December 24, 2014
By Riley McDermid and Jessica Wilson, BioSpace.com Breaking News
As we round out the year 2014, BioSpace has been combing through our archives for some examples of truly outstanding behavior in biotech—either because it was so heavenly, or because it was so heinous. Sadly, we had a much harder time finding nominees for our “nice” category.
After a year where the capital markets gave back record profits to most of big pharma and its related sector, we have spent much of our time reporting on “restructurings,” “rollbacks” and “revamps.”
That translation means the executive suite and shareholders have been cashing in while many jobs were lost in the process---not because biotech can’t afford them, but because biotech wants to plough that money back into other directions. So this year, we take a minute to honor those who doubled down on their workforce, as well as remember some of the more inglorious moments to come out of management in 2014.
NAUGHTY BY NATURE
1. Johnson & Johnson Slashes Pensions For New Hires As Cuts Continue
Healthcare giant Johnson & Johnson said this fall that it will slash benefits available to employees hired or rehired after Jan. 1, 2015, a leaked internal memo said, as the company seeks to rein in its liabilities and get the cheapest possible workforce.
Peter Fasolo, the company’s worldwide vice president for human resources, wrote in the memo that “the changes will more closely align with benefits offered by our competitors and maintain a retirement program that’s above average among our peer companies.”
The move is just the latest effort by J&J to slash costs and reduce overhead in an effort to compete with leaner competitors in an already-crowded pharma field.
The scale back has met with some limited success: Sales in the second quarter of 2014 spiked 9 percent, while earnings edged up 12 percent. Fasolo said the move was necessary because the “benefit landscape has continued to evolve in recent years” and “emerging trends” in hiring and recruitment have continued to change across the board.
“More importantly, it will continue to support our efforts to attract and retain talent to drive innovation and growth across our family of companies, helping us manage for the long term,” he wrote in the memo.
2. Martin Shkreli and the Retrophin Stock Scandal
Two words in 2014 biotech: Martin. Shkreli. The saga of ousted drug manufacturer Retrophin, Inc. ‘s chief executive, Martin Shkreli wrote a whole new novel this year, when a filing with the U.S. Securities and Exchange Commission in November showed Shkreli sold company stock while urging investors to buy into Retrophin.
According to an SEC filing made public that month, Shkreli raked in almost $3 million in gross proceeds by selling “forward contracts” on his Retrophin stock while simultaneously boosting the hype around the company via his Twitter account.
“Not selling $RTRX. The stock is very very cheap. The revenue generating assets alone are worth [greater than] $25/share,” Shkreli tweeted on Sept. 30, the day his leave from Retrophin was announced.
Retrophin was tight lipped at the time about why it booted Shkreli out of the CEO chair in September. But people familiar with the company have since told Bloomberg that he was unceremoniously sacked after granting Retrophin stock to “certain recipients in the absence of a shareholder-approved distribution plan, failures to disclose stock grants, and grants of stock above limits imposed by the plan that was eventually put in place.”
The news service also disclosed the Shkreli, who is a founder and managing partner of hedge fund MSMB Capital Management, has been involved in a criminal investigation into harassing a former employee. In a January 2014 affidavit for the case, the former employee, Timothy Pierotti, quoted from a letter sent to his wife by Shkreli, in which the then-CEO said: “I hope to see you and your four children homeless and will do whatever I can to assure this.”
So what makes this particularly bad? As a former short seller trader, Shkreli was likely well aware of what or was not strictly legal when dealing with company stock. The violations will now likely catch the eye of regulators with the SEC, which levies heavy fines and penalties on companies found to be in violation of securities laws.
3. Express Scripts Cuts Workforce But Keeps High Exec Salaries
When the chief financial officer of massive pharmacy benefits company Express Scripts decided to leave the job the week of Dec. 16 after repeated clashes with CEO George Paz, an inside source told BioSpace, the uncertainty over where the company is headed in 2015 made most of the market uneasy. But news that she would keep her massive severance package and six-figure salary for her successor in the face of the company’s recent layoff spree really earned them a lump of coal in 2014.
Express Scripts abruptly announced that CFO Cathy Smith would leave the company, to be replaced by James Havel, CFO of Major Brands Holdings, on an interim basis, starting Jan. 2. The company said at the time only that she was leaving to “pursue other interests” but insiders have told BioSpace it was solely due to her inability to get along with Paz.
“We thought odd timing given Smith was only there for less than a year and was viewed positively by investors,” the source told BioSpace. “We talked to [Express Scripts] and they were brutally honest and said Smith and CEO George Paz simply didn’t get along.”
Both executives were making top-line salaries at the company, which saw a rough year in 2014. Express Scripts laid off 400 employees, including 90 in St. Louis, in November, after blaming “lower prescription volumes and the loss of clients.”
Meanwhile, both Smith and Havel‘s base salary is $725,000, with Havel receiving a signing bonus of $110,000, according to recent filing with the SEC. Smith will receive an undisclosed amount of severance and other benefits.
So is it right to reward fat cat C-level execs at the expense of jobs? Well, just take a look at the bottom line. Express Scripts can afford it—the firm saw income leap 36 percent to $582.3 million for quarter ended Sept. 30. Those numbers have reassured Wall Street, but some in biotech have cried foul about so many former employees out of work at Christmas—without that cushy severance package to see them through the holidays.
SUGAR AND SPICE AND EVERYTHING NICE
1. GlaxoSmithKline Pays Dividends
Surprising nearly everybody who watches the sector, the chief executive officer of GlaxoSmithKline stood by his dividend in mid-December, saying it is secure despite cutting its profit forecast and increasing concern from analysts.
In a conference call last week Chief Executive Officer Andrew Witty told analysts worried about the dividend that they can expect the company to ante up its share. The firm said it will splash out 80 pence, or $ 1.25, per share for 2014.
“I don’t think people should be concerned about that,” Witty said in a call after a shareholder meeting discussing new deals the company is doing with Novartis AG.
Witty also reassured analysts that shareholders will get an additional 4 billion pounds when the deals with Novartis close.
Glaxo has been a ripe target for bearish analysts this year, after slow growth and whittled forecasts had several predicting the company will have to call in its dividend this year. After Glaxo cut its forecast in July, analysts at Liberum Capital Ltd warned investors that the likelihood of a dividend cut was “increasing dramatically.”
Instead, Glaxo appears poised to pay out a dividend, even at an enormous cost to the company’s bottom line. If it keeps to its initial 80 pence guidance, it will use around 85 percent of its profits to meet dividend calls this year, one of the highest margins in biotech, let alone the wider capital markets.
2. United Therapeutics Cuts CEO Pay
It was a totally new world order when United Therapeutics Corporation said in mid-December that it would revamp its C-suite structure and compensation, with Current Chief Executive Officer Martine Rothblatt lopping off 70 percent of her salary to and become co-CEO when current Executive Vice President and Chief Operating Officer Roger Jeffs is promoted to co-CEO beginning on Jan. 1, 2015.
It was a long process but a collaborative one that led to this point. Earlier this summer, proxy advisors Institutional Shareholder Services Inc. and Glass, Lewis & Co. criticized Rothblatt’s compensation, which jumped $30.2 million from 2012 to 2013.
In the wake of a “Say on Pay” vote by its shareholders, which was a non-binding advisory vote, United Therapeutics put forward a new compensation package for Rothblatt. The package revokes her previously agreed upon requirement that the company award her an annual grant of full-vested stock options, capped at one million shares per year—dependent upon the company’s market capitalization. This agreement has been in place for the past 15 years.
Rothblatt and the Compensation Committee agreed to an incentive package that will be a 70 percent reduction from her current package. The incentives will now depend on company-wide performance measures rather than market capitalization.
“It is unusual for an executive to voluntarily waive the right to a contractually bargained-for benefit,” Chairman of the Compensation Committee of the Board of Directors Christopher Causey stated. “She has demonstrated exceptional leadership on this issue.”
“As Chairman of the Board of Directors, I share our owners’ concerns,” Rothblatt said in a statement. “I am pleased that we have been able to so quickly agree on a new incentive compensation structure going forward.”
3. Regeneron Sticks to Plan to Double NY Workforce
Proving not all executives are clueless, the chief executive of Regeneron Pharmaceuticals said in an interview this fall that the company is sticking to its plan to will double its 2,500-employee workforce over the next five years.
He also said that increased competition for funding from New York state authorities for regional business development has had a “halo effect” on other regions looking to score high-profile companies, including biotech.
Leonard Schleifer, president and CEO of Regeneron Pharmaceuticals told the Albany Business Review that a recent bidding process between 10 regions for $709 million in state funding was a good thing that increased healthy competition.
“While we’re competing, I think it’s going to have a real halo effect into the other regions,” Schleifer said of the Mid-Hudson area, which received $82.8 million in state funds,
Schleifer is co-chair of the Mid-Hudson region’s economic development council, and although Regeneron itself wasn’t awarded any specific funding, the company will likely benefit from improved infrastructure and beneficial tax incentives.
“There’s a lot of activity going on that we have in common,” Schleifer told the paper. “The regions are different, but we do have the commonality of a lot of high-tech business up and down the region.”
Regeneron is based in posh Westchester County and has around 2,500 total workers in New York state, with 900 at its East Greenbush site. The Albany region, where the plant is located, was awarded $60 million, a huge chunk of the total available.
“The state has a great set of diverse skills and opportunities, and we as a company saw that we could grow discovery research and corporate activities, as well as our manufacturing all throughout the state,” Schleifer said in the interview.
Part of that plan is doubling Regeneron’s workforce, he said, as Schleifer co-chairs the Mid-Hudson council with Dennis Murray, president of Marist College. “When Dennis and I worked on our plan for the region, you could really feel our region is almost a model for the state because we have both very rural and very urban locations, just like the state does,” Schleifer said. “If we can make it work regionally, I think it’ll work for the whole state.”
