Starboard plotted a marketing campaign in opposition to Pfizer’s chief. Then a clean e mail dropped in his inbox | USAEMALL.com

Albert Bourla was preparing for a board off-site in Ireland this Sunday, when the Pfizer chief executive opened his email inbox to see an unexpected message.

The email from Frank D’Amelio, his former finance chief who had left the drugmaker abruptly three years earlier was blank, but it copied in three of Bourla’s board members. There was another recipient, too: a representative of Starboard Value, the hedge fund that has waged activist campaigns against some of corporate America’s biggest names, from Bristol Myers Squibb to News Corp.

The puzzling correspondence, which seemed to be a fat-fingered gaffe, was Bourla’s first hint of the drama that was about to engulf him. The story of what followed — pieced together from interviews with 10 of the investors, advisers and insiders involved — adds up to one of the most volatile, high-stakes activist campaigns in years.

For months, Starboard had been quietly building a $1bn stake in the US drugmaker behind the top-selling Covid-19 vaccine, whose share price had fallen 50 per cent from its pandemic peak, wiping away $180bn in market value.

One seemingly accidental click of a button had unveiled Starboard’s plan to take aim at the 175-year-old industry leader and its chief executive, who not long ago had been exalted for his role in taming the worst pandemic in a century.

An even bigger blow for Bourla was that D’Amelio and Ian Read, his predecessor as chief executive who had promoted him into the top job, were conspirators in the plot.

Bourla and three of his longest-serving directors — Adobe CEO Shantanu Narayen, erstwhile Deloitte boss Joseph Echevarria and Intuit chair Suzanne Nora Johnson — were soon fielding calls from the two former executives. They urged Bourla to listen to Starboard — which pointed the blame for Pfizer’s underperformance squarely at him.

D’Amelio had first gained Starboard’s respect when he was across the negotiating table from the activist during its campaign against health insurer Humana, on whose board he sat, according to two people familiar with the matter.

The flurry of Sunday calls that followed the blank email brought a stealthy campaign into the open. Then, just as suddenly, D’Amelio and Read withdrew their support for Starboard’s plan three days later, threatening to unravel the second-biggest investment the $8bn fund had ever made, and the bonuses riding on its position.

Late on Wednesday, D’Amelio and Read said they were now “fully supportive” of Bourla, his management and the board. The pendulum had swung back in Pfizer’s favour.

On Thursday, Starboard CEO Jeff Smith, accused Pfizer of skulduggery in forcing the pair to withdraw their support. He claimed that Read and D’Amelio had been contacted by company representatives, who threatened legal action and compensation clawbacks unless they withdrew their support for the activist.

Starboard and D’Amelio did not respond to requests for comment. Pfizer and Read declined to comment.

Smith said if Pfizer board members had known about the alleged threats it would amount to “a clear breach of fiduciary duty”, and called on them to stand up a special committee to investigate the accusation “with clean hands” and hold those responsible to account.

“To be clear, we believe this behaviour is highly inappropriate, flagrantly unethical, and a significant breach of fiduciary obligations,” said Smith, who was once described as the “most feared man on Wall Street”.

To one veteran of several activist defences who knows Read and D’Amelio but is not involved in the fight between Starboard and Pfizer, the tumultuous events added up to “the worst first week in an activist campaign in the history of Wall Street”.

“The angle was Ian and Frank. Now they are just a minnow taking on a huge company with a below 1 per cent stake,” he said, adding that he thought the two executives had “got in over their skis”, and were concerned about becoming the focus of the story.

According to three people briefed on their thinking, Read and D’Amelio had assumed there was board dissent against Bourla, which has failed to materialise. The dealmaker dismissed Smith’s letter as a “desperate, last-ditch attempt” to create space between the CEO and his board “which didn’t seem to be there”.

The rare occasions in which former executives have collaborated with activists have often come with risk and drama, but such a dramatic blow-up is unprecedented.

Pfizer’s share price jumped more than 5 per cent in the three days after Starboard’s stake was revealed — suggesting that some investors welcomed the prospect of a shake-up. On Thursday, though, it retreated as Wall Street digested Read and D’Amelio’s volte face and tried to work out what Starboard would do next.

Before D’Amelio’s apparent email blunder, Starboard had been planning to unveil its latest campaign in full on October 22 at 13D, an annual gathering of activist investors in New York, according to three people familiar with its plans.

Starboard’s argument is that despite the $92bn revenue bump Pfizer received from its Covid vaccine and antiviral during the pandemic, it had lost its way, overestimating the demand for Covid products and frittering away its windfall on a $70bn deal spree.

Its shake-up plan is laid out in a deck totalling more than 50 pages, which Smith and Patrick Sullivan, the Starboard partner copied on the errant emails, planned to inform Pfizer’s management of at a meeting next week before presenting it to long-only shareholders.

Yet despite Read and D’Amelio’s withdrawal from the campaign, Smith’s acrimonious letter suggests that Pfizer must still ready itself for a fight, and a moment of reassessment, which some industry watchers believe has been a long time coming.

“Pfizer has been struggling with finding its footing after the success it had during the pandemic: just the hint of an activist may make having difficult conversations more pressing,” said Vamil Divan, an analyst at Guggenheim Securities. 

Bourla and Narayen, his lead independent director, now plan to meet Smith and Sullivan next Wednesday.

Wall Street has been eager for change at Pfizer, but even before Read and D’Amelio split from Starboard, analysts and shareholders were sceptical that the typical activist investor playbook would work on the struggling pharmaceutical company.

Under Bourla’s leadership, the drugmaker hived off its consumer health division, cut $5.5bn of costs in response to plummeting Covid revenues and the debt from its acquisition spree that limited its ability to pursue promising biotech buyouts.

“There’s no low-hanging fruit. If a company is overspending, you can stop the overspending. If a company has too much fat, you can cut the fat. Pfizer doesn’t have that,” said one top-10 investor, adding that they thought it was unlikely much would change as a result of Starboard’s campaign. Starboard’s most famous brush with the pharma sector, when it opposed BMS’ $74bn takeover of Celgene, came to little, even if the investment still turned a profit.

The crucial long-term question for Pfizer is whether its pipeline can bear fruit. In particular, shareholders are watching to see if its $43bn buyout of cancer drugmaker Seagen which was completed last year will deliver eight blockbuster medicines by 2030 as promised and whether it can gain a foothold in the lucrative weight-loss drug market with its experimental pill danuglipron.

At the same time, Pfizer is searching outside the company for a new head of research and development before its longtime chief scientific officer Mikael Dolsten departs at the end of the year. 

Despite its faltering start, Starboard’s campaign is tapping into a groundswell of discontent among shareholders with Bourla, a Pfizer lifer who rose through the ranks of its animal health division to become CEO in 2019. The most obvious lever that it has left to pull is pushing for board representation or management change.

There are two contrasting portrayals of the Greek-born Bourla. The first is as a business leader who spearheaded the rollout of a Covid shot which helped end the pandemic, and then smartly channelled its resources into an exciting, new area of cancer drug development. 

The second is as a distracted chief executive who bet the company on Covid and has since run out of ideas — receiving plaudits from world leaders at the World Economic Forum and the UN General Assembly while turning a blind eye to growing frustrations from shareholders.

Bourla boarded a private jet departing Ireland on Thursday, after the most bizarre board meeting of his tenure. Which version of Bourla arrives at the showdown with Starboard next week may yet decide his fate and that of Pfizer.

Data visualisation by Patrick Mathurin