At a much-watched Congressional hearing on drug prices two weeks ago, AbbVie helmsman Richard Gonzalez faced a grilling over his bonus—specifically, that it was pegged to sales of the company's megablockbuster Humira. After all, price hikes have helped fuel Humira's spectacular growth.
Even after shareholders forced a vote last year on linking incentive pay to price-hike scrutiny, the company kept the Humira metric in place when determining Gonzalez's 2018 compensation, according to a proxy statement filed Friday.
In a pay package that will rank among the largest in biopharma, Gonzalez pocketed $21.27 million in 2018. Nearly 20% of that, or $3.9 million, came from a performance-based cash incentive award. That $3.9 million was smaller than the $4.33 million Gonzalez snared for 2017, but it's still 58% more than his target award, which in itself is 1.5 times his base salary.
Using Humira sales as a key factor to evaluate Gonzalez’s performance would make some sense; after all, the immunology megablockbuster accounts for about 60% of the company’s total revenue. But with Humira's growth fed by price hikes and protected by aggressive patenting tactics, AbbVie has drawn increasing public scrutiny.
The connection between Humira sales and Gonzalez's pay strikes Sen. Ron Wyden, D-Ore., as “problematic,” the Senate Finance Committee ranking member said during a hearing last week, when Gonzalez and six other pharma executives appeared.
“Would you make a smaller bonus if you drop the price of Humira?” Wyden asked Gonzalez at the hearing on Feb. 27.
“Humira was one element of a set of financial factors that were evaluated as part of my compensation,” Gonzalez responded. “It’s obviously a very significant product for us. So it’s clear that would be part of that evaluation.”
Humira sales, plus net revenues, operating margin and return on assets, account for about 60% in Gonzalez’s bonus review. Ironically, it was the only financial goal that AbbVie didn’t quite match up to in 2018.
According to AbbVie’s proxy, the board had previously set Humira’s 2018 sales target at $20.1 billion. But the actual result fell slightly short at $19.94 billion, probably one reason why Gonzalez’s 2018 incentive payout—and his total compensation—came in below what he collected in 2017.
In a report that Wells Fargo's David Maris put forward last January, the analyst noted that AbbVie’s 9.7% price increase on Humira would cost the U.S. healthcare system another $1.2 billion—the costliest hike among a few Big Pharma raises that Maris examined. And over the past five years, thanks to an accumulation of price increases, Humira’s sticker price has more than doubled, he noted.
The price hikes—and the unwanted attention they bring—have some investors concerned. At last year’s annual meeting, a small group of stockholders that collectively owned about 290,857 AbbVie shares proposed that the company’s compensation committee provide more clarity on how “risks related to public concern over drug pricing strategies are integrated into AbbVie’s incentive compensation [arrangements] for senior executives.” That motion was defeated with 21.83% in favor, according to Mercy Investment, one of the co-filers of the proposal.
Some of those investors are about to return this year with the same proposal, though the group seems to be smaller with only 86,219 AbbVie shares involved.
“In our view, excessive dependence on drug price increases is a risky and unsustainable strategy, especially when price hikes drive large senior executive payouts,” the investors wrote.
Referring to a case by California Department of Insurance that alleged AbbVie hired and paid a network of nurse “ambassadors" for physicians as a way to boost Humira prescriptions, the shareholders argued the situation “may have been better managed by leadership if Humira sales were not an explicit part of the payment incentive plan.”
In its rebuttal to the shareholder proposal, AbbVie’s board of directors—which Gonzalez heads—said the compensation committee conducts an in-depth risk assessment before granting executive pay, with results published in the proxy, and said that a “report specifically focused only on drug pricing risk would be redundant.”
As for drug pricing, the company said it’s still committed to capping its price increases at less than 10%.
“Therefore, AbbVie already limits the risk of extreme price increases being used to inappropriately meet performance goals,” the board added.
But AbbVie’s very ability to jack up Humira prices—thanks to patent settlements that fend off biosimilar versions of Humira until 2023—has also come under fire. During the Senate Finance Committee hearing, Wyden compared AbbVie and its Humira exclusivity protections to “Gollum with his ring,” referring to the Lord of the Rings character.
“Thick cobwebs of patents and legal tricks and shadowy deals with other drugmakers, all of them are in place to keep the cash flowing,” he said.
So far, AbbVie has reached settlements with several biosimilar manufacturers, pushing their copycat launches in the U.S. to 2023, leaving Boehringer Ingelheim still in a legal battle with the Illinois drugmaker.