In Response To Shareholder Pressure, Pharma Companies Begin To Acknowledge Drug Pricing Controversies As A Business Risk
Second-year shareholder resolutions highlight need for governance changes to ensure policies and practices don’t limit access and affordability of medicines.
Q1 hedge fund letters, conference, scoops etc
NEW YORK, NY, THURSDAY, JUNE 20TH, 2019 – As the last of the annual shareholder meetings of pharmaceutical companies come to a close this month, investor members of the Interfaith Center on Corporate Responsibility who again filed a series of shareholder proposals at key drug makers to highlight drug pricing concerns are taking stock of the progress made to date.
This is the second year shareholders invoked the corporate proxy in order to bring their concerns to company board members, executive management and their fellow shareholders. As the cost of medicines continues to rise, straining the U.S. health care system and endangering the lives of millions of patients who can no longer afford their basic medicines, shareholders have pressed pharma companies to reassess their business models, policies and practices to help solve the crisis. Sky-rocketing drug prices hurt not only patients, the investors argue, they present long-term reputational and financial risks to manufacturers that are material to shareholder value.
“Drug companies can no longer sit on the sidelines as their responses on pricing are being closely scrutinized by legislators, the media and the investment community,” said Donna Meyer of Mercy Investment Services, who leads ICCR member engagements with several companies. “To the degree that pharma companies are getting out in front and proactively addressing what are increasingly being seen as risk management and governance concerns, they will be better positioned to withstand the mounting criticism.”
A high visibility example of this increased scrutiny was the nationally televised Senate Finance Committee Hearing on Drug Pricing in April when five of the nation’s top pharma CEOs were repeatedly asked to justify continued price increases, particularly for older medicines, in light of affordability issues for economically vulnerable patients. AbbVie CEO Richard Gonzalez was singled out during the hearing by Sen Ron Wyden for bonuses he and top executives received that were tied to sales targets for its blockbuster arthritis drug, Humira. Since 2014, AbbVie has nearly doubled the list price of Humira to more than $60,000 per year. Meanwhile, Gonzalez made a total of $22.6 million for his performance in 2017, $4.3 million of which was his cash bonus.
2019 resolutions were filed at AbbVie (ABBV); Biogen (BIIB); Bristol-Myers Squibb (BMY); Celgene (CELG); Eli Lilly (LLY); Johnson & Johnson (JNJ); Merck (MRK), Pfizer (PFE) and Vertex (VRTX) on a range of governance topics, including board oversight of drug pricing risk, a report on how executive compensation structures may be linked to - and therefore driving - drug price hikes, and a report on drug companies’ anti-competitive practices to delay patent-sharing with lower cost generics’ manufacturers.
While the resolutions all received votes ranging from 21-29% - considered a strong indicator of investor interest in the issue – the shareholders are primarily focused on those resolutions that were withdrawn as a result of negotiated settlements and the changes in policy they produced.
“This is where the leaders distinguish themselves from the laggards,” said Meg Jones-Monteiro, ICCR’s Program Director for Health Equity. “While we made headway with four companies this year, we can definitely highlight both Biogen and Bristol Myers Squibb (BMS) for setting a higher standard than their peers in terms of actions they undertook to address the challenges presented by drug pricing.”
In the case of BMS, the company amended its proxy statement to reference governance changes that will:
- Put internal processes and controls in place to ensure that pricing decisions are vetted prior to implementation and with the involvement of senior management, and;
- Designate the Compensation Committee as responsible for evaluating annually the exec comp program, ensuring that the program aligns with the company’s mission and delivers shareholder value, while not encouraging executives taking excessive or inappropriate risks.
As a clear signal that it understands the risks price increases pose to its business, BMS included the following statement to its investors: When setting incentive plan targets each year, the Committee is aware of the risks associated with drug pricing, among other things, and ensures our plans do not incentivize risky behavior in order to meet targets.
"We are glad that BMS took its responsibility to manage drug pricing risks seriously and we look forward to seeing them implement these new policies," said Cathy Rowan of Trinity Health, who leads the engagement with BMS.
Biogen also responded to shareholder requests via its proxy stipulating that its weighting of metrics effectively mitigates the impact of a single risk, such as dependence on drug pricing, pipeline performance or market share, on overall compensation.
Investors say they will continue to use their leverage to encourage companies to review their policies and practices with an eye to mitigating the risks pricing presents to their businesses, and to increase the access and affordability of medicines for their customers.
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
