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.
Starboard identifies four key issues with Pfizer:
Its recent internal research and development (R&D) efficiency
Its expected future returns on R&D investments
Its capital allocation strategy
Its forecasting and budgeting processes
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.