Pfizer Tests the Breakup Waters

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And the breakup of Pfizer (NYSE: PFE  ) begins. Maybe.

The company announced today that it found a buyer for its Capsugel unit, which helps drug companies develop capsules and other delivery forms of their drugs. The sale will bring in a cool $2.4 billion from private equity group Kohlberg Kravis Roberts taking over Capsugel.

Pfizer's primary plan is to use the proceeds to increase its share repurchases beyond the $5 billion that it previously committed to. Pfizer's shares are cheap -- relative to price or earnings -- but that's because there's little growth priced in given the upcoming loss of Lipitor. It seems like Pfizer should be able to buy something that could deliver a better earnings boost than just lowering the share count.

With $2.4 billion, Pfizer could buy Seattle Genetics (Nasdaq: SGEN  ) for a 30% premium and gain the rights to an oncology drug that's already under review at the Food and Drug Administration. Or it could take on a little more risk and buy Exelixis (Nasdaq: EXEL  ) , which hasn't read out its phase 3 cancer drug trial, and still have a few hundred million left over to take a gamble on a company the size of Delcath Systems (Nasdaq: DCTH  ) or Keryx Biopharmaceuticals (Nasdaq: KERX  ) .

It remains to be seen whether the sale of Capsugel is a sign that Pfizer will undergo a major breakup. The company had previously announced that it was looking for a buyer, so the sale wasn't a huge shock. Until Pfizer completes its business review, we won't know whether other units will be spun out or sold.

Investors hoping that a breakup will happen can take solace in the fact that Pfizer found a buyer for Capsugel at an acceptable price. Pfizer may have been using Capsugel to test the waters, which it's clearly found warm enough. In fact, investors are already having a breakup pool party.

It's time to jump off the diving board, Pfizer.

Interested in keeping track of Pfizer as it decides whether to break up? Click here to add it to My Watchlist, which will help you keep track of all our Foolish analysis on Pfizer.

Pfizer is a Motley Fool Inside Value selection. Exelixis is a Motley Fool Rule Breakers recommendation. The Fool owns shares of Exelixis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (5)

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  • Report this Comment On April 05, 2011, at 10:08 AM, FarmaBiz wrote:

    PFE needs to keep pipeline aligned with pipeline and product aligned with product. If it needs more pipe from a failure or a missing portfolio component, then it needs to use money (yes it is fungible) from the R&D budget perspective - buying a Seattle Genetics or Medigene (for Endo-Tag) - are really R&D actions. If a product goes LOE, then it needs to buy product (not an experimental pipe from a small biotech) or if it sells an asset it needs to buy an asset, in this case PFE stock which as you rightly point out is very inexpensive (I prefer that over cheap).

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