UPDATED: Starboard wants to hold Pfizer leadership 'accountable' for overpaid M&A deals, poor return on R&D investment

Activist investor Starboard Value is baring its teeth at Pfizer management, more openly going after CEO Albert Bourla’s job.

Starboard has called on Pfizer’s board to “hold management accountable” for what the hedge fund described as poor revenue returns on investments in R&D and M&A, according to a new presentation (PDF) for the 13D Monitor Active-Passive Investor Summit in New York.

“We measure success in producing blockbuster drugs and we all get measured by our track records. The track record here is not great,” Starboard CEO Jeffrey Smith said at the conference Tuesday, as quoted by Reuters.

“We have to amp up the accountability” at Pfizer, Smith added, according to Bloomberg.

Starboard recently built a $1 billion position in Pfizer to stoke changes at the Big Pharma company. Although the brewing proxy fight was murmured to be targeting Bourla, this is the first time that Smith has made public the investment shop’s intentions.

“I’m asking for something different. I’m asking for them to massively improve the discipline around capital allocation inside the company so that they can put more dollars to projects that they have a higher degree of confidence [in],” Smith said Tuesday on CNBC’s “Squawk on the Street.”

By Starboard’s count, Pfizer has lost more than $20 billion in market value since 2019 despite receiving a $40 billion boost from its COVID-19 franchise during the pandemic. A low valuation and leveraged balance sheet could hamper Pfizer’s ability to do more acquisitions, further limiting future growth, Starboard argued.

“In similar situations where a company has underperformed like this, you may see a board make a change at CEO,” Smith told CNBC. 

 

Starboard blamed Pfizer’s low market performance on a lack of internal innovation and failure to deliver on its commitments. The investment shop pointed to several past clinical failures, comparing item by item a previous plan at Pfizer to have up to 15 potential blockbusters approved by 2022. The company unveiled that plan in early 2019 when Bourla took over as CEO.

More recently, in one hot area, Bourla has pegged Pfizer’s GLP-1 program as a potential $10 billion product. But after Pfizer axed a twice-daily form of its oral GLP-1 candidate danuglipron, analysts remained skeptical about the company’s once-daily formulation, Starboard said.

Pfizer’s track record in tapping external innovation is also disappointing, Starboard alleged.

Pfizer invested nearly $70 billion in M&A since 2022, as the pandemic was coming to an end. But pointing to Pfizer’s own target of having more than $20.5 billion in sales from business development assets by 2030, Starboard argued that Pfizer appears to have overpaid for those post-COVID acquisitions. What’s more, Wall Street analysts’ expectations of sales from those deals were $7 billion lower than Pfizer’s.

Starboard singled out the $5.4 billion acquisition of Global Blood Therapeutics in 2022. Pfizer last month abruptly decided to pull the centerpiece of the deal, sickle cell disease therapy Oxbryta, off global markets after new clinical data raised increased numbers of painful vaso-occlusive crises and deaths.

In its presentation, Starboard said the development “shocked the industry and raised serious questions” about Pfizer’s business development capabilities. As evidence, the investment shop cited a Jefferies note from last month that described the Oxbryta product pull as “truly jarring.”

Following the $43 billion acquisition of the antibody-drug conjugate specialist Seagen, Pfizer’s biggest post-COVID deal, the company in February announced a goal to have at least eight blockbuster cancer drugs by 2030. 

Overall, Starboard’s calculation suggests the expected revenue return on R&D and M&A investments at Pfizer is just 15% between 2023 and 2030, far below the industry peer median of 38%. Pfizer needs an additional $29 billion in 2030 revenue on top of the current consensus estimate of $50 billion to meet that 38% median, a target that Starboard said is likely not achievable.

“Capital allocation and M&A is critically important to pharma companies—Pfizer has been worst-in-class,” Starboard said in its presentation.

“We believe the board needs to actively hold management accountable for earning appropriate returns on R&D and M&A moving forward,” Starboard continued. “Pfizer deserves to be best in class.”

Editor's Note: The story has been updated with additional comments Starboard Value CEO Jeff Smith made during a CNBC interview.