AbbVie, Celgene, J&J, Merck, Pfizer and Vertex are targets of this year’s shareholder proposals citing drug pricing risks.
Shareholders in six of the country’s top pharmaceutical companies will once again be asked to support a shareholder-sponsored resolution requesting a report on the degree to which executive incentive packages are tied to price increases.
The companies where the proposal will appear on the proxy are: AbbVie (ABBV), Celgene (CELG), J&J, (JNJ) Merck (MRK), Pfizer (PFE) and Vertex (VRTX). The resolutions survived challenges from AbbVie and Pfizer at the SEC and have had consistent backing from proxy advisor ISS.
Similar proposals were filed last year at five drug makers (including AbbVie) and received strong shareholder support ranging from 21 – 28 percent. The resolutions stem from 2017 and 2018 Credit Suisse reports which concluded “that U.S. drug price rises accounted for 80 percent of the pharmaceutical industry’s earnings growth in 2017, despite significant public and political scrutiny.”
A separate PriceRx report further illustrates the industry’s reliance on price hikes for revenue growth: “In other words, it looks like price growth alone has contributed on average 5 percent/year to industry growth over the last five years, while total revenue growth was only 1 percent from 2017-2018. Without the price effect, the analysts found that revenue growth from 2017-2018 would have actually fallen 6 percent.”
Investors say they are concerned that executive compensation structures at pharma companies may inadvertently be rewarding these price hikes with negative consequences for long-term public health and business health.
“Investors want to ensure that executives are not incentivized to increase the price of drugs to ensure that short-term revenue targets are met as this is not only an unsustainable practice over the long term, it presents significant financial, legal and reputational risks,” said Katie McCloskey of United Church Funds, who leads the engagement with AbbVie.
According to a 1/6/19 piece in the NY Times, the price of AbbVie’s anti-inflammatory drug Humira has risen 100 percent between 2012 and 2019 from $19,000 to more than $38,000 per patient annually.
At the February 26th hearing called by the Senate Committee on Finance regarding drug pricing, AbbVie CEO Richard Gonzalez was specifically questioned on the links between his compensation and Humira’s price increases. His inadequate responses to these questions appear on page 21 of the recorded testimony.
Continued McCloskey, “When 1 in 4 adults today say they or a family member have not filled a prescription, cut pills in half, or skipped doses because of cost, the unsustainability of these pricing strategies must be called out. For this reason we hope our fellow shareholders will support our proposal.”
In filing the proposal, shareholders are specifically hoping to learn:
- How assumptions about price changes are incorporated when revenue goals are set;
- Whether any policy or guideline exists regarding the preferred proportion of revenue growth derived from price increases;
- Whether any policy exists regarding unplanned price increases that would enable revenue goals or compensation revenue targets to be met;
- Whether and when the board has to approve increases; and
- How the compensation committee uses revenue goals or estimates to produce the various target levels (e.g., minimum, target and maximum) used to determine incentive payouts.
While several drug makers tried to show some restraint by postponing price increases in 2018 in response to President Trump’s reproaches on Twitter, in early January 2019 they returned to business as usual and immediately set about raising prices on many branded medicines.
Pfizer, for example, uses revenue and earnings per share (EPS) as metrics for the annual bonus and operating income as a metric for performance share awards. A 2017 Credit Suisse analyst report identified Pfizer as a company where U.S. net price increases accounted for at least 100 percent of 2016 net income growth. In its 2018 report, Credit Suisse characterized Pfizer’s 2017 10 percent net price increase as above-average for the industry and noted that its list price increases were the second highest.
"As more and more people find themselves unable to afford their medicines — and the advances in health that come with taking them — these companies will come under even greater scrutiny by Congress, patient advocacy groups and the public," said Cathy Rowan of Trinity Health. "We seek greater transparency about how pricing strategies and executive incentive packages are developed at these companies, and we believe our request is not only reasonable, but both necessary and prudent."
The first of the group of resolutions will go to votes at the annual meetings of Pfizer and J&J on Thursday, April 25th.
About the Interfaith Center on Corporate Responsibility (ICCR)
Celebrating its 49th year, ICCR is the pioneer coalition of shareholder advocates who view the management of their investments as a catalyst for social change. Its 300 member organizations comprise faith communities, socially responsible asset managers, unions, pensions, NGOs and other socially responsible investors with combined assets of over $400 billion. ICCR members engage hundreds of corporations annually in an effort to foster greater corporate accountability. www.iccr.org