Biotech Resets Its Stock Options

United Therapeutics Shares Had Fallen

After a steep drop in its share price made it much less likely that executives could ever parlay recent stock option awards into profits, United Therapeutics this week changed the terms of the options.

Directors of the Silver Spring biotech firm had sought to provide management with an incentive to deliver good performance. But the company faltered recently. So rather than let executives suffer the consequences, the board simply made it easier for them to reap rewards.

The action "was intended to provide executive officers with the opportunity to hold Awards with a greater potential to increase in value over time, thereby creating long-term incentives for them to remain with the Company," United Therapeutics said in a filing with the Securities and Exchange Commission late yesterday.

The changes were approved by the compensation committee of the company's board Monday, one week after the company announced that a drug it is developing for hypertension failed to perform as desired in a clinical trial. The company's already reduced stock plunged on the Nov. 17 news.

Stock options give holders the right to buy shares at a set price, known as the strike price. Typically, the strike price is the price at which the company's stock is trading when the options are granted. If the share price later climbs, holders can exercise the options at a gain. Otherwise, the options are for all practical purposes worthless -- in common parlance, "underwater."

In June and September, United Therapeutics awarded a combined total of 454,275 options to President Roger Jeffs, Executive Vice President Paul A. Mahon and Chief Financial Officer John Ferrari at strike prices of $94.06 and $109.64. On Monday, the company reduced the strike price on those options to $50.63, which was Monday's closing price.

The awards were originally intended "to link the interests of [the company's] executive officers to those of its shareholders . . . and to provide them with an additional incentive to achieve superior performance," United Therapeutics said in the filing.

Because the options were "underwater" before Monday's action, they "had little or no value as incentives to retain and motivate the Company's executive officers," the filing said.

The compensation committee of the board also reduced the strike price on an additional 1.4 million options held by other employees and members of management, and it approved an offer to issue new options in exchange for 2.1 million outstanding options that are similarly underwater, the company reported. Board members will be eligible to participate in the exchange.

Some companies took similar steps years ago after the dot-com bubble burst, leaving many options far out of the money. It remains to be seen whether this year's stock market decline produces a similar wave of accommodations.

United Therapeutics shares closed yesterday at $55.59, down by more than half from a 52-week high of $117.82.