Closing ranks: After termination of talks on a Pfizer collaboration, Discovery Partners consolidates operations

Discovery Partners International (DPI) recently announced that discussions between it and Pfizer over a potential new collaboration had terminated, and that it will be reducing staff and consolidating operations as a result. The talks had been aimed at forging a new agreement to replace DPI’s previous long-standing collaboration with Pfizer, which expired on January 5 and which had brought DPI $92 million in revenues between 2002 and 2005, including $2.9 million during the fourth quarter of 2005. Pfizer could not be reached for comment on why they ended the talks, but DPI’s recently appointed acting CEO, Dr. Michael C. Venuti, speculates that his company was simply outbid by firms outside of the United States—probably in China, India or Eastern Europe.

Jeffrey Bouley
SAN DIEGO—Discovery Partners International (DPI) recently announced that discussions between it and Pfizer over a potential new collaboration had terminated, and that it will be reducing staff and consolidating operations as a result. The talks had been aimed at forging a new agreement to replace DPI's previous long-standing collaboration with Pfizer, which expired on January 5 and which had brought DPI $92 million in revenues between 2002 and 2005, including $2.9 million during the fourth quarter of 2005. Pfizer could not be reached for comment on why they ended the talks, but DPI's recently appointed acting CEO, Dr. Michael C. Venuti, speculates that his company was simply outbid by firms outside of the United States—probably in China, India or Eastern Europe.
 
"In addition to the offshoring issue, Pfizer seems to have been doing some worldwide restructuring to consolidate its procurement activities into one or a very few sites, and that probably worked against us as well," adds Venuti, who previously had been DPI's chief scientific officer—a position he was appointed to just seven months earlier.
 
The end of the talks means a huge financial hit for DPI, given that roughly half its revenue was from the recently expired chemistry services deal with Pfizer. The company does have several deals with other companies worldwide, such as Allergan, Chroma Therapeutics Ltd., Mitsubishi Pharma Corp., NascaCell IP GmbH, Ono Pharmaceutical Co. and Seikagaku Corp., but nothing that will replace Pfizer in terms of financial clout.
 
Because of this, DPI will close its facility in South San Francisco, Calif., lay off or relocate employees who are not associated with compound management operations at the facility, and consolidate its chemistry platform into its facility in San Diego.
 
Venuti could not say how many of the 50 employees from the South San Francisco location would be laid off, since relocation plans were not yet complete, but he did say that DPI would incur up to $10 million in restructuring and impairment charges as a result of the terminated talks with Pfizer. This includes a $3.7 million investment in the commercialization of DPI's uARCS technology during the fourth quarter of 2005 and the first half of 2006.
 
The upshot, though, might be that the name Discovery Partners will soon become a great deal more significant in meaning—as DPI makes moves to become a drug discovery partner with pharmaceutical companies and not just a chemistry services provider. Venuti says plans are to take the company away from the fee-for-service model it has been using and toward collaborations in which DPI takes on some risk, but will also be more richly rewarded when milestones are met and new compounds brought to market.
 
"We are thankful for our 10-year relationship with Pfizer Inc and its predecessor companies, Pharmacia & Upjohn and Parke-Davis, relationships from which we believe both companies benefited greatly," Venuti says. "With the end of this collaboration, we will consolidate our chemistry resources into our San Diego facility and focus on drug discovery collaborations designed to produce higher-value pre-clinical compounds.
 
"We want to pursue a model of doing more chemistry and biology and getting into an integrated drug discovery cycle with other companies," he adds. "We want the company to have a more blended model instead of just fee-for-service, so that we are more enticing to pharmaceutical companies in terms of collaborations."
 
The news of the Pfizer deal falling through came right on the heels of the resignation of Riccardo Pigliucci in mid-November, who had previously been DPI's chairman and CEO. A company news release says simply that his departure "was prompted by a mutual difference of opinion with the board over the company's strategic plans." That difference of opinion has been rumored to be over the decision to reduce or eliminate the fee-for-service model. According to coverage by the Union-Tribune in San Diego, Pigliucci was adamant about the company remaining a service business.
 
Although the loss of Pfizer as a client is a large hit, DPI is unlikely to suffer any immediate financial crisis. With an estimated $75 million to $80 million in cash and cash equivalents, Discovery Partners should have enough money to support itself at least through its initial transition into a drug discovery collaborator, according to Philip Nadeau, an analyst with SG Cowen & Co. in New York.

Jeffrey Bouley

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