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Source: The New York Times | Fair Game, September 1, 2016 column


Business Day

EpiPen Price Increases Could Mean More Riches for Executives

Fair Game


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

Heather 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.

But the argument that 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 of 2018.

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.

In any case, the timing of the one-time stock grant to executives is striking — especially when set against the history of EpiPen price hikes.

According to 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.”

Consider the 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.

That spread 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

Performance and Shareholder Support

The following graphs of corporate performance and of shareholder voting support for executive compensation are presented for the company addressed in the article with relevant market comparisons.

Full-size graphs of these and other companies you may select can be generated on the Shareholder Forum's websites for Returns on Corporate Capital™  and for Shareholder Support Rankings™. Definitions of both analyses are presented below.

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Returns on Corporate Capital™ are a performance measurement developed in a Shareholder Forum workshop project, and are calculated from the company’s SEC reports of its GAAP-defined net income plus interest expense and income taxes, divided by its prior year’s ending balance of total assets less current liabilities other than interest-bearing debt. Comparative averages for the company's industry are based on aggregate amounts for all reporting Russell 3000 companies in the six-digit Global Industry Classification Standard (GICS), excluding the amounts for the subject company.

Shareholder Support Rankings™ analyses are produced by The Shareholder Forum from research data provided by Equilar, Inc., calculated as the percentage of total votes cast for, against and abstaining in advisory “Say on Pay” shareholder approvals of executive compensation.

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