When big butterflies flap

I'm a big fan of chaos theory.

I think it can be traced to when I was fairly young and thought about the specific consequences, as it related to me, of my parents meeting. The epiphany for the primary school boy I was back then was the realization that had my parents not met, I simply would not have existed. As I further deconstructed the what-ifs and the number of things, had anything changed, that would have made me a non-entity, I was stunned by the very real notion that my existence was mostly the result of happenstance.

 

So it is this understanding of the interdependence of actions and reactions that make me a fan of chaos theory, which in the watered-down, pop-ified, broad-brush explanation states that a butterfly flapping its wings half a world away could potentially foment hurricanes in the Atlantic. Not right away, mind you, but it could set in motion a series of events that would cause the end result. In other words, small—even minute—changes in a system can potentially yield large systemic change.

 

Today, some companies in the drug discovery business are finding out about chaos, but not because some tiny butterfly flapped its wings. This chaos is due to the continuing reorganization of pharmaceutical industry Goliath, Pfizer. We don't need to get into a blow-by-blow account of the body shots Pfizer has taken over the past couple of years including the spate of lawsuits, declining sales from products these lawsuits involved and increased generic competition.

 

But now, roughly 10 months after the company announced its intention to return the company to double digit-growth—no small task for a company that boasts roughly $50 billion in annual sales—we are seeing the associated affects of its reorganization outside the company.

 

Case in point is our January story about Discovery Partners International and the closing of their facility in South San Francisco, Calif., that affected as many as 50 people. This was the direct result of the expiration of a contract with Pfizer—one that wasn't renewed—that had pumped as much as $92 million into the company over the previous four years. The Pfizer contract provided as much as 50 percent of the company's total revenue over that period of time. So it was only natural that when the spigot was cranked shut, DPI had its own little period of internal chaos.

 

Luckily, or, I prefer to think, smartly, DPI had stashed a big pile of that money away and is now repositioned under a different model that places less emphasis on big services contracts and more on building revenue streams via royalties for the work it does. Still, despite the new strategy, the big butterfly affected a significant number of DPI's employees and ultimately, if one believes industry rumblings, even cost the former CEO his job.

 

In this month's issue we also have a story about informatics company Tripos' very public examination—as is wont to happen with public companies—of how to proceed with its business in the future. The company has hired a business advisor to help it sort out all manner of options and "to explore various strategic alternatives to maximize shareholder value and enhance growth prospects for each of its core businesses: Tripos Discovery Informatics and Tripos Discovery Research," all while laying off nearly half the workforce of its U.K.-based operation in Bude, England.

 

Despite the different niche Tripos pursues, the parallel to this story and DPI is very familiar—Tripos had just completed a four-year chemical services contract for Pfizer that had contributed $90 million in revenue.

 

So what's the point of all this? Well, to begin with, it shows the potential danger of relying too heavily on one or two big customers to keep your business going. Tripos says that perhaps it is too expensive to be a public company, or that its two divisions could potentially be better served as separate entities. Thing is, this was probably also true when they were raking in all that cash from Pfizer these past four years.

But this isn't just about Pfizer. There are plenty of other big (and not so big) pharma players that have been bitten by the same earnings drags Pfizer contends with today. And that means we are apt to see more stories like the above two played out in the coming months.

 

The industry has been in a fairly active cycle of mergers and acquisitions. Well-positioned companies have been raking in some very tidy multiples through the consolidation wave. But they were dealing from strength.

 

If more, smaller companies are faced with losing a healthy percentage of their revenue because they put too many eggs in too few baskets, we may see another flurry of acquisition activity.