Financial Loss · Insurance · Risk Management

Not Sure The IRS Agrees With a Tax Position Your Company Has Taken? Here is a Solution

I recently read that Illinois Tool Works (ITW) prevailed in a case against the IRS.  The IRS challenged that a loan from ITW’s foreign subsidiary to its parent company was a nontaxable return of capital as ITW contended.  The IRS dtermined that it was not a loan but a dividend and as a result a taxable event. ITW challenged the IRS and the case was brought to the US Tax Court.  In early August the court released their decision and sided with ITW.  A short write-up can be found here.

Why I bring this up is that many companies have tax positions they are aware of that could be challenged by the IRS.  Companies rely on their accountants to determine whether certain events have tax implications and then proceed accordingly.  Unfortunately, this is not foolproof strategy, the IRS can and will challenge these events even if you are using the best and biggest accountants.  What few companies are aware of is that there is an insurance policy that can protect them in these instances.

Tax Liability insurance can protect against many types of tax issues, including, but not limited to, spinoffs, M&A, multinationals, tax exempts, related party transactions, and foreign investors.  The policy can cover the taxes, interest, defense costs, in some cases fines and penalties, and gross-up.  What is different with this type of insurance compared to traditional property and casualty insurance is that we are covering a known event, or tax position, that may not be 100% clear cut but that we are confident is correct.

The underwriting process is specific to that event and coverage is tailored accordingly. Information is collected on the event and might include commentary from a tax attorney and/or an accountant.  After preliminary info is collected it is presented to the insurance market and the carriers come back with non-binding pricing and terms.  At that point a carrier usually identified that would be a good fit and a more exhaustive underwriting process commences.  At this stage an insured typically pays an underwriting fee that is used to pay for the due diligence (think lawyers and accountants that really dig into the info) that allows the insurer to put together the actual terms and pricing.  Assuming all is in order, the insured can then bind the policy that can have up to a 7 year policy term.

If you are a company and have uncertain tax issues then a tax liability policy is worth looking into.  There is no upfront cost to get a non-binding pricing indication, but be aware that policy pricing is in the 6 figures to start, however, it is a one-time premium and not annual.  The policy limits usually start at $5MM and can go up from there.

Investment · Life Sciences · Risk Management

Why Securities Class Filings are a Reality for Publicly Traded Companies

A great mid-year report by Cornerstone Research on Securities Class Action Filings for the first half of the year.  I recommend you check out the full report which you can find here.

These visuals really speak for themselves but the big takeaway is that if you are publicly traded company the chances of being subject to a Securities Filing are rising.  In 2017, 8.4% of exchange listed companies were subject to a filing and in 2018 it is projected to be 8.5%.

Pct of US Exchange Listed Companies subject to Filings

If you are a member of the S&P 500 the chances of a filing are even higher at 9.6%.

Pct of SP 500 Companies Subject to Core Filings

Breaking this down even further, the industry you are in can change the odds dramatically as well as the chart below demonstrates.

Heat Map

The clients I work with are in the Life Science and Healthcare space and this is how filings breakdown in that group.

Life Science Filings by subgroup

I will dig a little deeper on this at a later post, but I believe companies need to believe a Securities Class Action filing is inevitable and prepare accordingly.

Once again I recommend you check out the full report from Cornerstone Research which you can find here.

Investment · Life Sciences · New York City

NY BIO’s Annual Meeting

I recently attended NY BIO’s annual meeting in New York City.  This was my first time to this event but I have attended other Life Science events that were focused on New York City and I do my best to keep up with how they are developing the ecosystem.  For those of you that don’t know, both the city and the state are making big investments to develop the life science sector and become a hub with I am guessing the goal of being in the same class as Boston and San Francisco.

From an outsider’s perspective looking in it would seem like the Life Science sector would be a natural fit for the city.  A key ingredient for the industry is money and in New York City there is plenty of it.  Another natural advantage the region has are its world class research facilities and hospitals.  Big pharma has a presence across the river in NJ so there should be plenty of talent familiar with the full life-cycle of drug development.

The meeting featured speakers on the front lines and I learned that you can’t always judge a book by its cover.  Let’s start with money, yes, there is a lot of money in New York but it is not necessarily the type of money that invests in biotech companies.  A fascinating point was made by the CEO of Alexandria Real Estate, in Q1 2018 there was $1.6 billion invested in Boston, $1.7 billion invested in San Francisco and less than $150 million in New York.  The general consensus was that despite this disparity between Boston and San Francisco the trend is going in the right direction and money is not as big of an issue as it was just a few years ago.  In addition, the state and city seem to be stepping in and putting serious money into growing the sector.  How easy or difficult it is to access the government money I cannot answer.

The biggest problem that I heard from virtually everyone was the lack of space.  Everyone complained that there was just not enough lab space in the city.  Again, inroads are being made but it seems like this is the biggest impediment.  JLABS has opened up space and BioLabs NY is about to open a huge new facility in Hudson Yards with NYU, so progress is being made.  Whether these new labs will be enough to curb the demand we will need to wait and see.

Finally, a somewhat surprising issue was the lack of depth when it comes to the talent pool.  A shared belief is that there is plenty of talent at the research level but it seems to dry up when companies mature and need the C-level and mid-manager types.  This was something I heard a few times and I would have thought with the big pharma presence so close it would not be an issue.

Overall, the trend is going in the right direction for New York, but it takes time.  You need to have some companies have success before you can really build a hub.  You need to have companies mature and build a sizable employee presence.  Someone said it takes 25 years and a couple of generations of companies before you really have a sustainable and robust ecosystem and New York is not even in year 10.  I know the people in New York are doing what they can to accelerate it so I will be anxiously watching to see how it turns out.

Daily Reads

Tuesday Reads

Here is what I’m reading today:

Daily Reads

Saturday Reads

It’s the weekend and don’t forget tomorrow is Mother’s Day.  Here is what I am reading today:

Have a great Saturday!

Financial Loss · Insurance · Property Insurance

Protecting Your Supply Chain

I read an interesting article* the other day about a supply chain issue Ford is having because one of their key suppliers suffered a fire loss.  Ford said the disruption could cause a reduction of up to 15,000 trucks being manufactured per week and would have an “adverse impact” on its financial results.

Ford is a colossal company and to see how a single supplier could have this much impact on its financials is mind numbing.  Many of my clients in the Life Science space are beholden to one or two suppliers and finding alternative suppliers and vendors can be both difficult and time consuming given the highly regulated industry of Life Sciences.  For many Life Science companies (both pre-revenue and revenue generating) this could potentially put them out of business.  This is the Black Swan event, both hard to quantify and catastrophic.

There is a solution, but it is often overlooked or at best underestimated.  The solution can be solved through the use of the Property Insurance policy and making sure there are adequate limits under Contingent Business Income.

The approach I use with my clients when designing their program is to first take a deep dive into their supply chain and identify worst case scenarios.  I like to ask few questions to get the process started.  Who are my client’s key suppliers?  Who are their suppliers?  If a supplier goes down can my client quickly move to another supplier or facility?  How much product does my client have in reserve?

Once we identify weakness or vulnerabilities in the supply chain we then start looking at the economics of each vulnerability.  This is part math and part art.  We start at what would be the worst possible scenario, what could put my client out of business.  An example would be a company with a single product using a single supplier for a key ingredient and the supplier goes down with no backup facility or vendor in place.  How long would it take to get another supplier?  If this scenario played out, what would be the economic cost to the client?  Once we identify this scenario it becomes my job to develop different program options that best fit the risk tolerance and economics of my client.

I had one client who was very conservative.  They had a recently approved product and were expecting significant sales from that product.  They had no other product on the market and they used a single manufacturer with no backup facility in place.  We determined the quickest a backup facility could be identified and validated was 8-10 months.  The client had about 4 months of product in reserve.  We created options that ranged from 4 months of protection to 24 months.  We also looked varying deductibles based on their reserve amounts.  In the end the client moved forward on a program that would protect their business income for a period of up to 12 months if the third party facility went down with a deductible of 30 days.

The more difficult situation to quantify is the R&D organization with X amount of dollars and a burn rate of Y who has a trial interrupted because of supply chain issues.  There are no sales but there would be a real economic loss if the trial is interrupted.  This is not necessarily business income, but can still be protected in the same exact way making sure the proper wording is on the policy form to protect R&D expenses.

Out of all the issues I see every day, this is often the most overlooked or the limits are inadequate because a deep dive on the exposure was never contemplated.  If Ford has a supplier that can cause an “adverse impact” on their financial results, how good do you feel about the protection you have if one of your suppliers suffers a loss?

*http://www.autonews.com/article/20180509/RETAIL/180509786/ford-f-series-production-cut-supplier-fire

Daily Reads

What I’m Reading Today

Here are some Tuesday reads to get your day going:

Have a great day!