Pfizer’s M&A disease brings activist cure
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Robert Cyran
NEW YORK, Oct 7 (Reuters Breakingviews) -Pfizer PFE.N frittered away a massive opportunity. The $166 billion pharmaceutical giant generated over $30 billion of extra cash during the pandemic thanks to sales of Covid vaccines and treatments. It spent over twice as much as that on questionable acquisitions. With shareholders sitting on a loss under Chief Executive Albert Bourla, activist Starboard Value will find fertile ground in a push back toward the parsimony of predecessor Ian Read.
Bourla became CEO at the start of 2020, just months before the world locked down. He sailed through the pandemic, partnering to help develop an experimental vaccine by Germany’s BioNTech that became a massive success. Pfizer’s free cash flow was about $10 billion in 2019. This figure rocketed to $56 billion in total in the two-year span of 2021 and 2022.
Problem is, Bourla became overly ambitious, going on a roughly $70 billion shopping binge. The largest acquisition in March last year, of cancer-specialist Seagen for $43 billion, looked eye-wateringly expensive at the time. Breakingviews estimated return on investment for 2025 would be around 2% even with huge cost cuts. And Pfizer paid $5 billion for biotech GBT, which appears a bust, after Pfizer pulled off the market a sickle cell disease drug developed by that firm.
Pharma deals take some time to work through, so Bourla may yet show improvement. And to be fair, cash windfalls like those created by the pandemic are hard to spend well. Repurchasing large amounts of Pfizer shares at puffed-up prices would have been a waste. The company sensibly upped its dividend. But it also over-optimistically upped its R&D spending. Strip out Covid revenue, and it’s a greater proportion of revenue now than it was in 2019.
Investors aren’t enamored with the results. Those who bought shares at the start of Bourla’s rein have lost money. That’s in sharp contrast to predecessor Ian Read, where shareholders tripled their investment, as the company focused more on selling – it exited two big businesses and spun off its animal health unit – than buying. Rivals have also done better than Pfizer under Bourla. Over the past five years, Merck’s MRK.N investors have over a 50% return, while Eli Lilly LLY.N shareholders have reaped more than a 700% gain on anti-obesity fever.
With a valuation of 3.5 times estimated 2024 revenue, which is a 20% discount to Merck and 50% compared to AbbVie ABBV.N, it’s a small wonder why the company has become a target. Starboard has approached Read, who at more than 70, might not be interested in another ride. At the very least, if he doesn’t return, shareholders may want him to bring back his strategy of cutting costs, disposals, and limiting the company’s ambition to concentrate on only a handful of medical fields. Bourla’s future depends on willingness to accept a more focused Pfizer.
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CONTEXT NEWS
Activist investor Starboard Value has taken a $1 billion stake in Pfizer, according to a Wall Street Journal story on Oct. 6.
The pharmaceutical company’s revenue more than doubled between 2020 and 2022 thanks to revenue from vaccines and pills for the treatment of Covid-19. Pfizer has bought multiple companies over the last four years, including Seagen for $43 billion, Biohaven Pharmaceuticals for $13 billion, Arena Pharmaceuticals for $6 billion, Global Blood Therapeutics for $5 billion, and Trillium Therapeutics for $2 billion.
The company’s stock price, however, has fallen, since Albert Bourla became chief executive in early 2019. The activist investor has approached former Pfizer Chief Executive Ian Read and former Chief Financial Officer Frank D’Amelio.
Pfizer's shareholders wasted pandemic https://reut.rs/3YbLqtI
Editing by Lauren Silva Laughlin and Pranav Kiran
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