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Thursday, July 03, 2008

Pfizer/RaQualia: The Cost of Layoffs vs. Spin-Offs


As we hinted a few months ago, Pfizer finally managed to spin off some of its Nagoya, Japan research site into a venture-backed start-up, called RaQualia Pharma Inc. Negotiations have been going on since at least mid-2007 as Pfizer began announcing big cuts in its international R&D infrastructure.

One big reason for deal's delay: it’s pretty costly. But the alternative – ex-US layoffs – is apparently even more expensive. Those expenses are one reason European pharmas traditionally liked to spin-off infrastructure they wanted to get rid of into new venture-backed companies (e.g., BioXell and Basilea from Roche, BioSearch Italia from Aventis, or Newron from Pharmacia). The strategy allows pharma to transfer employees from one company to another; instead of taking on the layoff costs, they contribute some otherwise likely-to-be-shelved IP and maybe some equity dollars.

The RaQualia deal gives a pretty good idea of just how expensive those now-avoided layoff costs might be in terms of direct charges, as well as, perhaps more importantly, Japanese government goodwill. If press reports are to be believed, Pfizer is seeding the 70-employee RaQualia (reportedly, the Nagoya site employed a total of about 400 people) with six drug discovery programs, six development programs and three products approved in the US -- Geodon, Zeven and Eraxis. For those who don't recall, Eraxis was one of two products Pfizer bought with its $1.8 billion purchase of Vicuron (which itself was a combination of spinoffs from Sepracor and from Aventis).

But in return for this IP – the entire basis for the company – Pfizer gets relatively little equity. Instead, Pfizer is apparently contributing ¥2.2 billion ($21 million) of the total ¥11.1 billion ($105 million) in new venture backing – taking a 19% stake. We assume Pfizer didn’t want to take more than 19% since it would probably have had to consolidate RaQualia’s expenses onto its own P&L if it did. It’s also apparently getting some rights to negotiate for, or even buy back, rights to at least one of the RaQualia development programs, a pain compound.

Nonetheless, RaQualia and its biggest venture backers -- Japan's NIF SMBC Ventures and the UK's Coller Capital (who put in a combined ¥6.7 billion, or about $63 million) – got a pretty good deal: an ownership position, more or less equal to the percentage of the total funding they provided, just for providing the development capital. In effect, they got the research programs for free – and only have to pay the costs of the 70 people they wanted to keep.Pfizer is presumably shouldering the restructuring costs for the other 330 Nagoya employees.

This is the second major spinoff of a Pfizer research program – and shows just how much more expensive these overseas deals can be. In May, having closed down much of its Michigan R&D infrastructure, it spun-off a single early-stage compound and some associated IP and infrastructure into a re-born Esperion, which Pfizer had originally acquired back in 2003 (see our analysis here). Pfizer got no rights to any of the new Esperion’s programs and minimal equity – but it also made no equity investment and sacrificed no marketable products.


(Picture courtesy of Flickr user Guy Fawkes through a creative commons license.)


1 comment:

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