Specialty Podcast: Insurance Considerations for Biotech in 2024

Rich Leavitt (00:00):
Welcome to our latest edition of Life Sciences Under The Microscope. My name is Rich Leavitt. Joining me today is my colleague, Doug Bixby, and we're here to discuss the recent J.P. Morgan Healthcare Conference and its implications for the biotech industry as well as insurance considerations. The JP Morgan Healthcare Conference has a longstanding tradition of setting the tone for the coming year in the biotech industry sector. Last year, a dark cloud loomed over JPM and sat over the industry for virtually all of '23. This year, the mood was distinctly more upbeat, albeit with a cautious optimism. Doug, thanks for joining me today to provide a recap of JPM. Let's start by reviewing the major themes of JPM and then we can venture into corresponding insurance considerations.

Doug Bixby (00:46):
Thanks, Rich. I'm glad to be here today. Let's start with a topic that kept me sidelined from this year's conference. Was COVID a major focus this year?

Rich Leavitt (00:54):
Well, other than people like you not being able to attend due to COVID, it barely made the agenda, though Novavax did present on Monday. From an indication perspective, the headlines were the GLP-1 for obesity and gene therapies for orphan diseases.

Doug Bixby (01:11):
I can't say I'm surprised by either of those. The market for obesity and diabetes is huge and lacks a go-to solution. Just spurring the biotech equivalent of an arms race. On the gene therapy front, investors were finally rewarded by a spat of approvals in Q4 of 23, notably CRISPR, Vertex and Bluebird for sickle cell. Was there anything else there that caught your attention?

Rich Leavitt (01:35):
There were a lot of both on and off the record conversations around AI, M&A and capital markets, and these conversations were both on panels as well as what people talked about during the many cocktail parties. I'll start with the AI, as everyone in the industry is quick to point out, AI is not new. Since its inception in the fifties, companies in any leading edge industry sectors have been using the technology. However, it's now reached a point where it's a critical component of virtually any drug discovery initiative. In other words, it's here to stay in biotech and very much an accepted technology.

Doug Bixby (02:12):
Yeah, certainly agree with that. And what do the pundits have to say about M&A activity?

Rich Leavitt (02:17):
Finally, they are looking at it as the overriding consensus amongst the pundits is that M&A is a healthy gardening technique to prune back an overgrown public biotech space that's been consuming too much public equity. One example of this certainly is the dearth of biotech IPOs in '23 and '22, approximately 20 each year, compared to the very robust IPO seen in '21 when there were over a hundred IPOs.

Doug Bixby (02:47):
So the public market seems poised to be stronger in 2024, and I read somewhere that there's roughly maybe 32 billion of private capital earmarked for biotechs. I can see why the mood in San Francisco is so much more upbeat this year than last. But, maybe we should shift to the insurance implications of those.

Rich Leavitt (03:07):
Let's begin with M&A. As you know, there are three main types of transactional risk insurance that can be used by buyers and or sellers depending on the circumstances. The challenge is that all but the largest biotech companies are largely unaware of these policies and how critical they can be in transferring liabilities to facilitate transactions. I thought that given your background in this space, it would be good for you to provide our listeners with a brief overview of each and when they might come into play.

Doug Bixby (03:39):
First and foremost is representations and warranty insurance. Let's start with reps and warranty insurance. For the listeners that are not familiar with coverage, reps and warranty insurance can be used in almost any M&A transaction and can benefit both the buyer and the seller. Buyers will look to the rep and warranty insurance policy to cover them for financial loss in the event of a breach of a rep that's made by the seller in the purchase agreement. And the benefit to the seller is that they can exit the transaction without traditional liability escrows or hanging indemnity obligations. While the coverage has been around really since the mid to late nineties, it wasn't really until recently years where coverage has become mainstream and it's used to help facilitate most transactions today. In fact, we're seeing in the purchase and sale agreements a written requirement for there to be rep and warranty policy purchased as a condition to signing a deal.

And that's something we were familiar with, insurance requirements like D&O insurance and D&O tail coverage to be purchased. But now we're seeing on the reps and warranty side in the last few years, is that being a requirement as well. Another area that is often used at the time of transaction but doesn't necessarily need to be used just in M&A, but it often is contemplated during M&A, is tax insurance. Tax insurance is designed to make an insured whole in the event of a successful challenge by a taxing authority. This could be a federal, state, local or even a foreign tax authority. While the coverage doesn't really require there to be an M&A transaction, as you pointed out, many companies going through a transaction consider the coverage, since like rep and warranty insurance, the coverage can help facilitate a smoother deal, a negotiation; it can help identify, quantify and cap financial exposures to specific tax risks.

It can also help mitigate or eliminate escrows and indemnities to historic tax exposures and can also provide certainty where tax authorities refuse to provide an advance ruling on certain tax matters. So all those combined can really come into play at the time of a transaction, but again, as I said before, not necessarily a requirement for there to be a transaction to contemplate tax insurance. The third area I think most listeners probably are not too aware of is litigation insurance. You know, it's also contemplated at the time of transaction, but it's not necessarily dependent on an M&A transaction, the way reps and warranty is. Litigation insurance is designed to transfer a company's legal exposure. Like reps and warranty and tax insurance, litigation insurance can provide critical advantages to both the buyer and seller and can enable the transaction to proceed without specific escrows or hanging indemnity obligations. But there's two main areas of litigation insurance that we should just touch on. The first is adverse judgment coverage, and adverse judgment insurance provides coverage to a defendant in the event of an unforeseen judgment. The second is judgment preservation coverage, and that's when a company can use judgment preservation insurance to hedge against risk that was awarded, damages that potentially were reversed or reduced on appeal. So again, those are the three main areas that we see companies that are contemplating transactions really focus in on when it comes to insurance.

Rich Leavitt (07:00):
Thanks, Doug. As you noted, I think most of our buyers are familiar with D&O and product liability tails and other things involved when there's a transaction, but I think the transactional risk insurance policies are a topic that we should probably just do an entire podcast on. There's just a lot to unravel, but many thanks for an intro to those. Let me share some of the considerations on the GLP-1 market for obesity. There was a lot of time spent talking about this, and what I'm going to focus on are just some of the major issues regarding product liability. Product liability insurers will be very concerned and are very concerned right now about the off-label use, i.e., people that are taking these weight loss drugs, not prescribed, but just buying them to use on their own volition. And that will continue to be an issue for product liability insurers to struggle with. Hand in hand with that to some degree is the potential for class action litigation.

Anytime a new market like this emerges, there are bound to be people that claim to be harmed by it. And finally, that leads to the third overriding consideration for insurers, which is aggregation. In other words, they are going to have a lot of their limit exposed to various companies in the industry. So not unlike opioids, if one company has a problem with the type of drug, all companies are likely to face litigation. Any company in this space will need to have well thought out presentations to underwriting decision makers regarding warning labels, education information and contractual safeguards. Sending in an application and hoping for an underwriter to provide best terms is not going to cut it in this space.

Doug Bixby (08:53):
And then there's AI. You and I have both had discussions with carriers as to how they're addressing the potential downsides of AI. It amazes me that there's not more concern in the industry about the downsides and what they're doing about it. Or maybe there's not enough talk about it.

Rich Leavitt (09:08):
Well, you know my feelings on it, without getting too much on my soapbox, I do believe that we need to be more focused on helping clients understand where they might be vulnerable to the misuse of AI and how insurance will respond. Without getting into too much detail, there are a few topics to think about. First, there's the advertising injury under general liability. Then we look into cyber and tech E&O for privacy and data security, which I think will continually be under pressure from AI. And finally, an often overlooked sector, I think will be bodily injury under product liability. And Doug, as you and I have discussed, I just don't think this is on the radar of most insurers. And my concern is that they will all come to the realization, or more to the point, their reinsurers will come to the realization and then just start putting exclusions in without a lot of forewarning. Again, for anyone in the industry, I think it's important to remember the $32 billion of private capital to fund biotechs; couple that with a resurgent public equity market and, as you noted, a spade of new product approvals, which we believe will just further loosen the gates of both private and public funding. Doug, thanks for joining this edition of Life Sciences Under the Microscope.