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Main Subject - Don't Let Tax Strategies Ruin Your Business Growth Prospects, Tips From a Banker
What is a business owner to do? You have had a successful year and have profits to report. There are some tax strategies that are standard and beneficial and that do not create problems for your bank. There are others that do creat
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
e problems and I will describe for you in a simple way what the effect is.
Banks operate in a highly regulated system where they must conform to the standards of the regulatory bodies. These standards require them to assess risk in a p
Banks operate in a highly regulated system where they must conform to the standards of the regulatory bodies. These standards require them to assess risk in a p
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
etty standard way, relying on financial statements prepared by the borrower or an accountant. So a bank will create a Loan Grading System or Policy which conforms to those requirements.
The three major factors in assessing loan risk ar
The three major factors in assessing loan risk ar
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
e: Cash Flow, Liquidity and Leverage. Trends in these factors are important as well.
Cash Flow is calculated in a simple way and then there are more complex ways to calculate cash flow. We will only discuss the simple way. A b
Cash Flow is calculated in a simple way and then there are more complex ways to calculate cash flow. We will only discuss the simple way. A b
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
nk will determine "Cash Flow Available for Debt Service" according to this formula. Pretax Net Income, plus Depreciation Expense, Plus Interest Expense, less Federal Income Taxes or in the case of different business types, Owner With
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
drawals (required to pay income taxes personally on the business income).
This Cash Flow will then be compared to the Annual Debt Service of the business to calculate a Debt Service Coverage ratio. Normally a bank will want a minimum o
This Cash Flow will then be compared to the Annual Debt Service of the business to calculate a Debt Service Coverage ratio. Normally a bank will want a minimum o
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
1.2:1. If this is the case and the balance sheet is healthy the loan will be considered a "Pass" and the bank will not be required to set aside additional Capital or Loan Loss Reserves against that loan. If the Debt Service Coverag
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
e is less than 1:1 the loan will often be "Classified" and will become a problem for the bank.
In more sophisticated grading systems the better the financial ratios, the better the risk grade even within "Pass" categories. The bank wi
In more sophisticated grading systems the better the financial ratios, the better the risk grade even within "Pass" categories. The bank wi
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
l be able to set aside less capital against these loans and will therefore be able to price them lower and earn the same Return on Equity.
There is no problem when a business owner uses accelerated depreciation to reduce Net Income and l
There is no problem when a business owner uses accelerated depreciation to reduce Net Income and l
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
ower the tax burden. The problems for the bank crop up when the owner decides to:
1. Pay high salaries or bonuses at year end to reduce net income
2. Write off inventory or accounts receivable that are still collectable in ord
1. Pay high salaries or bonuses at year end to reduce net income
2. Write off inventory or accounts receivable that are still collectable in ord
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
r to reduce net income
3. Not report revenues at year and and carry them over into the following year by not depositing checks that have come in.
4 Prepaying expenses for the following year without accruing them as an
3. Not report revenues at year and and carry them over into the following year by not depositing checks that have come in.
4 Prepaying expenses for the following year without accruing them as an
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
asset (Prepaids)
5. Otherwise make accounting entries to reduce Net Income to a level that is not reflective of the true economic performance of the business.
Some of these strategies may create problems with the IRS at some futur
5. Otherwise make accounting entries to reduce Net Income to a level that is not reflective of the true economic performance of the business.
Some of these strategies may create problems with the IRS at some futur
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
date as well.
The impact on the bank is that the Cash Flow Available For Debt Service number will drop suddenly (compared to interim statements), the Debt Service Coverage Ratio may go negative, and the Trends will be negative. The bo
The impact on the bank is that the Cash Flow Available For Debt Service number will drop suddenly (compared to interim statements), the Debt Service Coverage Ratio may go negative, and the Trends will be negative. The bo
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
rrower may lose access to credit or have to borrow on more restrictive or more expensive terms. This may restrict the growth prospects of the business and create an Opportunity Cost that is greater than the tax savings. It will also
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
impact the relationship with the bank and banker.
These same strategies can have a negative impact on the Balance Sheet and create similar issues. Liquidity can be understated if assets are no reported. Leverage will increase. Co
These same strategies can have a negative impact on the Balance Sheet and create similar issues. Liquidity can be understated if assets are no reported. Leverage will increase. Co
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
llateral values can be under reported and can create problems with a Borrowing Base or a Loan to Value ratio.
Once again these balance sheet impacts may cause a bank to assess higher risk to the credit and reduce the availability of loan
Once again these balance sheet impacts may cause a bank to assess higher risk to the credit and reduce the availability of loan
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
funds or increase borrowing costs or restrictions.
My bottom line advice is this, before employing some of these tax strategies determine what their impact will be on your reported cash flow. Talk to your banker in addition to your acc
My bottom line advice is this, before employing some of these tax strategies determine what their impact will be on your reported cash flow. Talk to your banker in addition to your acc
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
ountant. Determine what your future borrowing needs might be and how these might impact a loan application. Here is a critical point. The bank will generally use your historical cash flow and will compare it to your future debt
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
service. So when you are going to apply for new debt, the Debt Service used in the denominator of the formula will include that debt. It will be compared to your historical cash flow. So while you may have had an acceptable Debt S
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
ervice Coverage ratio based on your current debt, when you add the new debt service it is below the bank's standards and you may either be denied, your borrowing rates may go up, or more restrictions may be added as conditions of the loan
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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