Leaders of early-stage life sciences companies often don’t have a business background and may not fully understand the risks inherent to their business. Life sciences companies face many unique risks. Insurance and risk management programs need to address these key risks and the broker must structure the coverage appropriately.
“If the broker doesn’t understand the space and know the key risks, then he or she won’t know to ask the right questions,” says Michael Kearney, area executive vice president at Arthur J. Gallagher & Co.
“One of our primary roles is to advise a company’s leadership about their risks, so they can make decisions with eyes wide open,” says Dereck M. Malzi, area assistant vice president at Arthur J. Gallagher & Co.
He says it’s also important to let them know what their peers are doing, e.g., “most companies are insuring this risk because the cost impact could be substantial if it happens, and the cost of insurance is reasonable.”
Smart Business spoke with Malzi and Kearney about key risk management and insurance for life sciences companies.
What is a risk that life sciences companies often overlook?
Most early-stage biotech companies don’t manufacture their clinical or drug materials. These materials are generally manufactured and tested by third parties. Emerging life sciences companies often assume that their business partners are insuring these materials. And that’s very rarely the case.
If something happens at that facility — a fire, water damage, a freezer quits — it could cost millions to replace the materials. And if the materials aren’t insured, the replacement cost comes from the company’s cash balance.
Once research moves into the human clinical testing phase, life sciences companies should consider a separate policy for their clinical supply chain. This type of policy can cover materials during shipment and while at manufacturing and storage locations. In one recent instance, after Gallagher’s life sciences team identified this uncovered risk, coverage was placed for the client’s off-site materials. Two months later, $800,000 worth of materials were destroyed and the insurance paid to replace them.
Could you provide other examples of risks overlooked by life sciences companies?
One difficult-to-absorb expense is business interruption. For example, sprinklers douse the entire lab, so the Food and Drug Administration shuts it down until it is revalidated. During the interruption, the company’s scientists sit at home but still get paid. Given that developing companies don’t yet have sales, their biggest financial risk in a business interruption event is unproductive payroll. Business interruption insurance can help reimburse for this continuing expense.
Another expensive risk is replacement of a lost research project, in particular if it runs for a longer term. In the event that a company has a six-month project and a fire destroys it five months in, the project will likely need to be rerun from the beginning. R&D restoration insurance can be secured to reimburse this expense.
How else should life sciences companies protect themselves?
Most boards of life sciences companies require director’s and officer’s liability insurance to protect against shareholder and other litigation because personal assets are on the line. Another unique risk comes from conducting clinical trials on humans. Research sites, institutions and partners will require proof of clinical trials liability insurance before the trial can be initiated.
Both of these risks, along with the insurance products that cover them, however, are complicated and require specific expertise. Life sciences companies should ensure that their broker has substantial experience in both of these areas. As an example, a clinical trial site might require $15 million of clinical trials liability insurance; an experienced broker will know that $5 million is more in line with industry standards. In addition, international studies and clinical trials are subject to very specific regulations and insurance requirements. In order to maintain timelines, the right expert can help facilitate this complicated process.
Life sciences companies should align themselves with insurance and risk management partners that focus on the life sciences industry. By doing so, they greatly reduce the risk of uninsured financial losses, improve timeline performance and maximize ROI for investors.
Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.