Biotech Boom Cranks Out Some of the Highest-Paid CEOs in America

What's Behind the Soaring Pay for Biotech Executives?

A rally in pharmaceutical stocks has made top managers at four biotechnology companies some of the highest-paid executives in the U.S.

Hans Bishop, chief executive officer of Juno Therapeutics Inc., a Seattle-based developer of cancer therapies, was awarded salary, options and restricted shares in 2014 that were valued at $88.2 million as of year end, making him the 11th highest-paid executive in the U.S., according to the Bloomberg Pay Index, a daily ranking of the 100 top-paid executives. The awards were worth $7.3 million before the company’s initial public offering in December.

Investor appetite for companies in the industry, paired with low interest rates, has lifted the Nasdaq Biotechnology Index more than five-fold since 2009, compared to a more than doubling of the Standard & Poor’s 500 Index.

“The big picture shows a very, very fantastic growth story,” said Asthika Goonewardene, an analyst at Bloomberg Intelligence.

Higher equity values have bolstered the compensation of other biotechnology executives with pay packages that match or exceed chiefs of companies including Apple Inc. and Blackstone Group LP, despite running businesses a fraction of the size.

Arie Belldegrun, the CEO of Kite Pharma Inc., was given awards valued at $95.2 million as of the company’s fiscal year-end in 2014, ranking him No. 8 on the index. Radius Health Inc.’s Robert Ward was awarded a pay package valued at $33.5 million after his first year on the job, ranking him No. 67. Neither of the companies produced any revenue last year.

‘High Reward’

Juno and Kite are developing new cancer therapies that modify patients’ immune T-cells to target and destroy blood cancer cells, known as CARs. While their therapies have not yet been approved, they have shown remarkable results in trials, generating responses in patients who have failed traditional treatment. Radius is developing therapies for osteoporosis.

The value of biotech executives’ compensation can rise and fall with clinical trial results, approvals from government agencies and bids from larger competitors.

“It’s really high-risk, high-reward,” said Gabrielle Lajoie, co-head of the global health-care practice at executive recruiting firm Russell Reynolds Associates. “The smartest ones realize that their immediate wealth can be fleeting.”

The other executives on the index are Kite Chief Operating and Financial Officer Cynthia Butitta and Anacor Pharmaceuticals Inc. CEO Paul Berns, with awarded pay of $39.2 million and $22.4 million, respectively.

Merck, Pfizer

The pharma industry’s biggest companies, including Merck & Co. and Pfizer Inc., rely on research-focused biotech businesses for drug discovery and frequently acquire them once their products surpass certain milestones. Outside bids can cause big jumps in share prices and provide an opportunity for executives to reap their biggest windfall.

Actavis Plc’s takeover bid for antibiotics maker Durata Therapeutics Inc. in October valued former CEO Paul Edick’s options and ownership stake to at least $19.8 million, according to data compiled by Bloomberg.

Sanj Patel, CEO of Synageva BioPharma Corp., held equity valued at $103.7 million when Alexion Pharmaceuticals Inc. offered $230 a share in cash and stock for the Lexington, Massachusetts-based company in May. He was awarded $7.9 million in 2014, according to the Bloomberg Pay Index, and is not ranked.

Awarded pay measures what a compensation committee intended to pay an executive for the fiscal year, not what was reported by the company in the summary compensation table. It’s priced as of a company’s fiscal year end.

Rare Diseases

Alexion and Synageva both make drugs for rare diseases. As insurance companies and pharmacy benefit managers have been putting pressure on drug prices, many biotech companies have turned to developing treatments for so-called orphan diseases, believing that insurers will still pay for novel drugs for small populations with rare disorders.

Management teams are usually terminated after biotech takeovers, and executives know they might be “selling themselves out of a job,” said Susan Stemper, managing director at executive compensation consultant Pearl Meyer & Partners. Termination following a change in control typically allows for executives to cash in their equity awards.

“It’s not so much about buying the talent,” Stemper said. “It’s about buying the programs, the products and the molecules.”

Spokesmen for Kite, Radius and Synageva declined to comment. Spokesmen for Juno and Durata didn’t respond to calls and e-mails seeking comment.

‘Hero, Goat’

Share prices can experience big swings as investors with “imperfect” knowledge bet on biotechnology companies, Stemper said.

“It’s hero one day, goat the next,” she said. “Some great news on pipeline possibility, the market goes wild and you’re trading at $300 a share. Suddenly, some not so great news coming out of trial, and the price drops remarkably.”

Price volatility therefore becomes an important factor to consider when designing pay packages for top managers at biotech companies, said Kristine Bhalla, principal at executive pay consulting firm ClearBridge Compensation Group.

“We look at different performance scenarios and understand that if we get FDA-approval and the stock price shoots up ten-fold, here’s what the pay is worth, and analyze whether it still makes sense,” Bhalla said, referring to the U.S. Food and Drug Administration.

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