Pfizer CEO’s job is at risk. A shot of discipline could help.
Summary
As activist Starboard teams up with former Pfizer executives, the pharma giant’s lack of focus is in the spotlight.
When former executives team up with an activist investor to “help" a struggling company, it is often bad news for the current chief executive.
That is one implication behind activist investor Starboard Value’s $1 billion stake and its push to make changes at Pfizer, which The Wall Street Journal reported has support from former Pfizer Chief Executive Ian Read and former Chief Financial Officer Frank D’Amelio. Another important takeaway is that investors are eager to see a more disciplined and focused development strategy from the company.
With Pfizer’s stock down more than 30% over the past two years, speculation is growing that Albert Bourla’s position as CEO might be in jeopardy.
“We’ve sensed investor frustration with CEO Albert Bourla since at least the beginning of 2023," BMO Capital Markets analyst Evan Seigerman wrote. Don Bilson at Gordon Haskett wrote that Starboard might have “positioned itself to get the old band back together with Ian on guitar and Frank playing drums." He noted that the activist effort has some “Disney vibes," alluding to Bob Iger’s return to the helm of Walt Disney after his successor was ousted.
Pressuring Bourla to step down might offer frustrated investors an easy scapegoat, but pharmaceutical companies’ history suggests a mere change at the top wouldn’t be enough to lift the stock price over the long term. As Seigerman noted, for example, the sudden departure of Gilead Sciences CEO John Milligan in 2018 did little to lift the company’s struggling shares over the past six years. Ultimately, promising drug pipelines drive long-term stock performance in the pharmaceutical industry, and developing those pipelines takes time.
That doesn’t mean Starboard’s likely push for belt-tightening won’t help bring much-needed discipline to Pfizer. The company played a critical role in helping the world recover from the pandemic, developing the top-selling vaccine and treatment pill for Covid-19.
However, from a financial standpoint, the Covid windfall has proven to be a double-edged sword. While profit surged during the pandemic, Pfizer used the tens of billions of dollars in additional cash flow to fund a dealmaking spree that failed to boost its valuation. Despite spending nearly $70 billion on acquisitions since 2020, including $43 billion on biotech cancer specialist Seagen, Pfizer’s stock is now below its prepandemic levels.
One of the main criticisms from investors is that Pfizer’s business-development strategy has been too scattered, with acquisitions spanning neuroscience, blood disorders and cancer—lacking a clear, cohesive focus. Additionally, there is concern that in Bourla’s push to meet revenue targets through dealmaking, Pfizer might have overpaid for its acquisitions.
With little financial room for further large acquisitions, Starboard and former Pfizer executives are likely to advocate for a more focused strategy and deeper cost cuts. Although Pfizer has already announced a multibillion-dollar cost reduction plan, Starboard probably sees room for more. While larger cuts would be painful, they could have the added benefit of forcing Pfizer to clarify what it sees as its most promising areas for growth.
Bourla likely isn’t entirely surprised by these developments, given the pressure he has faced for nearly two years. At a JPMorgan Chase conference earlier this year, he acknowledged missing earnings expectations and Pfizer’s weak commercial performance. However, he promised better execution and argued that investors haven’t fully appreciated the potential value of the Seagen acquisition. In an email, a Pfizer spokeswoman wrote that the company doesn’t comment on market speculation. She added that Pfizer is focused on continued innovation, cost reduction and capital allocation to enhance shareholder value.
There are clear signs that Bourla is being attentive to Wall Street’s critics. Earlier this year, for instance, he hired Andrew Baum, a former Pfizer bear at Citi, to be chief strategy and innovation officer. The move seemed to echo Novartis’s hiring of former outspoken Wall Street analyst Ronny Gal to “shake the tree" at the Swiss drugmaker.
Perhaps no pharma executive played as key a role in helping the world recover from Covid as Bourla. But just as developing a vaccine required partners, there would be no shame in tapping outside help to pull Pfizer shares from the abyss.
Write to David Wainer at david.wainer@wsj.com
