UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material under §240.14a-12
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ARIAD Pharmaceuticals, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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Date Filed:
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On June 18, 2014, ARIAD Pharmaceuticals, Inc. sent a letter to Institutional Shareholder
Services the full text of which appears below.
***
FOR IMMEDIATE ATTENTION
June 18, 2014
Institutional Shareholder Services Inc.
702 King Farm Blvd
Rockville, Maryland 20850
Attention: Dr. Martha Carter
Head of Global Research
Re: ARIAD Pharmaceuticals, Inc. 2014 Proxy Statement
Dear Dr. Carter:
We are writing to you to express our
strong disagreement with Institutional Shareholder Services report dated June 12, 2014, recommending that investors vote
against
the approval of ARIAD Pharmaceuticals Section 382 rights agreement (NOL pill),
against
approval of our 2014 Long-Term Incentive Plan, and
against
the approval, on an advisory basis, of the compensation of our named executive officers as disclosed in our 2014 proxy statement. We believe that your report ignores
material aspects of each proposal that would support approval and respectfully request that you revisit your analysis of each proposal in consideration of the additional information provided in this letter.
Proposal 2: Approval of Section 382 Rights Agreement
In your report, you recommend that investors vote
against
our proposal to approve the adoption of our Section 382 rights agreement (the
Rights Agreement), which was adopted by our board of directors on October 31, 2013 to preserve the substantial amount of our net operating loss carryforwards and other tax benefits. We believe your report places undue weight on our
board of directors ability to amend the terms of the Rights Agreement without shareholder approval, without considering the potentially substantial negative impact on shareholder value that could be caused by a failure to approve this
proposal.
As discussed in our proxy and as you recognize in your report, the Company has substantial net operating loss carryforwards (NOLs)
and other tax benefits. The Companys ability to use these NOLs and other tax benefits could be substantially limited as a result of an ownership change as defined in Section 382 of the Internal Revenue Code of 1986 (the
Code). Because of the significant drop in the value of the Companys common stock and increase in trading volume following the October 2013 announcement by the U.S. Food and Drug Administration(FDA) calling for a
temporary suspension of clinical trials of Iclusig, our board of directors determined that it is in the best interests of the Companys shareholders to take appropriate action to protect our NOLs and other tax benefits from a potential
ownership change. Your report even recognizes that the potential economic benefit of the NOLs appears material.
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While your report acknowledges this concern, you nonetheless recommend that investors vote against approving the adoption of the Rights Agreement,
seemingly solely on the basis that our Board of Directors may supplement or amend the Rights Agreement, including the expiration date, without shareholder approval. We believe this concern is misplaced. The ability of a board of directors to amend a
rights agreement is a ubiquitous feature of such agreements your criticism would be a basis for recommending against the approval of almost any rights agreement in existence. Your report also ignores the fact that any change to this provision
would
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be of no practical effect, as a board of directors may generally adopt or replace a rights agreement at any time, subject to its fiduciary duties under applicable law. The fact that our board of
directors may amend the Rights Agreement in no way expands its powers or alters its fiduciary duties, and any such amendment would only be approved in compliance with our boards fiduciary duties.
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It is also worth noting that your analysis of the ability to amend the Rights Agreement ignores your own stated position that ISS considers the companys governance structure and practices to assess whether
the Rights Agreement would be used prudently and whether shareholders would have recourse in the event it were not.
As you determined in your report, the Companys governance practices are not cause for concern with respect to
determining whether to approve the NOL Pill rights agreement.
We believe that, at a minimum, you should have taken into account our good governance practices when evaluating the ability to amend the Rights Agreement.
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Your report also fails to give proper weight to the material risks posed by a potential ownership change under Section 382. According to its terms, the Rights Agreement will expire on October 30, 2014, if its
adoption is not approved by the Companys shareholders. The expiration of the Rights Agreement will remove the sole protection against an ownership change that the Company has in place. As such, a vote against this proposal should not be taken
lightly.
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Effective May 15, 2014, we granted an exemption to Black Rock, Inc. under the Rights Agreement following a determination that Black Rock and the various investment funds and accounts for which Black Rock acts, or
may in the future act, as manager and/or investment advisor, are collectively an Exempt Person pursuant to the Rights Agreement. The Board concluded that the exemption would not jeopardize the availability of the Companys NOLs and
other tax benefits.
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Based on the foregoing, we urge you to review and reconsider your June 12, 2014 recommendation relating to our
proposal to approve the adoption of the Rights Agreement. The Rights Agreement was adopted in an effort to protect shareholder value, and a negative vote would pose a serious risk to material assets of the Company. In conclusion, we request that you
recommend FOR the approval of the adoption of the Rights Agreement.
Proposal 3: Approval of 2014 Long-Term Incentive Plan
The ISS analysis recommends
against
approval of ARIADs 2014 Long-Term Incentive Plan based solely on your Shareholder Value Transfer
calculation and without regard to the Companys need for additional shares and the Companys broad-based equity strategy, which has played an integral role in allowing ARIAD to attract and retain best-in class talent at all levels of our
organization and contributed significantly to the Companys historical performance.
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ARIAD has historically used equity much more broadly than our peers
, with stock-based compensation issued annually to employees across all levels of our organization rather than focused solely on our
executive team. The ISS report itself shows that grants to our CEO represented only 6.4% of total equity awards in 2013, and grants to all NEOs represented only 13.8%. These numbers compare to industry medians that are twice as high among our
GICS industry group, the median CEO award represents 12.7% of total annual awards, and grants to all NEOs at median represent 34% of all awards.
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Even while using stock-based compensation more broadly than our peers,
we have managed our annual equity usage (burn rate) and aggregate dilution to conservative levels well below the median of our peer
group
. The ISS report calculates ARIADs 3-year equity burn rate for 2011-13 at 3.1%, which is well below the limits of your own model and well below the median of our peer group, calculated by Radford, our independent compensation
consultant, at 3.5%. In terms of the total dilution associated with our equity program, ARIADs total overhang would be 15% assuming shareholders approve the 2014 LTIP, compared to a median value of 18.3% among our peer group, as calculated by
Radford.
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ARIADs existing pool puts us at risk of running out of shares, and the 2014 Plan represents a very conservative, needs-based request intended to carry us to 2016
. As of March 31, 2014, our 2006
Long-Term Incentive Plan has only 4.8 million shares remaining available for grant, or 2.6% of total shares outstanding. The 2014 Plan would add only 8 million shares to the total pool, or 4.2% of our shares outstanding. If shareholders
approve the 2014 Plan, our go-forward pool will represent 6.8% of our shares outstanding, sufficient to fund 2 years of grants at prudent and responsible levels based on our burn rate described above.
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Finally, the structure of the 2014 LTIP and our ongoing equity strategy are aligned with best practices in corporate governance
. Not only does the 2014 LTIP prohibit repricing without the prior approval of
our shareholders, which we believe is a critical commitment given the decline in our stock value since October 2013, but our equity strategy as it pertains to our executive team has been even
more
skewed towards performance. While the use of
important drug development milestones as vesting conditions for executive equity awards has been part of our strategy since 2010, the proportion of total executive awards subject to such performance criteria was increased from 1/3 in 2013 to roughly
50% in our March 2014 grant.
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We strongly believe that our equity strategy as described above, designed to provide incentives across all
levels of the organization while managing our annual burn rate and overall dilution to levels well within industry norms, has been a critical driver of our past success, and we expect it to play a central role in helping us drive the business
forward. Equity has been and continues to be the critical component of our total compensation program, allowing all of our employees the opportunity to share in ARIADs success, reinforcing alignment with shareholders, and simultaneously
minimizing cash burn for the Company. We urge you to reconsider your analysis and recommend FOR approval of the 2014 Long-Term Incentive Plan.
Proposal 5: Advisory Vote on Executive Compensation (Say on Pay)
Finally, your report recommends
against
approval of our annual Say on Pay vote. However, we believe that a more complete understanding and consideration
of our circumstances and the design and function of our executive compensation programs should lead to a reversal of this recommendation.
As you know and
your report acknowledges, 2013 posed an unexpected and highly disruptive challenge to our business with the FDAs adverse action on Iclusig, our lead drug, last October. While this event constituted a major blow to the Company, our management
team responded immediately and vigorously to the FDA announcement, commencing extraordinary efforts to negotiate updates to the United States prescribing information for Iclusig and implementation of a risk mitigation strategy with the FDA.
Unremarked upon by your report, these efforts have been productive, and on December 20, 2013, we obtained FDA approval to resume marketing and commercial
distribution of Iclusig under a revised U.S. Prescribing Information and a Risk Evaluation and Mitigation Strategy. As a result, we have now
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resumed marketing and commercial distribution of Iclusig through an exclusive specialty pharmacy, and this success has been recognized by the market, with our stock now trading in the $6 to $7
range, up from a low of $2.29 in early November 2013. At the present time, we continue to commercialize Iclusig in the United States and are continuing to build our footprint in Europe.
In parallel with managements immediate initiative to resolve the FDA challenges to Iclusig, our Compensation Committee last fall undertook a
comprehensive review of our executive compensation programs to determine the appropriateness of structures and practices that had been developed in the context of extremely strong business performance over the preceding years. Following this review,
the Committee made several key decisions affecting 2013 and 2014 pay programs that it believed were appropriate given ARIADs changed circumstances:
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The Compensation Committee froze our named executive officers base salaries for 2014, providing
no merit increases
or market-based adjustments to any member of the team. Although the Committee did
approve a merit budget of 2% for the broader employee population in order to maintain morale and proper retention and incentivization across our organization, the Committee determined, and management agreed, that executive officers should not
participate in this pool given the ongoing effects of the FDAs negative action on Iclusig.
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The Compensation Committee also exercised its discretion to pay
zero cash bonuses
to executive officers for 2013. This was the case in spite of the fact that the Company technically met most of our 2013
objectives, some before the FDA action on Iclusig. The Committee determined, and management agreed, that executive bonuses were inappropriate in the context of the significant setback the FDA action posed to our business and the loss of market value
experienced by our shareholders as a result.
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The Compensation Committee
reduced the size of the executives annual equity grants
issued in March 2014, while
substantially increasing the proportion of the grants contingent upon achievement
of designated performance milestones
. These actions were directly responsive to the challenges facing the Company and intended to ensure that executives long-term incentive values are strongly linked to resolution of the FDA issues
relating to Iclusig and restoration of the full-value of our business.
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Furthermore, the Compensation Committee in early 2014
dramatically reduced the profile of the peer group
used for purposes of assessing the market for our executives cash and equity compensation. The
median profile of the final peer group is 300 employees, $120 million in revenue, and $1.5 billion in market value, versus 550 employees, $500 million in revenue and $4.7 billion in market capitalization at the median of the 2013 peer group. This
peer group was used to assess executive cash and equity compensation in 2014.
(Please see page 30 of our 2014 Proxy Statement for detailed list of our final peer group)
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Finally, in April 2014 we
adopted a set of principles relating to clawback of executives future incentive compensation
. These principles were jointly developed by six major pharmaceutical companies
and thirteen institutional investors as a best practice corporate governance strategy that seeks to strengthen board risk oversight and preserve long-term shareholder value and will be used, together with the compensation clawback requirements set
forth in Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, by the Compensation Committee to create a formal clawback and incentive recoupment policy before the end of 2014.
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Although your report acknowledges some (but not all) of the above, you appear to have discounted these critical
changes and decisions made by our Compensation Committee based largely on three concerns, none of which in our view warrants voting against the 2014 Say on Pay proposal:
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First, your report raises concerns regarding the companys reliance on discretion in [annual incentive] award determination. This concern strikes us as misplaced, given that the Committee exercised
precisely this discretion in determining to pay no executive bonuses for 2013. In fact, if ARIAD had paid 2013 bonuses based purely on a formulaic approach tied to our corporate objectives, our achievement of various key goals in 2013 prior to
October would have yielded a payout
higher
than the year before. And ARIADs historical bonus payouts prior to 2013 have been well within market norms in the context of the Companys very strong historical performance.
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Second, your report flags as problematic the lack of disclosure in our proxy of the specific metrics that will determine the number of shares earned under the 2014 performance-based share grant. While we understand the
argument for fuller disclosure, we have declined to enumerate specific metrics at this time based our determination, in consultation with management and expert counsel, that
prospective
disclosure of metrics could be used by our competitors
and could expose our business to significant competitive harm. We expect to
retrospectively
discuss the metrics and performance targets of the 2014 equity awards in more detail, and in the context of actual performance, in future year
disclosures relating to the grants, as we have done in the past.
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Third, your report cites our philosophy of targeting the 65
th
percentile of the market for executive compensation as a cause for concern pursuant to what we
understand to be ISSs default preference for 50
th
percentile pay positioning. While we understand and agree with general investor perspectives on this issue, we note that ARIAD has
historically been at the extreme upper end of our industry in annual performance, and we strongly believe that our 65th percentile pay positioning has been justified by this performance. Furthermore, the Compensation Committees recent
decisions to reduce the size of the March equity awards, freeze salaries, and not to pay bonuses results in
actual
pay well below the target levels (2013
actual
total cash compensation across the executive team came
in at 10%
below the market 25
th
percentile
). Finally, the adoption of a go-forward peer group comprising significantly smaller companies than historically used is directly responsive
to the companys changed circumstances and the need for a go-forward compensation philosophy that is cognizant of ARIADs current profile. We believe this should mitigate any ISS concerns about our general pay philosophy.
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Additional considerations:
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We note also that the total compensation delivered to our CEO over the past three-years valuing 2013 equity awards on a realizable basis based on our price on December 31, 2013, is very well aligned
with our stock performance over the same period. We understand that this is an analysis ISS regularly conducts for S&P 500 companies, but does not appear to have considered for ARIAD this year. Per a realizable pay analysis prepared for the
Committee by our independent compensation consultant, ARIADs positioning relative to our peer group for 3-year TSR and 3-year CEO realizable pay were virtually identical for the period ended December 31, 2013, with both positioned almost
exactly at the 50
th
percentile. We understand that had ISS conducted this analysis internally, the result would have suggested very strong pay-for-performance alignment and would have weighed in
the Companys favor in ISSs Say on Pay assessment.
(Please see pages 25-26 for detailed discussion of ARIADs pay-for-performance and realizable pay)
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Your report also singles out the CEOs 280G gross-up protection for criticism. However, we reiterate that the CEOs gross-up is a preexisting arrangement that has been in place since 1992. Since that time,
ARIAD in 2010 adopted a policy precluding us from entering into any go-forward employment arrangements providing a gross-up. In 2013, our Compensation Committee strengthened this policy further, eliminating a narrow exception to allow for gross-ups
in limited and unusual circumstances. Since adoption of the gross-up policy in 2010, we have not entered into any agreements with any of our executive officers that provide for an excise tax gross-up, other than Dr. Bergers employment
agreement, which pre-dated the April 2010 policy
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Based on the foregoing, we respectfully request that you review and reconsider your
June 12, 2014 recommendation relating to ARIADs 2014 Say on Pay proposal. While 2013 was a uniquely challenging year, we strongly believe our Compensation Committee acted reasonably and proportionately to the challenges, reducing
executive pay and adopting an even stronger performance-based design for go-forward incentive compensation. In this context, we submit that a negative vote on our Say on Pay proposal would send the wrong message to our board, our shareholders, and
the market at large. In conclusion, we request that you recommend FOR the approval, on an advisory basis, of the compensation of our named executive officers as disclosed in the Compensation Discussion and Analysis, the accompanying compensation
tables, and the related narrative disclosure of the proxy statement.
Sincerely yours,
/s/ Harvey J. Berger, M.D.
Harvey J. Berger, M.D.
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