Investors say executive pay packages at pharma may incentivize drug pricing risks

Dec 13th 2017

In resolutions at five U.S. drug makers, investors request a review of compensation policies that may drive senior execs to ignore the long-term business risks of skyrocketing drug costs.

NEW YORK, NY, Wednesday, December 13, 2017 – Investors today announced they have filed resolutions at five major pharmaceutical companies asking for information about how well executive pay incentives mitigate long-term financial risks associated with mounting public concerns over the affordability of prescription medicines.

The investors are all members of the Interfaith Center on Corporate Responsibility (ICCR), a shareholder coalition that has been engaging the pharma sector for decades on drug access and affordability. In the resolutions, the investors argue that an executive compensation incentive program reliant on revenue growth solely from drug price increases is a risky and unsustainable strategy.

The resolution specifically requests a report on the extent to which risks related to public concern over drug pricing strategies are reflected in executive compensation policies, plans and programs. Read the full resolution text here. The five companies receiving the resolutions are Abbvie, Amgen, Biogen, Bristol Myers Squibb, and Eli Lilly. ICCR members also filed a separate but similar resolution at Pfizer and Vertex requesting a report on the business risks from rising pressure to contain U.S. prescription drug prices.

“As investors in these companies, we are concerned that misaligned incentive pay may encourage executives to sacrifice long-term, organic growth from drug discovery for short-term, ‘quick fix’ strategies that may pose business risks,” said Meredith Miller of the UAW Retiree Medical Benefits Trust.

Public anxiety over drug prices has soared in recent years as millions of Americans struggle to afford the essential medicines needed to maintain their health. Scandals over excessive price hikes at several pharma companies have made the pharma industry the target of Congressional hearings, law suits, denials of coverage from insurers and ballot initiatives in several states which would force manufacturers to negotiate the prices of key medicines with government agencies such as Medicare and Medicaid.

Against this backdrop, the investors say, companies need to prove to their investors and to the public that they are doing everything possible to control drug prices in order to manage business and brand risk. The investors view executive incentive programs as a governance tool designed to ensure adequate oversight of risk and alignment of corporate strategies with mission.

Said Donna Meyer of Mercy Investment Services, “The increased scrutiny around drug pricing and how it is being managed by pharma management has had reputational consequences for the entire industry. Our resolution request is very straightforward: an evaluation of how these concerns are being integrated into corporate governance structures. To the degree that executive incentives reflect a company’s mission and growth strategies, this is clearly a critical and material issue for investors.”

“Our goal is to better understand what oversight these pharmaceutical company boards are exercising when executive incentives are tied so closely to profits," said Cathy Rowan, who represents Trinity Health as a member of ICCR. "When these profits appear to be derived wholly from price hikes, it raises concerns among those of us who care about access to, and the affordability of, medicines — particularly for vulnerable populations like women, children and seniors.”

Investors are expected to vote on the resolutions at each company’s 2018 annual meeting of shareholders.