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Thursday, Nov. 19, 2009 | San Diego emerged as a winner last week when pharma behemoth Pfizer formally announced the massive, and long-talked-about, shakeup of its worldwide research and development operations.

As many as 2,000 R&D scientists will lose their jobs in the aftermath of the downsizing following Pfizer’s $68 billion acquisition of rival Wyeth last month.

The cuts are devastating to places like New London, Conn., where the company is shutting down a $300 million research facility and planning to lay off at least 1,400. It is one of six R&D facilities worldwide that the company is shuttering.

Pfizer’s research facility in La Jolla, meanwhile, was not only spared in the downsizing, but is now one of five main R&D centers in the newly restructured operation. That’s good news for the roughly 1,000 employees at the La Jolla facility, and perhaps for other San Diego scientists who could get hired by Pfizer as it moves more of its work here.

And, on another level, the new Pfizer — as well as other Big Pharma restructurings — might be good news for the all the little fish that make up the San Diego biotech industry.

Big Pharma is getting significantly smaller — Pfizer alone will have laid off more than 30,000 people between 2005 and 2012, according to some estimates — but the companies still need to fill their drug pipelines. And they are increasingly willing to do deals with smaller biotechs, say some industry experts.

“La Jolla will indeed be a major part of Pfizer R&D operations,” said Pfizer spokesperson Elizabeth Powers. She added: “San Diego is one example of place we chose to locate operations because of its thriving biotech market.”

Powers’ statement is a tacit acknowledgement that the everything-under-one-roof, from basic research to commercialization of drugs, business model common to Big Pharma since the 1950s is a relic.

“The whole industry continues to let people go, but they still have needs that must be met,” said John McCamant, a Bay Area-based biotech industry analyst. “So they are more likely to buy up biotechs on a one-off basis. It’s less R and more D.”

San Diego is home to more than 500 biotechs that employ more than 40,000 workers and have an approximate $9 billion impact on the local economy. But more than the other biotech hubs — like the Bay Area and Boston — most San Diego biotechs are start-ups.

This fact could work in the local industry’s favor as Big Pharma transitions into its new business model.

Historically, when large pharmaceutical companies have decided to acquire a company, they have targeted more established biotechs with drugs that they thought were close to U.S. Food and Drug Administration approval. But they would have to pay handsomely for these companies, something they are less and less interested in doing.

There are a couple reasons for this. First, the companies have spent most of their cash acquiring each other, and simply don’t have a billion dollars to drop on an established biotech with a late-stage drug.

Second, too many of these big bets didn’t pan out. Oftentimes the standards the biotech has used in its trials don’t measure up to Big Pharma standards, and the drug is farther from commercialization than originally thought.

“The bet on the later-stage company isn’t as safe as it seems,” said Stephen Ferruolo, a local attorney who specializes in mergers and acquisitions in the life sciences industry. “The prices are high, but there is still a lot of risk.”

As a result, Ferruolo said, the big fish is willing to go further down the food chain. They are essentially making smaller bets for smaller rewards.

The mantra is “risk sharing,” and everything is on contingency. It is similar in concept to how Hollywood options scripts from screenwriters — pay a little up front, but only pay a lot if the movie gets made. So on its surface the deal might be for $400 million. But the Big Pharma company is only laying out $100 million up front. The rest is contingent on the drug making it through clinical trials, through regulatory approval and onto the market.

On one level, this shift in emphasis could be a boon for many small biotechs, which, like struggling screenwriters, are willing to take just about anything they can get. This is especially true now, when fundraising has been perhaps as difficult as it’s ever been.

But the new trend is for a company to assemble a collection of smaller “pieces” and put them together into a network, said local angel investor Jack Florio. “That benefits us, because we have tons of pieces,” he said.

Ferruolo said he expects the number of such deals to pick up substantially. “There are a lot of deals being talked about. So I do expect a lot of M&A over the next 8 to 10 months — and they will be risk sharing deals,” he said.

That doesn’t mean, however, that happy days are necessarily here again for the tiny biotech, said Wendy Johnson, a local venture capitalist and long-time entrepreneur. It is still very hard for the little guy to get the attention of Big Pharma, Johnson said. And she is worried that those that make these option deals might regret it in the long run.

“I don’t think it is necessarily a good thing — companies are having to sell pieces of their primary assets earlier and at discounted prices,” Johnson said. “But I understand that it sure ain’t easy right now. The industry is undergoing a fundamental change and no one knows how it will shake out.”

Please contact David Washburn directly at david.washburn@voiceofsandiego.org and follow him on Twitter: twitter.com/davidwash. And set the tone of the debate with a letter to the editor.

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