RESOLVED, that shareholders of Vertex Pharmaceuticals Inc. (“Vertex”) urge the Management Development and Compensation Committee (the “Committee”) to report annually to shareholders on the extent to which risks related to public concern over drug pricing strategies are integrated into Vertex’s incentive compensation policies, plans and programs (together, “arrangements”) for senior executives. The report should include, but need not be limited to, discussion of whether (i) incentive compensation arrangements reward, or not penalize, senior executives for adopting pricing strategies, or making and honoring commitments about pricing, that incorporate public concern regarding prescription drug prices; and (ii) such concern is taken into account when setting financial targets for incentive compensation arrangements.

Supporting Statement: As long-term investors, we believe that senior executive incentive compensation arrangements should reward the creation of sustainable long-term value. To that end, it is important that those arrangements align with company strategy and encourage responsible risk management. 

A key risk facing drug companies is increased criticism from the public and actions that legislators and regulators are taking regarding pharmaceutical prices. The White House released a “Blueprint” for lowering drug prices in May 2018. As of September 2019, 33 states have enacted a record 51 laws to address drug prices, affordability and access.[1]An October 2019 Kaiser Family Foundation poll found that “[l]arge majorities of the public favor various policy options aimed at lowering the cost of prescription drugs, including over eight in ten who favor allowing the federal government negotiate with drug manufacturers.”[2]

In its 2019 annual report, Vertex cites as a risk factor the dependence of future revenues on the “ability to obtain adequate reimbursement for our products” and the absence of “pricing limitations.” (Annual Report on Form 10-K at p. 20) Vertex’ new cystic fibrosis (CF) drug, Trikafta could, analysts say, push the Company’s CF drug sales to over $8 billion,[3]butthe Institute for Clinical and Economic Review has opined that the prices for Vertex’s other CF drugs would need to be reduced by 71-77% to be cost-effective.[4] In October 2019, Vertex agreed to lower reimbursement than it had originally sought from England’s National Health Service for three drugs.[5]

We are concerned that the incentive compensation arrangements applicable to Vertex’s senior executives may not encourage them to take actions that result in lower short-term financial performance even when those actions may be in Vertex’s best long-term financial interests. Vesting for half of the performance share units Vertex’s named executive officers can earn depends on one-year net CF product revenue goals, and for 2018, revenue growth for Vertex’s CF drugs was the most heavily weighted factor in the quantitative portion of the annual bonus formula. (2019 Proxy Statement, at 53-55) 

The disclosure we request would allow shareholders to better assess the extent to which compensation arrangements encourage senior executives to responsibly manage risks relating to drug pricing and contribute to long-term value creation. We urge shareholders to vote for this Proposal.

[1]  https://khn.org/news/states-pass-record-number-of-laws-to-reel-in-drug-prices/

[2]  https://www.kff.org/health-reform/poll-finding/kff-health-tracking-poll-october-2019/

[3]  https://www.statnews.com/2019/10/23/we-conquered-a-disease-how-vertex-delivered-a-transformative-medicine-for-cystic-fibrosis/

[4]  https://www.biopharmadive.com/news/icer-vertex-cystic-fibrosis-drugs-expensive/522962/

[5]  https://www.bbc.com/news/health-50144742