Last week we supported Pfizer CEO Dr. Albert Bourla, in response to unfounded attacks on him in the media from anonymous sources, and we expressed our initial skepticism about aspects of Starboard Value’s activist position in our Fortune column. This was reinforced by a meticulously detailed, 36-page original research slide deck. We received tremendous positive feedback – and many experts joined us to question the activist attack on Pfizer.
That chorus of public skepticism grew louder after Starboard’s Jeff Smith presented his long-awaited slide deck yesterday during a special CNBC interview with David Faber and at Ken Squire’s 13D conference, with critics noting that it contained a lengthy plea for change but little remedies or solutions.
What we noticed, however, was a subtle shift in Starboard’s approach, with Smith claiming: “We’re excited about what’s here… and we think the future [of Pfizer] will be better than people think.” He refused to be tempted to openly call for CEO change, stating: “I don’t know why we have to be mean. We enjoy working with everyone [there]”.
Smith is right: Pfizer’s future, led by Dr. Bourla, could indeed be much rosier than many expect. Here’s how Dr. Bourla is already well on his way to getting Pfizer back on track, as well as the next steps Pfizer needs to take to boost its recipe for success.
As Smith accurately noted yesterday, Pfizer stock is trading at a historically low valuation (low multiple of 10x earnings), largely due to low expectations from Wall Street analysts and investors about Pfizer’s future growth.
A series of high-profile recent missteps over the past two years – ranging from demand for COVID-19 vaccines collapsing faster than Pfizer expected, to responding to allocation concerns with a slump in Nurtec sales after Pfizer migraine drug from Biohaven for ~$11.6 billion until the recall of Oxbryta after Pfizer acquired the sickle cell disease drug from GBT for ~$5.4 billion led to setbacks in GLP-1 drug development – didn’t help.
As a result of these setbacks, as Smith succinctly noted, “investors and analysts just don’t believe it [Pfizer] is going to produce what they hoped to produce…but definitely that one [low expectations] is not correct. Could Pfizer do better? Naturally.”
Smith is right: Not only can Pfizer prove these low expectations wrong, but it also appears that Pfizer is already back on track operationally and ready to raise the bar significantly. Investors and analysts should pay much more attention to at least three key near-term earnings drivers that they currently undervalue.
First, much of Pfizer’s future depends on whether or not its transformative $43 billion acquisition of Seagen will pay off, especially since the Seagen acquisition was larger than any other recent acquisitions of Pfizer together. Analysts have been bearish on the Seagen deal from the start, and that hasn’t really changed, but the facts are that Seagen’s return on investments to date has exceeded even the most optimistic expectations, as we describe in more detail in our 36 – page slide deck. With its flagship cancer drug, PADCEV, still performing strongly, it appears that Pfizer may have gotten a bargain and underpaid for Seagen, paying one of the smallest acquisition premiums of any recent comparable drug company.
Second, although the migraine drug Nurtec got off to a slow start, this was fully expected and anticipated by Pfizer management, which expected it would take at least a year to plug it into a very different distribution, staffing and marketing system. But now, thanks in part to proactive advice from the highly respected Biohaven team, which is strongly financially incentivized to ensure Nurtec succeeds, sales have accelerated again in recent quarters and the drug appears to be well on its way to becoming one of the most to become successful. blockbuster drugs (generating at least $1 billion in annual sales) in the crown jewels of Pfizer’s portfolio. Additionally, Pfizer retains further upside opportunities around oral Nurtec candidates still in the research and development (R&D) pipeline.
Third, the COVID-19 vaccine franchise may be showing promising signs of stabilization after Pfizer dramatically overestimated vaccine demand last year. many expect earnings figures and upward revisions due to resurgent waves of COVID-19 around the world, especially now that many contracts are about to reprice. At the very least, Pfizer is now likely past the bottom of vaccine demand.
Even beyond Pfizer’s operational missteps over the past two years, another key reason why Wall Street has such low expectations for Pfizer’s future growth may be that they clearly have little visibility into Pfizer’s pipeline, little visibility into what could happen and when, and what could happen. Pfizer’s own vision is moving forward. As some analysts have aptly noted, “There is a lot of value to be unlocked in vaccines, oncology and obesity, but the Street isn’t sure what it will take to drive the stock higher or get investors to own the stock. ”
Dr. Bourla is already well on its way to getting Pfizer back on track operationally, but the more pressing challenge for Pfizer right now may be communicating their story more proactively and compellingly to the investment community.
In the near term, the upcoming quarterly results will provide crucial opportunities to provide detailed updates on the successes of the Seagen, Nurtec and COVID-19 franchises; but all eyes will be on 2025 earnings expectations. Analyst expectations are low, and some seem to think that earnings per share (EPS) in the ~$2.75 – $3.00 range would be a big contributor restoring the confidence of investors and management. credibility.
Furthermore, Pfizer can get back to the story when it comes to capital allocation by reiterating its commitment to shareholder returns, not only through its ~6% dividend, but also by defining the prospect of potential share buybacks over the longer term.
Longer term, it’s hard to see any downside to hosting an R&D day that gives investors a better understanding of Pfizer’s vaunted pipeline, which is widely regarded as best-in-class but may not be sufficiently Pfizer’s valuation is priced in due to low visibility for investors and analysts.
Alternatively, an Investor Day could help clarify the catalysts for a possible revaluation of the stock. These do not necessarily have to be advances in a potential GLP-1 drug. Yes, GLP-1 companies like Eli Lilly and Novo Nordisk are having their moment, but the pharma stock market’s swings are notoriously fickle. After all, those now surging stocks looked weak during the pandemic, having missed the COVID-19 vaccine boom. Ultimately, if there were to be a shift in the market regime away from the exclusive focus on GLP-1s and towards one of a number of emerging areas within the pharmaceutical sector with a large total addressable market, such as oncology, vaccines or neurological medicines, Pfizer would perform well in a unique way. positioned to benefit from deep, sustainable pipelines in each of these areas.
Not all activist engagements are the same. We have never hesitated to call out misguided activists when they find themselves in the middle of harassment and controversy – and have advocated strongly against overly activist attacks on Disney, Norfolk Southern, DuPont and many other companies. However, we also enthusiastically applaud activists as they work constructively to increase shareholder returns and protect them from unfair attacks.
In this case, we have expressed our skepticism about certain aspects of Starboard Value’s activist campaign against Pfizer, but just as we have criticized the misleading ad hominem attacks on Dr. Bourla denounced what some anonymous sources previously blundered against, we also find recent advertising hominem attacks on Jeff Smith by anonymous sources in the media are deeply unfair.
Unwarranted and inaccurate anonymous hatchet whispers that Starboard’s launch was “the worst first week in an activist campaign in Wall Street history” are simply too many. At the very least, Starboard – and Smith – deserve far more credit than has been given thus far for their relentless focus on driving investment returns at Pfizer, and for taking a constructive, smart approach since meeting with management last week .
Similarly, critics wrongly lamented what they perceived as a loss of credibility for Starboard after former Pfizer CEO Ian Read and CFO Frank D’Amelio apparently switched sides, but as we previously explained, we believes that Read’s excessive cost-cutting approach has depleted Pfizer’s pipeline. , leaving Bourla with major challenges to clear up.
Perhaps Starboard could do without the occasional comments about the firing of CEOs at other companies, which ultimately became misquoted and misinterpreted into highly disrespectful, unwarranted and premature calls for Bourla’s resignation. Nevertheless, as shareholders of Pfizer ourselves with small positions and who know and respect both parties, we objectively and independently hope and believe that Smith’s encouragingly constructive involvement could potentially have a positive outcome for all involved.
Listening to activist investors can be a chore for many management teams and boards of directors, who tend to view activists as huge distractions that keep them away from actually running their businesses, or as attention-hungry gadflies who only take credit for changes that are already underway. While this criticism is not without truth, the smartest leaders know how to use activist engagement to accelerate change. Nothing can be as effective as the ghost barbarians at the gates to rally employees, sharpen the organization’s focus, and accelerate changes that might otherwise be difficult to achieve.
Pfizer’s board needs no prodding, as they have shown their responsiveness to shareholders by having two of the three largest shareholders represented on the board, through State Street CEO Cyrus Taraporevala, the recent addition of former Vanguard CEO Tim Buckley, in addition other stars such as Coca-Cola CEO James Quincey and former FDA Commissioner Scott Gottlieb.
Pfizer is already back on track, but under the continued leadership of Dr. Albert Bourla, an even more powerful recipe for success could be in store for the pharmaceutical giant.
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This story originally appeared on Fortune.com
