The drugmaker at the center of a firestorm over hefty price
increases on the lifesaving EpiPen put a special incentive plan in
place more than two years ago that rewards executives if they hit
aggressive profit targets.
In early 2014, the board of Mylan NV approved a one-time award
for more than 100 employees that hinged on more than doubling the
company's adjusted per-share earnings over a five-year period
ending in 2018, Mylan's regulatory filings show. Meeting that goal
would require 16% compound annual earnings growth—a tall order for
a company that generated almost 90% of its revenue from the
generally mature generic-drug business.
At the time it was granted, the award was potentially worth as
much as $82 million overall to the company's top five executives.
But it would be worthless if the company—whose star product is the
EpiPen—fails to achieve at least 90% of its 2018 earnings
target.
The board also approved shorter-term pay tied to equally
ambitious targets for "adjusted diluted" earnings. For this year,
the company's plan targeted 16% growth in that earnings benchmark,
Mylan filings show. Last year, its executives produced 21% growth
in adjusted diluted earnings, maxing out their bonuses even though
net earnings fell.
Companies commonly give their executives incentives by linking
their pay to earnings or stock-price goals, and companies are free
to raise prices as they see fit. But some industry watchers say
Mylan's incentives may have played a role in the steep price
increases for the EpiPen, a medication injector that many
school-age children and others depend on to reverse severe allergic
reactions.
"They are being compensated very heavily on hitting [earnings
per share] targets," said Ronny Gal, an analyst at Sanford C.
Bernstein & Co. with a "buy" rating on Mylan's stock. "We
suspect Mylan realized that their EPS targets will be tougher to
reach and decided to raise prices on EpiPen to make that target
more achievable," he said.
Mylan, in a statement, rejected the idea that its performance
depended on any single product. "Mylan has a large and diverse
business, with more than 2,700 products sold in 165 countries" and
"has performed well across all business segments," the company
said.
Since the incentive program was announced two years ago, Mylan
has doubled the list price of the EpiPen, which delivers an
emergency shot of epinephrine, bringing the cost to $608 for a
two-dose package and the total increase since 2007 to nearly 550%,
according to data from Truven Health Analytics.
Mr. Gal estimates that by the time the pricing controversy
erupted, the EpiPen was generating about 10% of Mylan's revenue and
20% of its operating profit.
Mylan CEO Heather Bresch, in a CNBC interview last week,
defended the price increases. She blamed high patient costs on
insurers who set high deductibles and drug-benefit managers who
make money by negotiating bigger discounts off increasing list
prices.
Mylan has attempted to quell the EpiPen furor by increasing
copay assistance for some consumers and promising to make available
an identical generic form of the drug priced at about $300 for a
two-pen pack. Mr. Gal estimates the moves could cut Mylan's
operating profits from the drug by about one-third.
The company, based in the Netherlands but managed from
Canonsburg, Pa., outside Pittsburgh, has grown from a sleepy
generic maker to a global player with $9.4 billion in revenue last
year. Pay has grown, too. Ms. Bresch, the CEO, earned $18.9 million
last year, up from $9 million in 2013.
The EpiPen imbroglio isn't the first time Mylan has attracted
bad publicity. In 2008, Ms. Bresch was found to have wrongly
claimed to have an M.B.A. degree from West Virginia University. Ms.
Bresch has said she thought she had done everything needed to earn
the degree.
The company and its board also have been engulfed in a series of
controversies. Some governance experts say the company has approved
outsize pay and that too many of its directors are drawn from the
area around its U.S. executive offices.
"This company seems to find itself in governance controversies
all over the place," said Charles Elson, a corporate-governance
expert from the University of Delaware who serves on two
public-company boards. "If you see it over and over, you begin to
wonder how strong a board they have."
A Mylan spokeswoman said that its board is "comprised of highly
qualified, experienced and diverse individuals."
The Securities and Exchange Commission is investigating a land
deal involving Mylan and Rodney L. Piatt, a local real-estate
developer and the company's lead outside director. Mr. Piatt was
chairman of the compensation committee when the board approved the
incentive-pay awards.
The SEC investigation was sparked by a page-one article last
year in The Wall Street Journal, which revealed that Mylan in 2013
moved into a new headquarters outside Pittsburgh, but never
disclosed that land for the building had been partly owned
previously by Mr. Piatt, who transferred it to a partner before
Mylan purchased the property.
Mylan has said there was no need for any such disclosure because
there were no direct dealings between Mr. Piatt and Mylan. Mr.
Piatt didn't return phone calls seeking comment.
Mr. Piatt stepped down from the compensation committee in
October 2015, days before Mylan disclosed the SEC probe.
Write to Mark Maremont at mark.maremont@wsj.com
(END) Dow Jones Newswires
September 01, 2016 08:05 ET (12:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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