This is an audio transcript of the Behind the Money podcast episode: ‘An activist tried to take on Pfizer. Then things got messy’

Michela Tindera
Hey there. It’s me, Michela. Before this week’s episode, I want to inform you of an upcoming event that I think you’ll want to know about. This December 3rd and 4th, the FT is hosting its Global Banking Summit in London. And if you attend, you’ll join the CEOs of Deutsche Bank, Barclays, Wells Fargo and more to explore the top global issues dominating banking today. Oh, and I’ll be there too. I’m hosting a live Behind the Money podcast on the 3rd. To find out more about the summit and claim a discount code, check out our show notes and see you there.

It’s Sunday, October 6th. Pharmaceutical business Pfizer is about to host a board off-site in Ireland. And the company’s CEO, Albert Bourla, is getting ready for it. While he’s doing that, he opens his email. Inside of his inbox, he sees a message that’s a bit out of the blue. (Email alert bleeps) It’s from Pfizer’s former chief financial officer Frank D’Amelio, and the email is a bit weird: it’s completely blank. And he looks at the To line of the email, which contains something very unexpected. The blank email was also sent to someone from Starboard Value, a major activist investor.

Oliver Barnes
I mean, if you want corporate drama where, like, life itself is stranger than fiction, this feels like it.

Michela Tindera
That’s the FT’s US pharmaceutical correspondent Oliver Barnes. And he says that Bourla receiving this seemingly fat-fingered email is only the beginning.

Oliver Barnes
What follows is, as one Wall Street dealmaker told me, the worst first week in an activist campaign in the history of Wall Street.

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Michela Tindera
I’m Michela Tindera from the Financial Times. Today on Behind the Money, we’re taking you inside a very chaotic activist investor campaign and looking at what it could mean for one of the world’s biggest pharmaceutical companies.

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Remember back to the height of the Covid-19 pandemic, everyone’s waiting on tenterhooks for a vaccine, and the US pharma giant Pfizer is on the case.

News clip 1
The FDA has now granted full approval of the Pfizer Covid-19 vaccine . . . (cuts to other news clips)

News clip 2
. . . Pfizer is shipping out the first doses of the coronavirus vaccine . . . 

Michela Tindera
Oliver says that Covid transforms Pfizer. It takes it from the company that was best known for developing drugs like Viagra and Lipitor and turns it into the stock to invest in.

Oliver Barnes
And it has the almightiest of all almighty bull runs. And its market cap soars to more than $350bn. Record highs, basically.

Michela Tindera
And Pfizer CEO Albert Bourla is thrown into the limelight.

Oliver Barnes
Bourla is someone who is praised for delivering the Covid vaccine, effectively taking on the status of like a world leader during the pandemic. I mean, he is held in like incredibly high esteem.

Michela Tindera
He writes a book. President Joe Biden calls him his good friend. But as Covid fades into the rear-view mirror, Pfizer starts to face new challenges. For one, the vaccines become old news, and then the next big thing in pharma kicks off.

Oliver Barnes
There’s pharmas that have weight-loss drugs and are making money out of them, which are two companies: Eli Lilly, the world’s biggest-ever pharma company, and Novo Nordisk, the world’s second-biggest ever pharma company, and then everyone else. So it’s the kind of story of, like, there are these ones doing gangbusters and Pfizer’s a bit of an also-ran at the moment.

Michela Tindera
But even so, Pfizer is sitting on this Covid vaccine windfall and Albert Bourla seems to have a plan to find new ways for the company to grow.

Oliver Barnes
They obviously get all this money from Covid. And partly using that cash and partly using debt, they go and fund $70bn worth of M&A.

Michela Tindera
Most importantly, in March of 2023, Pfizer announces it’s making a $43bn acquisition of a cancer drugmaker called Seagen.

Oliver Barnes
Seagen is in like quite a cool, hot area of drug discovery. But the doubts that investors have about this acquisition — it’s a big acquisition, it’s $43bn — and the consensus among investors about the Seagen acquisition is that Pfizer basically overpaid. To a lot of investors, it doesn’t look like the kind of acquisition that is creating value.

Michela Tindera
And so these factors — the slowing demand for vaccines, the rise of weight-loss drugs and the M&A spree that upset investors — they all play a role in Pfizer share price collapsing.

Oliver Barnes
Basically, all the pandemic gains evaporate and it falls to, like, pre-pandemic levels. And it goes from like a high of nearly $60 a share to now like $29 a share or thereabouts.

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Michela Tindera
This makes the company start to look like a prime target for an activist investor.

Maria Heeter
So the goal of activist investing is primarily to make money.

Michela Tindera
That’s Maria Heeter. She covers deals for the FT, and she’s been following the story with Oliver. 

Maria Heeter
Activist investors tend to come into a company stock. They accumulate a position, and then they’ll knock on the door of management, the CEO, the board, and say, we are shareholders in your company. We have a large position. We would like to see the share price go up. And they outline a list of decisions, changes that they think would make that share price go up.

Michela Tindera
And this is where the hedge fund, Starboard Value, comes in.

Maria Heeter
They’re probably best known for, in 2014, replacing the entire board of directors of the parent company of Olive Garden, which is a casual Italian dining restaurant loved by people in the US. They’d outlined a very detailed presentation that sort of went so granular that they criticised Olive Garden for not salting their pasta water adequately.

Michela Tindera
Maria says that investing in tech companies is more of Starboard’s breadsticks and butter. It’s dabbled in pharma before but without much success. And when it spots Pfizer’s cratering share price, it wants another shot at the sector. So earlier this year, Starboard starts quietly building up a $1bn stake in the company.

Oliver Barnes
The ambition of Starboard is to make the stock pop, right? They’ve parked $2bn in it. If the stock goes up 20 per cent, they make $200mn, right?

Michela Tindera
The issue is Oliver says that there’s not much Starboard can do to really pop that share price up any more. Bourla has already taken a lot of the steps that an activist would typically come in and do.

Oliver Barnes
The kind of questions or doubts everyone’s had about Pfizer having activists, like, what levers are there to pull in Pfizer. The typical kind of playbook and tactics of an activist are not really there with Pfizer. So to go through a couple obvious examples, activists often call for divestitures where you go, you’ve got this division, sell it off. Investors will like it. You’ll make money out of it. Pfizer’s basically done all its divestitures.

Then investors might say, we either block or encourage you to do acquisitions. The Seagen acquisition’s closed. They can’t block it. They can’t unwind it. Pfizer has a very high debt level. It spent most of the Covid money. It can’t go and do more acquisitions. So that avenue is kind of closed off, too. And then maybe Starboard can outline a plan of how Pfizer can basically do better in terms of, like, costs. But they’ve done a 5.5 or outlined a $5.5bn cost-cutting drive over the past couple of years, which runs through to 2027. So that’s kind of been done, too.

Michela Tindera
But Oliver and Maria’s sources have told them that Starboard sees Pfizer CEO Bourla and his acquisition spree as the problem.

Oliver Barnes
When you kind of read the tea leaves, it leaves you to one place, right? Maybe Starboard’s target in this is the man himself — the CEO.

Michela Tindera
Now, remember, Starboard doesn’t have loads of experience investing in pharmaceutical companies. And that means it could be a tough sell to come in as an activist and propose big structural changes to Pfizer. So while it’s building up the stake, Starboard also starts building up its campaign’s credibility by recruiting two key people.

Maria Heeter
They were lucky to enlist the help of two of Pfizer’s longest-serving executives who had left the company. That’s Ian Read and Frank D’Amelio. Ian Read was the longtime CEO of Pfizer who actually gave Albert Bourla his job, and Frank D’Amelio was the company’s chief financial officer. Being able to tap the resources of two former longtime pharmaceutical executives gave them a lot of leverage. It’s a sign to the board and to investors and to the management team that something needs to change at Pfizer if two of its longest-serving former executives are unhappy with how the company has performed.

Michela Tindera
These are also two people, Read and D’Amelio, who Albert Bourla really seems to think highly of.

Oliver Barnes
Reading through Albert Bourla’s book Moonshot, which is his kind of reminiscence on what happened during the pandemic, he calls Ian Read a man of strong convictions from whom I learned a lot. And he says of Frank D’Amelio, he’s a long-standing and highly regarded chief financial officer who likes to roll up his sleeves and problem-solves. These are like out-and-out compliments.

Michela Tindera
Now, at this point, as Starboard is building up its stake and getting these former execs involved. The CEO, Albert Bourla, has no idea of Starboard’s plans until he sees that blank email. (Email alert bleeps) So let’s go back to that moment a few weeks ago on Sunday, October 6th.

Oliver Barnes
What I think the biggest jolt for him is when he receives that email is that his former finance chief has turned on him, right?

Michela Tindera
Just moments after the email lands in Bourla’s inbox, Read and D’Amelio realise what happened and start damage control. They both call up Bourla and they urge him to hear Starboard out.

Oliver Barnes
And I’m sorry, for anyone on a human level, that is the most extraordinary gut punch, right? The guy who was your predecessor then turns round a few years later and is, like, the way you’ve run the company is so bad that I’m now working with an activist investor who’s going to call for a shake-up of it.

Michela Tindera
Scale of one to five, five being the worst, how bad is this situation?

Oliver Barnes
Six. (Chuckles) You know what I mean? Like, it’s crazy, isn’t it? Basically their former colleagues have turned on them.

Michela Tindera
But within a few days, a lot unravels. By Wednesday . . . 

Oliver Barnes
Frank D’Amelio and Ian Read put this statement out, basically saying, we’re not backing Starboard. We’re actually backing Albert Bourla, his management and the board. And everyone’s like, what?

Michela Tindera
Yeah, exactly. What?

Oliver Barnes
In Starboard’s telling, an unnamed representative from Pfizer threatened to sue Read and D’Amelio. Starboard says that they offered to cover their legal fees, but they still dropped out of the campaign.

Michela Tindera
So that’s what Starboard says happened. And Read and D’Amelio haven’t made any kind of public statements since they decided to change sides back to Bourla. So it’s tough to say exactly what made them switch. But one thing is clear: this decision really dents Starboard’s chances for a successful campaign. Having two former executives on their side really gave them a lot of firepower. And without it, Starboard could be back to square one.

Coming up, we’ll look at Starboard’s next move and what this could mean for Albert Bourla.

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Michela Tindera
So last we heard, these two ex Pfizer executives, Ian Read and Frank D’Amelio, have pulled their support for Starboard and are backing Bourla in his fight. So Maria, if we’re to take stock of this situation right now, walk me through just like how bad is this for Starboard that their plan was revealed early in basically a fat-fingered email.

Maria Heeter
Activists benefit, I think, from surprise and also from preparation. So the company is usually at the back foot. They’re learning about the stake sometimes through a story in the Financial Times, sometimes in a presentation. And the company sort of typically, like, scrambles to respond. In this case, Frank D’Amelio’s fat-fingered email, which was sent to Albert Bourla, gave the company a chance to sort of mount its defences. Now executives at Pfizer have been able to tap advisers like investment bankers or lawyers to strategise on how to sort of stymie Starboard’s involvement.

Michela Tindera
But despite losing Read and D’Amelio’s support, Starboard is still pushing ahead with its campaign. Yesterday, October 22nd, at an activist investor conference in New York, Starboard went ahead and officially presented their plan for Pfizer. So, Oliver, what happened at this meeting?

Oliver Barnes
So basically, all the great and the good of the activist investment world got together at the Pierre Hotel, which is like a plush, old-timey hotel just off Central Park. And the headline act was Jeff Smith, the chief executive and chief investment officer of Starboard. And in his 40-minute or so speech, what Smith outlined was how — in quite acute detail — was how under the tenure of Dr Bourla, Pfizer had failed to deliver on turning many of its experimental drugs into blockbusters, drugs that generate more than $1bn in revenue, and also its R&D spending and spending on M&A had failed to yield revenues and growth in a way that other peers have managed to do. And there was one particularly striking line in the presentation where he calls on management and the board to do something different. He says he thinks it was unlikely that Pfizer would be able to reverse its declining revenues and languishing performance. Effectively, I think he’s basically saying, let’s think about the CEO and whether he should still be in his job.

Michela Tindera
Oliver, you already mentioned that the company’s made a lot of the changes that activists typically try to do to raise the share price. I mean, you know, cost-cutting, divestitures. So what sort of impact is this presentation going to have on the success of this campaign?

Oliver Barnes
What happens next is not ultimately down to Jeff Smith, Starboard, even Albert Bourla. It’s about the 13 other board directors of Pfizer who now are going to be thinking in their private moments about whether Dr Bourla is the guy to carry this company forward and give it a post-pandemic future. And maybe Starboard’s gamble is that them coming out and putting pressure on Pfizer’s management gives some of those board members, if they are discontented with Dr Bourla, the cover to make that known.

Michela Tindera
Now, we mentioned that Starboard hasn’t run loads of activist campaigns on other pharmaceutical companies. How much of a difference does that kind of experience make and just how all this could turn out?

Oliver Barnes
Starboard’s most high-profile campaign in pharma was trying to block Bristol Myers Squibb’s $74bn acquisition of Celgene, but ultimately that case ended up failing and the acquisition happened. They did, however, still make money and there’s a lesson in that, right, which is that maybe the asks that Starboard has for Pfizer don’t come through, but they may still end up making money out of the position, right?

Michela Tindera
Yeah. So it’s like . . . 

Oliver Barnes
If it’s successfully done. 

Michela Tindera
. . . these activists. Yeah, their bottom-line goal is to make money, get a return, get the share price to go up in some way. One would think the way to do that would be to make strategic changes to the company. But if they don’t do that, it can still work out for the activists.

Oliver Barnes
It can still work out, yeah. Like if they get the stock to move in a positive direction, it could still work out. And it’ll be interesting to watch because maybe they see it as, let’s just throw everything at it and like that means it could get even more acrimonious.

Michela Tindera
Right. But why is it that activist campaigns and pharma seemed to just not gel so well together?

Oliver Barnes
So this is maybe one of the issues why, like activism struggles in pharma, right, is because pharma relies on this thing called science. And science is tricky and there’s failures in it and stuff like that. And that’s one of the things the Starboard contends with in its campaign against Pfizer, right? Which is that Pfizer and all these drugmakers work off the basis of making bets on science, putting money towards science, whether that’s through R&D or whether that’s through going and buying biotechs. And, you know, Starboard might have like an eye for the detail, they might have one of the best constructed decks ever and it might be perfectly worded and written, but they don’t determine whether or not a drug works in clinical trials or not.

Michela Tindera
You know, I have to admit, I mean, it’s pretty wild to hear that this guy, Albert Bourla, whose company and vaccines basically helped the world restart during Covid and prevented loads of deaths, is just a few years later being targeted like this. I mean, what have your sources said about this? I mean, it feels a bit like a Shakespearean tragedy.

Oliver Barnes
It is a bit tragic. I mean, there’s one thing getting activists, there’s another thing getting an activist who is collaborating with the guy who hired you. But, you know, the guys managed to make it to the top of one of the world’s biggest drugmakers. He played this huge front foot forward role during the pandemic. The guy likes a fight. He likes strategy. So one would expect that, like, you know, despite the kind of personal dynamics and complications involved in all of this, he is going to rise to whatever kind of challenge Starboard presents him and try and find a route through it. And that route through it might be closing the door on them and saying, we’re not listening to you. That might be trying to find a settlement that like is a compromise between the two parties and draws a line under this quickly. But yeah, it’s not the last we’ve heard from him.

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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Sound design and mixing by Sam Giovinco and Joseph Salcedo. Special thanks to Dan Stewart. Topher Forhecz is our executive producer. Cheryl Brumley is the global head of audio. Original music is by Hannis Brown. Thanks for listening. See you next week.

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