Updated from 7:56 a.m. EDT

Pfizer

(PFE) - Get Report

announced a big expected deal at a bigger unexpected price.

The New York drug giant said Monday that it will sell its consumer-health business, a mixture of nonprescription drugs and products such as Listerine mouthwash, to

Johnson & Johnson

(JNJ) - Get Report

for $16.6 billion. After taxes, Pfizer would net about $13.5 billion.

Although Pfizer's strategy has been clear for many months, some analysts said the deal reflected a more defensive posture by J&J.

The agreement, which must pass U.S. and European Union regulatory review, is expected to close by year-end. The deal appears to conclude a contest among several companies, including

GlaxoSmithKline

(GSK) - Get Report

, for Pfizer's consumer unit.

In February,

Pfizer was still considering its options for the consumer-products unit that accounted for $3.9 billion, or about 7.5%, of $51.3 billion in sales last year. Pfizer wants to concentrate on prescription drugs, the part of its business that contributed $44.3 billion, or 86%, to last year's total sales.

Growing Demand

When Pfizer disclosed its intentions, analysts speculated that the consumer-products unit would be worth $8 billion to $12 billion, but later raised their estimates as high as $14 billion as bidding rumors blossomed. Pfizer officials had said the price of a sale would need to be higher than the price of a spin off because of tax considerations.

For J&J, over-the-counter products represent more sales and a bigger percentage of corporate revenue than at Pfizer.

J&J's consumer products, including Band-Aids and Tylenol, accounted for $9.1 billion, or 18% of revenue last year. J&J's other main businesses are prescription pharmaceuticals and medical devices and diagnostic products.

"We see the consumer health care markets as increasingly attractive growth opportunities as consumers take greater interest in, and responsibility for, their own health," said William Weldon, chairman and CEO of J&J. "In addition, higher levels of disposable income in developing nations are helping drive increased demand for consumer health products."

J&J certainly has the money and the desire to expand. Earlier this year, it was outbid for the medical-device maker

Guidant

by

Boston Scientific

(BSX) - Get Report

.

Strategic Shift?

Analysts who follow J&J had mixed views on the deal.

"While this deal may reflect solid financial engineering and solves J&J's short-term dilemma regarding deployment of cash, it does not speak to J&J's longer-term problem of rejuvenating

growth in high-tech medical products," Bruce Nudell of Sanford Bernstein wrote in a research report.

Nudell, who has a market-perform rating on J&J, notes that the company had $16 billion in cash by the end of 2005. He doesn't own shares, but his firm has provided noninvestment banking services to J&J in the last 12 months.

"J&J is paying a healthy premium," says Michael Weinstein of JPMorgan in a report to clients on Monday. "J&J is in essence saying it is willing to trade growth for a business mix that is lower in risk and has a longer asset life."

Weinstein, who has an outperform rating, adds that investors are being asked to reassess their reasons for owning the stock. "Historically, deals at J&J have been executed to elevate the company's growth," he says. "This one is designed to lower its risk and increase its sustainability." He doesn't own shares, but his firm has had a recent investment banking relationship.

The company "is paying a high price," adds Larry Biegelsen of Prudential Equity Group, who maintains an underweight rating on J&J in his research note. "We did not think J&J would ultimately acquire the unit because it didn't seem to be the area of greatest need ... and it wouldn't accelerate J&J's top line growth." Prudential doesn't have an investment banking relationship. Biegelsen's report says the analyst, a member of his team or a member of his household owns shares in Pfizer.

By early afternoon, J&J's stock was down $1.46, or 2.4%, to $59.86. Pfizer's stock was up 35 cents, or 1.6%, to $29.99.

Investing and Value

Pfizer says it won't let the J&J money burn a hole in its pocket.

"We will focus on our key priorities: leveraging our internal research and development and strong pipeline of new medicines; continuing to acquire products and technology that will drive long-term growth of the business; and improving shareholder returns," said Hank McKinnell, Pfizer's chairman and CEO, in a prepared statement.

One shareholder-return strategy is a stock buyback. Pfizer plans to buy as much as $7 billion in stock this year and $10 billion next year. The company's market capitalization is now $168.8 billion.

Thanks to the stock repurchases, McKinnell says the sale of the consumer-products unit will have a neutral impact on earning per share next year and will improve EPS in 2008. Excluding the sale proceeds and the costs of capital expenditures and dividends, McKinnell says Pfizer expects cash flow from operations of $34 billion for the next 30 months.

"The expansion of our share-purchase program reflects our conviction that Pfizer stock at current levels is a compelling investment opportunity," said David Shedlarz, a vice chairman. "We will also continue to support strong dividend growth." Pfizer paid quarterly dividends of 24 cents a share in early June and in March, up from the 19 cents a share paid Dec. 6, 2005.

Shedlarz said the high interest in Pfizer's consumer products, including Nicorette for smoking cessation and Neosporin for minor wound care, enabled the company to act faster than the third-quarter deadline that it set in February.

"We will use the proceeds to both invest in our future and build value today," he said. "To drive long-term growth, for example, we have acquired products, product candidates and technologies in priority areas such as Alzheimer's disease, diabetes, obesity and infectious diseases in just the last 12 months."