The brewing proxy battle between activist Starboard Worth and pharmaceutical large Pfizer has already taken a hostile flip. Nameless sources have been disparagingly suggesting that Pfizer CEO Dr. Albert Bourla must be eliminated. After information experiences steered they initially sided with the activists, former Pfizer CEO Ian Learn and former CFO Frank D’Amelio switched sides, abandoning their erstwhile Starboard allies and expressing their help for Bourla. Then, Starboard Worth Founder Jeff Smith reportedly issued a fiery letter to Pfizer’s board, alleging intimidation and coercion.
We don’t know for certain what Starboard’s turnaround plan incorporates. It has allegedly created an “extensive 50-page slide deck on its turnaround plans” which it’s but to disclose publicly. However one can simply guess what the first complaints about Bourla is perhaps since these criticisms have now been repeated so many occasions in nameless leaks to the media: that Pfizer inventory has gone sideways beneath Bourla’s watch; that he supposedly overpaid in a number of main acquisitions and squandered tens of billions of Pfizer’s COVID-19 vaccine windfalls; that Pfizer’s enterprise is in serious trouble after the demand for COVID vaccines fell off quicker than anybody thought attainable.
There’s only one downside: These criticisms are merely not factual, regardless of what number of occasions they might be repeated, as we reveal in our authentic detailed evaluation and 36-page slide deck.
The ‘haves vs. have nots’ of the GLP-1 revolution
In fact, what’s undeniably true is that Pfizer’s inventory value has gone sideways throughout Bourla’s tenure, to the comprehensible frustration of some shareholders. Nevertheless, the underperformance of Pfizer inventory isn’t all that it seems to be. Actually, Pfizer inventory has carried out consistent with, if not a bit stronger than, pharmaceutical friends corresponding to Merck, Johnson & Johnson, and Bristol-Myers Squibb this 12 months.
Pharma shares have been decreased to a “haves vs. have nots”: a stark divide between GLP-1-driven shares, specifically Novo Nordisk and Eli Lilly who’ve soared to document heights, and all different pharma firms, a lot of whom languish buying and selling close to record-low multiples as investor sentiment plummets. This can be a reversal from the COVID-19 pandemic when these now-soaring shares (Novo Nordisk and Eli Lilly) regarded weak for having missed the COVID vaccine and therapeutics growth and had been attacked by critics, whereas COVID-powered shares benefitted.
To pin the blame for see-saw swings within the inventory market on Bourla, contemplating Pfizer inventory is performing precisely consistent with non-Novo Nordisk, non-Eli Lilly pharma friends, one must fault Bourla for not growing a GLP-1 drug sooner, regardless of the actual fact just about the whole pharmaceutical business—like just about each investor—was caught off guard by the pace with which these new weight problems medication had been commercialized.
Mergers and acquisitions
Equally, the persistent critique that Dr. Bourla overpaid and made unhealthy offers throughout his post-COVID M&A spree—a criticism that appears to have turn out to be a rallying cry for buyers upset with Bourla’s management—isn’t all that it seems to be.
For certain, certainly one of Pfizer’s 4 largest offers, the smallest deal of the 4, Pfizer’s acquisition of World Blood Therapeutics, has been a catastrophe to this point by most goal measures (although not unsalvageable).
Nevertheless, the return on funding for the three bigger offers—the $6.7 billion acquisition of Area, the $11.6 billion acquisition of Nurtec from Biohaven, and most significantly, the transformative, bet-the-farm $43 billion acquisition of Seagen—appear to be surpassing even the extra optimistic inside and exterior projections to this point, as we describe in additional depth in our authentic evaluation.
And whatever the ROI numbers, a easy undeniable fact that many appear to have forgotten is that it’s simply plain too early to guage these offers as defeats. A lot of the worth of those offers is locked up within the analysis and improvement (R&D) pipeline of potential drug candidates that Pfizer acquired—and it’ll take a few years for these pipeline tasks to achieve maturation. Because the outdated pharma saying goes, the difficulty with analysis is you don’t know whether or not you’ve achieved the correct factor for 10 years. Till that pipeline reaches maturity, writing off these offers as failures is equal to chucking up the sponge after the primary inning with eight innings left to go.
That’s the entice that critics have persistently fallen into. Courting again many years, progress via M&As has been the Pfizer method, and every time, monetary markets have mistakenly underestimated Pfizer’s acquisitions just for these offers to repay handsomely with time, as we present in our evaluation.
For instance, regardless of preliminary investor criticism of Pfizer’s $90 billion acquisition of Warner-Lambert in 2000, the deal ultimately paid off many occasions over as Lipitor and different marvel medication reached maturity, with further revenues introduced in from the divestiture of some ancillary property that got here with the deal corresponding to Entenmann’s Bakery and Schick Razors.
As we present, comparable criticism greeted Pfizer’s $64.3 billion acquisition of Pharmacia in 2002, in addition to Pfizer’s $68 billion acquisition of Wyeth in 2009 (together with its key product Prevnar), each of which ended up paying off with time. Every time, the markets fell into the identical entice: the power undervaluation of high-potential pipeline medication, which buyers had little visibility into, understanding of, or endurance for. Whereas it took a number of years in some circumstances, a lot of these unloved pipeline medication ended up turning into blockbusters which were massively worthwhile for Pfizer.
Some critics query whether or not Bourla was proper to spend on M&A in any respect. Some shareholders have even overtly advocated for a big particular dividend or accelerated share repurchases as a substitute of offers. However the Pfizer board—some of the certified boards in America with stars corresponding to Coca-Cola CEO James Quincey, State Road CEO Cyrus Taraporevala, and former Meals and Drug Administration commissioner Scott Gottlieb— knew that such short-sighted strikes would have mortgaged Pfizer’s future and imperiled the corporate.
As a result of Pfizer’s present blockbuster medication are restricted to 10–20-year patent intervals, Pfizer should continuously hunt down new, promising drug candidates to interchange misplaced revenues as patents roll off its books periodically. With some ~$17 billion in revenues which can begin rolling off Pfizer’s books over the following 5 years, Pfizer had no alternative however to replenish the R&D pipeline via M&A, and couldn’t afford to attend for extra favorable entry factors. Plus, it’s not like Bourla has neglected capital returns to shareholders throughout his M&A spree, paying out over $50 billion in dividends since he turned CEO, persevering with the streak of 345 consecutive quarters through which Pfizer paid dividends, all whereas sustaining its standing because the highest dividend-yielding pharma firm.
Investing within the enterprise via M&As is commonly unpopular with short-term centered buyers—however can understand outsized returns with sufficient time, a sample that holds true throughout industries. 5 years in the past, I celebrated Occidental CEO Vicki Hollub’s acquisition of Anadarko Petroleum and stood by her when Carl Icahn and different activist buyers sought to undo the deal when oil costs collapsed through the pandemic. Happily, buoyed by help from Warren Buffett, Occidental beat again Icahn’s problem and rode out the financial cycle again to excessive oil costs, permitting Anadarko to pay for itself a number of occasions over.
Product pipeline
Past the persistent myths surrounding Pfizer’s M&A observe document, there’s additionally a persistent narrative that Pfizer’s enterprise is in hassle after demand for COVID-19 vaccines fell off quicker than anybody thought attainable. Bourla’s pandemic heroics, for which he has been extensively saluted, want no retelling. There is no such thing as a dispute that the good partnership between Pfizer and BioNTech, his management via later-stage vaccine improvement and profitable scientific trials, with seamless manufacturing execution and unequalled distribution in addition to such follow-up therapeutics as Paxlovid, profoundly modified the course of public well being historical past and world financial resilience in massively constructive methods.
Pfizer administration has taken accountability for being too optimistic of their latest aggressive forecasts for COVID-19 vaccine demand and are correctly right-sizing their price construction accordingly. Nevertheless, by analyzing Pfizer’s gross sales product line by product line, it’s clear that just about the whole lot of Pfizer’s income decline was induced solely by the drop-off in COVID-19 vaccine demand, and nothing else. All of Pfizer’s different main product strains have seen important year-over-year progress, together with document progress within the essential oncology division, with most cancers therapies poised for continued fast income progress within the years forward.
It’s straightforward to overlook the inexperienced shoots of progress as Pfizer’s post-COVID reset features steam: Pfizer now has no much less than 112 promising drug candidates in its vaunted pipeline, together with a number of latest launches with blockbuster potential. Since Bourla turned CEO, Pfizer has had a larger scientific trial success charge than many business friends—a stark turnaround from the worst R&D returns of any pharma firm beneath prior management.
A harmful playbook
That is precisely why the drastic price cuts that Starboard is seemingly advocating for now are so harmful for Pfizer. These price cuts take a web page out of Learn’s outdated playbook. As famous by CNBC’s Jim Cramer, “Ian Read, very tough guy, he cut costs, I was scared of him. He was humorless.” On the finish of Learn’s tenure, this method left Pfizer’s pipeline depleted, with solely a pair dozen venture launches left. Moreover, Learn bought off parts of Pfizer’s companies which offered constant income streams, together with dumping the worthwhile shopper well being and animal well being divisions for bottom-of-the-barrel costs. At an organization with an extended historical past of predecessor CEOs sticking round and undermining successors, as documented in riveting fashion by Fortune in 2011, the Starboard-Learn playbook for Pfizer of shrinking its strategy to progress could lead to shrinking its method into oblivion.
Like all CEOs, with the knowledge of hindsight, maybe Pfizer and Bourla could have timed some strikes in a different way. Nevertheless, our factual evaluation of Pfizer’s efficiency means that some deceptive narratives about Bourla’s management which were put ahead have been distinctly unfair.
We all know, like, and respect each side. We beforehand supported a number of of Starboard Worth’s campaigns, corresponding to their profitable efforts at Darden, and work intently with Jeff Smith’s companions at his prior corporations. Equally, Albert Bourla has attended Yale CEO Summits and was a Yale Legend of Management award winner in 2021, like peer pharma giants corresponding to Merck CEO Ken Frazier, Johnson & Johnson CEO Alex Gorsky, Regeneron Co-Founders Len Schleifer and George Yancopoulos, former Amgen CEO Gordon Binder, and lots of others. However now we have no conflicts of curiosity that get in the best way of providing our impartial, goal evaluation and calling it as we see it.
As Starboard ramps up its engagement with Pfizer with a gathering scheduled subsequent week, we consider Starboard could have the chance to play a constructive position in serving to Dr. Bourla and the spectacular Pfizer board steer the corporate towards extra success. We hope Starboard seizes this real alternative to be constructive—which might be a win for all concerned—quite than falling into the fact-free chasms and advert hominem assaults that some nameless sources appear to have blundered into.
Extra must-read commentary printed by Fortune:
The opinions expressed in Fortune.com commentary items are solely the views of their authors and don’t essentially mirror the opinions and beliefs of Fortune.
