Biotech Values

[DewDiligence]

Re: RVNC /rationale for insider’s exercise-and-hold transaction

…for some people, it can make sense to accelerate income into 2017. Increasing 2017 taxable income can increase state income tax liability, which can then be paid in 2017 and deducted. The concept is, if the state tax will have to be paid at some point in the not too distant future, why not pay it in a year when the state tax can be deducted. As against that, ordinary income rates will be slightly lower (37 v 39.6) in 2018 so one would have to be in…California or NYC for this to make much of a difference.

RVNC is indeed in California (Silicon Valley East) so, as you noted, the CFO, Lauren Silvernail, may be reducing her cumulative federal income taxes by incurring the California tax liability from the option exercise in 2017 rather than 2018.

However, there’s an alternative, perhaps simpler, explanation for Lauren’s exercise-and-hold transaction in December: She wants to increase her RVNC position before the stock goes up!

If (for the sake of discussion) Lauren has already seen RVNC’s phase-2 data in plantar fasciitis and knows that the data are positive, she is barred from buying RVNC shares on the open market. But the exercise-and-hold transaction provides a legal way to accomplish the same thing! Why? Because an exercise-and-hold transaction in which the tax liability from the exercise is paid in cash (rather than by forfeiting some shares back to the issuing company) is mathematically equivalent to using the cash to purchase new shares of stock.

For related comments, please see #msg-109706657 and #msg-109711695.