Source: Flickr user Images Money.

The past few years have been very kind to biotech investors, with the overall sector vastly outperforming the broader market indexes. But it's also been a great couple of years for CEOs of biotech companies, who've seen their compensation soar on a year-over-year basis.

According to The New York Times, which referenced Securities and Exchange Commission filings to list the top-paying CEOs across all sectors, health care CEOs filled 10 of the top 45 spots on the highest compensation list in 2014, with biotech CEOs laying claim to five of those spots.

The highest paid CEOs in biotech
Let's quickly take a look at the five highest paid CEOs in biotech and examine what attributes may have led to their exceptional compensation in 2014. We'll also examine whether or not the compensation structures for these CEOs are sustainable in the future.

Without further ado, the highest paid CEOs in biotech are:


2014 Compensation

% Change From 2013

Leonard Schleifer,
Regeneron Pharmaceuticals (NASDAQ: REGN)

$42 million


Jeffrey Leiden,
Vertex Pharmaceuticals (NASDAQ: VRTX)

$36.6 million


Herve Hoppenot,

$32.7 million


Martine Rothblatt,
United Therapeutics (NASDAQ: UTHR)

$31.6 million


Robert Hugin,
Celgene (NASDAQ: CELG)

$24.2 million


Source: The New York Times. N/A = not available.

As you can see, some biotech CEOs made off like Wall Street tycoons in 2014, although how they got paid and whether they deserved their pay are both up for debate.

How these CEOs got paid in 2014
Regeneron CEO Leonard Schleifer and United Therapeutics' Martine Rothblatt hit these salaries mostly as a result of stock options. Options are often tied to the results of the underlying stock price or the performance of a company's fundamental metrics (revenue and/or profit growth), meaning happy shareholders equal a big payday for the CEO. Nearly $29.5 million, or 93% of Rothblatt's compensation, and $38.6 million, or 92% of Schleifer's pay, were direct results of stock options awarded to these leaders. Regeneron's stock rose by 49% in 2014, with United Therapeutics' stock rising a more pedestrian 15% -- however, both surpassed the S&P 500's 11.4% gain last year.

CEO Jeffrey Leiden. Source: Vertex Pharmaceuticals.

On the other hand, Vertex Pharmaceuticals' Jeffery Leiden and Incyte's CEO Herve Hoppenot both received the bulk of their compensation in the form of company stock, as opposed to stock options. Stock options give the recipient the right to execute contracts entitling them to shares of common stock at a later date, as opposed to regular stock compensation which allows them to own it now. Leiden was the recipient of $19.9 million in stock and $12.7 million in stock options, while Hoppenot received $24.8 million in stock and just $3.4 million in stock options. The great thing about receiving payment in stock is that it aligns a CEO's goals with those of their shareholders. The more shares management owns in a company, the more shareholders can believe the interests of management are tied in with their own. For reference, Vertex and Incyte shares rose by 60% and 44%, respectively, in 2014.

Lastly, Celgene's Bob Hugin was the only high-paid biotech CEO whose compensation was fairly balanced between common stock and stock options. Balancing his pay with common stock and stock options ties Hugin's performance in with his shareholders, which is good news for everyone. On top of a base salary of nearly $1.4 million, Hugin received $9.6 million in stock options, a $9.1 million bonus, $3.9 million in Celgene's common stock, and a little more than $200,000 in various perks. The money seems well-spent, however, after Celgene shares returned 32% in 2014.

A few similarities
If there were one major similarity we could pull from the above CEOs, it's this: if the CEO's company's share price outperformed the broad-market averages, they were handsomely rewarded. This isn't the case with all biotech companies necessarily, but it's certainly a partial justification for the high pay of these five CEOs.

REGN Chart

But there's more to it than just "their company's stock price went up." These companies also tend to have blockbuster drugs or niche indications where they are dominant.

CEO Leonard Schleifer. Source: Regeneron Pharmaceuticals.

For example, Regeneron Pharmaceuticals is establishing itself as a dominant ophthalmic player with Eylea as a treatment for wet age-related macular degeneration. A number of similar therapies being developed by rivals have failed to impress in clinical studies. Incyte's claim to fame is having the first Food and Drug Administration-approved treatment for patients with myelofibrosis. Vertex Pharmaceuticals' Kalydeco is focused on improving the lives of patients with cystic fibrosis, a disease with very limited treatment options. Celgene has Revlimid, the leading treatment for patients with multiple myeloma, a type of bone marrow cancer. Last year Revlimid delivered $5 billion in sales. Finally, United Therapeutics' focus on common cardiopulmonary diseases led it to impressive double-digit sales growth.

Can these pay structures last?
High-paid biotech CEOs only tend to keep their astronomical compensation packages as long as their stock prices are heading higher. Personally, I'm of the opinion that two CEOs on this list could be at risk of a compensation haircut in the future, while three could continue to see their pay climb even higher.

I suspect Celgene's Hugin, United Therapeutics' Rothblatt, and Regeneron's Schleifer could be the lucky trio of the bunch. Their respective companies generate substantial cash flow for their size, and they've all shown the ability to grow organically and maintain dominant market shares within select indications. They also have growing pipelines and could all one day feasibly pay dividends.

On the other hand, I suspect the compensation for Leiden and Hoppenot could eventually deflate a bit.

Incyte's myelofibrosis drug delivered clinical improvement in trials, but it's not designed to treat the actual disease. A new drug under development known as imetelstat has shown promise in clinical studies, with the drug registering both partial and complete responses. In short, Incyte's lead drug could come under pressure later this decade.

Vertex Pharmaceuticals is a clear-cut winner with its cystic fibrosis lineup, but investors have already pumped up the company's valuation to a frothy $31 billion. Even at the high end of Wall Street's estimated peak annual sales projections of $10 billion, Vertex is already valued at more than three times these levels. Vertex would need perfect execution on all fronts simply to maintain its current valuation in the coming years, which could be a tough task.