Increases Could Mean More Riches for Executives
Heather Bresch, chief executive at Mylan,
which has found itself at the center of the latest public
outrage over high drug prices.
Credit Victor J. Blue/Bloomberg
Bresch, chief executive at
Mylan, the pharmaceutical giant
that has been vilified for price increases on its EpiPen allergy
treatment, maintains that her company has attained a sort of
capitalist nirvana — it does
good for others while doing well for itself.
Mylan has achieved a balance
benefiting all of its stakeholders simply doesn’t hold up when viewed
through the prism of the company’s recent proxy filings. Those
materials detail the company’s
executive pay and show, for
example, that Mylan’s top brass received a windfall when it
incorporated overseas in 2014 to cut its tax bill sharply.
The filings also
show that under a special, one-time stock grant created in 2014, top executives
— including Ms. Bresch — stand to reap further riches at least partly on the
back of price increases on the EpiPen. Under the grant, Mylan executives will be
rewarded if the company’s earnings and stock price meet certain goals by the end
Given that EpiPen
accounted for $1 billion of Mylan’s $9.4 billion in revenue in its most recent
year, the allergy treatment’s price increases seem integral to meeting those
targets and generating a big payday.
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Mylan says the one-time grant aligns management’s interests with those
of the shareholders. But relentlessly managing a company with an eye
toward its stock price can lead to trouble.
case, the timing of the one-time stock grant to executives is striking
— especially when set against the history of EpiPen price hikes.
Truven Health Analytics, Mylan began
significantly stepping up the pace of its EpiPen price increases just a few
months after the company announced the special grant in February 2014. While
price increases in the previous four years averaged 22 percent annually, in 2014
and 2015 Mylan increased EpiPen prices 32 percent each year.
I asked Mylan if
the bigger price increases after the 2014 stock award were intended to help
propel its performance toward the earnings and stock price targets.
No, replied Nina
Devlin, a spokeswoman.
In a statement,
she elaborated further: “Mylan has a large and diverse business, with more than
2,700 products sold in 165 countries and 600 products sold in the U.S. alone.
The targets set forth in the one-time special program were not and are not
practically achievable based on pricing of any single product.”
Ms. Devlin added
that after Mylan’s recent acquisition of Meda, a company specializing in women’s
health, respiratory, allergy, dermatology and pain management, the EpiPen
business will represent under 10 percent of the company’s revenue, compared with
11 percent last year.
But Brian Foley,
an independent compensation consultant in White Plains, said it was impossible
to separate the company’s business decisions from its pay practices. “The
pattern of conduct with the EpiPen business seems egregious,” Mr. Foley said in
an interview. “It looks like price gouging, and why would you do that? The
answer has got to be because it’s in management’s financial interest to do it.”
special stock award. In 2014, Mylan’s proxy filings valued Ms. Bresch’s grant at
$13.2 million. If Mylan clears the price and adjusted earnings hurdle, her
payout will be far larger.
Now, though, with
Mylan’s pricing practices under scrutiny, it may be more difficult for the
company’s executives to clear the hurdles necessary to cash in. Its stock is
well below the $53.33 price that will be needed to generate a payout. And the
company’s decision last week to start selling a generic EpiPen at half the $600
branded price means the adjusted earnings per share target of $5.40 on Dec. 31,
2018, may be more difficult to achieve.
But don’t cry for
Ms. Bresch. It turns out the earnings hurdle put in place by the board has some
wiggle room. That’s because it is based not on generally accepted accounting
principles but on a so-called adjusted earnings figure that excludes certain
corporate costs chosen by Mylan. The company also uses fantasy figures when
calculating its top executives’ incentive pay packages.
Among the costs
Mylan excludes from its adjusted earnings are those related to acquisitions,
financing and investment losses. Last year, these and other exclusions gave a
big boost to Mylan’s pretend per-share earnings. Under generally accepted
accounting principles, each Mylan share earned $1.70 in 2015. Under its own
rules, each share earned $4.30.
between Mylan’s actual earnings and its pretend number — $2.60 a share — has
widened significantly. In 2014, it was $1.22 a share.
Note, too, that
Mylan’s true earnings in 2015 were 27 percent below what it actually earned in
2014. Luckily for Mylan’s top executives, earnings as computed under accounting
rules are not one of the company’s metrics for calculating executive pay.
Ms. Devlin, the
Mylan spokeswoman, contends that its preferred financial measures are “useful
supplemental information for our investors” in addition to those presented under
accounting rules. She added: “All public companies in our peer group use non-GAAP
measures, as do a large number of public companies outside of our peer group.
Furthermore, the board and/or compensation committee has discussed these metrics
with shareholders and has taken that feedback into consideration.”
At Mylan’s most
recent annual shareholder meeting, 35 percent of the votes were cast against the
company’s pay practices. By contrast, the median company in the Standard &
Poor’s 500-stock index received support from 95 percent of votes cast.
On Thursday, Scott
M. Stringer, the New York City comptroller and overseer of city pension funds
that hold Mylan shares, criticized Mylan’s governance practices in a letter to
Douglas J. Leech, chairman of the nominating and governance committee of the
company’s board. Mr. Stringer, who has voted the city funds’ shares against
Mylan directors in the past, asked that the company install an independent board
chairman to provide oversight.
We’ll have to wait
until December 2018 to see whether Mylan’s executives can cash in their special
one-time awards. In the meantime, Ms. Bresch and her colleagues received a
windfall after the company acquired certain businesses of
Abbott Laboratories in 2014 and
incorporated overseas. As part of the deal, executives were allowed to exercise
all their unvested stock awards. Ms. Bresch realized $32 million in 2015 as a
result, proxy filings show.
That’s not all.
The company also paid its executives’ income taxes associated with the
acceleration of the stock awards. Under that deal, Mylan shareholders paid the
extra $5.8 million Ms. Bresch owed in taxes.
The outcry over
the EpiPen pricing shows Mylan to be the latest example of a company whose board
allowed executives to reap bounties from activities that wound up harming other
stakeholders. When they do so in the name of the company’s shareholders, it is
especially offensive. And now that Mylan has reminded everyone just how common
price gouging is in the pharmaceutical industry, even its shareholders are
paying a price.
“You would think
at least somebody on the board would have the brass and the class to say enough
is enough,” Mr. Foley said. “We were making money at $400; why do we need to
charge $600? This reminds me of my 16-month-old grandson who after he’s had a
good meal looks at me and says: ‘More?’”
A version of this article appears in print on September 4, 2016, on page
BU1 of the New York edition with the headline: EpiPen Soars and So
Does Bosses' Pay.
© 2016 The
New York Times Company