There may be changes coming to this company, if the activists get their way.
On Oct. 6, The Wall Street Journal reported that activist investor group Starboard Value owns a stake in Pfizer (PFE -0.61%) that’s worth approximately $1 billion. Now, Starboard will aim to work with the company’s management as well as consult with former executives — all with the aim of turning around Pfizer’s sagging fortunes.
But can bringing in a new group of advisors do much to bolster Pfizer’s competitiveness? Was there actually anything wrong with the strategy it was pursuing before, or was it merely in a transitional period where the market wasn’t valuing its stock correctly? And how will this new development affect the stock for today’s shareholders?
Let’s drill down and answer each of these questions in detail.
Starboard can’t turn the ship on its own
First, let’s examine what the activist investor can actually accomplish, and think about why it wanted a stake in Pfizer in the first place.
Starboard’s mission statement is “to invest in deeply undervalued companies and actively engage with management teams and boards of directors to identify and execute on opportunities to unlock value for the benefit of all shareholders.” Typically, such activist investing groups would not take a position in a business if they did not have a clear set of changes that they could propose to management.
The most immediate consequence is that Pfizer’s management will now have access to a new perspective on how to advance the company’s goals, even though its leaders are not under any obligation to follow through on any proposals.
It makes sense why investors would think that the big pharma is undervalued and due for a new direction. Its shares have achieved a total return of just 4% over the last five years, dramatically lagging the market’s 110% gain despite the major financial windfalls the company earned as a result of its work on medicines to prevent and treat COVID-19.
Furthermore, over the last year Pfizer has not been consistently profitable operationally, and its price-to-sales (P/S) ratio of 3 is on the low side compared to the pharma industry’s average of 4.5.
So, taking the somewhat simplistic perspective that the objective of a company’s management, operations, and strategy is to increase the price of the stock, it’s true that Pfizer was not consistently delivering. But that belies the reality of the situation; after bringing in a record haul of more than $100.3 billion in revenue in 2022 from its COVID medicine sales, a sharp decline was inevitable as the pandemic became more controlled.
Nonetheless, while its trailing-12-month sales are still above their total in 2019, its earnings per share (EPS) are not, suggesting that there are indeed some actual issues that are blocking the top line from trickling down into shareholders’ returns.
PFE Revenue (TTM) data by YCharts
Is this an issue that a new proposal from activist investors could fix in the near term? It depends on what they’re thinking, which hasn’t been disclosed yet, but let’s look at a couple of scenarios.
Will anything change immediately?
One way that an activist investor proposal could lead to Pfizer’s stock rising sooner rather than later is if it suggests spending cuts that management opts to implement.
The business is already pursuing manufacturing efficiencies of $1.5 billion between now and 2028, and it should be wrapping up a cost reduction drive of around $4 billion before the start of 2025. It’s unclear what else could be cut or sold off without sacrificing revenue, but Starboard may have some ideas. Announcing more cost cuts could pump the stock up upon the announcement, even if the campaign might take a few years.
Switching out company leaders or members of the board of directors could also provide a nearly immediate boost to its shares. Once again, it’s unclear which executives Starboard would choose to replace and why, not to mention who would be the replacements. But Starboard probably doesn’t have enough of a stake to actually force any of its preferred changes.
A longer-term vision from Starboard might call for reworking Pfizer’s research and development (R&D) pipeline to focus on different disease areas, or different segments within the areas it’s already established. Even with the help of a few acquisitions, such a plan would probably take upward of a few years to have any appreciable benefit to shareholders, as drugs take a long time to be developed on average.
Considering Pfizer’s recent major acquisition of Seagen for the purpose of beefing up its cancer therapy program portfolio, any strategic changes would probably need to build on the new oncology-heavy direction the business embarked on rather than pivoting again.
All in all, Starboard’s investment in Pfizer could be a positive development, and it seems to be the case that there are actually some (perhaps operational) inefficiencies that could be addressed. It remains to be seen whether the activists can contribute on that front beyond what management already has in the works.
For now, it’s reasonable to be optimistic, as having more experienced advisors around is probably beneficial.