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Wall Street Journal: Pfizer Business Incubator Fosters Emphasis On R&D

Note: The Pfizer Incubator is using Imaginatik's technology to drive their open innovation program

23 May 2007 - By Lorie Konish

Amid challenges to revive its multibillion-dollar drug pipeline with new moneymaking drugs, Pfizer Inc. has created its first incubator for health-care start-ups as part of a renewed focus on research and development.

Pfizer and other drug companies, such as Johnson & Johnson, have made direct investments in developing companies for years. But the use of incubators is less common among them -- at least until recently. Biotechnology company Biogen Idec Inc. also set out plans for forming a full-service incubator not long ago.

The Pfizer Incubator, a subsidiary of Pfizer's research and development organization, will invest $10 million a year over five years to cultivate early-stage resources in-house, providing tenant companies a range of services at its labs in La Jolla, Calif.

"This is really a strategic move we are making" to gain access to new ideas and new ways of getting to drugs from academia, said Alex Polinsky, Pfizer Incubator's chief operating officer.

Pfizer faces the task of replenishing its drug portfolio even as it struggles with a cost-saving and restructuring plan that includes cutting about 10,000 jobs, or 10% of its work force, over the next two years.

The company has already lost market exclusivity for its antidepressant Zoloft and blood-pressure medication Norvasc, and has lowered revenue expectations for 2007. Meanwhile, time is running out as soon as 2010 for patent protection on the company's blockbuster cholesterol drug, Lipitor, which had about $12 billion in sales in 2005. A possible replacement -- experimental drug torcetrapib -- failed in trials last year.

In an effort to address its pipeline woes, the company announced Sunday that its longtime head of research and development, John LaMattina, will retire shortly after the company finds his successor. The company's relatively new chief financial officer, Alan Levin, will also step down.

Pfizer said it doesn't expect any immediate financial gain from the incubator. Tenant companies must enter an upfront equity-sharing agreement, with Pfizer maintaining the option to acquire rights at fair-market price. Pfizer "will have what is called a right of first offer, and we will pre-agree to a mechanism to determine a fair price, using independent, third-party arbitration," Dr. Polinsky said. "In the end, if we cannot agree, the company can turn to other buyers."

There's precedent for this type of arrangement. Boston Scientific Corp. has made venture investments and gained the option to acquire the company in the process. In April 2002, for instance, it made an equity investment in Therus Corp., a developer of a vascular-sealing technology, and received distribution rights and an option to buy the Seattle company. Frazier Healthcare Ventures and Spray Venture Partners are among Therus' other backers.

Some venture investors frown on such arrangements because of the risk that a company would appear tainted if the corporation decides not to acquire it.

Kevin J. Kinsella, a general partner at Avalon Ventures in La Jolla, doesn't see great potential for success from incubators. "In 25 years, I can't tell you or name for you any particular brand success stories that have emerged from this," he said.

"Our experience has been that companies need to develop their own strategic core. . . . They need to be an entity in and among themselves to progress beyond basic research," Mr. Kinsella said. "We are skeptical, but we are happy to look at any opportunities that may come out."

The Pfizer incubator will have room to shelter five to eight companies, Dr. Polinsky said, providing as much as $2 million a year to each for two years. Each company will have access to laboratory space and concierge-like services, he said, such as Internet, payroll and accounting services, as well as access to various resources of Pfizer campuses. About 30 companies have applied for tenancy, 19 of which are currently being developed at academic institutions. Pfizer has yet to choose any.

Edmund P. Harrigan, Pfizer's senior vice president of world-wide business development, said Pfizer will also continue to invest in early-stage companies separately from the incubator.