers. Applicants who fare best see the world through the reviewers’ eyes, and design the application accordingly. This is where experience and success really matters.
William Baron, PhD, is president and CEO of Vision Metrics Inc. (Palo Alto, CA).
Copyright ©2002 MX
