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Pfizer Sells Capsugel Pill Unit to KKR for $2.4 Billion

Pfizer Inc. (PFE), the world’s biggest drugmaker, agreed to sell its Capsugel manufacturing unit to KKR & Co. for $2.38 billion in an effort to focus on its higher- profit business developing new medicines.

The New York-based company lowered its yearly revenue forecast after backing out Capsugel, a unit that makes wholesale pill casings and had $750 million in sales last year. Pfizer said it will use proceeds from the deal to expand a planned $5 billion share repurchase.

Today’s sale may be the first of several for Pfizer this year, and may spur rivals to evaluate similar deals as generic competition erodes sales of top-selling medicines, said Les Funtleyder, a New York-based fund manager at Miller Tabak & Co., which owns Pfizer shares. Drugmakers face generics copies in the next five years to products with $141 billion in annual sales, according to health research firm IMS Health.

“Pharma acts like a herd sometimes, and other pharmaceutical companies are probably looking through their portfolios as we speak,” Funtleyder said in a phone interview today. Pfizer executives “have been signaling that they want to do divestitures, and now they’re going through with it. That will be perceived by the market as a positive.”

Pfizer rose 16 cents, or less than 1 percent, to $20.54 at 4 p.m. in New York Stock Exchange composite trading. The shares have gained 17 percent this year. KKR climbed 23 cents, or 1.4 percent, to $17.14.

KKR’s Deals

The acquisition of Capsugel is KKR’s second-largest deal in the past year, according to data compiled by Bloomberg. In November, a KKR-led group agreed to buy Del Monte Foods Co. for $5.3 billion including debt. Capsugel, Pfizer’s smallest unit, made more than 180 billion hard capsules for drugs in 2010, Pfizer said. The unit is separate from Pfizer’s drug business and will be easy to split off, said Barbara Ryan, an analyst at Deutsche Bank AG in New York.

“It really doesn’t make sense for Pfizer to keep it,” Ryan said in a telephone interview. “It’s too tiny to make a difference either way, and it’s a distraction.”

Pfizer Chief Executive Officer Ian Read said Feb. 1 that he is reviewing each of the company’s business units as the company faces generic competition to $10.7 billion in annual sales of its Lipitor cholesterol pill. Pfizer acquired the Capsugel unit in its 2000 purchase of Warner-Lambert Co.

‘Starting Point’

“Our hope is that this represents the starting point of a larger series of divestitures by the company, said Tim Anderson, an analyst with Sanford C. Bernstein & Co. in New York, in a note to clients today. Pfizer may shrink the company’s revenue base by almost half, to as little as $35 billion from $67 billion, according to Anderson.

“To achieve this, Pfizer’s nutritionals, consumer health, animal health and established products drug division may be jettisoned,” Anderson said.

Pfizer lowered its annual revenue forecast range by $800 million to $65.2 billion to $67.2 billion this year to reflect lost Capsugel sales.

There have been 81 acquisitions of U.S. health-care companies by private equity firms in the past five years, with an average value of $1.01 billion and a typical premium 64 percent. The biggest was the $32.2 billion purchase of hospital operator HCA Holdings Inc. in 2006 by funds led by New York- based KKR and Bain of Boston.

$210 Billion

KKR, the New York-based private-equity firm run by Henry Kravis and George Roberts has a portfolio of businesses with more than 900,000 employees $210 billion in annual sales, the company said. KKR’s investments in the health-care industry include HCA Holdings, the largest publicly-traded U.S. hospital chain, and Biomet Inc., a manufacturer of orthopedic medical devices.

Pfizer and KKR expect to complete the deal in the third quarter. Morgan Stanley and Guggenheim Securities LLC were financial advisers for the drugmaker, while Cadwalader, Wickersham & Taft LLP and White & Case LLP provided legal counsel. Simpson Thacher & Bartlett LLP acted as legal counsel for KKR.

To contact the reporter on this story: Tom Randall in New York at trandall6@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.

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