My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, November 29, 2010

Resverlogix- A Cautionary Tale

This blog will recount the saga of my share ownership of  Resverlogix Corp. (“RVX”), a TSX-listed company. This is a cautionary tale in investing and a very interesting story and it should not be construed as advice. If I had the inclination, there is enough gossip and innuendo surrounding this stock that I could spin this story into one that could be printed in the National Enquirer; however, it is my intent to be mostly matter of fact and reflect the investment element.
The saga begins in the spring of 2006 when I was made aware of a bio-tech stock out of Calgary called Resverlogix Corp. (“RVX”). The company was working on a drug (RVX-208) to turn on Apolipoprotein A-1 (“ApoA-1”). ApoA-1 is the major protein component of high density lipoprotein (HDL). HDL is known as the “good cholesterol.” In extremely simplistic terms it is hoped that the protein will promote the removal of plaque from the arteries by reverse cholesterol transport (cholesterol is removed from the arteries and delivered to the liver for excretion).
With my eyes wide open to the fact that bio-techs are very risky, I dipped my toe into RVX as the concept denoted above was very novel and extremely exciting. In addition, the CEO Don McCaffrey stated it was the intention of RVX to sell pre-clinical, which in my mind removed substantial bio-tech risk.
In early December 2006, Pfizer announced that its cholesterol drug Torcetrapib failed its clinical tests and Pfizer’s stock plummeted. If I had done more then dip my toes in RVX, I would be writing this blog from the Turks and Caicos because after Pfizer’s failure, RVX was seen as a possible successor and, fueled by rumours of a sale, RVX stock went from $5 to $30 within about ten weeks. Helping fuel the fun was a press release stating that RVX has hired UBS Securities as an investment banker to help with a “strategic alternatives.” Not a bad profit for a ten week timeframe.
What follows is the roller coaster ride from hell. The stock drops from $30 to $13 in two months as no deal emerges and by August of 2007 it is at $9.  By the end of the October 2008 crash RVX is down to $2.30. I blow most of my gains on the initial huge run by buying back shares as I think the price is a bargain. This story includes my ignorance.
The dramatic stock drop is blamed on RVX not receiving any public offers and Big Pharma’s reluctance to make purchases due to numerous drug failures and, probably more significantly, financing issues.
Anyone who has ever been involved with a small-cap stock, and especially a small-cap bio-tech stock, is aware that financing is a huge issue. RVX engaged in “death spiral financing,” a process where the convertible financing used to fund a small-cap company can be used against the company in the marketplace causing the company’s stock to fall dramatically. It can lead to the company’s ultimate downfall.
While RVX stock stayed low, the science moved along tremendously with positive testing and good results in Phase 1B/2A testing . In October 2009, RVX announced it would move ahead with parallel tests called Assert and Assure. These studies were to be run by renowned researchers  at the Cleveland Clinic. This was considered to be important confirmation that RVX had a potential blockbuster drug.
The primary endpoint of Assert was to determine if RVX-208 would increase ApoA-1 and to examine safety and tolerability. Assure was going to use a process called intravascular ultrasound to detect changes in plaque and examine early lipid effects and plaque on the coronary vessels. Assert moved ahead quickly, dosing patients ahead of schedule in late 2009.
What was extremely interesting to investors was that at the beginning of 2010, even though the stock price of RVX was only $2.40, the science had moved at a rapid pace and  if Assure was successful, a “big if,” there would be a bidding war for RVX with estimates in the range of $30-$60. Of course, if Assure failed, RVX would most likely fall to less then $1.
I personally felt that $2.40 was a ridiculously low price for a drug with potential yearly sales of 10-20 billion dollar and purchased more shares at that point. Score one for my investing intelligence.
The stock floated around the $2-$3 range until March 2010 when the stock took off up to $7.50, mostly propelled by an article by Ellen Gibson of Bloomberg stating “Resverlogix Corp., without a marketed product, may accomplish what Pfizer Inc., the world’s biggest drug maker, couldn’t: Creating a new medicine that fights heart disease by raising so-called good cholesterol.” There was some additional publicity that followed and the stock jumped around in the $5 to $8 range. At this point I sold a portion of my stock and bought call options. The options provided me high leverage but could expire worthless, but most importantly, the options allowed me to remove a significant amount of my cash investment, while retaining potential upside to the stock.
In May 2010 it was announced that the Assure trial would be delayed as RVX was having trouble recruiting patients. The RVX spin was positive saying that since Assert had finished early, the researchers could now use what they learned in Assert to plan Assure; however, many months were wasted. The market did not appreciate the delay in Assure and the stock price fell from $6.80 to $2.80 in late June.
RVX decided to present the Assert data at a Late Breaking Trial Session on November 17th at the American Heart Association (“AHA”) conference. These session slots are supposedly only provided to those companies providing significant trial results, whether good or bad, and there is an embargo on any information being released prior to the presentation. RVX would lose their presentation spot if any information was released.
At RVX’s Annual General Meeting in early September, which I did not attend, the trial’s principal investigator Dr. Stephen Nicholls of the Cleveland Clinic spoke, and while he could not speak about Assert results, those there blogged about his appearance and said that his apparent enthusiasm for RVX 208 bode well for the AHA presentation. After the AGM, the stock rose from the high twos into the mid-fours over the next several weeks as attention was directed towards the November 17th AHA presentation.
Many investors were unaware that Merck would also be presenting results on a HDL drug they were working on known as Anacetrapib, a drug from the same family of inhibitors as Pfizer’s Torcetrapib which, as noted above, had failed miserably. Thus, investors who had heard of Merck’s presentation were not expecting much.
A cause of concern for RVX investors from August onwards was that the short position grew from 440,000 at July 31st to 1,770,000 at September 15th and ultimately to 2,160,000 at October 31st. An increase in shorts prior to the most significant trial results in RVX’s history was reason to raise an eyebrow. I figured the increase might have something to do with the people who had financed RVX the last year using shorts as a hedge on their warrants, but I was unsure and sort of wary of this increase.
I expected an increase in RVX’s stock price as the AHA approached on anticipation of positive results that would put them one step closer to Assure testing and the small possibility that the Assert results would bring an offer from Big Pharma. Not much happened until the week of November 14th, which is now a week I will never forget and leads to the title of this article.
On Monday, November 16th, in anticipation of the AHA presentation, RVX stock ran from $5.72 to $6.39. On Tuesday, the day before the presentation, the stock ran to a high of $6.98 in the morning and then settled at $6.70 or so until 3:30, at which time, out of nowhere, the stock dropped to $4.50 on significant volume. Needless to say, it was a shocking last half hour of trading and rumours on the stock bullboards ran from a leak of bad results to the shorts pulling a “Bear Raid;” a tactic where shorts try and push the stock down to cover their shorts. This “Bear Raid” theory seemed to make the most sense at the time, since the shorts had a large position with RVX’s presentation scheduled for the next day. A leak did not seem to make sense based on the embargo by the AHA.
Apparently the embargo on the late breaking sessions at the AHA on Wednesday was lifted first thing Wednesday morning. Early Wednesday morning Bloomberg reported that “Resverlogix Corp.’s most advanced experimental medicine, a cholesterol pill called RVX-208, failed to raise levels of a protein thought to help clear plaque from arteries in a study.”
The Bloomberg report was followed by an RVX press release that said the “Assert trial data demonstrated that the three key biomarkers in the reverse cholesterol transport (RCT) process showed dose dependant and consistent improvement.”
Following the RVX release, the Dow Jones reported “A study involving a new type of drug being developed by Resverlogix Corp. showed it failed to meet a goal of boosting levels of a specific protein the drug was designed to raise.”
To put the final nail in the RVX’s coffin for the day, Merck reported its Anacetrapib had tremendous results in increasing HDL and also reducing LDL the bad cholesterol.
The stock opened around $5.30 on Wednesday morning with investors obviously thinking the shorts had caused the prior day’s stock price drop, but after the press releases, the stock quickly dropped to a low of $3.35 by 9:45 am. However, investors were clearly now not sure what to believe; the headlines by Bloomberg and the Dow Jones, or RVX’s press release. The stock rebounded to $4 by the time of RVX’s actual presentation. By all accounts the presentation was very factual emphasizing that RVX did not achieve a statistically significant  % change in ApoA-1. Supposedly, to be statistically significant the p (probability value) would have to be less than 0.05 and RVX’s was 0.06.
Following the presentation, RVX’s stock slid to $2.73. It then slid Thursday to $2.14 before rebounding on the Friday to $2.34. As of today’s writing, the stock is $2.00.
Notwithstanding the fact I probably will need RVX-208 to combat the heart attack symptoms this experience caused, the story still has more twists and turns.
Some questions arise in relation to the AHA conference itself. Supposedly video clips of presenter interviews were made days before the presentations, and supposedly the slides for Dr. Nicholls’ presentation were available online before the presentation.
The conclusions presented by Dr. Nicholls were buffered somewhat in a post presentation RVX conference call on Wednesday with statements that some of the data RVX noted in their press release was promising and, if the trial had continued, the results may have become statistically significant. More importantly, Nicholls made a couple comments that RVX-208 could still have a “profound effect” on reducing plaque volume. It was clearly a “could” and not a “would,” but a far more positive spin than the media was reporting.
All in all, there was mass confusion and huge paper or actual stock losses for RVX shareholders.
You are probably thinking “Why the heck did Mark not sell the day before the AHA?” In retrospect, that would have been prudent, however, I had decided I was going for a home run and would accept a strike out. In the bloody aftermath, more detailed analysis of RVX-208 and Merck’s Anacetrapib were reported. The analysis ranged from optimism for Anacetrapib to comments that the HDL levels were out of line and may never achieve clinical success.
Meanwhile, RVX created significant problems for itself with its endpoint selection, especially since there was evidence that a longer trial may have given the drug time to   achieve statistical significance. RVX also had an increase in liver enzymes not highlighted in its press release that led to further unanswered questions. The uncertainty around RVX-208 became cloudier as AHA clips and Medical publications said such things as: 
"The discussant for the trial, Eliot Brinton, said “that a drug like RVX-208 that has a modest effect on HDL levels might have a large clinical effect.”"
MedPage Today, quoted Elliott Antman, MD, professor of medicine at Harvard Medical School (a very well respected researcher according to a doctor friend of mine) as saying
"The important thing that we saw here with RVX-208 was the dose response. That means that something is happening with the drug. I think that the dose response trumps P-values."
What is a non scientist to think? At the end of the day, RVX’s stock price was hit so badly that it may cause financing issues in the future. Some may say that although the Bloomberg and Dow Jones writers were accurate in reporting that RVX did not achieve statistical significance, they also went for headlines instead of researching the more hidden or complicated facts. It remains to be seen whether RVX does indeed have a drug that will inspire Big Pharma to either buy or partner with RVX .
I am not sure there is a moral to this story; this was cathartic to write and like I said, it is a saga, a saga that is still ongoing. I guess, if anything, this is just a cautionary tale about investing in biotech’s and investing in general.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Thursday, November 25, 2010

Sign That Will

I always try to ensure that my clients have up to date wills (if they have their own corporations I recommend 2 wills to reduce probate tax) that tie into their estate plans. Often one of the action points following a meeting includes updating a will. However, I have observed a consistent procrastination in relation to completing this task. In the end, I think it is an issue of mortality. People just don’t want to face their mortality and preparing or updating a will brings you face to face with the fact you are planning post mortem. I have seen situations of wills drafted months and years ago that remain in draft because of a reluctance to deal with the issue only to have that person or their spouse pass away with the draft will still unsigned. The proposed changes become null and void and the estate is forced to go back to a prior will that was usually created years and years ago when the taxpayer had limited wealth to distribute.

Thus, if your will needs to be updated, it is extremely important that you not only update the will, but also ensure the process is completed on a timely basis.

As noted above, I try to ensure that my clients’ wills are updated to tie into their estate plans. This can be problematic on its own. Some clients live in a penurious manner, denying themselves their just rewards so that their children will inherit the maximum amount possible, while others believe they deserve to live life to the utmost and if there is nothing left for the children so be it. Still others want their children to earn their own money and leave their inheritance to charity. Finally, there is the most common mid-ground, where a client wants to leave substantial funds to their children while still enjoying the fruits of their labour.

Whatever the decision, there are various means to achieve the wealth transfer from outright gifts to the use of trusts. The details of such means will be a topic in a future blog.

Bucket List

In the 2007 movie The Bucket List, starring Jack Nicholson and Morgan Freeman, two terminally ill men head off on a road trip with a wish list of the things they want to do before they die. As result of the movie, the term “Bucket List” has become a common slang term.

In the movie, the characters were ill when they created their bucket list. The message of the movie is to live life to the fullest while you are able and not to wait until you are old or sick. The movie did not garner many good reviews, but the message certainly made many think about setting some time aside to create their own bucket list and stop putting off their dreams for "someday" in the future.

I created my own bucket list the day after watching the movie. My bucket list includes travel (African Safari, Bora Bora, Australia) and certain golf spots (Pebble Beach, St. Andrews) amongst other things.

Daily life often gets in the way and when you finally look up, time has flown by.
I suggest if you have not created your own Bucket List, you consider doing so and create a plan to start acting upon it.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Thursday, November 18, 2010

Doing Business of Any Kind in China

Whether you are outsourcing, entering into a business venture, or just investigating doing business in China, there are plenty of risks for the uninitiated. However, if you can navigate the Chinese playing field, there are substantial profits to be made.

Cunningham LLP, the firm I work for, has an International Accounting Affiliation with the Alliott Group. I recently attended Alliott’s worldwide conference in Singapore. One of the sessions at the conference was titled “Protecting your clients’ interests when doing business in Singapore, China and Vietnam.” The session was presented by a lawyer, Caroline Berube ( a transplanted Quebecer now living in China.

Amongst the many discussion points, Caroline pointed out that even if a Canadian business just outsources to a Chinese manufacturer, the Canadian company should register its trademark or risk the trademark being seized by the outsourcing firm in China.

Even business cards require a new understanding in China. Caroline stated that the English name on a Chinese business card has no meaning. So a company can market itself under the English name “Beijing Truss Fabricators Inc.” and in reality, the company’s legal Chinese name could be “Chan Bubble Gum Company.”

Caroline provided an interesting example of why you need advisors on the ground in China who can provide proper due diligence. She cited an example of a Canadian client that was extremely excited abut a Chinese company they met at a trade show that could provide manufacturing for the Canadian company. Caroline stated although the Canadian client was pushing to get her to sign the deal immediately, upon further legal due diligence, it was determined the Chinese company was in fact not a manufacturing company itself, but a trading company who subcontracted to Chinese manufacturing companies.

Caroline also notes that legal signing authority can be an issue in China and without understanding the position of who is signing the contract on behalf of the Chinese company, you may have an invalid contract.

Another potential legality is who is provided legal signing authority for the Chinese company. The legal representative maybe able to access loans for themselves on behalf of the Chinese entity if you do not have proper legal restrictions in place.

The above are but a few of the traps and pitfalls of doing business in China. Doing business in China can open up tremendous opportunities, but it is a very complex place to do business and Canadian companies must ensure they obtain proper professional advice from those who have Chinese experience before entering into any kind of a Chinese business arrangement.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, November 15, 2010

Ontario HST Small Business Transition Support and Sales Tax Transition Benefit

Pretty boring stuff, however I have been asked a couple times by sole practitioners about the taxability of both the Ontario HST Small Business Transition Support and the Ontario Sales Tax Transition Benefit, so here it is.

The Ontario HST Small Business Transition Support payment going out to small businesses across Ontario is meant to provide assistance to small businesses with the transition to HST. This payment is for Ontario businesses with revenue of less then two million dollars for the most recent 12 month period ending after January 1, 2009 and is being sent out automatically. The maximum credit is .05% of revenue to a maximum amount of $1,000.

The Ontario HST Small Business Transition Support payment is taxable.

The Ontario Sales Tax Transition Benefit is meant to provide temporary relief to residents of Ontario to help them adjust to the HST. Ontario residents that qualify will receive three payments. The first payment was in June 2010. The next two payments are December 2010 and June 2011. The maximum benefit is $300 for single people and $1,000 for families. Single people lose their benefit if their income exceeds $82,000 and families lose their benefit if their income exceeds $166,700. The payments are sent out automatically when you file your 2009 and 2010 tax returns.

The Ontario Sales Tax Transition Benefit is not taxable.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Friday, November 12, 2010

Smoke & Mirrors - Is Retirement as Costly as We are Led to Believe?

I recently attended a course taught by David Trahair called “Smoke and Mirrors”. David is a well known author and proponent of various retirement and investment strategies that contradict accepted conventional wisdom. Some of David’s against-the-grain thoughts are (1) GIC’s are a better investment than stocks (2) RRSP’s are not the Holy Grail and (3) you need substantially less to retire than the investment community purports. Although I may disagree with some of the above, I nevertheless find several points David makes about retirement to be poignant and I discuss them below.

David attempts to dispel the financial planning “myth” that you need to accumulate enough funds at retirement to provide for 70% of your current yearly income, i.e.: if you make $100,000 a year you will need $70,000 a year in retirement and a retirement fund of at least $1,400,000. David feels the mythical 70% number is in most cases significantly in excess of what will be required at retirement.

David is a proponent of eliminating all debt pre-retirement. This ensures that at retirement you are not paying out funds and depleting capital, but rather living off the capital. He feels that the reduction of debt has a secondary positive offshoot in that during your working life, your need for disability insurance is reduced. The rationale is that since repaying monthly debt is the largest cost for most people, as that debt is reduced, your need for disability insurance that would cover these debt payments is also reduced.

David feels that in addition to the significant reduction of mortgage and other debt payments in retirement, retirees will have additional cost reductions as dependent children become self sufficient, RRSP or pension plan contributions cease, and tax burdens and automobile costs decrease. David feels that it is important to plan to purchase your last car before retirement and drive it a number of years in retirement.

As David would admit, one size does not fit all. I would suggest your costs in retirement will be far less than 70% if you don’t plan to travel, help your children buy a house, join a golf course, etc. That is why it is vital to have a financial planner who takes all your future needs into consideration and reviews your pre-retirement spending habits.

This is where I agree totally with David: you need to have a financial plan and take charge of your future now. Review your monthly spending and determine what can truly be trimmed now and what could be trimmed in retirement.

China- Communist or Capitalist?

I was recently in Beijing and Singapore and will blog about both these countries in more detail in future blogs. I am having trouble reconciling China and its economic growth. As someone who had never visited China, I did not know what to expect in Beijing. What I found was a bustling city with hundreds and hundreds of office buildings, Cartier stores, Hugo Boss stores, etc. I met several US businessmen in my hotel who told me China is a great place to do business, yet the typical Chinese citizen does not appear to have benefited in equal amounts from this “capitalistic” growth and wealth either in lifestyle or wages. It is all very confusing for someone who does not have intimate knowledge on China, its politics or its change in attitude towards commerce.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Wednesday, November 3, 2010

TFSA's- I Opened The Account, Now What?

I think by now, most Canadians are familiar with Tax-Free Savings Accounts (“TFSA’s”).  In today’s blog, I will provide a quick summary of TFSA’s, but I also want to veer off  into a discussion of the growth potential of TFSA’s and how the actual deployment of your TFSA funds will affect you from an income tax and investment perspective.

TFSA’s have been in existence since 2009. You can contribute up to $5,000 a year into a TFSA and you can carryforward unused contribution room. There is no income tax deduction for contributing to a TFSA; however, the income earned inside a TFSA is tax-free. In addition, you can withdraw monies from a TFSA tax-free at any time and can re-contribute the amounts you withdrew anytime after the year of withdrawal (i.e. if you withdraw money in 2009, you can re-contribute beginning in 2010).

Initially, I found my clients were indifferent to TFSA’s, however, with the banks and investment houses pushing these accounts, most clients now have TFSA’s.  I think the fact you are investing only $5,000 a year in a low interest rate environment has caused many to look at the account as small potatoes. However, they seem to snap to attention when I inform them that if they contribute $5,000 a year for 20 years at a return of approximately 4% they will end up with around $150,000, and if their return is closer to 6% they could end up with around $200,000.

Once you realize the potential growth power of a TFSA, I think you then need to get a handle on what the TFSA means to you. Is it solely a rainy day fund? A tax-free replacement to your regular trading account? Something in the middle?

After answering the above question, you or your advisor must then address how you invest your TFSA funds. If your TFSA is a rainy day fund, clearly you and your advisor should ensure you hold risk-free investments such a GIC’s, money markets, etc.

But what if you, like many of my clients, are a higher net worth individual and are essentially just moving money from your trading accounts to your TFSA? As a Chartered Accountant I cannot advise you on what to invest in, but I will tell you what I have seen.  Many clients have just “thrown” their TFSA funds into GIC’s or Money Markets. Others have placed the funds in ETF’s, mutual funds, etc. looking at the TFSA as a long term growth investment. Some of my more sophisticated clients have been stock pickers and purchased higher growth stocks to try and maximize the tax-free aspect of the TFSA. The result is that some clients have $20,000 to $30,000 in their TFSA’s today, while other clients have picked incorrectly and have only 30% to 40% of their original investment remaining.

Whether you are the ETF-type, Mutual Fund-type, or stock picker, what you have to understand is that the tax-free aspect of the TFSA may come at a cost for equity investments. If your investments increase in value, at the high rate in Ontario you have saved 23% in income tax on your realized capital gains within your TFSA. However, if your investments decrease in value and are sold in your TFSA, you will have forgone the capital loss you could carryforward outside your TFSA. Very clearly, you are playing off a potential tax-free capital gain against the risk of incurring a capital loss which is forgone.

In conclusion, once you invest in a TFSA, you need to consider the significant growth potential as the years march by and discuss with your investment advisor your investment strategy on the funds accumulated.

For the Love of Football?

I am a casual football fan. I usually only watch when there is a specific game of interest or nothing else on TV. However, the last few years I have been in a suicide football pool (initially created by my son’s hockey coach to raise money for the team) where you pick a winner each week and are eliminated if you select a losing team. It is incredible how much my level of interest and awareness of all things NFL has increased since I joined the pool. I now follow ESPN’s top picks, watch the NFL Network previews of games, etc. to get all the facts for my weekly pick.

I know my friends have had the same experience. However, except for diehard NFL fans, we all have the same response once our teams are eliminated - complete indifference to the NFL. Whereas the week before I was eliminated I could tell you the injury list for each team, two weeks after I am eliminated I cannot even tell you which teams are playing.
It just makes one realize how intertwined the NFL’s success is with legal and illegal betting and football pools.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.