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(Reuters) – One of the leading U.S. firms developing a coronavirus vaccine, Novavax Inc (O:NVAX), has awarded executives stock options that could pay out tens of millions of dollars even if its efforts fail.
Novavax CEO Stanley Erck and three other executives would earn the options, worth $101 million at Tuesday’s closing stock price, if the company’s vaccine candidate enters a mid-stage clinical trial – regardless of its eventual success, according to a company filing. The incentive plan, which has not been previously reported, allows the executives to start exercising the options a year after Novavax starts the so-called Phase 2 trial, as it expects to do soon.
Starting the Phase 2 trial is no guarantee the vaccine candidate will make it to market. Novavax would have to successfully complete more extensive Phase 3 trials and win approval from the U.S. Food and Drug Administration.
The Gaithersburg, Maryland-based company has not brought a vaccine to market in its 33-year history. But its market value has rocketed from $250 million to $8 billion in about five months on news of its coronavirus vaccine prospects. The Trump administration has given Novavax $1.6 billion under its “Operation Warp Speed” program to accelerate coronavirus vaccine development.
Graphic – Novavax shares soar on vaccine prospects: https://fingfx.thomsonreuters.com/gfx/mkt/nmopalmxzva/Pasted%20image%201595338421819.png
In a statement to Reuters, Novavax said the stock options were awarded to retain its top talent and recognize their intense effort. “Launching a Phase 2 trial quickly and under these circumstances is a significant achievement,” the company said.
The company did not address why the options were tied to mid-stage trials rather than the vaccine’s ultimate success.
Executive compensation experts and patient advocates said the Novavax options skew incentives for executives by tying a massive payout to a short-term, interim milestone.
“Drug companies like Novavax are getting billions of dollars from taxpayers to develop a COVID-19 vaccine, so it’s certainly concerning to see their executives get massive payouts before we know if the vaccine actually works,” said Eli Zupnick, a spokesman for consumer watchdog Patients Over Pharma.
Sanjai Bhagat, a University of Colorado finance professor and an expert on executive pay plans, called the options an example of poor corporate governance and misguided incentive compensation.
“Phase 2 is nice,” he said. “But you want the company focused on the actual vaccine. What investors care about – and what we as general members of society care about – is the long-term success.”
SHIFTING OPTIONS
Stock options have fallen out of favor across corporate America as a way to reward executives amid concerns that they encourage management strategies that promote short-term stock gains at the expense of long-term growth. As a result, equity compensation has been shifting towards share awards that are structured to align executives more closely with their investors and cannot be gamed for a big profit as easily as options.
In the boom-and-bust biotech industry, more companies grant options that vest over time, but few tie them to performance goals, making Novavax’s arrangement unusual. Only seven of 125 U.S. biotech companies had pegged option awards to achieving drug development milestones in 2019 and 2018, according to an analysis conducted for Reuters by ISS Corporate Solutions, the consulting arm of corporate governance consultant Institutional Shareholder Services.
Executives at another leading vaccine maker, Moderna (NASDAQ:MRNA) Inc, have come under scrutiny for regular stock sales that have netted executives tens of millions of dollars since its share value spiked.
Whether Novavax executives reap fortunes from the options remains to be seen. The company’s prospects for selling a coronavirus vaccine should be more clear by the time executives can start exercising the options, which could be shortly more than a year from now, according to the company’s anticipated clinical trial schedule. Novavax has said it expects to start Phase 2 trials soon and enter Phase 3 trials by year end.
While vaccines traditionally could take a decade to develop, many experts expect a much faster process with the current crop of COVID-19 vaccine candidates. Their confidence stems from the effort’s massive scale and new development technologies.
Amesh Adalja, senior scholar at the Johns Hopkins Center for Health Security, said it is “within the realm of possibility” for Novavax or another major developer to have a COVID-19 vaccine fully approved and in use within a year. For that to happen, however, “everything would have to go perfectly” in trials and in regulatory reviews, he said.
If development drags on longer – and stock values stay high – Novavax executives could be in a position to cash in on continuing vaccine hopes regardless of whether it ultimately delivers on them.
HUGE UPSIDE POTENTIAL
Erck’s stock options would be worth $48.6 million if they could be exercised at Novavax’s closing price of $140.69 per share on Tuesday. That would be 20 times his total compensation in 2019 of $2.4 million and much higher than the $25 million received last year by Alex Gorsky, the CEO of Johnson & Johnson, one of the largest U.S. healthcare and consumer products companies and a rival of Novavax in the race for a vaccine.
Even before the stock options were awarded in April, Erck was well positioned to capitalize on the rally in Novavax shares. Erck, who has been CEO since 2011, holds options and other awards totaling roughly $64 million, with $25 million that can be cashed out now, according to an analysis by pay consultant Farient Advisors.
Novavax disclosed in its filings that the awards to its executives were among 2.5 million stock options, currently worth $304 million, granted to all of its employees in April. The company filing did not make clear what performance requirements apply to the options for employees beyond the four executives, and a spokesperson declined to comment. Novavax had 165 full-time employees as of March 6.
At the company’s June 25 annual meeting, 88% of shareholder votes cast supported its executive pay and 82% of votes favored changes allowing Novavax to issue the new options.
A smaller Novavax shareholder, Allianz (DE:ALVG) Global Investors, voted against both of the pay items. Allianz Global analyst Robbie Miles said the executives already had adequate incentives and he would have preferred to reward them based on how Novavax shares perform. He said some investors’ concerns, however, may be alleviated should the company’s coronavirus vaccine succeed.
“If they save humanity,” Miles said, “there may be less focus on the pay construction, for sure.”
