Is Pfizer’s sale of Capsugel a sign of future divestitures in the pharmaceutical industry?

Pfizer announced that it is selling its Capsugel business for $2.38 billion in cash to a private equity firm. Is this a sign of potential future divestitures? Is this type of divestiture a trend for the industry?

Kaustubh Dharkar, an international pharmaceutical consultant who has worked with the UN Development Programme in Africa, thinks it makes sense for Pfizer to divest Capsugel, a company in a low technology sector, in order to concentrate on its drug development that can provide much higher returns. “The revenue generated by manufacturing 180 billion capsules is just $750 million, which as a percentage of Pfizer’s annual sales of $68 billion is just one percent. Imagine the resources that need to be deployed in terms of personnel, capital, and, most importantly, time, to generate that one percent,” notes Dharkar.

In terms of market share, Asian companies have a higher share at a lower cost of production. Asian companies, such as Associated Capsules and Universal Capsules, are regarded as the number one producers of high quality capsules at a lower cost. Dharkar feels that it would have been a misjudgment on Pfizer’s part to continue competing with these Asian companies.

Dharkar says that it seems as if this action could be a trend for global pharma giants: to withdraw from low technology, low margin, and high resources segments. “If this is a trend, it could release the capital locked up in these segments, which could be deployed in more profitable areas,” he says. “This is what Pfizer is doing, plowing the funds generated from this sale into buying back its shares.”

The pharmaceutical industry also seems to be rebranding itself as biopharma. According to Dharkar the term biopharma seems to be the latest buzz word for the pharmaceutical sector. “I believe that the term is really being overused by most of the industry. Pharma companies would like to re-invent their businesses, either for the stock market or for stakeholders, and by coining biopharma, it might be trying to do just that,” he says. But, he wonders how many of these companies will actually do the necessary research in the true biopharma sphere.

Slaveyko Djambazov, a healthcare CEO in Bulgaria who specializes in pharmaceutical market evaluation and research, makes the patent case, saying that as the patent cliff approaches, the big pharmaceutical companies are headed towards divestitures. “Really big pharma started to invest in biotech in recent years: Roche, Novartis, Eli Lilly, Sanofi-Aventis, Pfizer,” says Djambazov. Biopharmaceuticals are less prone to copying, and he thinks that pharma companies are trying to avoid the patent issues that come with generics (bigger quantities, lower quality, and constantly dropping prices). Djambazov says that rebranding as biopharma may lead toward stronger IP rights and longer business cycles.

Thomas Argentieri, PhD, and a highly accomplished pharmaceutical executive, says there is no question that Pfizer is maneuvering to minimize the impact of the Lipitor patent expiration later this year, a drug that in 2010 represented over $10 billion in sales and 42% of Pfizer’s pharmaceutical revenue. “Many had hoped that Pfizer’s mega acquisition of Wyeth would strengthen its pipeline, but for a variety of reasons, Wall Street is still quite nervous,” says Argentieri.

Not everyone is ecstatic about Pfizer’s recent decision to divest of its Capsugel business, explains Argentieri. “One obvious reason is the lost revenue, but there is no doubt that $2.38 billion will go a long way towards increasing the company’s bottom line,” he says. “I believe the company will look toward divesting other assets, which could include animal health, consumer health, and/or nutrition divisions, each with 2010 revenues of $3.6 billion, $2.8 billion and $1.9 billion, respectively.”

The bigger question, says Argentieri, is if dismantling the business will truly serve to break the cycle of Pfizer’s underperformance or is this latest maneuver by Pfizer simply an attempt to cut its way to short-time profitability.

Jorge Alessandri, an expert in the biotech and pharmaceutical fields, notes that there is a clear trend in pharma companies divesting from assets that are no longer part of the core business. “Last year I worked for a big pharma company that wanted to sell its pharmaceutical factories to concentrate on biopharmaceutical products,” Alessandri says. “Because drug blockbusters are not in the pipeline for any pharma company right now, the trend is to downsize.”

By Maureen Aylward

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