Pfizer Sells Capsugel: Will More Asset Sales Follow?

Pfizer Sells Capsugel: Will More Asset Sales Follow?Pfizer (PFE) on Monday began executing what could be the start of two years of asset sales: The New York-based drugmaker said it agreed to sell its Capsugel business for $2.375 billion in cash to private-equity firm Kohlberg Kravis Roberts.

Later this year, the world's biggest pharmaceutical company will lose patent protection on the world's best-selling drug: cholesterol fighter Lipitor. In 2010, with $10.8 billion in sales, Lipitor accounted for 15.8% of Pfizer's total revenue. Between 2010 and 2012, drugs that account for 42% of Pfizer's pharmaceutical revenue will lose patent protection.

Of course, Pfizer has known about its looming patent cliff for years. As it found itself unable to compensate for its certain decline in sales with new products from its pipeline of drugs, it began acquiring other companies in search of growth possibilities. This policy led to the $68 billion mega-merger with Wyeth in 2009 and smaller acquisitions later.

But it seems that the consolidation trend has failed to deliver, and Pfizer itself may have become too big. The promised margin improvements from economies of scale didn't materialize, and instead the mergers created a bloated organization, critics said.

Bigger is not better, a Goldman Sachs (GS) analyst Jami Rubin noted in February, as reported by Barron's, suggesting that Pfizer and other pharmas could benefit from spinning off non-core businesses.

Dismantling the Business

Such a 180-degree turn could certainly explain the sudden resignation in December of former CEO Jeff Kindler, who led the Wyeth acquisition. Especially when soon afterward, new CEO Ian Read indicated the acquisition trend would reverse, following months of hints about asset sales.

In March, Sanford C. Bernstein analyst Tim Anderson met with Read. In a note to clients, he wrote that the drugmaker may spin off various businesses, including its consumer-health and generic-drug units. The deals, Anderson said, could result in a 40% contraction in Pfizer's revenue base to between $35 billion and $40 billion from $67 billion. Read and the board believe that "dismantling the business" will "break the cycle of underperformance," as the Dow Jones Newswire quoted. R&D chief Mikael Dolsten also outlined the divestiture strategy at a Barclays Capital (BCS) investor conference.

On top of Capsugel, whose revenue in 2010 amounted to $750 million, Anderson thinks Pfizer could spin off its other diversified business units: animal health, consumer health, nutritionals, as well as its pharma unit of established products (which includes generics). And while Capsugel was sold outright, the rest of the deals would likely be spinoffs to Pfizer shareholders.

Here are the units' revenues in 2010:
  • Established Products: $10.1 billion
  • Animal Health: $3.6 billion
  • Consumer Health: $2.8 billion
  • Nutrition: $1.9 billion
If all these deals go though in the next two years, Pfizer would have four pharmaceutical units remaining: primary care, specialty care, oncology and emerging markets.

For now, it seems investors approve of the Capsugel sale: Pfizer shares are up 0.7%. Still, not everybody's ecstatic about this new trend. One obvious reason is the lost revenue. But mostly, many question whether Pfizer has what it takes to be an innovative core pharmaceutical company -- it sure hasn't had the best track record recently. And Read's recently announced plans to shrink the research & development budget and pipeline certainly don't promote confidence in Pfizer's future.


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