PfizerIt is (PFE -0.66%) The burgeoning feud with activist investor group Starboard Value appears to be intensifying. Since the activist took a billion-dollar stake in the drug developer, it remains an open question what he wants to change and how he proposes to do it.

Now, after a presentation at the 13D Monitor Active-Passive Investor Summit by Starboard CEO Jeffrey Smith on October 22, there is much less ambiguity. In particular, Smith uttered seven simple, blunt words that shed light on his group’s view of Pfizer and its management.

If you are a shareholder or considering investing in this stock, you need to know what he said and why it opened a can of worms.

This phrase means there is a fight brewing

“The track record here is not great,” Smith joked, referring to Pfizer’s recent lack of new drug launches. blockbuster drugs capable of earning over $1 billion in revenue per year.

Starboard’s criticism is aimed squarely at Pfizer CEO Albert Bourla, who has led the pharmaceutical giant since early 2019. Although activists applaud Bourla’s leadership in the race for coronavirus vaccines and therapeutics, they say the The company lost between $20 billion and $60 billion in value. under his mandate, depending on how the figure is calculated.

Starboard identifies four key problems with Pfizer:

• His recent internal research and development (R&D) efficiency
• Its expected future returns on R&D investments
• Its capital allocation strategy
• Its forecasting and budgetary processes

On the first two points, the group’s version is difficult to dispute. Despite repeated glowing public reports from the CEO on the strength of the pipeline and 10 potential blockbuster drugs planned for launch between 2019 and 2022, a series of late-stage clinical trial failures and worse-than-expected sales performance of approved medications. left shareholders with dashed hopes.

Additionally, despite management’s optimism about the company’s current attempts to develop a drug to treat obesity and type 2 diabetes — potentially opening the door to entry into a market that could be worth up to to $100 billion by 2030 — Starboard rightly points out that, so far, Pfizer’s efforts have not been successful.

Another problem is that for the programs currently in preparation by Pfizer, the return on investment in R&D is just 15%, putting it well below virtually all of its pharmaceutical peers, who expect a median return of 38%. Part of the problem is that its revenue is only expected to grow about 41% by 2030, not including both its coronavirus products and the revenue it will lose when certain patents. Activists point out that this problem is at the root of the pharmaceutical sector’s current struggle.

But Starboard’s complaints don’t stop there. It says the company overpaid for its recent acquisitions, such as the $43.4 billion it spent to acquire oncology drug developer Seagen. He also claims that Pfizer’s sales and profit forecasting capabilities are less accurate than those of its competitors, leading to large discrepancies between the revenue forecasts reported to investors and what it actually achieved.

Pfizer management has not yet responded, but they likely will, and soon.

There is now long-term performance at stake here

Starboard’s only public and explicit request to Pfizer Board of Directors for now, it needs to “hold management accountable to achieve appropriate returns on capital.” The subtext seems to be that he wants the CEO to be replaced by someone else who can make more prudent investments in R&D, either through internal work or through acquisitions and deals. license. It probably also contains concrete suggestions on how to achieve these priorities.

Are Starboard’s arguments valid and are the claims it makes accurate? For the most part, the answer to both of these questions is yes. Pfizer has indeed encountered many obstacles in the clinical stage in recent years, and it is also true that many management statements regarding expected business performance have ultimately been too optimistic.

Likewise, the difficulties of its weight loss and diabetes program were somewhat exacerbated by the company’s reluctance to accept mediocre effectiveness data on its face and start from scratch with another attempt. And while it’s somewhat subjective, it’s very plausible that he overpaid for certain pharmaceutical companies or assets amid his acquisition spree over the past few years.

With the exception of clinical trial failures, which are largely an unpredictable and unavoidable reality of the industry, the responsibility for most of these pitfalls lies with senior management.

But more important than Starboard’s claims is that it is now ensuring that there are public feuds with Pfizer’s management and major shareholders. These disputes will generate bad press and are likely to harm Pfizer’s stock price. It could also cause management to take ill-advised actions in an attempt to save face or address the activist’s concerns. Company strategy is now a contentious issue rather than a unified plan.

All of this makes Pfizer a riskier stock to invest in today than it was a year ago.