Pfizer‘S (NYSE:PFE) The budding feud with activist investor group Starboard Value appears to be escalating. Since the activist took a $1 billion stake in the drug developer, it has been an open question what the activist wants to change and how he wants to do it.
Now, after a presentation at the 13D Monitor Active-Passive Investor Summit by Starboard CEO Jeffrey Smith on October 22, there is much less ambiguity. In particular, Smith had seven simple and bold words that shed light on his group’s perspective on Pfizer and its management.
If you are a shareholder or are considering investing in this stock, you need to know what he said and why it opened a can of worms.
“The track record here isn’t great,” Smith joked, referring to Pfizer’s recent lack of new launches of blockbuster drugs that could generate more than $1 billion a year in revenue.
Starboard’s criticism is directly aimed at Albert Bourla, CEO of Pfizer, who has led the pharmaceutical giant since early 2019. While activists applaud Bourla’s leadership in the coronavirus vaccine and therapeutic races, they claim the company has lost between $20 billion and $60 billion in value. under his term, depending on how the figure is calculated.
Starboard identifies four major issues with Pfizer:
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The recent internal research and development (R&D) efficiency.
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The expected future return on R&D investments
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The capital allocation strategy
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The forecasting and budgeting processes
On the first two issues, it’s hard to dispute the group’s story. Despite repeated glowing public messages from the CEO about the strength of the pipeline, and ten potential blockbusters set to hit the market between 2019 and 2022, a series of late-stage clinical trial failures and worse-than-expected sales performance of the approved drugs left the shareholders left with dashed hopes.
Furthermore, Starboard rightly points out, despite management’s optimism about the company’s ongoing effort to develop a drug to treat obesity and type 2 diabetes – potentially opening the door to entry into a market that could be closed by 2030 could be worth as much as $100 billion. So far, Pfizer’s efforts have not been successful.
Another problem is that for the programs Pfizer currently has in the pipeline, the expected return on R&D investments is only 15%, which is well below almost all of its big pharma peers, which expect an average return of 38%. Part of the problem is that sales are only estimated to grow about 41% between now and 2030, not counting coronavirus products and the revenue the company will lose when certain patents expire. The activists point to this problem as the root cause of the pharmaceutical industry’s ongoing struggles.
But Starboard’s complaints don’t stop there. It says the company overpaid for its recent acquisitions, such as the $43.4 billion it spent on acquiring oncology drug developer Seagen. It also claims that Pfizer’s sales and profit forecasts are less accurate than those of its competitors, leading to large gaps between the revenue expectations it told investors and what it actually achieved.
Pfizer management has not yet responded, but will likely do so soon.
Starboard’s only publicly stated and explicit demand to Pfizer’s board of directors to date is that it “hold management accountable to achieve appropriate returns on capital.” The subtext seems to be that they want the CEO swapped for someone else who can make wiser investments in R&D, either through internal work or through acquisitions and licensing deals. It is also likely to contain some concrete suggestions on how to achieve these priorities.
Are Starboard’s arguments valid and the claims it makes accurate? The answer to both questions is largely yes. Indeed, Pfizer has faced a slew of stumbling blocks in the clinical phase in recent years, and it’s also true that many of management’s statements about expected sales performance were ultimately overly optimistic.
Likewise, the weight loss and diabetes program’s problems have been somewhat exacerbated by the company’s unwillingness to accept mediocre efficacy data and start from scratch with a new effort. And while it is somewhat subjective, it is highly likely that it has overpaid for certain companies or pharmaceutical assets, amid the plethora of acquisition activity in recent years.
With the exception of clinical trial failures, which are largely an unpredictable and unavoidable reality of the industry, the responsibility for most of these pitfalls lies with upper management.
But more important than Starboard’s claims is that it now ensures there will be a public feud with Pfizer management and major shareholders. This feud will generate bad press and has a significant chance of hurting Pfizer’s stock price. It could also prompt management to take unwise action in an attempt to save face or assuage the activist’s concerns. The company’s strategy is now a contentious issue, rather than a unified plan.
All of 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 holds and recommends positions in Pfizer. The Motley Fool has a disclosure policy.
These 7 Blunt Words Just Opened a Can of Worms for Pfizer’s Stock was originally published by The Motley Fool
