Who will cure the pharmaceutical giant? The shot of activism that might shake Pfizer

When former executives team up with an activist investor to “help” a struggling company, it can spell bad news for the incumbent CEO.

in the case of Pfizer this may be one of the consequences of the move on the part of the activist investment fund Starboard Value (Starboard Value), which has a billion dollar holding in the pharmaceutical company. The fund’s push to make changes at Pfizer, according to the Wall Street Journal report, is supported by the company’s former CEO Ian Reid and its former CFO, Frank D’Amelio. Against this background, investors are eager to see a more organized and focused development strategy in Pfizer.

After Pfizer’s stock fell by more than 30% in the last two years, speculation is growing that CEO Albert Borla’s job may be in jeopardy.

“We have sensed investor frustration with CEO Borla since at least the beginning of 2023,” wrote BMO Capital Markets analyst Evan Siegerman. Don Bilson of the consulting and research firm Gordon Haskett wrote that Starboard may be “thinking about ‘uniting the old band’ with Ian on The guitar and Frank on the drums”, and noted that the move by the activist fund has “vibes that remind us of the Disney case” – a reference to the return of Bob Iger to head the Walt Disney Company, after his successor was dismissed.

The pressure on Borela to resign may make him a necessary scapegoat for investors, but the history of pharmaceutical companies shows that a change at the top alone will not be enough to raise the stock price in the long term. Siegerman mentioned the sudden departure of Gilead Sciences CEO John Milligan in 2018, which did little to help the company’s struggling stock recover over the past six years. Ultimately, what could boost the industry’s stock performance over the long term is a promising backlog of drugs , and its development requires time.

This is not to say that Starboard’s push for “belt-tightening”, which is likely to come, will not help bring Pfizer the much-needed order and discipline. The company that developed the best-selling vaccine and cure for Corona played a critical role in helping the world recover from the pandemic, but from a financial perspective, the windfall from Corona proved to be a double-edged sword.

Of course, Pfizer’s profit rose during the pandemic, but the decision to use the abundant cash flow amounting to tens of billions of dollars to finance a campaign of purchase transactions, did not help to strengthen the value of the company. Despite spending nearly $70 billion on acquisitions since 2020, including that of cancer biotech Cygen for $43 billion, Pfizer’s stock is currently below its pre-pandemic level.

Relax with the purchases and find growth engines

One of the main criticisms from investors is that Pfizer’s business development strategy has been too scattered, with acquisitions in a variety of areas – neuroscience, blood disorders and cancer, without a clear and cohesive focus. Added to this is the concern that Borla’s push to meet revenue targets through the same wave of transactions actually led to Pfizer paying too much for the purchases it made.

Now that there isn’t much financial room left for more big acquisitions, Starboard executives and former Pfizer executives are likely to support a more focused strategy and deep cost-cutting. Although Pfizer has already announced a multibillion-dollar cost-cutting plan, Starboard seems to think there is room for more cuts. Bigger cuts will be painful, but may have an added benefit — forcing Pfizer to clarify what it sees as the most promising areas for growth.

It is likely that Borla is not completely surprised by these developments, given the pressure he has been dealing with for almost two years. At a JPMorgan Chase conference earlier this year, he admitted that he had missed earnings expectations and acknowledged Pfizer’s weak financial performance. However, he promised improved performance on the grounds that investors had not properly assessed the potential value of the SEAGEN acquisition.

“Do Novartis” and appointed an analyst to a senior position

There are clear signs that Borla is attentive to his Wall Street critics. Earlier this year, for example, he appointed Andrew Baum, a former Citi analyst who was ‘bearish’ on Pfizer shares, as chief strategy and innovation officer for him. The move seems to echo the one made by Novartis, when it recruited Roni Gal, the outspoken former Wall Street analyst, to the position of director of strategy and growth at the Swiss pharmaceutical manufacturer.

There may not have been another senior member of the pharmaceutical industry who played a central role in saving the world from the corona epidemic, like Borla, but just as the development of a vaccine requires partners, there is no shame in the establishment of a Pfizer stock of this level to use external help.

Pfizer stated that the company does not respond to market speculation. A company spokeswoman said that Pfizer is focused on continuous innovation, cost reduction and capital allocation to improve shareholder value.