The Link Between Higher Drug Prices And Executive Pay

Prescription drug expenditures make up nearly 20 percent of all health care costs, and spending for prescription drugs is growing faster than any other part of the health care dollar. A Kaiser Health Tracking Poll in early 2018 found that one out of four patients have a difficult time affording their medicines. December 2018 POLITICO poll showed the public’s top priority for the 116th Congress is taking action to lower prescription drug prices. 

While there was a small decrease in prescription drug spending per capita in 2017, the Centers for Medicare and Medicaid Services project that “drug spending will continue to represent a larger proportion of health care spending over time.”

Data shows pharma companies are relying on drug price increases to drive growth. Not only is this model unsustainable, but it has implications for public health & presents financial, legal and reputational risks to companies. @TrinityHealthMI #ProxyPreview

Research by the investment bank Leerink showed how pharmaceutical companies have relied on drug price increases to drive growth. For example, price increases for Pfizer's nerve pain medication Lyrica drove 90 percent of the more than $1 billion in sales growth Pfizer recorded for the drug between 2014 and 2017. For AbbVie's top-selling Humira, price increases accounted for 43 percent of growth.

In 2017, a Credit Suisse report stated that “US drug price rises contributed 100 percent of industry [earnings per share] growth in 2016” and characterized that fact as “the most important issue for a pharma investor today.” A 2018 Credit Suisse report concluded that “US drug price rises accounted for 80 percent of the pharmaceutical industry’s earnings growth in 2017, despite significant public and political scrutiny.”

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These reports raise serious concerns about price increases as a long-term business model for drug makers. A model that relies on price increases to achieve revenue targets can have implications for public health and present financial, legal and reputational risks to companies. If a drug company’s executive compensation plan is based on short-term market forces, executives might lean on price hikes to grow profits.  That approach can create risks when, over time, the market, payers and policy makers push back. 

Last year, ICCR members filed shareholder proposals with AbbVie, Amgen, Biogen, Bristol-Myers Squibb and Eli Lilly, seeking disclosure of the link between executive pay incentives and U.S. drug prices. Investors sought assurance that executives are not incentivized to increase the price of drugs in order to meet revenue targets. Votes in favor of the proposals ranged from 18 percent to 28 percent.

This proxy season, eight pharmaceutical companies received the proposal: AbbVie; Biogen; Bristol-Myers Squibb; Celgene; Eli Lilly; Merck; Pfizer, and Vertex.  Celgene, Merck, Pfizer and Vertex are first-time filings. Shareholders withdrew the proposal at Eli Lilly after the company agreed to increase disclosure.  The proposal was not re-filed with Amgen after the company agreed to increase disclosure.  

The shareholder’s goal in filing this proposal is that the companies will enhance disclosure of 1) their revenue goal setting process, 2) how assumptions about price changes are incorporated when revenue goals are set and 3) how these goals translate into executive incentive pay targets. 

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Cathy Rowan
Director of Socially Responsible Investing, Trinity Health