Having owned the operating unit for a decade, Pfizer (NYSE: PFE) is finally wondering what the heck to do with Capsugel, which develops formulations, like capsules for drugs, for it and other drugmakers.
The pharmaceutical giant is "reviewing strategic alternatives" for Capsugel, the unit it got when it acquired Warner-Lambert in 2000. That's company-speak for trying to figure out whether to sell the thing. If it's worth more to a generic-drug maker like Teva Pharmaceutical (Nasdaq: TEVA) or Mylan (Nasdaq: MYL), or perhaps a private equity fund, then why not redeploy the capital elsewhere?
Pfizer is in the driver's seat here. Even if it decides to put Capsugel on the block, it still doesn't have to sell if the price isn't right. That's what Abbott Labs (NYSE: ABT) did when it shopped the vaccine business it got in the acquisition of Solvay. When no bidder with a high enough price tag arrived, it pulled the division off the table. Unless they're desperate for cash, companies are better off collecting revenue from unwanted units than giving them away for a song.
In the bigger picture, Pfizer might be better off selling much of its ancillary businesses, slimming down, and giving its drug discovery business a chance at growing. Diversification can work, but at some point a company becomes worth less than the sum of its parts. Selling off its animal health, consumer health, and nutrition businesses -- or spinning them off, like Bristol-Myers Squibb (NYSE: BMY) did with its baby formula business, Mead Johnson Nutrition (NYSE: MJN) -- might be a wise move.
After slimming down, Pfizer could have a decent shot at growing. It would have a smaller base to start from, making additions count more. But more importantly, the sales would generate considerable amounts of cash to spend. In order to grow, Pfizer needs to get drugs from outside its walls through acquisitions or licensing; both require cash.
Warren Buffett is willing to part with a little of his cash. Go figure.
