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21% Of AbbVie Inc (ABBV) Shareholders Want To Know How Drug Pricing Is Integrated Into Incentive Programs

At this morning’s annual shareholder meeting for pharma giant AbbVie Inc (NYSE:ABBV), a first-time shareholder proposal requesting regular reporting on how drug pricing risks are integrated into exec comp structures garnered over 21% support. Investor proponents from the Interfaith Center on Corporate Responsibility want to understand whether exec incentives are designed to reward short term gains generated by price hikes as opposed to longer term growth fueled by new product discoveries and other innovations.

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Board sent clear message amid growing investor concern over metrics used to reward pharma executives.

NEW YORK, NY, FRIDAY, MAY 4TH, 2018 – At today’s annual shareholder meeting for Abbvie (ABBV) a first-time shareholder proposal questioning the links between executive compensation packages and drug price increases received a solid show of support from investors, signaling to the board of directors that this issue is key to investor confidence about the long-term sustainability of the company.

Investors view executive pay packages as a window into the quality of board decision-making. In the context of drug pricing, investors are eager to understand if companies are rewarding executives for short-term profit gains through drug price increases or rewarding longer-term investment in the company related to research and development and successful innovation.

The resolution was filed by members of the Interfaith Center on Corporate Responsibility, a shareholder coalition that has been engaging the industry for decades on questions of corporate accountability, including business risks posed by drug pricing increases that have important implications for long-term shareholder value, as well as access and affordability of medicines. Four other pharmaceutical companies received a similar proposal: Amgen (AMGN), Biogen (BIIB), Bristol-Myers Squibb (BMY) and Eli Lilly (LLY).

The proposal urges the Compensation Committee to report annually to shareholders on the extent to which risks related to public concern over drug pricing strategies are integrated into AbbVie’s incentive compensation policies, plans and programs for senior executives. The report should include discussion of whether incentive compensation arrangements reward, or not penalize, senior executives for (i) adopting pricing strategies, or making and honoring commitments about pricing, that incorporate public concern regarding the level or rate of increase in prescription drug prices; and (ii) considering risks related to drug pricing when allocating capital.

“Abbvie’s strategy statement emphasizes a commitment to sustainable growth and our resolution sought to understand whether our executive incentive structures support this strategy,”   said Katie McCloskey of United Church Funds and lead filer of the proposal. “An over-dependence on revenue sourced from price increases as opposed to drug discovery and innovation is not a sustainable growth strategy for Abbvie, and moreover, it is has serious financial and health consequences for its millions of customers.”

Two recent analyses within the span of as many weeks revealed the extent to which drug prices have soared:

  • A recent Pharmacy Benefits Consultants review[i] of average wholesale drug prices from January 2017 to March 2018 found “twenty prescription drugs saw their prices rise by more than 200%”, and;
  • A comprehensive review by the Senate Homeland Security and Governmental Affairs Committee Minority[ii] revealed that “prices for each of the 20 most-prescribed brand-name drugs for seniors have increased dramatically every year for the past five years” at a rate that is “approximately ten times higher than the average annual rate of inflation.”

In their proposal, the investors argued that reactions from the public, health care payers, policymakers and prescribers to high drug prices pose serious legal and reputational risks, and instead recommend proper alignment of executive incentives with strategies to mitigate these business risks.

The proposal withstood Abbvie’s challenge at the SEC to have the proposal omitted from the company proxy and was further endorsed by proxy advisor ISS. In their analysis of the proposal, ISS wrote:  Regular reporting on the integration of risks related to public concern over drug pricing strategies into incentive compensation arrangements may be an effective way to further incentivize executives to put in place a plan to mitigate such risk. Furthermore, investors are demonstrating increasing interest in drug pricing issues and how companies are managing related risks.

Judy Byron of the Northwest Coalition for Responsible Investment said, “The pharma industry is facing mounting scrutiny from legislators, doctors, payers and the public as a result of price increases on key drugs. We are gratified that other investors share our concern that AbbVie’s incentive pay arrangements, which are based on revenue and earnings per share targets, may overlook the risks this increased scrutiny represents for the company.”

 


[i] http://www.pharmacybenefitconsultants.com/wp-content/uploads/2018/03/AWP-Comparison-20161231-to-20180301.pdf

[ii] https://www.hsgac.senate.gov/media/minority-media/breaking-brand-name-drugs-increasing-at-10x-cost-of-inflation-mccaskill-report-finds