If you’re a pharmaceutical executive, there could be better money in getting fired than there is in keeping your job. You see, when pharmaceutical companies merge, their executives get paid very well for the privilege of getting sacked.
Never Fear – The Golden Parachute is Here!
These laid-off pharmaceutical executives aren’t likely to go hungry any time soon. Let’s take, for example, the recently announced Pfizer-Allergan merger. Allergan promised to pay its top 5 executives a total of about $386 million in severance packages if they end up losing their jobs as part of the Pfizer deal.
Allergan Will Also Pay Taxes for Executives
That huge chunk of change also includes payment of any taxes that might be owed on those big, juicy golden parachutes so that the executives don’t have to pay it themselves. If you whip out your calculator, you’ll see that’s an average payout of $77.2 million each. The award table, which also includes compensation for company aircraft, car, and driver allowances, is quite astonishing.
Big Pharma Gets Bigger With Continual Mergers
Pharmaceutical companies don’t just sell drugs – they also sell themselves. Of the top 20 biggest pharma company mergers of all time, 15 of them have occurred since the year 2000. What’s more, four out of the top 10 mergers have occurred within the last five years. Pfizer acted as purchaser in four of the top 10 pharma mergers of all time, the most of any pharma company.
Why Do Pharma Companies Merge?
- Most companies merge with or acquire other companies because there’s financial benefit in doing so: the value of the top 10 pharma mergers was over $732 billion.
- Another reason for mergers is to lower a company’s overall tax rate. The Allergan/Pfizer merger may allow Pfizer to dodge about $35 billion in US taxes.
- Additionally, an acquiring company can essentially take ownership of valuable prescription drug patents by purchasing the company that owns the patents.
Do Golden Parachutes Incentivize Pharmaceutical Executives to Create Mergers?
One valid question is whether or not huge severance payments actually encourage executives to seek out mergers. Does a pharmaceutical CEO stand to benefit more from remaining employed (with salary, perks, and benefits) or from being laid off as the result of a merger?
Let’s use Allergan’s CEO Brenton L. Saunders as an example. According to Allergan’s SEC filing, including base salary, stocks, incentives, and other awards, Saunders’s total compensation for 2015 was well over $48.6 million. However, his estimated “termination payment” if he’s laid off due to the Pfizer acquisition is $63 million. All of which means that he’ll get about a 30% increase in pay by being laid off due to the merger.
Golden Parachutes Make for a Golden Career
It seems like a lucrative financial strategy for pharmaceutical executives to swing from company to company in serial employment followed by cushy severance payouts. Mr. Saunders, for example, served as “Head of Integration” for two previous mergers when he worked at Schering-Plough. Interestingly enough, both of these mergers (one with Merck, the other with Organon) are also listed among the top 20 biggest pharma mergers of all time.
Who Pays for Pharma’s Severance Packages?
If only we could all be pharma executives! Instead, consumers are the ones who end up paying for these huge executive golden parachutes, little by little, with every prescription or over-the-counter medication that we buy.
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