CEO jackpot

In­dus­try ex­ec­u­tives con­tinue to see big pay­outs de­spite spend­ing de­clines and cost-cut­ting

Modern Healthcare - - COVER STORY - Me­lanie Evans

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.

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