Pfizerhis (PFE -0.66%) The burgeoning tiff with activist investor group Starboard Value appears to be escalating. Since the activist took a $1 billion stake in the drug developer, it’s been an open question about what he wants to change and how he plans 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 had seven simple, brutal words that shed light on his group’s perspective on Pfizer and its management.

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

This expression means that a fight is being prepared

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

Starboard’s criticism takes direct aim at Pfizer CEO Albert Bourla, who has led the pharmaceutical group since early 2019. While activists applaud Bourla’s leadership during the coronavirus vaccine and therapy races, they say the business has lost between about 20 billion dollars and $60 billion. under his mandate, depending on how the figure is calculated.

Starboard identifies four key issues with Pfizer:

• It is recently internal research and development (R&D) efficiency
• Expected future return on investment in research and development
• Its capital allocation strategy
• Its forecasting and budgeting processes

On the first two issues, the group’s account is hard to dispute. Despite the CEO’s repeated glowing public reports about pipeline strength and 10 potential blockbuster drugs to launch between 2019 and 2022, a string of late-stage clinical trial failures and worse-than-anticipated drug sales performance approved. left shareholders with dashed hopes.

Moreover, despite management’s optimism about the company’s ongoing push to develop a drug to treat obesity and type 2 diabetes — which could open the door to tapping into a market that could be worth as much as 100 billions of dollars by 2030 — Starboard correctly points out that, so far, Pfizer’s efforts have not been successful.

Another issue is that for the programs currently in Pfizer’s pipeline, the anticipated ones return on investment in research and development it’s just 15%, putting it well below virtually all of its big pharma peers, which expect an average return of 38%. Part of the problem is that its top line is only expected to grow about 41% between now and 2030, excluding both its coronavirus products and the revenue it will lose when certain patents expire. Activists point to this issue as the root cause of pharmacy’s ongoing struggle.

But Starboard’s complaints don’t stop there. The company is said to have overpaid for its recent acquisitions, such as the $43.4 billion it spent to buy oncology drug developer Seagen. It also claims that Pfizer’s sales and earnings forecasting capabilities are less accurate than those of its competitors, leading to wide gaps between the revenue guidance it told investors and what it actually achieved.

Pfizer management has yet to respond, but may soon.

Now there is a long term performance in play here

Starboard’s only publicly stated and explicit request from Pfizer board of directors so far is that they must “hold management accountable to achieve adequate returns on capital”. The subtext seems to be that he wants the CEO replaced with someone else who can make more prudent investments in research and development, either through internal work or through acquisitions and licensing deals. He probably has some concrete suggestions on how to achieve those priorities as well.

Are Starboard’s arguments valid and are the claims it makes correct? For the most part, the answer to both questions is yes. Pfizer has indeed faced a number of clinical-stage stumbles in recent years, and it’s also true that many of management’s statements about expected sales performance have ultimately been overly optimistic.

Similarly, the struggles of its weight loss and diabetes program have been somewhat exacerbated by the company’s reluctance to accept mediocre efficacy data at face value and start from scratch with a new trial. And while it’s somewhat subjective, it’s highly plausible that it overpaid for certain pharma businesses or assets amid its flurry of acquisition activity over the past few years.

With the exception of failed clinical trials, which are largely an unpredictable and unavoidable reality of the industry, the buck for most of these pitfalls stops with senior management.

But more important than Starboard’s claims is that it now ensures there will be public spats with Pfizer management and major shareholders. This fight will generate bad press and has a significant chance of affecting Pfizer’s stock price. It could also push management to take non-compliant actions in an attempt to save face or address the activist’s concerns. Company strategy is now something that is a contested issue rather than a unified plan.

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