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Main Subject - ESOPs: An Opportunity for Bankers
An ESOP represents Superb Opportunities for Bankers and their Customers
Leveraged (involving a bank) ESOPs enable employees to borrow money using the corporate borrowing capacity of their company to buy stock in the company. ESOPs usually use loan fund
Leveraged (involving a bank) ESOPs enable employees to borrow money using the corporate borrowing capacity of their company to buy stock in the company. ESOPs usually use loan fund
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
s to purchase stock from existing shareholders or from conglomerates divesting subsidiary companies. ESOP loans can also be used to purchase newly issued shares from the sponsoring corporation. Many financial institutions were leery of making ESOP related loan
; 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
in the 1970s and early 1980s until ESOPs were recognized as the "ultimate instrument of corporate finance".
There are several banks throughout the country whose portfolio consists primarily of ESOP loans and this is an extremely profitable book of business w
There are several banks throughout the country whose portfolio consists primarily of ESOP loans and this is an extremely profitable book of business w
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
th essentially a zero or almost zero default rate. When properly configured there are two reasons why ESOP loans represent almost no risk to bankers. First, fifty years of history validates what seems to be self-evident that owners work harder than employees,
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
re more team-oriented, and better able to weather downtimes. Second, the ESOP loan proceeds are used by a stockholder to purchase "alternative securities" of a US corporation. This portfolio of blue chip securities will collateralize the loan.
Moreover, the s
Moreover, the s
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
ecurities can be held by the lending institution. As bankers this will be of particular interest to you, so I will expand upon the concept. Refer to the following diagram for clarity. The bank will (1) make a loan to the sponsoring corporation, who then (2) ma
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
es a "mirror" loan to its ESOP. The ESOP then (3) buys stock from the stockholder. The stockholder then purchases alternative securities (4) which are assigned to your bank as collateral for the outstanding loan. Your collateral interest reduces as the loan is
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
repaid. The obvious advantage to the bank is that they have instant access to the securities collateralizing the loan. To summarize, the bank has booked a $1,000,000 loan and holds $1,000,000 of blue chip securities in an account within the bank. What is the a
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
vantage to your customer?
The customer has monetized $1,000,000 worth of equity in his corporation and he will forego all capital gains tax liability on this and future sales of his stock to his ESOP. As an example, if your customer would simply sell $1,000,0
The customer has monetized $1,000,000 worth of equity in his corporation and he will forego all capital gains tax liability on this and future sales of his stock to his ESOP. As an example, if your customer would simply sell $1,000,0
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
00 of his stock at best he would net, after capital gains tax, approximately $600,000. Using the ESOP he has converted his tax liability into capital appreciation and his net is -- $1,000,000. $1,000,000 invested in a blue chip security over the long term will
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
generate approximately a 10% annual return (average annual stock market return since 1929 has been 10.2%).
Additionally, the customer's cost for an ESOP loan is approximately 70% of what a conventional loan would cost him. This is a result of his ability to t
Additionally, the customer's cost for an ESOP loan is approximately 70% of what a conventional loan would cost him. This is a result of his ability to t
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
x deduct both principal as well as interest on all debt service made to extinguish the $1,000,000 ESOP loan. Let me say that again. The Internal Revenue Code allows us to tax deduct the interest expense associated with a business loan. All payments made to an
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
SOP are deductible to the sponsoring corporation, and this includes debt service for both principal and interest on loans.
Evaluation of the company stock is required whenever an ESOP is being implemented in a closely held company (public company evaluation i
Evaluation of the company stock is required whenever an ESOP is being implemented in a closely held company (public company evaluation i
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
s usually determined by the stock market). The evaluation is the basis for the sale price and the amount of the loan. The lender will want to make sure that the evaluation methodology makes sense, that it follows the proposed Department of Labor regulations re
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
ating to the definition of adequate consideration, and that the price is reasonable.
There is much room for creativity and imagination in the design of an ESOP structure. As an example, the amount of cash that can be tax deductibly contributed by a sponsoring
There is much room for creativity and imagination in the design of an ESOP structure. As an example, the amount of cash that can be tax deductibly contributed by a sponsoring
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
corporation to its ESOP directed at principal cannot exceed 25% of payroll. We are able to tax deductibly contribute more from the sponsoring corporation in the form of dividends. Interestingly enough, this is the only place where the Internal Revenue Code all
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
ws dividends to be a tax deductible expense of the declaring corporation.
There is good reason for ESOP being characterized as the ultimate instrument of corporate finance. The banking community is well advised to present this option to its customers as an ex
There is good reason for ESOP being characterized as the ultimate instrument of corporate finance. The banking community is well advised to present this option to its customers as an ex
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
tremely cash and tax advantageous opportunity. The bankers image is enhanced as the customer realizes that the banking relationship has much added value, in that the banker can bring creative financial strategies to the table. Very often the customer's review
.
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
f the option results in a significant addition to the bank's loan portfolio. It's a win, win, win for everyone; the bank, the customer, and the customer's corporation.
ESOP - The Robert Morris Associates Bankers Journal, July 1998 Volume 20, Issue 3
Fran
ESOP - The Robert Morris Associates Bankers Journal, July 1998 Volume 20, Issue 3
Fran
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
Amato is Managing Member of the Arizona ESOP Group, LLC located in Scottsdale, Arizona. He has spoken before the Arizona State Legislature and is member of the National Center for Employee Ownership. Mr. Amato can be reached at (480)222-0199 or (480) 227-3064
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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