By Ross Kerber and Jessica DiNapoli
Novavax CEO Stanley Erck and three other executives would win the options, worth $ 101 million at Tuesday’s closing stock price, if the company’s vaccine candidate enters a clinical trial at the stage. intermediate, regardless of its eventual success, according to a company presentation. The incentive plan, which has not been previously reported, allows executives to start exercising the options a year after Novavax begins the so-called phase 2 trial, as it is expected to do soon.
Starting phase 2 testing is not a guarantee that the vaccine candidate will reach the market. Novavax would have to successfully complete more extensive Phase 3 trials and obtain approval from the US Food and Drug Administration.
The Gaithersburg, Maryland-based company has not released a vaccine in its 33-year history. But its market value has soared from $ 250 million to $ 8 billion in about five months on the news of its coronavirus vaccine prospects. The Trump administration has given Novavax $ 1.6 billion under its “Operation Warp Speed” program to accelerate the development of the coronavirus vaccine.
Chart: Novavax stocks soar amid hopes for COVID-19 vaccine 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 their best talents and recognize their intense effort. “Launching a Phase 2 test quickly and in these circumstances is a significant achievement,” the company said.
The company did not address why the options were tied to intermediate-stage trials rather than the vaccine’s ultimate success.
Executive compensation experts and patient advocates said Novavax’s options skew incentives for executives by linking a massive payout to a short-term interim milestone.
“Pharmaceutical companies like Novavax get billions of dollars from taxpayers to develop a COVID-19 vaccine, so it’s certainly worrying to see their executives get massive payments before they know if the vaccine really works,” said Eli Zupnick, spokesman for consumer surveillance. Pharma elderly patients.
Sanjai Bhagat, a professor of finance at the University of Colorado and an expert on executive payment plans, called the options an example of bad corporate governance and wrong incentive compensation.
“Phase 2 is nice,” he said. “But you want the company to focus on the real vaccine. What matters to investors, and what matters to us as general members of society, is long-term success. ”
EXCHANGE OPTIONS
Stock options have fallen out of favor with American companies as a way to reward executives amid concerns that they foster management strategies that promote short-term stock earnings at the expense of long-term growth. As a result, equity compensation has shifted toward the award of shares that are structured to align executives more closely with their investors and that large profits cannot be made as easily as options.
In the booming and drowning biotech industry, more companies are granting options that consolidate over time, but few tie them to performance targets, making the Novavax deal unusual. Only seven of the 125 US biotech companies have awarded option awards to achieve milestones in drug development in 2019 and 2018, according to an analysis conducted for Reuters by ISS Corporate Solutions, the consulting arm of the corporate governance consultant. Institutional Shareholder Services.
Executives at another leading vaccine maker, Moderna Inc, have come under scrutiny for regular stock sales that have brought executives tens of millions of dollars since their stock value skyrocketed.
It remains to be seen whether Novavax executives reap fortunes from the options. The company’s prospects for selling a coronavirus vaccine should be clearer by the time executives can start exercising the options, which could be in just over a year, according to the clinical trial schedule scheduled by the company. Novavax has said it expects to start Phase 2 testing soon and enter Phase 3 testing by the end of the year.
While vaccines traditionally could take a decade to develop, many experts expect a much faster process with the current cultivation of COVID-19 vaccine candidates. Their confidence comes from the massive scale of the effort and new development technologies.
Amesh Adalja, principal investigator for the Johns Hopkins Center for Health Safety, said it is “within the scope of the possibility” that Novavax or another major developer will have a fully approved COVID-19 vaccine in use within a year. However, for that to happen, “everything would have to go perfectly” in trials and regulatory reviews, he said.
If development continues longer and stock values remain high, Novavax executives may be in a position to take advantage of the vaccine’s continued hopes, regardless of whether it ultimately fulfills them.
HUGE POTENTIAL TO THE SIDE
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 2019 total compensation of $ 2.4 million and much more than the $ 25 million received last year by Alex Gorsky, the CEO of Johnson & Johnson, one of the largest US consumer and health product companies. And a rival to Novavax in The Race for a Vaccine.
Even before the stock options were awarded in April, Erck was well positioned to capitalize on the recovery of Novavax shares. Erck, who has been CEO since 2011, has options and other awards totaling approximately $ 64 million, with $ 25 million that can be cashed now, according to an analysis by payment consultant Farient Advisors.
Novavax revealed in its presentations that the awards to its executives were among 2.5 million stock options, currently worth $ 304 million, awarded to all of its employees in April. The company’s presentation did not make clear what performance requirements apply to 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 annual meeting on June 25, 88% of the votes cast by shareholders supported its executive payment and 82% of the votes favored the changes that allowed Novavax to cast the new options.
A smaller Novavax shareholder, Allianz Global Investors, voted against both payment items. Allianz Global analyst Robbie Miles said the executives already had adequate incentives and would have preferred to reward them based on the performance of Novavax shares. He said some investors’ concerns, however, may be alleviated if the company’s coronavirus vaccine succeeds.
“If they save humanity,” said Miles, “there will surely be less focus on building the pay.”
(Report by Ross Kerber and Jessica DiNapoli; Editing by Greg Roumeliotis and Brian Thevenot)
