[Ip-health] EpiPen Price Rises Could Mean More Riches for Mylan Executives

Claire Cassedy claire.cassedy at keionline.org
Wed Sep 7 11:48:24 PDT 2016


EpiPen Price Rises Could Mean More Riches for Mylan Executives


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.

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 rises.

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

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 lift 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 shareholders’ 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?’”

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