SOMETHING VENTURED: A New Government Cash Source For Biotechs
By Daniel Rosenberg
20 February 2003
Dow Jones News Service
CHICAGO -(Dow Jones)- It seems like a perfect match.
Just when start-up biotech and pharmaceutical firms desperately needed a new influx of cash, the U.S. government established the Department of Homeland Security with a kitty of $500 million for biotech and pharmaceutical companies that can provide technology to protect the country against terrorism.
"Industry needs the funding and the government needs the technology," said Monica Medina, an attorney and a specialist on government funding at the law firm Heller, Ehrman, White and McAuliffe LLP in Washington. "The time is ripe."
But before start-ups rush to Washington with their hands out, they should know that government funding comes with some built-in obstacles and isn't always the best way for a company to push forward with its development plans, venture capital experts said. This isn't the first time government money has become available for companies in this sector. For several years, the U.S. Defense Department's Defense Advanced Research Projects Agency, or DARPA - the Pentagon's central research and development hub - has been courting the biotech industry.
This year, the opportunities are bigger than ever. The National Institute of Allergy and Infectious Diseases, thanks to a big increase in its budget, will have over $35 million to dispense in small business grants to biotech companies. It will give out grants for projects aimed at developing therapeutics, vaccines, diagnostics and other resources for biodefense. Meanwhile, the U.S. Army's Soldier and Biological Chemical Command is seeking proposals from biotech companies for the next generation of reagents, or substances used to detect the presence or amount of another substance.
In addition, during his State of the Union address last month, President Bush proposed a 10-year, $6 billion effort called Project BioShield to protect the country against biological threats. But the Department of Homeland Security is the most obvious new source of money, and has its own Advanced Research Projects Agency aimed at defending the U.S. through research and development working with the private sector and university researchers. Congress has authorized $500 million for the agency to spend this fiscal year.
"In the war against terrorism, America's already existent science and technology base provides us with a key advantage," the department says on its Web site. "The department will press this advantage with a national research and development enterprise for homeland security comparable in emphasis and scope to that which has supported the national security community for more than 50 years."
The government will be looking for ways to treat victims of chemical or biological attacks, as well as for vaccines. The main threats it sees are anthrax, ebola, plague, smallpox and botulin, the neurotoxin responsible for botulism. Other threats include ricin and sarin - a toxic nerve gas that terrorists used to kill and injure numerous commuters on Tokyo's subway in 1995. "There are segments around the world hostile to the U.S. that have been known to catalog a host of deadly toxins - all kinds of different nerve agents," said Matthew Lyons, director of government relations at the Biotechnology Industry Organization.
The need is definitely there - no doubt the Bush administration is eager to line up some projects as Democrats carp about not enough being done to protect the homeland. It looks like some companies will bite, but they should be careful not to take on more than they can chew, experts said.
"I've talked with a number of companies," Lyons said. "They've called in, and they see this as a two-fold opportunity for their businesses and for the country. There's an opportunity here where companies can position themselves, but it's got to be done very carefully. You might get vaccines into a program now, but at some point the government will say, 'We've got enough.'" The question, then, is what the company will do after devoting so much of its resources to just one project.
Dr. Jonathan Root, a partner with U.S. Venture Partners and founder of Embol-X, a company that developed an intra-aortic arterial blood filter, said a government contract can be alluring for small companies, but also can get in the way of their goals.
"It's appealing as another source of dollars to help the biotech start-ups (that) are cash-starved, but it's not a long-term business solution," Root said. "I worry that biotechs will look to the government as a source of financing - which it will be as long as the (national security) problem exists, but at the end of the day won't be for the long term."
A few companies, he said, will be able to use government money and the projects it funds as a leverage opportunity. For instance, the company that develops an anthrax vaccine and supplies it to the government may be able to use the money it makes and its research to develop a continuing source of revenue - such as a vaccine for AIDS or herpes. Other companies will consider the federal funding and then decide against it.
This happened recently with a company called Allergenics Inc., which Root's firm is helping to fund. The company is working on an oral vaccine for allergies like ragweed, and it became apparent that the government might be able to provide it with $10 million for an anthrax project. The company decided not to go forward, at least not immediately.
"Was this the right time to apply while we're in the midst of clinical trials and possible partnerships on the allergy side?" Root asked. "We determined it makes more sense to focus on the commercial opportunity and prepare to submit an application to the government, but not right now. The worst thing that could happen is the government agrees to do it, and then you'd have to do it."
For companies that do accept government tender, there will be other challenges, notably cultural differences.
"The hard part is, they haven't worked together in the past," Heller, Ehrman's Medina said. "The government doesn't work well with small companies. It's prejudiced toward larger companies. It's hard to overcome the cultural and language barriers that exist, and the money doesn't flow right away."
She suggests that smaller companies might partner with large firms like Baxter International Inc. (BAX) that have worked with the federal government before. She believes larger companies will reach out to smaller biotech companies to find technology for the government. This could be a tremendous opportunity for small biotech firms, Medina said. The vast majority of innovation is taking place at smaller companies, and the new funds represent an alternate way for the U.S. government to dip into that technology. Root, of U.S. Venture Partners, expects some activity in this area.
"Companies are definitely applying for it," he said. "It will be discussed and it will be relevant. But it would be distracting from commercial opportunities. Once you take on a customer like the U.S. government, you do not disappoint, or it's over. There will be a lot of pressure on you. Things can get averted to fulfill an immediate need."
-By Daniel Rosenberg, Dow Jones Newswires; 312-750-4118;