Pfizer‘s (NYSE: PFE) burgeoning tiff with activist investor group Starboard Value looks like it’s escalating. Since the activist took a $1 billion stake in the drug developer, it’s been an open question as to what it wants changed and how it proposes to do so.
Now, after a presentation at the 13D Monitor Active-Passive Investor Summit by Starboard’s CEO Jeffrey Smith on Oct. 22, there’s a lot less ambiguity. In particular, Smith had seven simple and brutal words that shed light on his group’s perspective on Pfizer and its management.
If you’re a shareholder or thinking about investing in this stock, you need to know what he said and why it opened a can of worms.
“The track record here is not great,” quipped Smith, referring to Pfizer’s recent lack of new launches of blockbuster drugs capable of earning more than $1 billion per year in revenue.
Starboard’s criticism is targeted squarely at Pfizer CEO Albert Bourla, who has led the pharma juggernaut since early 2019. Though the activists applaud Bourla’s leadership during the coronavirus vaccine and therapeutics races, they allege that the business lost between roughly $20 billion and $60 billion in value under his tenure, depending on how the figure is calculated.
On the first two issues, the group’s account is hard to dispute. Despite repeated glowing public reports from the CEO about the strength of the pipeline, and 10 potential blockbuster drugs teed up for launch between 2019 and 2022, a series of late-stage clinical trial failures and worse-than-anticipated sales performance of the approved medicines left shareholders with dashed hopes.
Furthermore, despite management’s optimism about the business’ ongoing attempt to develop a drug for treating obesity and type 2 diabetes — potentially opening the door to accessing a market that could be worth as much as $100 billion by 2030 — Starboard correctly points out that, so far, Pfizer’s efforts have not been successful.
Another issue is that for the programs currently in Pfizer’s pipeline, the anticipated return on R&D investment is just 15%, putting it far beneath practically all of its big pharma peers, which expect a median return of 38%. Part of the problem is that its top line is only estimated to grow by around 41% between now and 2030, excluding both its coronavirus products and the revenue it’ll lose when certain patents expire. The activists point to this problem as being the root cause of the pharma’s ongoing struggle.
But Starboard’s complaints don’t stop there. It says that the company overpaid for its recent acquisitions, like the $43.4 billion it spent on acquiring the oncology drug developer Seagen. It also claims that Pfizer’s sales and earnings forecasting capabilities are less accurate than its competitors’, leading to large shortfalls between the revenue guidances it has told investors and what it actually accomplished.
Pfizer’s management has yet to respond, but they’re likely to, and soon.
Starboard’s only publicly stated and explicit demand of Pfizer’s board of directors so far is that it needs to “hold management accountable to achieve the appropriate returns on capital.” The subtext appears to be that it wants the CEO swapped out for someone else who can make more prudent investments in R&D, via either internal work or through acquisitions and licensing deals. It likely has some concrete suggestions for how to go about accomplishing those priorities as well.
Are Starboard’s arguments valid, and are the claims it’s making accurate? In large part, the answer to both these questions is yes. Pfizer has indeed encountered a slew of clinical-stage stumbles in recent years, and it’s also true that many of management’s statements about expected sales performance have ultimately been overly optimistic.
Similarly, the struggles of its weight loss and diabetes program have been somewhat exacerbated by the company’s reluctance to accept mediocre efficacy data on its face, and start from scratch with a new attempt. And while it’s somewhat subjective, it’s very plausible that it overpaid for certain businesses or pharmaceutical assets amid its binge of acquisition activity over the last few years.
With the exception of the failed clinical trials, which are in large part an unpredictable and inevitable reality of the industry, the buck for most of those pitfalls stops with upper management.
But more important than Starboard’s claims is that it’s now ensuring that there will be public feuding with Pfizer’s management and major shareholders. This feuding will generate bad press, and it has a significant chance of hurting Pfizer’s share price. It could also push management to take ill-advised actions in an attempt to save face or address the activist’s concerns. The company’s strategy is now something that’s a contested issue, rather than a unified plan.
All this makes Pfizer a riskier stock to invest in today than it was a year ago.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.
