The controlled release of small molecular modulators of the immune response from hydrogel microspheres (MS) used for cell immobilization is an attractive approach to reduce pericapsular fibrotic overgrowth (PFO) after transplantation. Ketoprofen is a well-known non-steroidal anti-inflammatory drug involved in the early stage inflammation cascade. PEGylated derivatives of ketoprofen, presenting either ester or amide linkage to the drug, were synthesized and conjugated to the hydroxyl groups of sodium alginate (Na-alg). Functionalized cell-free and MIN6 cells containing MS were produced from the resulting modified alginates. In vitro quantification of ketoprofen release indicated regular and sustained drug delivery over 14 days, resulting from the hydrolytic cleavage of the ester bond. The release kinetics was enhanced over the initial 7 days by the presence of MIN6 cells, probably as a result of cell esterase activity. In the presence of amide bond, traces of ketoprofen were released over 14 days due to a much slower hydrolysis kinetics. Cell-free and MIN6 cells containing MS were transplanted in immune-competent mice, either in the peritoneal cavity or under the kidney capsule, with a follow-up period of 30 days. Comparison with non-modified Ca-alg MS transplanted in the same conditions demonstrated a clear reduction in the severity of PFO for MS functionalized with ketoprofen. Quantification of collagen deposition on MIN6 cells containing MS transplanted under the kidney capsule revealed the significant effect of ketoprofen release to decrease fibrotic tissue formation. The impact was more pronounced when the drug was covalently conjugated by an ester linkage, allowing higher concentration of the anti-inflammatory compound to be delivered at the transplantation site. The functionality of microencapsulated MIN6 cells 30 days after transplantation was confirmed by detection of insulin positive cell content.