By ED SILVERMAN
posted March 21, 2014 on Wall Street Journal Corporate Intelligence Blog
Outraged by the prices that Gilead Sciences charges for some of its medicines, an AIDS advocacy organization has succeeded in placing what is being called a unique resolution before the drug company’s shareholders. The proposal ties compensation for chief executive John Martin to wider access to the drug maker’s popular roster of HIV and hepatitis C treatments.
The shareholder resolution from the AIDS Healthcare Foundation, which has previously lambasted Gilead and other drug makers over their pricing, was proposed in response to the recently approved Sovaldi pill for hepatitis C. Gilead priced its medicine at $84,000 for a 12-week treatment, which works out to $1,000 a day. As a result, AHF maintains that Sovaldi will be unaffordable for some patients.
Such concerns, in fact, prompted the U.S. House Energy and Commerce Committee to ask Gilead to explain the rationale behind its pricing. In a letter sent yesterday to the drug maker, the lawmakers worry that Sovaldi pricing may be too high for patients with public or private insurance. A report released last week by the Institute for Clinical and Economic Review, a nonprofit that is supported, in part, by insurers, forecast that Sovaldi may negatively burden health-care budgets.
At the same time, AHF also cited the $90 million in compensation that Martin received in 2012. In doing so, AHF attempted to strike another nerve, given that CEO pay remains a flashpoint issue among some shareholders.
Resolutions have advocated social issues before. Two years ago, an order of Catholic nuns asked several drug makers to put a lid on their prices. Last year, the New York State Comptroller placed a resolution before Abbott Laboratories that tied executive compensation to compliance. But the AHF resolution may be the first time that CEO compensation has been tied specifically to creating wider access to medicines.
“Every year, we see a number of proposals from shareholder proponents asking to link executive compensation to an additional factor,” says Gary Hewitt, head of research at GMI Ratings, a firm that publishes risk ratings for public companies based on factors including corporate governance. “But this is unique and has another layer of complexity.
“Gilead is an interesting target. The CEO exercised a lot of options last year, and it’s a successful firm in creating shareholder value. The question is how much of that is pinned to an unsustainable business practice? And does this practice, which appears to profiteer on the backs of a community, bring scrutiny that may potentially risk shareholder value long term? It’s a reasonable argument.”
Gilead officials didn’t immediately respond to a request for comment. But in its proxy materials, Gilead urges shareholders to reject the proposal and maintains that Martin’s compensation is tied, in part, to patient access. “Under our corporate bonus plan, the target bonus opportunity for our chief executive officer is based entirely on Gilead’s achievement of both financial and non-financial performance objectives, such as patient access.” Last year, his bonus was $3.5 million.
The AHF proposal is unlikely to sway most shareholders, though. “Social resolutions usually don’t do as well as typical governance resolutions,” says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “They’re not mandatory. The board isn’t required to follow the resolution. It’s pretty hard for a company to keep things off [the ballot]. But it doesn’t mean [the resolution] will win or if it does, it’ll have much of an impact.”
Michael Weinstein, the AHF president who holds 52 Gilead shares, acknowledges as much. “There’s no chance this will be successful. The CEO and chairman control the dialogue with investors and the stock is doing so well, no one wants to rock the boat. But we think pricing should be part of corporate reputation and they are severely hurting their reputation. I think Gilead is pushing the envelope and may eventually kill the goose that laid the golden egg if it brings about restrictions on pricing.”
