In this Issue

	Insuring the Unique Property of Life Science Companies
	Representations and Warranties Insurance

Quick Facts

Cost of Injuries
The average American business pays approximately 18 cents of every dollar of pretax corporate profits for work related injuries.  (Source:  Chubb Insurance Group)

U.S. Twice the Cost
The United States has the world’s most expensive tort system, costing more than double those of other industrialized nations.  (Source: Chubb Insurance Companies)

Landmark Tellabs D&O Decision
There have been some early predictions that the Tellabs decision will lead to at least a modest increase in the rate of dismissals in securities class action lawsuits. These predictions are most likely to prove correct in the 7th, and possibly 2nd and 3rd circuits, where the U.S. Supreme Court decision in the Tellabs case in effect raised the bar for plaintiffs. Yet there has been some commentary suggesting that the Tellabs decision, by rejecting the standard recommended by the concurring opinions, may have in fact lowered the bar for plaintiffs in the 1st, 4th, 6th and 9th Circuits, which had apparently been using stricter standards similar to the one rejected by the majority opinion.

Insuring the Unique Property of Life Science Companies

Contributed by Donna DeBolt, Barney and Barney

The life science industry faces unique exposures to loss of property beyond the normal risks associated with owning or leasing space, furniture, computers, machinery and equipment that are common to any business.  The additional exposures to property such as research animals, cells, cultures and specimens that can’t be reproduced unless an entire clinical trial is repeated, however, belong to life science companies alone.   

Although property exposures vary from one life science company to the next, some of the most common exposures are:

• Scientific Animals: Life science companies frequently conduct pre-clinical studies using research animals and house them for breeding and/or production purposes.  Loss of these animals can result from traditional perils such as a fire, to changes in air quality or the loss of air conditioning in the Vivarium.  The value of these animals is not just the cost to buy a new one but rather includes research and development investment in the animals (i.e. a 4th generation mouse bred to carry a certain chromosome).

• Research and Development Property: The research and development property of a life science company is the foundation upon which the company is built.  Examples of this type of property include cells, cultures, processes, prototypes, formulas, plans and documents.  As with scientific animals, the value of the property includes the research and development investment in the property and care must be given to properly establishing insurable values to include this investment.

• Loss of Research & Development Income: Life science companies in the R&D mode usually have no short term expectation of generating revenue.  Instead, their existence is often dependent upon grants, endowments and funding tied to milestones reached.    As a result, loss of critical funding resulting from a property loss can have a devastating effect on a company’s future.

• Dependence upon Others for Services and Supplies: A reliance on contract manufacturers, in particular FDA-approved manufacturers, contract research organizations, contract packaging and warehousing operations is the norm for the majority of life science companies.  As a result, losses to these subcontractors, especially if they are single source, can be catastrophic for the R&D life science company.  The costs associated with finding alternative suppliers, manufacturers or subcontractors can be enormous as delays in clinical trials or the release of commercialized products to the market may result.

• Contingency Plans: As was mentioned previously, if the life science company is dependent upon a FDA-approved facility to manufacture their drug or component, it is important to have a plan in place to deal with physical loss to that facility.  Few companies can afford to wait until their contract manufacturer restores their facility and regains FDA approval.  As a result, an understanding of the contract manufacturers own contingency/continuity plans will help with analyzing what additional plans/contingency plans the life science company needs to put in place.  Contracting with a second source, an FDA pre-approved supplier/manufacturer, sooner rather than later may be an expensive, but necessary step if the primary manufacturer has no backup/secondary manufacturing capabilities already in place.   

Working with an experienced broker who understands these exposures, how to insure them and the applicable risk management techniques is essential to properly managing risk in any life science company.  In almost all cases, the exposures outlined above can be insured or the associated risk can be managed in another way.  The key is identifying and quantifying the risks in coordination with a knowledgeable professional and then taking appropriate action.

Representations and Warranties Insurance

Contributed by Sandy Osgood, TIS / Ned Sander, AH&T

Both buyers and sellers of businesses expose themselves to increased liability during the merger and acquisition process.  Representations and Warranties Insurance provides a financial back-up in the event of a breach of the representations and warranties in the purchase agreement by either the buyer or the seller.

Buyers may elect to purchase a Representations and Warranty policy because of their inability to obtain a satisfactory indemnification from the seller.  If an indemnification agreement exists, Reps and Warranties coverage backs up the indemnity negating the practical and financial difficulties that may potentially be involved in collecting on it.  Strategically a buyer may want to make their bid for the target company more attractive than competitors’ bids or the buyer may want to avoid having to provide a mutual indemnification to the seller. 

Sellers may need to lock in the proceeds of the sale of their company and remove contingencies so shareholders can be paid.  Removing contingencies can be especially important when debt must be paid down immediately after the sale.  Sellers can use the coverage to broaden their appeal to more potential buyers.  Sellers may also be apprehensive about unintentional non-disclosures by the buyer or want to reduce hurdles to finalizing the sale.

The process of obtaining Representations and Warranties coverage takes a minimum of 3-4 weeks to complete.  The cost ranges between 3% to 8% of the limit purchased and most acquisitions insured range from $25M to $250M in value.  Certainly coverage is expensive, but it can make the difference of successfully completing the deal.