The Progressive Ensign

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Tag: stock buybacks

Mylan’s Executives Go Too Far: Bring Down the Price of Epipens, End Executive Perks

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(Editor Note: August 29, 2016 – Mylan executives announced they would introduce a generic version of the two Epipen product for $300.  This move is a step in the right direction, but not nearly enough, the two pack was priced at $100 in 2007.  So, this price move is a 300 % increase instead of 578 %,  just not enough.  Particularly, when inflation has been on average 1.4 % since 2007,  or 11.2 %.  Our view is Mylan still needs to end stock buy backs in the amount of $1 billion, lower extremely high executive pay based on stock performance, plus, drugs like the Epipen which are life saving should be categorized as  ‘patient critical’. )

The View:

Mylan’s executives have raised the price of two Epipens, used to counteract allergic reactions, over 578 % since 2007.  They made this move because soon a generic alternative was coming on the market from Teva – however the FDA found deficiencies in their product.  So, Mylan has a virtual monopoly.  This gives them extreme pricing power to drive profits for the firm.  While, Mylan has been raising prices, for the last year they have been buying back stock – authorized up to $1 billion over the last year.  Stock buybacks are employed by companies to take stock off the open market, to try to move the stock price up – these funds are not invested in product innovation, worker salaries, or cost reduction.  Mylan’s executives have highly leveraged stock compensation plans, so stock buybacks can put money in their pocket – taking dollars from patients and parents who critically need the Epipen.  Epipen sales are estimated to be $1.7 billion per year, so $1 billion in stock buyback funds would go a long way to reduce the price of Epipens!  While Mylan has spent these funds over the last year ending Aug 27 of this year, they have been issuing corporate bonds for hundreds of millions of dollars. Instead of using debt funds for stock buybacks they could be used to reduce the price of Epipens. While, Mylan says they offer coupons to those with insurance and out of pocket copays it is not nearly enough – they still have not reduced the price of the product. By keeping the product price high they maintain their revenue stream via the drug insurers. Those families without insurance, are paying $608 for two Epipens, the full retail price.  This is an example of a indirect income transfer from the poor and middle class who can’t afford these sky high prices to the top 1 % in executive ranks.  The Action:

  1. End Stock Buy Backs – corporations are using stock buybacks to manipulate and control their stock price without immediate disclosure. Support Senator Tammy Baldwin’s request for disclosure and enforcement of existing laws and write to the SEC.
  1. Sign the MoveOn.org Petition – they are collecting signatures to be sent to Mylan CEO Heather Bresch
  1. Convince university and foundation endowment administrators to sell their holdings in Mylan shares until the firm ends stock buybacks and reduces the price of the Epipen product.
  1. Establish a list of ‘patient critical’ drugs, monitor their price, when it moves too high, release PR campaigns directed at the offending firms and demand price reductions (along with stock buybacks that are taking money right out of patient pockets).

The Story:

Mylan management employed a standard industry practice (which is debatable ethically) to raises prices of a drug just before the drug goes off patent and a generic competitor emerges.  The firm can milk this income stream before losing market share and price position.  In this case, the executive team went way to far raising prices on a product that is critical for patient health.   Most schools require that parents provide an Epipen for a student who may suffer a major allergenic reaction, thus creating critical demand for the drug.

Does Mylan have the ability to reduce the price by up to 50 %Yes!  a year ago Mylan’s board approved the buyback of Mylan stock in the open market up to $1 billion!   That $1 billion would go a long way toward reducing the price of the product to all patients.  Stock buybacks are used by corporations to drive their stock price up by reducing the number of shares to investors in the open market. By moving the stock price up, they will increase the value of the shares they hold thereby increasing their compensation. Mylan’s stock price hit a high of 76 dollars the summer of 2015, then concerns about the Epipen and other issues saw the stock price fall – which is why the board authorized the stock buy back for one year ending Aug 27 2016 (to make the chart large right click on the image, the bars below price are stock volume for the week):

MyL stock chart 8-26-16

Mylan executives receive the majority of their compensation from stock performance of shares they hold and options on additional shares.  Notice that the stock did move up some last year, but intelligent investors are beginning to question the viability of stock buybacks as they do nothing for the viability of the company in the future. There is no investment in worker salaries, worker development and education, research and development or systems to reduce costs. Please see my blog on Stock Buy Backs Spike Executive Pay for more background and details on this unethical practice.

Mylan says they are helping out with costs – but are they really?  while Mylan says they will help with coupons for out of pocket expenses or copays that is fine. Except, there are many patients and parents of children who need two pens (home and school) who do not have drug insurance and many others with high deductibles which Mylan’s offer does not cover.  Often arrangements between insurers and drug companies are setup where they negotiate the price lower than the list retail (ie two pens for $608), lowering the cost to the insurance firm, but giving the drug company an ongoing revenue stream and access to more patients.  When Mylan picks up the out of pocket expense it is in effect it is subsidizing Epipen’s high price.  Of course, the high prices fall hardest on those with no insurance who pay the full retail price.

Is our federal government indirectly supporting these actions by Mylan executives?  Yes! Federal government policies and tax laws contribute to this unacceptable corporate executive behavior. Corporations receive income tax deductions for corporate executive performance compensation (stock) above $1 million, During the Clinton administration in 1993 this tax provision was approved – in effect subsidizing these exorbitant executive compensation plans when companies are not paying their fair share of taxes, leaving us to pick up the tab.

In addition, Mylan, has purchased the development assets of Abbott Labs overseas and this is able to use a tax inversion (allowing favorable tax treatment for operations in lower tax countries) to move their tax rate on these operations from 25 – 35% to 12 – 15%. It seems if they enjoy this tax break the dollars saved in taxes could go to reducing the price of the drug.

The firm has employed financial engineering to dress up the balance sheet as well.  By using highly leveraged corporate debt used for stock buybacks (they have billions of dollars in debt offerings) these borrowed funds were used to perform the stock buybacks and possible future acquisitions. Instead of using the proceeds of these corporate debt offerings to finance stock buybacks, this money could be used to reduce the price of Epipens.

The Action:

It’s time to take action –

  1. End Stock Buy Backs – corporations are using stock buybacks to manipulate and control their stock price without disclosure. Support Senator Tammy Baldwin’s request for disclosure and enforcement of existing laws and write to the SEC.
  1. Sign the MoveOn.org Petition – they are collecting signatures to be sent to Mylan CEO Heather Bresch
  1. Convince university and foundation endowment administrators to sell their holdings in Mylan shares until the firm ends stock buybacks and reduces the price of the Epipen product.
  1. Establish a list of ‘patient critical’ drugs, monitor their price, when it moves too high, release PR campaigns directed at the offending firms and demand price reductions (along with stock buybacks that are taking money right out of patient pockets).
  1. Write to your senator or congressman to end corporate income tax deductions for executive performance compensation above $1 million, and the foreign tax escape of corporate inversions.

 

 

Stock Buybacks Spike Executive Pay at Expense of Workers & Economy: End Buybacks

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The View:

While CEO pay is at an all-time high at 290 times average worker pay (vs 20 times in the 1950s), CEOs are boosting their stock incentive base pay by offering corporate bonds (increasing corporate debt) to create cash to make stock purchases. By making stock purchases, they can artificially soak up shares in the stock market, manipulating an increase in share price and thus boost their pay.  Corporations are spending $391B year to date ($553B all of 2014) on these stock buyback programs according to Birinyi Associates. Since 2004, corporations have spent $6.9 trillion in stock buybacks and 54 % of their profits over the last decade, according to the Academic Research Industry Network.  Between 2006 and 2014, 500 of the highest paid corporate executives received 76 % of their income from stock based compensation. Finally, stock purchases correlate with the surge of the S & P 500 stocks over the past 7 years since the Great Recession, in analysis by Business Insider. Though, for the past few months stock buybacks have fallen off to 2012 levels, which may mean market share prices will fall without these corporate buying programs propping prices up.

What’s the problem with these buybacks?  First, executives are putting their corporate viability at risk by borrowing at low interest rates to build cash when at the same time over the past 6 quarters S & P 500 companies have seen a decline in earnings by an average of 3.5 %.  As earnings decline combined with debt servicing can cause a future cash flow crunch. Second, they are not spending this cash to make investments in employees, equipment or research and development to increase productivity – which would raise the standard of living and help bring employee pay back into line with the norms prior to the 1980s. Third, this practice is really a form of insider trading (timing not disclosed to average investors) of up to 25 % of daily trading volume. Executives are violating their fiduciary responsibility to shareholders to ensure investments are made for the future viability and growth of the enterprise versus their own financial gain. Fourth, in 1993 the Clinton administration gave companies permission to deduct from corporate taxable income executive pay over $1M if it was linked to corporate performance – stock price.  So, in effect we are all subsidizing corporate executive pay, when we pay our fair share of taxes and corporations do not. Fifth, these buybacks are artificially inflating stock share prices, making it difficult for average investors to know what the real price of stocks should be, and creating a market bubble that will eventually burst.

Let’s end corporate stock buybacks:

  1. Support Senator Tammy Baldwin’s request to SEC Chair Mary Jo  White     to tighten stock repurchases regulations and to gather stock repurchase information from corporations by writing to the SEC.
  1. Work with major university endowment administrators to stop purchasing stock of top stock buyback firms including: Apple, Microsoft, Pfizer, Gilead Sciences, Boeing and others, until they eliminate the stock buyback practice (sign a pledge too).
  1. Identify and develop plans with progressive corporate executives to not perform stock buybacks, and take a pledge not to in the future.
  1. Run a US financial community PR campaign highlighting the successes of non-stock buyback corporations, identify surrogate spokespersons, and run ‘events’ to keep the topic in the mainstream media to shift the public discourse on stock buybacks.

The Story:

Stock buybacks were viewed by the SEC from 1934 to 1982 as stock manipulation and fraud, with a limit of 15 percent of share volume on any given day, and required disclosure when buybacks were made. In 1982, John Shad, SEC Chairman, was previously the vice chairman of EF Hutton, and the first SEC Chair to be named from the industry in 20 years by President Ronald Reagan. Mr. Shad was a major contributor to Mr. Reagan’s New York campaign. Shad removed these stock buyback restrictions allowing CEOs to perform buybacks in secret, with disclosure only in hard to find filings at the end of the each quarter. In that year, the SEC adopted rule 10b-18 which holds corporations harmless from allegations of stock price manipulation due to stock repurchases. Plus, conformance is voluntary and does not require repurchase data reporting! Voluntary reporting was noted by the current SEC Chair Mary Jo White to Senator Tammy Baldwin in a reply to an earlier request for increased policy enforcement of stock purchase regulations.

There is a correlation with stock purchases by corporations and stock market performance.  This chart that appeared in Business Insider shows a correlation that is hard to miss (right click to enlarge image):

Stock buybacks correlate to Stock Market ride

While, it can be argued that stock buyback purchases are not the only factor driving the market (Federal Reserve keeping interest rates near zero is another), certainly to any reasonable observer the pumping of $6 trillion dollars into the stock market since 2004 and 54 % of corporate profits of S & P 500 corporations has to have some impact.

Earnings are fading, at an average of – 3.5% per quarter for the last 6 quarters.  So, where do corporations get the cash to do stock buybacks?  By issuing corporate bonds, which in the month of August have hit a new record high for just the first six days of the month at $70 billion, when an in an average month is $125 billion. Here is a chart on the just the month of August compared to past years ( right click to enlarge image):

Corp bond issuance hit new highs in Aug 16

So after getting the cash they need, CEOs perform stock buybacks and get well compensated for doing so. The pumping up of stock prices to increase executive pay is a standard executive compensation practice, some examples are particularly capricious.  Pfizer CEO, Ian Read between 2011 and 2015 enjoyed $76.8 million in compensation, of which 63 % was in stock shares. During this time Pfizer made $44.7 billion in stock buybacks.  For the same period Pfizer only paid $16 billion in US income taxes. This $44.7 billion is not invested in research, development, cost reductions in operations or employee pay – instead is used for stock price manipulation.  It is not hard to fathom given the magnitude of the miss application of investments that more effective and productive investments would benefit all patients, employees, stockholders and give us lower drug prices!  Plus, the US government would have more tax generated funds if a provision adopted in the Clinton administration in 1993 were eliminated to allow corporations to to deduct from corporate taxable income executive pay over $1M if it was linked to corporate performance (stock price).  Finally, when executives allocate resources that benefit only themselves and a few shark investors, they are acting in violation of their fiduciary responsibility to all shareholders, employees, customers and the public to focus on ensuring the future growth and development of the enterprise.

Some industry observers see the perils of stock buybacks to the stock market and economy.  Ben Silverman, VP of Research at Insider Score, that tracks buybacks says that buybacks mask managements’ inability to grow the business and be innovative thinkers.  Professor William Lazonick, University of Massachusetts, further observes that buybacks have the potential to push the economy into a recession, as companies are using stock buybacks to boost share prices instead of investing in their business for future stability and long term growth.

What should be done about stock buybacks by corporations?  Professor William Lazonick, recommends that we recognize that the ‘safe harbor’ provision 10b-18 is really a shelter for stock manipulation.  He suggests the provision be repealed.  Agreed.  Let’s take stock price manipulation by corporate executives out of the markets so we can have a fair stock market setting prices on real demand and supply, rather than price set by corporate manipulation. Since July of 2015, Senator Tammy Baldwin has been working on this issue with SEC Chair Mary Jo White.

The Action:

  1. Support Senator Tammy Baldwin’s request to SEC Chair Mary Jo  White     to tighten stock repurchases regulations and to gather stock repurchase information from corporations by writing to the SEC.
  1. Work with major university endowment administrators to stop purchasing stock of top stock buyback firms including: Apple, Microsoft, Pfizer, Gilead Sciences, Boeing and others, until they eliminate the stock buyback practice (sign a pledge too).
  1. Identify and develop plans with progressive corporate executives to not perform stock buybacks, and take a pledge not to in the future.
  1. Run a US financial community PR campaign highlighting the successes of non-stock buyback corporations, identify surrogate spokespersons, and run ‘events’ to keep the topic in the mainstream media to shift the public discourse on stock buybacks.

 

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