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Pfizer Says Cash From Nestle Deal Will Go to Share Buybacks

Pfizer Inc. (PFE), with almost $27 billion in its existing cash hoard, will add more with the $12 billion sale of its infant nutrition unit, opening the way for buybacks that will help shore up the shares as the company cycles in new products over the next several years.

Pfizer, the world’s biggest drugmaker, will initially use the “vast majority” of the money from the sale to buy back shares, rather than pouring the money into expensive acquisitions, said Mark Schoenebaum, a pharmaceutical industry analyst with ISI Group Inc. in New York.

“We don’t expect a major M&A deal,” Schoenebaum said in a conference call with investors today. “There’s been this speculation that they might buy Bristol-Myers, but that’s not going to happen in our opinion.”

Pfizer needs new products as it enters an era without Lipitor, the cholesterol pill that lost patent protection in 2011 after generating $9.58 billion in revenue. The New York- based company doesn’t have a drug in its pipeline that will replace all of Lipitor’s sales. Instead, it’s trying to fill the hole with several products, including two under review by U.S. regulators for possible approval this year.

Tofacitinib, an arthritis pill, could be worth $1.1 billion million for Pfizer by 2017, according to John Boris, an analyst with Citigroup in New York. Eliquis, a blood thinner developed with Bristol-Myers Squibb Co., could be worth $3 billion, though those sales will be split.

Revenue Cut

Divestitures of two Pfizer units will cut revenue by about 10 percent once completed this year. Buybacks and a spinoff of the animal-health business, expected to be announced before July 1, could cut Pfizer’s share count by as much as 15 percent and boost earnings per share by 20 cents, Schoenebaum said.

Pfizer announced the $11.9 billion sale of its infant nutrition unit to Vevey, Switzerland-based Nestle SA (NESN) today. Pfizer shares fell less than 1 percent to $22.38 at the close in New York. The stock has gained 3.4 percent so far this year.

The price of the nutrition unit was at the “upper end” of expectations, said Seamus Fernandez, an analyst with Leerink Swann & Co. in Boston who has a market perform rating on Pfizer.

The sale “should be viewed as a positive,” Fernandez said in a note to clients today. “The attractive valuation around today’s sale will very likely be well received by investors.”

In a statement today, Chief Executive Officer Ian Read reiterated comments that Pfizer’s free cash would be used for buybacks before anything else.

‘Case to Beat’

“We expect to allocate the after-tax proceeds to further share repurchases, or invest in other business-development opportunities, with the return on share repurchases remaining our case to beat,” Read said.

The company’s evolved to a phase of its corporate life where it’s no longer rapidly growing as it did over the last decade, said Paul Danos, dean of the Tuck School of Business at Dartmouth College in New Hampshire.

Under Read, the drugmaker is shifting from quickly adding mass to cutting fat and focusing on what it wants to do best, Danos said in a telephone interview from Hanover.

“There’ll come a time when you have a more elegant organization,” he said.

Along with cutting units, the company’s is also shrinking expenses. Read has said he plans to cut another $1 billion from the company’s expenses this year, specifically focusing on what the company describes as selling, informational and administrative costs. Severance packages for workers who are fired are to be cut in May, as part of that plan.

Animal-Health Unit

Pfizer’s animal-health unit, which generated $4.18 billion in 2011 revenue, will be spun off in an initial public offering that may be announced before June, people familiar with the proceedings have said. The company has hired JPMorgan Chase & Co., Bank of America Corp. and Morgan Stanley to handle that deal, said one of the people.

Pfizer’s sale is the largest for a nutrition business of 77 deals in the last three years, according to data compiled by Bloomberg. The next largest was when Bristol-Myers split off its majority stake in Mead Johnson in 2009, leaving the food company with a $8.94 billion market capitalization at the end of that year.

The $11.9 billion cash sale to Nestle closed a contest between the Swiss food company and Paris-based Danone (BN), which also offered about $11 billion for the unit. Pfizer made the decision to sell to Nestle yesterday after months of negotiating with potential buyers, according to a person familiar with the process.

To contact the reporter on this story: Drew Armstrong in New York at darmstrong17@bloomberg.net;

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

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