Start with this fact fixed in your mind before we begin talking about Mylan Labs and its EpiPen: a company’s stock price is determined by its future earnings growth.
You can look up how corporate finance theorists reached that conclusion if you want. For our purposes here—which are to examine how Mylan landed in such a mess of public outrage over the price of its EpiPens—just take it as fact. Stock price is determined by future earnings.
That detail explains much of why Mylan has reacted to the unhappy EpiPen crowd the way it has, with offers of coupons and generic alternatives rather than rescinding its price hikes. Cutting the price would cut future revenue, which would hurt the stock. Which Mylan doesn’t want to do.
That last part—that base impulse to preserve shareholder value—also shows just how calcified corporate governance can get at large organizations, and why Corporate America has such a low reputation with the public. Then compliance officers and everyone else on the executive floor wonder why employee cynicism and disengagement are such rampant problems. Well, why wouldn’t they be?
One easy shot to take against Mylan is to say the company wants to preserve stock price to preserve lucrative executive compensation deals—so OK, let’s start there.
CEO Heather Bresch has seen her base salary alone jump 20 percent in three years, from $1.08 million in 2013 to $1.3 million in 2015. According to Mylan’s most recent proxy statement, Bresch also owned roughly 930,000 shares as of May 16. On that day, those shares had a market value of $37.2 million.
Bresch also received $3.9 million in performance-based pay. Half of that amount was tied to hitting targets for adjusted earnings per share. For Bresch to receive the maximum payout, adjusted EPS had to hit $4.30. Let’s remember that adjusted EPS is a non-GAAP metric—which means that executives have considerable discretion to adjust it as they believe best. At Mylan, Bresch is among those executives who do the adjusting.
Mylan’s adjusted EPS for 2015 was $4.30—the precise amount Bresch needed to hit her maximum payout, and not one penny more.
All this adds up to a strong personal incentive for Bresch to keep the list price of the EpiPen high. It preserves projected revenues, which props up the stock price. Any actual revenue that’s lost because of the coupons or generic alternatives or some other idea Mylan dreams up, can be adjusted away next year so senior executives still hit performance goals where they get to do the adjusting.
Anyone paying attention can see these motives. Compliance officers are relatively powerless to change them, since you won’t be serving on boards’ compensation committees any time soon. You just get to deal with the consequences, which include cynical employees and an alienated public.
Still, I don’t believe Mylan’s leaders are flim-flamming their way around the EpiPen price hikes to make themselves rich.
Our Deeper Corporate Problems
One of the most telling statements Bresch made about the EpiPen scandal happened last week. In an interview with the New York Times, Bresch simply spoke the truth about her role at Mylan: “I am running a business. I am a for-profit business. I am not hiding from that.”
Bresch is doing her job, and doing it well. Total shareholder return for Mylan is 25.4 percent in the last three years, 20.7 percent in the last five. The company outperforms its peers. Revenue from EpiPen sales alone have gone from $200 million a decade ago to $1 billion today. Mylan has the ability to extract more money from its customers (whether the customer is you directly, or your insurance plan), and that’s what it does.
The EpiPen fiasco simply shows the fallacy in talking about corporations’ stakeholders—that when push comes to shove, corporate executives are duty-bound to place shareholders above other groups, like customers or the general public. (Because even if you don’t use an Epi-Pen, Mylan’s price hikes are part of why your insurance premiums increase year after year.)
This is the reality of “stakeholder engagement.” It only exists to the extent that corporate leaders allow it. It only exists to the extent that it doesn’t upset important goals like EPS and stock price appreciation too much. Bresch is simply more unapologetic about that fact than most. Her position is socially tone deaf and at odds with the interests of the consuming public, but it’s defensible.
After all, consider the converse for a moment. Let’s say Mylan cuts the price of the EpiPen in half—still high enough to make a profit, and also a grand gesture to consumers that, yes, a major corporation is willing to leave some money on the table for the sake of others. What happens then?
The stock price falls. Over the longer term, it probably rises but not at the impressive rate Bresch delivered previously. Consumers applaud for a week, then go back to grumbling that their 401(k) plans don’t rise quite as much as they’d like. Bresch might personally make less money, but as I said, I don’t believe her bloated executive pay is the chief reason for her actions. Then the activists arrive and start calling for her scalp.
Mylan just captures all the internal contradictions in Corporate America today, where we all know as individuals what “the right thing to do” is—yet as an organization, Mylan has no incentive to do it.
And corporate ethics & compliance officers are caught in the middle.