Cystic fibrosis drug could bring millions to executives

Critics decry plan to compensate Vertex executives if costly new drug is profitable

“We want to make sure our team is in place to complete our work,” said Vertex chief executive Jeffrey M. Leiden, in regard to executive retention payouts. Suzanne Kreiter/Globe staff

If Vertex Pharmaceuticals Inc. wins federal approval for a new cystic fibrosis therapy in the coming months, 8,500 Americans with the life-threatening disease can look forward to healthier lives, although the treatment is likely to cost hundreds of thousands of dollars a year per patient.

On the other end of the financial equation are a dozen senior executives, who would reap more than $53 million in one-time bonuses — if the new medicine tips Vertex into profitability, as expected. The Vertex chief executive alone would earn nearly $15 million.

Critics are questioning the so-called retention awards, a type of payment less common in corporate America in recent years, saying such payouts offer incentives to drive up patient costs.

“The juxtaposition of high drug prices and the amount going to the corporate executives is extraordinary,” said John Rother, president of the National Coalition on Health Care, which represents 85 consumer groups, health care providers, and insurers.

“This is an extreme case. It’s coming at the expense of patients, and it deserves a lot of scrutiny . . . Retention bonuses are appropriate in some cases, but this indicates to me a lack of social responsibility,” Rother said.

The executive retention payouts would be triggered if Vertex earns an annual profit in any of the next three years. Chief executive Jeffrey M. Leiden would be paid $14.9 million, and other top executives would receive up to $8.2 million each three years from now. The awards are intended to assure stability at the company as it enters a pivotal expansion period, according to Vertex.

“We want to make sure our team is in place to complete our work, which is about bringing these drugs to patients around the world,” Leiden said in an interview.

Vertex doesn't fit the typical mold of a Wall Street darling. The company has lost money consistently for decades, and its sole drug now on the market treats fewer than 2,000 people suffering from cystic fibrosis.

But the Boston biotech has nearly doubled in market value over the past year to more than $30 billion — among the highest in Massachusetts — thanks to the enthusiasm of investors who believe the company will become highly profitable on the strength of its new medicine. The treatment has improved the breathing and reduced lung infections of patients in clinical trials, enabling them to lead more normal lives and avoid hospitalization.

Though 8,500 Americans could benefit immediately from the treatment, there are about 22,000 patients overall in North America, Europe, and Australia in similar circumstances, Vertex said.

Vertex Pharmaceuticals Inc. recently moved into its new two-building headquarters on the South Boston waterfront. Dina Rudick/Globe Staff

One such patient, Heather Bonner, a 27-year-old office manager for a financial firm in Rochester Hills, Mich., said she has tried at least 10 other treatments before entering a clinical trial. “Nothing compares,” she said. “The [Vertex] combination drug has made a noticeable difference. I’ve gained weight, which is hard for cystic fibrosis patients to do. And I can breathe a lot better.”

The currently approved Vertex cystic fibrosis medicine, Kalydeco, is priced at more than $300,000 a year per patient. Its new combination therapy, consisting of Kalydeco and another drug known as a “corrector,” is expected to cost at least as much. That medicine, which Vertex plans to sell under the brand name Orkambi, would treat patients, like Bonner, with the most common cystic fibrosis-causing mutations.

Vertex’s application, filed with regulators on Nov. 5, is scheduled to come before a Food and Drug Administration advisory committee on May 12. If approved by the FDA, the drug combo could be on the market by July.

Robert Weissman, president of the advocacy group Public Citizen, said compensation has been rising among executives of publicly traded biotech companies capitalizing on the budget-busting medicines in their portfolios or research pipelines. Much of their compensation has come from cashing in stock that soared in value in recent years.

“It’s instructive how specialty biologics companies like Vertex are basing their business models on these extraordinarily high drug prices,” he said. “And there’s a perverse incentive to charge these prices because it feeds the executives’ paychecks. We’re long past the time where these prices are justified based on R&D or anything. It’s just what the market will bear.”

All cystic fibrosis patients with the mutations treated by Kalydeco have access to the drug, either through private or government insurance, or through a Vertex support program that provides the drug free to uninsured patients and subsidizes the monthly co-pays of many others. Vertex plans to introduce a support program for Orkambi but won’t give details until it is approved.

Leiden, in an interview, said the retention awards were designed to keep Vertex’s leadership team in place at a time when executives are being wooed by other Boston area drug makers. “We are in an incredible war for talent,” he said. “We have more new biotech startups, more pharmas coming here every year than we’ve ever had before. We’ve spent a lot of time building this leadership team that’s been very successful, and every time a startup starts those folks get calls to try to recruit them away.”

Leiden said revenue from Vertex’s drug sales will help finance research and testing to develop new treatments for cystic fibrosis and other diseases.

“Our goal as a company is to create an institution that can deliver innovative drugs over and over again to patients,” he said. “That’s unbelievably expensive. It’s unbelievably risky. We’ve spent $7 billion on [research and development] at Vertex, and we’ve been profitable for one year out of 25 . . . That’s not a sustainable model. The financial goals we have are to make sure we can reinvest to create the next generation of medicines for the 40 percent of patients with CF who don’t have anything today. And that’s just how the business model works in biotech.”

Vertex, celebrated for its innovative science, recorded its only annual profit in 2011 on the strength of a hepatitis C drug it later stopped selling. Despite that, some analysts have identified Vertex as a takeover target. Gilead Sciences Inc., best known for its own costly hepatitis C drug that overtook Vertex’s, has been mentioned as a potential acquirer.

Stock analysts project Vertex will lose more than $400 million this year but earn more than $1.1 billion in 2016, the first full year its combination medicine could be available to patients. Profits will climb to $2.2 billion in 2017 and $3.2 billion in 2018, according to a consensus of forecasts. The forecast shows sales climbing from $1 billion this year to $5.2 billion in 2018.

While the company says high prices are needed to assure the financial stability that will enable it to produce more life-saving drugs, even some investors are troubled by the cost of drugs.

One company shareholder, the UAW Retiree Medical Benefits Trust, which declined to discuss the retention bonuses, has raised the issue of drug prices in a proposal it submitted before the Vertex annual meeting on June 4. The proposal would require the board to report to investors on its exposure to a backlash that has been building nationally against costly specialty drugs.

The proposal cites, among other things, growing “price sensitivity of prescribers, payers, and patients.” Vertex’s board opposed the UAW measure, noting that “we are in a high-risk, high-return industry.”

Companies have long used retention bonuses as a tool to keep valued executives from jumping to rivals. Among the Massachusetts businesses that have awarded such bonuses in past years are Biogen Inc., Staples Inc., Infinity Pharmaceuticals Inc., and Akamai Technologies Inc. But compensation specialists say they have fallen from favor in recent years.

Leiden’s retention bonus was part of $36.6 million pay package that also included a salary and cash bonus of about $4.1 million and stock awards valued at about $17.6 million, according to a regulatory filing.

A company spokesman noted that Vertex’s shares have increased about 250 percent since Leiden joined the biotech in 2011.

Shareholder advisory firms that issue recommendations on matters coming before company stockowners often frown on retention bonuses, compensation specialists say, believing stock options should be enough incentive to keep executives from jumping to other jobs.

Some of these firms are expected to issue recommendations later this month in advance of the Vertex annual meeting.

Equilar Inc., a national compensation consulting firm in Redwood City, Calif., said only about 6 percent of companies in the Russell 3000, an index of US stocks, awarded retention bonuses in the most recent fiscal year.

“They’re one-off situations,” said Aaron Boyd, director of governance research at Equilar. “They’re not a standard practice for most companies. Proxy advisory services aren’t fans of these special bonuses. They usually protest that they’re excessive or unnecessary if they feel the stock grants they have in place are sufficient to reward their executives.”