The Compound and Friends - The Battle for Pfizer Begins

Episode Date: October 21, 2024

On this special episode of The Compound and Friends, Robert Armstrong, US financial commentator for the Financial Times, joins Josh Brown to discuss the revelation that activist hedge fund Starboard Value has taken a billion dollar stake in Pfizer. Don't forget to sign up for The Compound Newsletter to receive Callie's free Election Chartbook! Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: https://www.linkedin.com/company/the-compound-media/ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Ladies and gentlemen, welcome to the compound and friends. If you're hearing this, I am in Omaha, my first trip ever to Omaha, Nebraska. I'm there to give a talk to the Financial Planning Association of Nebraska. I am also going to visit my friends at Carson Wealth and say hello to Ron Carson. And I think I'm going to eat a whole bunch of steaks. So I actually put this on LinkedIn. I asked for a bunch of suggestions. I got way more back than I'm going to have time for.

So there'll be a little bit of prioritizing. I'm also going to maybe stalk Warren Buffett. No, I'm definitely not going to do that. But if somebody listening knows how to get me in touch with Warren while I'm in town. Feel free to reach out. All right. I want to tell you about tonight's show. So as many of you know, I'm in a Pfizer stock.

It's something I've been sitting in for a year. I feel trapped. I'm not really trapped because it's trading a little bit above my cost average. I could sell it anytime, but I'm stubborn. It's 10 or 11 times anytime, but I'm stubborn. It's 10 or 11 times earnings, 6% dividend yield. It refuses to rally. Everything else is up. Literally, you could throw darts and make money in the market this year, and this stock just will not budge. But now there's an activist. And to discuss that story with me, I brought

in Robert Armstrong, who is covering this unfolding saga for the Financial Times. And Rob is first time on the channel. So I think we had a really great conversation. I can't wait for you to hear it. I have nothing more on that front, but I do want to tell you, for those of you subscribed to the Compound Insider, which everybody should be. We are doing something very special.

We are sending out our election season chart book. This is something that Callie Cox, our chief strategist at Ritholtz Wealth has put together working with chart kid Matt and Sean on the research side. And it's fantastic. The charts are incredible. The insights are incredible and it's free. The charts are incredible, the insights are incredible and it's free. We typically send this out to clients.

It facilitates a lot of really helpful conversations between the financial planners at the firm and the clients of the firm and we want you to have it as well. So it is on the way if you are already subscribed and if you're not, it's not too late. Check out the compound insider Make sure you subscribe and we will get you a copy of

Callie's election season chart book and I think you're gonna love it. Alright, that's it. I'm gonna send you to the show right now Please enjoy and I will talk to you all soon when I'm back in New York back in New York. Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this

podcast. Hey guys, welcome to the Compound and Friends. I'm your host, Rachel, and welcome to the Compound and Friends podcast. Today, we're going to talk about the Ritholtz Wealth Management podcast. We're going to talk about the Ritholtz Wealth Management podcast, which is a podcast that's been around for a long time. It's a podcast that's been around for a long time, and it's been a big hit. It's been a big hit for a long time.

It's been a big hit for a long time. It's been a big hit for a long time. It's been a big hit for a long time. It's been a big hit for a long time. It's been a big hit for a long time. It's been a big hit for a long time. It's been a big hit for a long time. It's been a big hit for a long time.

It's been a big hit for a long time. It's been a big hit for a long time. It's been a big hit for a long time. It's been a big hit for a long time. It's been a big hit for a long time. It's been a big hit for any investment decisions. Clients of RIDHOLT Wealth Management may maintain positions in the securities discussed in this podcast. Hey guys, Pfizer has been one of the worst performing stocks in the pharmaceutical space and within the entire S&P 500 over the last few years as the COVID emergency has wound down and demand for both the vaccine as well as the Paxlova treatment has plunged and along with that demand the company's profit growth as well. This month, after years of underperformance and setbacks, Pfizer has finally caught the attention of an activist hedge fund Starboard Value, which has bought a billion dollar stake in Pfizer stock. With me today to discuss is Robert Armstrong, who is the FT's US financial commentator and writes the unhedged newsletter. Previously, he was the US financial editor, chief editorial writer, and has also edited the FT's Lex column. Rob, this is your first

time on the show, but we're so happy to have you. How's it going? I'm excited to be here. It's a great topic. Fascinating story. So you wrote a really great piece just giving people an overview on what's happening, why it might be helpful, or why it might not work. And I just want to start from the beginning. So Pfizer obviously had fabulous success during the pandemic. They were among the first drug makers to come up with what at the time seemed a miraculously fast vaccine for the COVID emergency. Yes. I mean, of course,

it was an incredible product. They made a ton of money. But you know better than I do that what Wall Street likes is not products that make money for a couple of years, but products that go on forever. They like those perpetual cash flows. So when the vaccine was no longer a blockbuster drug, it's like, what have you done for me lately, Pfizer? Yeah. And it almost, it seemed like it happened like somebody flipped the switch.

We went from a situation where everyone was getting vaccinated around the world, and then there was a booster. And then at some point in 2021, after enough people had gotten the Omicron version, they just said, all right, it's over, take off the masks. And Pfizer wasn't ready. And I think the expectation at a lot of companies was actually that the

boosters would be a perpetual thing that you did like every six months or every year or something, and it just didn't play out that way. Right. Okay. So now you have one of the largest drug makers in the world finds itself, finds itself with the government selling it back unused treatments, uh, vaccine demand dries up and there's this gap. They don't have the next thing that's going to replace it.

There's no growth engine there. If you look at growth expectations for this company there, it's like inflation type growth for the next couple of years, you know? And, and then it's trading like that. The stock is down from where it was five years ago. It's way down from the pandemic. And it's like almost at a single digit price earnings multiple. The stock is kind of dead in the war. Okay.

So the stock has lost more than half its market cap. It's got, uh, Alfred Borla is the CEO and he is somebody that has spent most of his time now at Pfizer, either in the pandemic or trying to repair the company. He's basically a wartime CEO, for better or for worse. It's become apparent that he's betting the farm on Seattle Genetics, what we call Cgen, which was a massive acquisition. Pfizer took on a ton of debt to do it. And if it doesn't work, it's unclear how this company's ever going to grow earnings

and revenue again. It seems like it almost has to be a success. Well, a little perspective here. The cycles in the pharma industry are long. So I have been following this industry, I'm ashamed to say long enough to remember when Lilly, which is the fastest growing, the hottest thing, has the GLP weight loss drugs. You know, it's the hottest thing in the industry.

You know, 15 years ago, it was like Lilly looked like Pfizer. It was like, can this company have a drug? Can it have a single successful trial? It was trading at eight times earnings and everybody thought, you know, it was dead man walking in the industry. So it's like the cycle of drug development is long and it's Chansey trying to develop a big drug, but what Pfizer needs to get back on the horse is that big drug. And you're right.

It's not clear what it is right now. Just on Lilly today, it's the largest market cap pharmaceutical in the world. And to your point, people said, why does this company even exist as recently as 2012? It seemed unclear what they would ever be able to get right. And Pfizer's in that place right now. It sure is. Okay. Let's talk a little bit about the Cgen acquisition because it is the kind of thing where we're

talking about a huge amount of patents and compounds that could ultimately turn into blockbusters for a variety of oncology cases. And Pfizer thinks cancer is its future, which is a pretty big category, so that makes sense. But they spent a lot, and to your point, it's a long cycle, and they have nothing to show for it yet, and it may be years before they do. Yeah, exactly right. And so this is like an invitation to investors to be like, what do we think about this strategy that Borla has been pursuing? You know, something that sets Pfizer apart somewhat from other companies is

it's very light on the early stage development of drugs. What it basically does is buy stuff that are in kind of mid-stage or later stage development. And then it's a kind of final stage development plus marketing. And when you're not pulling in stuff, when you're not getting the good stuff from that strategy, it looks like, what are you doing for a lot? You can kind of understand why an activist might fear.

Yeah, so do you think that right now, given where the stock's valuation is, it's basically bottom of the barrel, they're not getting the benefit of the doubt that they're gonna have any hits whatsoever. It's paying a 6% yield. Do you think that yield is appropriate? Or do you think that there should be a reinvestment

or a debt pay down that takes priority over paying out 6% annual dividend yield? Right now, as of this year, they're not covering the dividend from pre-cash flow. That is something that scares you. Now, they have a big cost cutting plan on. They're going to kind of try to right size the company so it fits with the cashflow profile of the company. But you know how those things that takes time, uh, re-engineering a company like that, so it runs cheaper. That takes time as well.

So, uh, you know, it's, as you know, very well, it's very tough for companies to cut their dividend. Oh yeah. It sends a terrible message and probably a lot of people who own this stock are kind of classic little old lady in Ohio dividend investors, I would say. Or ETFs that are waiting Pfizer because of the size of its dividend and a lot of money comes out of the stock if they decide, you know what,

the prudent thing to do for the long term is to conserve cash or pay down debt and we're gonna cut our dividend by 50%. It might be the right decision, but that stock is going way lower. Oh, it would be smashed. It would be a thing to see for sure, yeah. Okay, so as a shareholder,

that's probably what I consider to be the biggest risk here. Yeah. No, I think that's absolutely right because depending how this latest back and forth with the activist investor with Starboard, you could see big changes at this company. So there's uncertainty there for sure. All right. We're going to talk about the activist now. If Borla cuts the dividend, he's toast because the activist is not going to have a difficult

time unseating him and probably some board members. Yeah, that's the kind of thing that's a lot easier for a new CEO to do. Like, I'm the new guy here. We're resetting things for the old CEO has been there five years to do it. It's almost impossible. Let's talk about Starboard Value. So this is a firm that's had massive success with companies in all different industries, including the healthcare space. What are you hearing in the course of your reporting about the overall reception just within Pfizer or within

the pharmaceutical investor community that they've bought a billion dollar stake and they, uh, they're paying attention. There is a lot of question marks about what they're going to suggest. A lot of times when an activist comes in, there's like an obvious play. Let's break this company up. Let's do an acquisition. Let's radically change the capital allocation strategy. Nobody I had spoken to has a real clear idea what that kind of open goal for them to just tap through is.

Right. This looks like a hard turnaround. Even activist investors who are willing to hang around for three or five years, which is that extreme long holding period for the activist investor industry, a turnaround like this, you may not, there's no obvious quick payoff thing to do. Right. One exception, which is you get new management in there and that convinces investors, look, things are going to be different now.

Uh, and you know, we're willing to take a shot that might give the stock a bump. But again, it's not totally clear, at least not to me, that Borla has done a terrible job. Right? He's gotten a pretty tough hand and he's played it okay. A lot depends on how the Cgen acquisition works out, but it's not like, Oh, this guy, uh, he's been a disaster and we clearly need, need, need to get rid of it. Well, so pushing back on that, you could say that the M&A strategy, even if Cgen ends up being a hit has been somewhat unfocused, there have been some other acquisitions where they've actually had the shelf of the drug.

Yeah. There have been some other acquisitions where they've actually had the shelf, the drug. Yeah, the sickle cell drug that blew up very quickly after they bought the company. You could also say a good pharmaceutical CEO has a portfolio that can withstand the sudden drop off of something like Paxlovid and a vaccine. And you know, Pfizer really bet the ranch that this was gonna be the growth engine for the next at least five years and the evidence of that is there was nothing else waiting. Yeah, there didn't seem to be a plan in place

for the big drop off. In other words, if you know revenue is gonna drop a lot because you have a drug that's basically a one shot deal. Metaphorically, it's not actually one shot, it's several shots, but then you better have your cost cutting plan in place early on, you know, you better have your, you better have your ducks in a row for when the day comes when revenue drops and that didn't seem to be the case. In recent years, we've seen several blue chip companies that were struggling, case? In recent years, we've seen several blue chip companies that were struggling make a management

change and produce that like immediate halo effect of, hey, things are going to be different here from now on. 3M is a recent example. 3M is up 50% on the year, replaced the CEO last fall, cleared the deck, settled some lawsuits and it's not like that's a fast growth story now, or they've really figured anything fundamental out. It's just a breath of fresh air and they got a rerating as a result. And we've seen that elsewhere.

It is a legitimate possibility that that's the kind of thing that could happen here. Yeah. I think it's a possibility. And you know, maybe this stuff is borla's fault and maybe it isn't, I think it's a possibility. And maybe this stuff is Borla's fault and maybe it isn't, but it almost doesn't matter in a way. Starbucks is another example of this. Exactly. And I think the classic example of this, actually, Josh, is when value act got into Microsoft and they pushed Bulmer out. And it was what

company needed and it created a tremendous amount of value, getting a new set of eyes in that company that wasn't part of the kind of sounding group of people. And they took the company to a different direction and it's been a great story. Yeah. What's ironic is it might actually be the best case scenario for Borla himself. He made a big amount of noise last year about having put his entire retirement account or

his pension account into Pfizer stock. So he is all in and paradoxically, that might be the best case scenario for his personal finances. Yeah, they get a big bump. But I think from what I understand, and this is mostly hearsay, but from reliable people, the board likes Borla and the board is a strong board with a lot of big names on it, a lot of really serious people on it. So I don't think it's going to be an easy thing where we snap our

fingers and there's a new management team, a couple of new board members, and we're off, you know what I mean? I just don't think it's going to play out like that. It's going to be a bit more of a, what we call a knife fight in a phone booth, as they say. Starboard bought a billion dollars worth of stock. The market cap is 165 billion. So percentage wise, this doesn't look like they're at the stage where they get incredibly aggressive. Right now, it seems like they just want to take meetings. But the door is open for them to get bigger. But I wanted to ask you, one of

the most successful activist campaigns in recent years took place at Salesforce. And Starboard was a part of that along with three or four other prominent activists. They got Benioff's attention. Benioff immediately went into cost cutting, trim the fat mode, and the stock doubled. So it's, it's not out of the realm of possibility that Starboard attracts other activists and combined, they end up owning a more meaningful stake. That is absolutely true. But I would say two things. One, in the case of Salesforce, there was a clear story about what needed to be done.

Salesforce was a big company that was still acting like a startup in terms of its sort of discipline on the P&L and on the balance sheet. So the mission was very clear what you had to do there. And if you look at Pfizer's stock, since this story started to unfold with Starboard, it's not like people, it's not like the market is saying, wow, something big is going to happen here. The market is basically holding its breath. And I think that reflects the complexities and the difficulties of this situation.

None of us have seen the Starboard deck though, right? So it'll be interesting when they finally open the kimono a little bit and tell us what their plans are, that's gonna be an interesting problem. One of the wrinkles here, Rob, is that it appeared at first that Starboard had the former CFO and the former CEO of Pfizer on their side, on their advisory panel, to help them turn the company around from the outside. of Pfizer on their side, on their advisory panel,

to help them turn the company around from the outside. And then as soon as that news broke, something happened behind the scenes and both the former CEO and the former CFO disavowed their involvement with the activists. Are there naked pictures of these two gentlemen somewhere at Pfizer headquarters? Well, of course, Smith at Starboard says that a representative of Pfizer threatened them,

like we're going to claw back your deferred compensation or whatever. So there's accusations flying back and forth. But I've never heard of anything like this before. This is unbelievable. Yeah. And it's like, what did this former CEO and the CFO read and the CFO, what were they thinking was going to happen?

Did they think this was going to be like a nice friendly thing where they just like rocked into their old place of business and told people there's this campaign and everyone was going to like hug them and pat them on the back? You know what? I do think there's probably some frustration on the part of rank and file Pfizer employees who own a lot of the stock, especially when they look at the GLP-1 pharma companies that

have, you know, you've got employees walking around with $10 and $20 million positions in not just Lilly but Novo Nordisk. If you're sitting at Pfizer and you've got a flat stock price over, I don't know, 12 years and you've just been through this roller coaster, you're definitely sympathetic to any activist that has something new to say. Absolutely right. But it's so interesting. And the other story that the FT reporter, which I thought was incredible, was the CEO

found out there was an activist campaign as a fat singer. Tell that story. So Borla the CEO of Pfizer has no idea that there is this activist campaign brewing. Right. He's like sitting at home on Saturday, doing a little work and he gets an email from his email in his email box that has no message and it's from Frank D'Amelio,

the former CFO of Pfizer who has been talking to the activists. No message in it, but the email is from D'Amelio to him and there's a starboard guy on the CC. Why is there a starboard guy on the CC. Why is there a starboard person on the CC? On this blank email and, uh, you know, starboard had been planning to disclose this whole thing like later this month at a big conference and somebody literally hit send by mistake. And it was like, Oh, I guess we're doing this today instead.

You know, it's like, you know, you think that wall street works in this kind of perfect world, but it's like the movies and it's orgies and it's slick and it's fancy restaurants, but you know, weird stuff happens by mistake too. So the latest reporting that I saw from the FT, I'm not sure if, uh, if you're part of the byline here, um, was that there's a Guggenheim connection here that is kind of a wrinkle between the company and the activist. So, D'Amelio and Ian Reed, the two former Pfizer executives who had first been kind of with the activist group, but then publicly changed their mind when things got a little bit hot. They sent their statement, their statement saying, actually, we support war lines,

support the board. That statement came on a Guggenheim partner's letterhead, as it were. Okay. And then the thing that's interesting about this is Guggenheim has made approximately $10 gazillion dollars advising Pfizer on ass sales. And now Guggenheim is putting out the statement by these guys who are like, maybe traders are playing for the bad guys or whatever. And everybody is, you know, is, is walked up over it. And now Pfizer is using a different advisory firm for its defense of the activist approach.

And so again, it's an example of you think Wall Street is all slick and on top of things. Yeah. This looks messy. I was going to say it's kind of a, it can be a clown show. This looks like celebrity, uh, drama on TMZ. Yeah. This is from the FT story.

Guggenheim has raked in an estimated 172 million in fees from advising Pfizer on nearly $400 billion of completed and attempted acquisitions since 2011. If you had a good relationship with Pfizer as an advisory investment bank, you'd think you would be walking on tiptoe around that company, right? Because that's the cash cow of all time. What does Pfizer do? They buy companies. You're the M&A Pfizer. You don't want to screw up that relationship. I'll promise you. Okay. Is there a non-zero chance that Starboard looks at this circus and says, this is going

to take too long. We lost our two aces in the hole. They've defected to the other side or thrown in the towel already. And what life is too short. Why, why bother? Like, is that possible here? Of course. And you know that one, what good investors do is they fold when they have to. You're not going to sit around with your billion dollars in an investment that's not working.

Right. Uh, you know, uh, a uh, an embarrassing headline saying that you walked away and you made a mistake. You can handle that, but you're not going to sit in a non-functional situation for years. So what do you think is, uh, uh, what do you think is the next shoe to drop? Just to give people a preview of where this could go next. Um, do you think that there was some sort of a public, here's our deck, here's the recommendations

we're making to the Pfizer board, or do you think there's a full on proxy battle this spring? Where do you think this could potentially be going? Yeah, it's very hard to predict, but I would say the next year to drop is that deck you just referred to. What are the proposals? At some point, Starboard has to show their cards. This is what we think needs to happen. And you know, Pfizer already has a

cost-cutting program going on. It's already spun off the non-core assets. So what are they gonna, they're gonna have to talk about strategy, right? And that's why I think it's very hard to understand what they're up to if part of their strategy is not a management change. I could be wrong, but I just don't see what else this could be about. Well, Rob, we're going to be following the story and I'm going to be reading your reporting on it. So I just want to say thank you so much for joining me today.

I want to let people know how they can follow you. The Unhedge newsletter, how often does that go out? Is that weekly or? No, it's every morning for my sins. I write a daily newsletter. Oh my, but, uh, if you just look up on hedge, F T you'll see how to sign up for the newsletter. And I look forward to, uh, having your listeners as readers, Josh, thanks for having me on. Fantastic. Thank you so much, Robin. We'll check, we'll check in with listeners as readers, Josh. Thanks for having me on. Fantastic.

Thank you so much, Rob, and we'll check in with you as the story develops. Guys, everyone make sure to follow the Unhedge newsletter from the FT. That's Rob Armstrong. And thanks so much for listening. We'll talk to you soon. Whether you're just getting started as an investor or you're managing a multi-million dollar portfolio, Ridholtz Wealth Management has the solution for you. It all starts with building the right financial plan.

To speak with a certified financial planner today, visit ridholtzwealth.com. Don't forget to check us out at youtube.com slash the compound RWM. Make sure to leave a rating and review on your favorite podcasting app. If you love investing podcasts, check out Michael and Ben every Wednesday morning on Animal Spirits. Thanks for listening.