Small business status impacts government contractors in several ways. Set-aside procurements and financial assistance programs are available for small businesses. Small business status is important for those seeking to meet the goals and commitments set forth in their small business subcontracting plans. Looming over all determinations of small business size status is the concept of affiliation. If the Small Business Administration finds that two business concerns are “affiliates” (one controls or has the power to control the other or a third party controls or has the power to control both), a business may no longer be a “small business.”
Affiliation determinations are likewise essential for pharmaceutical companies seeking to have the Food and Drug Administration waive the user fee for reviewing a new human drug application. Under § 736(d)(4) of the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § 379h(d)(4), a small business is entitled to a waiver of the prescription drug user fee when the business meets three criteria:
- The business must employ fewer than 500 persons, including employees of its affiliates.
- The business does not have a drug product that has been approved under a human drug application and introduced or delivered for introduction into interstate commerce.
- The application must be the first human drug application, within the meaning of the FD&C Act, that a company or its affiliate submits to the Food and Drug Administration for review.
For many years the FDA has relied upon the Small Business Administration to determine if the fee waiver applicant meets the first criterion. Such determinations have been made pursuant to 13 CFR § 121.901, which provides for other government agencies to obtain SBA size determinations upon request “under SBA rules, standards and procedures.” Under this procedure, the SBA (typically acting through the Area Office with responsibility for the geographic area where the applicant’s headquarters office is located) issues a formal size determination. Such determinations used the 500-employee size standard set forth in the FD&C Act, but they also relied on all of the nuances of the SBA’s long-standing affiliation rules—not only those set forth in 13 CFR Part 121 but also those in the many affiliation decisions issued by the SBA Office of Hearings and Appeals. Having the SBA resolve questions of affiliation for the FDA improves predictability. Both the applicants and the FDA know the procedures the SBA will follow, beginning with a request for a completed SBA Form 355, the affiliation rules to be applied, the OHA precedents interpreting those rules, and the applicant’s right of recourse following an unfavorable determination.
In the past few weeks, the SBA ceased processing small business size determinations for FDA fee waivers. This abrupt change is so recent that the FDA’s Guidance for Industry: User Fee Waivers, Reductions, and Refunds for Drug and Biological Products still reflects the former process of SBA making the size determination for FDA.
While some may lament the FDA’s decision to bring the size determination in-house, the decision offers the FDA a one-time opportunity to address circumstances that historically have plagued pharmaceutical companies seeking an FDA small business fee waiver. Many such companies rely on venture capital and private equity firms to provide seed financing. To ensure their investment is not diluted or compromised, these investment firms routinely demand participation on the governing board and protective provisions in the By-Laws, Certificate of Incorporation, and other company documentation. In many cases these protections give the investment firm certain limited blocking rights, which the SBA has held result in negative control and, thus, affiliation. See, e.g., Size Appeal of Novalar Pharmaceuticals, Inc., SBA No. SIZ-4977 (2008); Size Appeal of Eagle Pharmaceuticals, Inc., SBA No. SIZ-5023 (2009). Since the investment firms invariably have other portfolio companies in which they participate, the SBA approach often makes it impossible for the applicant to qualify as a small business and to obtain the fee waiver. This has a chilling effect on pharmaceutical start-ups and investment in such companies, because the new drug application fee is substantial. In FY 2017, the fee is $2,038,100 with clinical data and $1,019,050 without clinical data.
The FDA has the opportunity to adopt a different approach to affiliation that will eliminate this problem and encourage investment. The FDA should update its Guidance such that control (and thus affiliation) means control over the operation and management of a business and does not extend to blocking rights in place merely to protect a shareholder’s investment. There is precedent for this interpretation. See Size Appeal of EA Engineering, Science, and Technology, Inc., SBA No. SIZ-4973 (2008). The FDA might even go so far as to state that an applicant is not affiliated with its investors. This is a well-recognized exception to affiliation and is set forth in 13 CFR § 121.103(b)(5), but it has not yet been applied to the FDA small business fee waiver. The term “affiliate,” as defined in section 735(11) of the FD&C Act, 21 U.S.C. § 379g(11), is broad enough to provide the FDA flexibility to adopt either or both of these approaches.