CEO jackpot
Industry executives continue to see big payouts despite spending declines and cost-cutting
Regeneron Pharmaceuticals, founded a quarter-century ago by a Cornell University professor, had a breakthrough year in 2012. The price of the company’s stock tripled. Sales of its new macular degeneration-fighting drug, Eylea, approached $1 billion blockbuster status. And its colon cancer drug won regulatory approval.
The result: Regeneron closed the year with its first-ever profit, the company boasted to investors in April. And no one benefited more than Dr. George Yancopoulos, the company’s top scientist. Regeneron’s board of directors voted Yancopoulos a total payout of salary, bonus, stock options and other benefits totaling $81.6 million. It threw in 500,000 shares of restricted stock, which he can’t claim until 2017.
No matter that the company’s macular degeneration and cancer drugs, whose success put Yancopoulos atop Modern Healthcare’s list of the industry’s highest-paid executives in 2012, were me-too drugs that added little to physicians’ armamentarium for fighting disease. Indeed, the company’s cancer drug, Zaltrap, was pulled from the formulary of one of the nation’s leading cancer-treatment centers because oncologists there said it wasn’t worth the price.
Yancopoulos’ compensation easily surpassed that of the most richly rewarded executives in healthcare’s other sectors. The jackpot increased his total compensation by a multiple of seven compared with the $10 million he received the year before.
Healthcare chief executives at for-profit firms did well across-the-board in 2012. Drugmakers led the parade, garnering 14 of the top 25 spots among highest-paid executives with a median increase in compensation of 16% for 13 executives. These gains came even though the latest reports showed spending on pharmaceuticals declined 3.5% last year to $325.8 billion, the first decline in decades as fewer patients visited doctors and hospitals and a number of patents on best-selling medicines expired, according to the IMS Institute for Healthcare Informatics.
But CEOs and top officials in other segments of the healthcare industry did well, too, even as their firms have been under unprecedented pressures to cut costs and become more efficient. Sluggish demand strained operations at hospitals, in particular, that are grappling with recent and proposed Medicare cuts from healthcare reform and federal budget negotiations. Yet four top hospital chain executives ranked among the nation’s top paid executives, with HCA employing three of the four highest-paid hospital executives. The fourth, Community Health Systems’ Wayne Smith, was the only one to see his total compensation decline last year.
Hospital giant HCA awarded its chief executive, Richard Bracken, total compensation of $46.4 million, up from $5.7 million in 2011. That made him the top-paid hospital executive in the U.S. Bracken’s pay boost largely stemmed from roughly $22 million from distributions paid on vested stock options in
2012 and $11.8 million in stock options and so-called stock appreciation rights, which are payments made for the difference in stock price during a set time period.
Kent Thiry, the chairman and CEO for dialysis provider DaVita HealthCare Partners, took home $26.8 million last year even as Medicare moved to a bundled-payment system designed to cut costs. Thiry saw a roughly 50% increase in compensation, largely driven by about $8 million in restricted stock awards and another $1.25 million incentive payout. DaVita, which operates the nation’s largest chain of dialysis clinics, last November acquired HealthCare Partners, a medical group and physician network company. Skip Thurman, a spokesman for DaVita, said in an e-mail that patient outcomes factor into compensation for the company’s chief executive.
At insurer WellPoint, the combined severance and total compensation paid to departed chief executive Angela Braly, who left abruptly last August, reached $20.6 million. But the high payouts will continue. The insurer’s newly appointed CEO, Joseph Swedish, will earn $14.4 million in compensation after being recruited from Trinity Health, a not-for-profit health system based in Livonia, Mich.
At least one top officer in a sector—distributor McKesson Corp.’s John Hammergren— saw a pay decline. But it was from already lofty heights. The CEO of the diversified firm earned $39.7 million last year, a decline of 16% from the $45.6 million payout in 2011.
Peter Dworkin, a spokesman for Regeneron, said Yancopoulos’ rising fortunes were tied to the company’s climbing stock because so much of his payout is equity. Yancopoulos received only $850,000 in salary and a $2 million bonus. His stock awards, on the other hand, totaled $57.3 million and options amounted to another $21.4 million.
His 500,000 shares in restricted stock “is a so-called retention grant that recognizes his past value, but especially what we expect to be his future value to the company,” the spokesman said. “It was under his watch that all of our scientific, clinical and medical progress has been made, so he’s really been integral to the success of Regeneron.”
Regeneron stockholders have little to complain about. The company’s stock price more than tripled last year and is now trading at five times its January 2012 price.
John Core, an MIT Sloan School of Management accounting professor who studies executive compensation and governance, said drugmakers encourage risk in pursuit of high rewards. Their executive compensation packages are weighted with equity that deliver big payouts when the company succeeds. “I don’t think that the shareholders are going to be unhappy for paying for a year like that,” he said.
Healthcare payers may not feel the same way, though. Regeneron’s surging stock price and Yancopoulos’ compensation were fueled by its bringing to market me-too drugs that have figured centrally in public criticism by ophthalmologists and oncologists over the rising price of new drugs.
Regeneron’s Eylea, a macular degeneration treatment, entered the market as a rival to Genentech’s Lucentis, both of which sell at a hefty premium to Genentech’s equally effective Avastin, which can sell for as little as $50 a dose when used off-label to produce the monthly shots required to fend off the blinding eye disease. Zaltrap, which is similar to Avastin in the way its combats blood vessel formation in solid tumors, was sharply criticized by oncologists at Memorial Sloan-Kettering Cancer Center, New York, after it was priced above the alternative already on the market. Neither drug prolonged life for very long in advanced cancer patients.
Regeneron has since lowered the price. Dr. Randall Stafford, a professor of medicine and director of the program on prevention outcomes and practices at Stanford University, said new me-too drugs have the potential to lower drug spending by creating competition. But when all the competition remains on patent, the new competitors often increase drug spending because they enter the market with heavy advertising.
Grant Comer, an assistant professor of ophthalmology and visual science at the University of Michigan, said the entry of Regeneron’s Eylea into the macular degeneration market did not prompt Lucentis to lower its price. “I keep expecting them to cut their price and it just hasn’t happened, as far as I know,” he said. “I really don’t know the reason they haven’t. I keep hoping they will, for our patients’ sake. But they haven’t done it.”
Comer doesn’t dispute the drugs’ value. Doctors previously could slow the progression of macular degeneration, but could not stop it. Patients went blind. The new class of drugs can preserve eyesight. “They are phenomenal drugs.”
But the brand name drugs are costly. Comer said Eylea’s price is slightly less than the roughly $1,900 per monthly dose for Lucentis, though after the first three injections, it can be administered half as often. The Ann Arbor-based physician continues to reach first for Avastin since its cost—$50 to $75 a dose—is a fraction of the onlabel drugs. “I favor the one that’s going to benefit the medical system,” he said.