Japanese Drug Lab Starts Over

ONE OF THE BIOTECH WORLD'S biggest funding packages this year was raised not by some hot California start-up but by a former Pfizer drug discovery laboratory in Japan. Now called RaQualia Pharma, that lab is out to prove it can succeed on its own with an entirely different business model.

"Our goal is to offer high-quality drug candidates to our clients through a collaborative working style," says RaQualia Chief Executive Officer Atsushi Nagahisa. A former managing director for R&D at Pfizer Japan, Nagahisa is based in what had been the Nagoya Laboratories of Pfizer Global Research & Development in Aichi prefecture.

RaQualia was created as a result of Pfizer's announcement in January 2007 that it would close its Nagoya labs along with four facilities in the U.S. and France. The closure plan followed the pharma giant's decision in December 2006 to halt the development of torcetrapib—a cholesterol drug Pfizer hoped would be a successor to the best-seller Lipitor after its patent expires in 2011. "With a 40% decline in sales by 2011 in view, Pfizer's management needed to change its business strategy," Nagahisa explains.

Even so, he says, Pfizer's decision to shut down the Nagoya lab was unexpected, coming as it did only a couple of months after executives at Pfizer U.S. headquarters hailed Japan's role in the firm's R&D effort and also suggested adding 100 researchers at the lab. "To lay off people under such circumstances, Pfizer needed to act responsibly," Nagahisa says.

The choices for the Nagoya researchers were to join Pfizer at another location or to try to find jobs at other drug companies in Japan. But soon after the closure was announced, Nagahisa recalls, 80 to 100 staffers expressed their strong wish to continue research right where they were.

To do that, they needed to form a company of their own—and for that, they needed a plan and money. "To secure Pfizer's support for a new company, we needed to have enthusiastic researchers, good management, attractive intellectual property, and a solid business model that would draw outside investors' interest," Nagahisa explains.

Apparently, Nagahisa was able to convince Pfizer's leadership that his team had all of that because in September 2007, the U.S. company endorsed the plan. And by July of this year, Nagahisa and his colleagues had managed to raise $105 million to launch the new company. Pfizer contributed $21 million, and two other major investors, Japan's NIF SMBC Ventures and U.K.-based Coller Capital, contributed $34 million and $25 million, respectively.

Twelve experimental drugs for pain and gastrointestinal disorders, which constitute the Nagoya labs' areas of expertise, were carved out from Pfizer along with Japanese rights to three Pfizer drugs now sold in the U.S. RaQualia plans to focus on drug discovery research in its first three years with a view to conducting proof-of-concept testing four or five years down the road. It aims to have $39 million in sales by 2010, go public in 2011, and be profitable by 2017.

Ichiro Shinkai, chief scientific officer at Beta-Chem, a pharmaceutical development consulting firm owned by Mitsui & Co., says Pfizer's financial backing is a silver lining, but he cautions that it may not be enough. Because of strong resistance to the lab closure from Nagoya staffers, Pfizer has to support the new venture, he says. "But European investors may drop out if they think new products are unlikely to come. There needs to be something very strong and special to succeed as a venture business."

Nagahisa claims that the new company has that something special. He says the staff spent a whole year discussing a business model that would counter the disadvantages typical in large organizations. Their solution: a structure that keeps the new venture open for collaboration with outside researchers, including those in academia, while removing cultural walls that exist within.

"Researchers at large pharma companies tend to be bound by their bureaucratic decision-making processes and too many unnecessary internal guidelines," Nagahisa explains. "In order to come up with good compounds, it is important to remove such impediments and empower researchers."

ACCORDING TO Nagahisa, the typical workday at RaQualia begins with a morning meeting where the 70 staff members discuss their goals, address problems, and ask questions. Another change was the creation of a flat organizational structure. "We want to create a world without hierarchy," the CEO says. "What used to be eight layers has been streamlined to a CEO, a small management team, and the researchers."

Shinkai, the Beta-Chem executive, isn't convinced that the Japanese work environment is ready for RaQualia's business model. "Workers who are used to the old hierarchy will find it difficult to switch to the flat structure," Shinkai says. "Removing the superior-assistant relationship sounds ideal. But I wonder how it works, because creating new drugs takes such a strong leadership to pull the team."

Nagahisa points to the company's name, RaQualia, as an example of how the new organization might work. It was coined by staffers by combining two words: Ra, the name of an Egyptian sun god symbolizing warmth, and qualia, Latin for "qualities or senses experienced by a person."

To Nagahisa, the name showcases a spirit of contribution that already is emerging at RaQualia. "Instead of deciding in a top-down fashion, we wanted a name that reflects many ideas from our team," he says.