Pfizer to sell Capsugel business to KKR for nearly $2.4 billion

Capsugel, described as “the world leader in hard capsules and an innovator in drug- delivery systems,” generated approximately $750 million in revenue and manufactured more than 180 billion hard capsules in 2010

Jeffrey Bouley
PEAPACK, N.J.—It was just a couple weeks ago that we shared on the blog a little tidbit about how Pfizer might sell off as much as 40 percent of itself to focus more tightly on drug discovery and development, and now comes news that Pfizer and Kohlberg Kravis Roberts & Co. L.P. (KKR) have entered into an agreement whereby an affiliate of KKR will acquire Pfizer's Capsugel business for $2.38 billion in cash. Capsugel, described as "the world leader in hard capsules and an innovator in drug-delivery systems," generated approximately $750 million in revenue and manufactured more than 180 billion hard capsules in 2010.

If the deal goes through as planned, Pfizer expects to repurchase some of its common stock on the open market during 2011 with money from this transaction, and any such repurchases by Capsugel sale proceeds would be in addition to the previously announced anticipated repurchase of approximately $5 billion of shares planned for 2011.

Pfizer reported in October that it was considering selling the Capsugel unit, and Pfizer CEO Ian Read hinted in February that he was consider other business units that might be better sold off than kept around.

Whether or not this sale is the first of many steps in a larger divestment plan remains to be seen, but Timothy Anderson, a Sanford C. Bernstein analyst who talked about how serious divestment talks at Pfizer seem to be in a March 14 note to investors, still seems to expect the company will sell or spin off most or all its nonpharmaceutical businesses. In his mid-March note, Anderson wrote, "We recently met with Pfizer's new CEO Ian Read, and had we not heard it firsthand, we might not have appreciated just how serious he is about potentially splitting up the company" to leave just its "innovative core." Anderson predicts that divestment could even extend beyond non-pharmacological business units to include Pfizer's Established Products unit, which sells off-patent drugs and may generate $17 billion in 2012. If this is the beginning of something bigger, Anderson believes such major divestment would be "extremely bold" and well-received by investors.

But getting off the speculative track and back to the realities of this current deal, the expected sale of Capsugel will mean some loss of income, and so the Pfizer is updating its previous 2011 reported revenue guidance range of $66 billion to $68 billion and saying that $65.2 billion to $67.2 billion is a more accurate range. Likewise, its previous 2012 reported revenue target range, which was $63 billion to $65.5 billion, is now $62.2 billion to $64.7 billion. All other elements of its 2011 financial guidance and 2012 financial targets are being retained for now.

Pfizer and KKR expect to complete their deal in the third quarter.

Capsugel was acquired by Pfizer as part of its $90 billion acquisition of Warner-Lambert in 2000. With a sale to KKR, Capsugel is expected to maintain a corporate presence in the United States, with its global headquarters continuing to be located in New Jersey.
 

Jeffrey Bouley

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