Last week, we stood in support of Pfizer CEO Dr. Albert Bourla, responding to unfounded attacks on him in the media from anonymous sources, and we expressed our initial skepticism about aspects of Starboard Value’s activist position in our Fortune column. This was fortified by a meticulously detailed, original 36-page research slide deck. We received thunderous positive feedback—and many experts joined us in questioning the activist assault on Pfizer.
That chorus of public skepticism grew louder after Starboard’s Jeff Smith presented his highly-anticipated slide deck yesterday during a special CNBC interview with David Faber and at Ken Squire’s 13D Conference, with critics noting it contained a lengthy case for change but few remedies or solutions.
However, what we noted was a subtle shift in Starboard’s approach, with Smith asserting “We’re excited about what’s there… and we think the future [of Pfizer] will be better than people think.” He refused to be baited into calling overtly for CEO change, declaring “I don’t know why we need to be nasty. We like to work with everybody [there]”.
Smith is right: Pfizer’s future, under Dr. Bourla’s leadership, could indeed be much brighter than many expect. Here’s how Dr. Bourla is already well on his way toward getting Pfizer back on track—as well as the next steps Pfizer needs to take to turbocharge its prescription for success.
What Wall Street’s low expectations miss
As Smith accurately pointed out yesterday, Pfizer’s stock is trading at a historically depressed valuation (low multiple of 10x earnings), largely the result of low expectations from Wall Street analysts and investors for Pfizer’s future growth.
A series of high-profile recent misses over the last two years—ranging from COVID-19 vaccine demand collapsing faster than Pfizer expected to capital allocation concerns with a slump in sales of Nurtec after Pfizer acquired the migraine drug from Biohaven for ~$11.6 billion to the recall of Oxbryta after Pfizer acquired the sickle cell disease drug from GBT for ~$5.4 billion to setbacks in GLP-1 drug development—hasn’t helped.
As a result of these setbacks, as Smith pithily noted, “investors and analysts just don’t believe that [Pfizer] is going to produce what they hoped to produce...but for sure, those [low expectations] aren’t right. Could Pfizer do better? Of course.”
Smith is correct: Not only could Pfizer prove these low expectations wrong but it also appears Pfizer is already back on track operationally and poised to raise the bar significantly. Investors and analysts should be paying much closer attention to at least three key near-term revenue drivers that they are currently underappreciating.
First and foremost, much of Pfizer’s future comes down to whether or not its bet-the-farm, transformative $43 billion acquisition of Seagen will pay off, especially since the Seagen acquisition was bigger than all of Pfizer’s other recent acquisitions combined. Analysts were bearish on the Seagen deal from the outset, and that hasn’t really changed, but the facts are that the returns on investment from Seagen so far are surpassing even the most optimistic expectations, as we describe in more depth in our 36-page slide deck. If anything, with flagship cancer drug PADCEV continuing to outperform, it looks like Pfizer may have gotten a steal and underpaid for Seagen, paying one of the smallest acquisition premiums of any recent comparable pharma.
Second, while migraine drug Nurtec got off to a slow start, this was fully expected and anticipated by Pfizer management, who expected it would take at least a year to plug it into a very different distribution, staffing, and marketing system. But now, thanks in part to proactive advice from the highly respected Biohaven team, which remains highly incentivized financially to ensure Nurtec succeeds, sales have re-accelerated in recent quarters, and the drug seems to be well on its way towards becoming one of the blockbuster drugs (generating at least $1 billion in annual sales) in the crown jewels of Pfizer’s portfolio. Furthermore, Pfizer retains further upside optionality around oral Nurtec candidates still in the research and development (R&D) pipeline.
Third, the COVID-19 vaccine franchise may be showing promising signs of stabilization after Pfizer dramatically overestimated vaccine demand last year, with many expecting earnings beats and upward revisions from resurgent waves of COVID-19 around the world, especially with many contracts set to re-price. At a minimum, Pfizer is likely now past rock bottom in vaccine demand.
Pfizer’s strategic messaging challenge
Even beyond Pfizer’s operational misses over the last two years, another key reason why Wall Street has such low expectations for Pfizer’s future growth may be because, plainly, they have little understanding of Pfizer’s pipeline, little visibility into what might hit and when, and what Pfizer’s own outlook is moving forward. As some analysts have aptly observed, “There is a lot of value to be unlocked across vaccines, oncology, and obesity, but the Street is unsure of what it will take to move shares higher or get investors to own the stock”.
Dr. Bourla is already well on his way towards getting Pfizer back on track operationally—but the more pressing challenge for Pfizer at this point may be in communicating their story more proactively and attractively to the investment community.
In the near term, upcoming quarterly earnings calls will be crucial opportunities to provide detailed updates on the successes of the Seagen, Nurtec, and COVID-19 franchises; but all eyes will be on earnings guidance provided for 2025. Analyst expectations are low, and some seem to think an earnings-per-share (EPS) forecast in the ~$2.75 - $3.00 range would go a long way towards restoring investor faith and management credibility.
Furthermore, Pfizer can reclaim the narrative when it comes to capital allocation by reiterating its commitment to shareholder returns, not only through its ~6% dividend but also by defining the prospect of potential share repurchases down the road.
In the longer term, it’s hard to see any downside to hosting an R&D Day that provides investors with a better understanding of the vaunted Pfizer pipeline, which is widely considered to be best-in-class but may not be priced adequately into Pfizer’s valuation due to investors and analysts having little visibility.
Alternatively, an Investor Day could help clarify catalysts for a potential re-rating of the stock. These don’t have to be progress on a potential GLP-1 drug. Yes, GLP-1 companies such as Eli Lilly and Novo Nordisk are having their moment, but the see-saw swings of the pharmaceuticals stock market are notoriously fickle. After all, those now-soaring stocks looked weak during the pandemic for having missed the COVID-19 vaccine boom. If there is an eventual market regime shift away from the exclusive focus on GLP-1s and toward any of a number of emerging fields within pharma with a large total addressable market, such as oncology, vaccines, or neurological drugs, Pfizer would be uniquely well positioned to benefit with deep, durable pipelines in each of those fields.
Starboard’s constructive activist engagement fortifies Pfizer shareholder relations
Not all activist engagements are alike. We have never hesitated to call out misguided activists when they fall into bullying and bluster—and have advocated strongly against over-the-top activist assaults at Disney, Norfolk Southern, DuPont, and many other companies. However, we also enthusiastically celebrate activists when they work constructively to drive greater shareholder returns and defend them from unfair attacks.
In this case, we’ve been vocal in our skepticism about certain aspects of Starboard Value’s activist campaign against Pfizer, but just as we called out the misleading ad hominem attacks on Dr. Bourla that some anonymous sources blundered into previously we also find recent ad hominem attacks on Jeff Smith by anonymous sources in the media to be deeply unfair.
Unwarranted and inaccurate anonymous hatchet whispers that Starboard’s launch was “the worst first week in an activist campaign in the history of Wall Street” are just too much. At a minimum, Starboard—and Smith—deserve much more credit than what has been accorded so far for their relentless focus on driving investment returns at Pfizer, and for taking a constructive, savvy approach since meeting with management last week.
Similarly, critics unfairly bemoaned what they perceived to be a loss of credibility for Starboard after former Pfizer CEO Ian Read and CFO Frank D’Amelio apparently switched sides, but as we explained previously, we believe Read’s excessive cost-cutting approach left Pfizer’s pipeline depleted, and left deep challenges for Bourla to clean up.
Perhaps Starboard could do without the occasional asides about removing CEOs at other companies, which ended up getting misquoted and misconstrued into highly disrespectful, unwarranted, and premature calls for Bourla’s removal. Nevertheless, as Pfizer shareholders ourselves with small positions, and knowing and respecting both sides, we objectively, independently, hope and believe Smith’s encouragingly constructive engagement could potentially turn into a positive for all involved.
Listening to activist investors can be a chore for many management teams and boards, who tend to think of activists as massive distractions taking them away from the business of actually running their enterprises or attention-hungry gadflies who merely take credit for changes already underway. While these critiques are not without truth, the savviest leaders know how to leverage activist involvement to accelerate turnarounds. There can be nothing quite as effective as the specter barbarians at the gates to rally employees, sharpen organizational focus, and accelerate changes that may otherwise be hard to pull off.
Pfizer’s board needs no prodding, as they have shown their responsiveness to shareholders by having two of its three largest shareholders represented on the board, through State Street CEO Cyrus Taraporevala, the recent addition of former Vanguard CEO Tim Buckley, alongside other stars such as Coca-Cola CEO James Quincey and former FDA Commissioner Scott Gottlieb.
Pfizer is already getting back on track, but an even more potent prescription for success could be in the cards for the pharmaceutical giant under Dr. Albert Bourla’s continued leadership.
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