Vaughn Smider is not likely to solve the problems faced by Pfizer, but in a small way he represents the future of the company. An assistant professor at the Scripps Research Institute in La Jolla, California, Smider and his new company Fabrus are the first tenants in Pfizer's newly christened incubator.

On the same day that Pfizer announced Fabrus would enter the incubator, which is housed at the pharmaceutical giant's research and development site in La Jolla, the company also released another glimpse of its future as it announced its second quarter earnings. Net income fell nearly 48 percent to just under $1.3 billion from about $2.4 billion for same period last year. The adjusted 18 cents per share in profits fell far short of analysts' expectations of 50 cents a share as the loss of patent protection on two key drugs and competition for its blockbuster cholesterol-lowering Lipitor delivered a bigger-than-expected hit to revenue.

Pfizer is not alone in the challenges it faces. Big pharma is seeking ways to get a better return on its investment in research and development, address a troubling decline in new drug approvals and fill the widening gaps in revenue expected in the next several years as some of its biggest products lose patent protection—including Pfizer's Lipitor, which rang up sales of $12.9 billion in 2006. To address these problems, companies such as Pfizer are seeking new ways to tap innovation from outside their own labs at an earlier stage.

Under Jeffrey Kindler, the CEO who took the helm of the world's largest pharmaceutical company a year ago, Pfizer has reorganized in an effort to become leaner and more entrepreneurial. His plans called for the company to do more to reach outside to find potential new products. That effort includes the company's five-year, $100-million agreement announced last year with the Scripps Research Institute to collaborate on the development of new therapeutics. It also includes the creation of what many believe may be the only incubator run by a major pharmaceutical company, which Pfizer unveiled plans for in November 2006.

"It's a recognition that all through the history of our company good ideas have come from inside and from outside," said Stephen Lederer, spokesman for Pfizer. "In the discovery space we are always looking to partner. Obviously we can provide a great deal of knowledge and skill and science that is not available to a small company and vice versa. Small companies can bring ideas and knowledge that we simply don't have."

Through the incubator, Pfizer will provide support to Fabrus for a two-year term, at the end of which, Pfizer has the option to either acquire the company and its technologies or spin out Fabrus as an independent entity.

Fabrus plans to eventually employ six to eight scientists, who will have laboratory and office space in part of the new incubator facility. Fabrus is trying to develop novel antibody libraries and ways to screen them against biological targets. The technology will be tested on targets in some of Pfizer's 11 disease areas.

Pfizer plans to incubate about six companies at a time at the La Jolla R&D facility, which sits on a 33.5-acre campus housing more than 1 million square feet of floor space spread across eight buildings. The company expects to invest $10 million a year to support these companies and said it is reviewing proposals and expects to have other occupants move into the facility in the near future.

"Everyone is trying to get technology earlier and increase their exposure to opportunity and decrease their exposure to risk. That's clearly what Pfizer is doing," said Elliot Parks, managing director of Hamilton BioVentures in San Diego. "The big challenge for the last quarter of a century has been how do you incubate that technology to differentiate it and develop it into a real product opportunity you can take into the clinic. If they let the venture community do it, they are going to want a return on their capital and it is going to increase the price of those successes to big pharma."

The incubator will be no quick fix for Pfizer, but rather a small piece of a much broader effort to think and act differently. Big pharma is entering a new era, one that will driven less by blockbusters and more by innovation. Companies are scrambling to find new ways to capture groundbreaking ideas that can lead to the next generation of products.

Pfizer said it has no plans to replicate the incubator at any of its other R&D facilities but said that it might eventually do so if the La Jolla effort proves successful. Rich Mejia, director of Ernst & Young's life science practice in the Pacific Southwest, said Pfizer is capitalizing on space and resources it has in La Jolla as an opportunity to work closely with young companies without having to make a substantial investment to gain access to them. He thinks many in the industry will be watching to see if it pays off.

"If Pfizer is successful at all," Mejia said, "we'll clearly see other companies do that."