As a billionaire activist takes a stake, is now the time to buy Pfizer stock?

Actions of Pfizer (PFE -0.07%) have been stuck in the mud since December 2022, its shares are down more than 45% in that stretch. Despite its disappointing performance, many individual investors are attracted to the drug giant’s robust dividend, with the stock now carrying a forward dividend yield of around 5.7%. And despite its performance, a major institutional investor just unveiled a billion-dollar bet on the company.

right Wall Street Journalactivist-investor hedge fund Starboard Value, led by billionaire Jeffrey Smith, has taken a $1 billion stake in the company and is looking to help turn it around.

The question for individual investors: Should you follow suit and buy Pfizer stock?

Recent fights

Although it has become a pandemic favorite as one of the three main makers of COVID-19 vaccines, Pfizer has struggled over the past two years. Using cash from its COVID-19 vaccine, the company made several big acquisitions. These include spending $43 billion on cancer drug company Seagen, $11.6 billion on migraine drug maker Biohaven Pharmaceutical, $6.7 billion on the acquisition of Arena Pharmaceuticals, $5.6 billion on blood disorder drugmaker Global Blood Therapeutics and $2.2 billion for immuno-oncology company Trillium Therapeutics. In total, the company has spent about $70 billion on acquisitions since 2021.

However, not all deals went according to plan. For example, Pfizer recently had to withdraw Global Blood Therapeutics’ lead drug, Oxbryta (used to treat sickle cell disease), after determining that the drug’s risks outweighed its benefits. Meanwhile, it also had some domestically developed disappointments, including an obesity pill that failed clinical trials and an RSV shot that received a poor response.

Meanwhile, two of the company’s biggest drugs — Ibrance for breast cancer and Xtandi for prostate cancer — both go off patent in 2027. Ibrance accounted for $1.13 billion in second-quarter revenue, while Xtandi generated $495 million in revenue.

Image source: Getty Images.

Bet big on cancer drugs

While Pfizer has made a number of acquisitions, its biggest bet is on Seagen. Pfizer wants this to be a transformative acquisition and projects Seagen to contribute $10 billion in sales by 2030. It said it now has eight or more potential blockbuster drugs as a result of the deal.

With the acquisition of Seagen, Pfizer shifted its oncology focus from chemically produced small molecule drugs to biologics. As a result, its oncology revenue jumps from 6% biologics in 2023 to about 65% in 2030.

Organic products offer several benefits to their producers. They have longer patent protection and, after their exclusivity ends, tend to continue to have strong sales. The reason is that generic drug manufacturers cannot make exact copies like they can for chemically produced drugs, but can only make similar products. For this reason, most doctors continue to prescribe the brand-name drug instead of the biosimilar.

While Seagen brought with it four top cancer drugs, for the acquisition to be truly profitable, Pfizer will also need to see some blockbusters come from its pipeline. Thus, it will be years before the company can decide whether this was the right strategy.

Starboard’s involvement

As an activist investor, Starboard isn’t waiting to see if Seagen’s product line turns out to be the transformative acquisition that Pfizer is hoping for. According to reports, Starboard has not been enamored of CEO Albert Bourla’s acquisition spending and believes that Pfizer needs to focus on cost discipline and new drug development.

Starboard is said to have approached former Pfizer CEO Ian Read and CFO Frank D’Amelio to help turn the business around. Read led the company from 2010 to 2019, with a focus on core products and cost discipline.

Starboard is a strong investment company and often gets seats on company boards and adopts changes. However, its track record can be quite mixed; had both big wins, as with Darden Restaurantsand some losses. Its investments in healthcare-related names such as Elanco Animal Health and eHealth they didn’t go well.

Is it time to buy Pfizer stock?

Given Starboard’s history with healthcare companies, I wouldn’t rush to buy this stock based on that alone. Actually, I think Bourla’s strategy of taking the cash flow for the COVID-19 vaccine and acquiring new companies was not a bad idea. Although it has not worked so far, its ultimate success will depend heavily on the success of the Seagen pipeline.

Trading at a forward price-to-earnings (P/E) ratio of 10, Pfizer stock isn’t expensive. Meanwhile, it also has an attractive yield.

PFE PE ratio data (forward 1y) by YCharts.

I think investors can buy the stock now and wait to see how the Seagen acquisition plays out over the next few years while collecting its attractive dividend. However, Starboard’s stock wouldn’t be my reason to jump into the stock.