Executive Compensation and Drug Pricing Risks—Feasibility Report
RESOLVED: AbbVie Inc. (“AbbVie”) shareholders request that the Compensation Committee of the board of directors publish a report (at reasonable expense, within a reasonable time, and omitting confidential or propriety information) assessing the feasibility of incorporating public concern over high drug prices into the senior executive compensation arrangements described in AbbVie’s annual proxy materials.
Supporting Statement To reward the creation of long-term value, incentive compensation arrangements for senior executives of branded pharmaceutical companies should promote responsible risk management. A key strategic risk now facing pharmaceutical firms is backlash against the high price of medicines. The effects of high drug prices on patient access, government payer budgets and the broader health care system have kept drug prices in the public spotlight, especially as campaigning for 2020 presidential and congressional elections intensifies.
A 2019 Credit Suisse analyst report stated that US drug price rises contributed 33% of industry net income growth in 2018 and noted “strong political pressure to reduce absolute drug prices.” The report ranked AbbVie as one of the companies at greatest risk from regulatory changes that have been floated, such as using international reference pricing and eliminating Medicare rebates, and identified Humira as benefiting substantially from high rebates. (Global Pharmaceuticals, “Future of US Drug Rebates Under Review,” Apr. 29, 2019, at 4, 6-7, 11) One estimate pegged the increase in US healthcare costs from AbbVie’s January 2018 9.7% price increase for Humira at $1 billion for 2018 alone. (https://splinternews.com/your-meds-dont-have-to-cost-this-much-1830657097)
We are concerned that AbbVie’s senior executive incentive compensation arrangements may not encourage consideration of risks created by high prices. For example, 80% of CEO Richard Gonzalez’s annual bonus is determined by one-year financial metrics, including net revenue, income before taxes and Humira sales, while only 20% depends on R&D/Innovation. (2019 Proxy Statement, at 38) Although the final vesting of performance share awards occurs after a three-year cycle, performance on one of the two metrics, earnings per share, depends on meeting three separate annual targets. (See id. at 53-54) Excessive dependence on drug price increases and tactics like high rebates that limit competition create significant risks, which may be exacerbated when price hikes drive large senior executive payouts.
Accordingly, we believe it is advisable for the Compensation Committee to explore incorporating measures that relate to the financial and strategic risks created by high drug prices into senior executive compensation arrangements. This Proposal gives the compensation committee total discretion in selecting potential measures and in analyzing the feasibility of incorporating them. By way of illustration, though, such measures could reward executives for increasing access or limit the extent to which price increases can be used to meet revenue and income targets.
We urge shareholders to vote for this Proposal.