The Life Science Innovator
A WBBA Publication
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You are invited to join over 50 of your HR colleagues from WBBA member companies, as we network, share ideas and exchange information about the challenges and issues we encounter while working in the biotechnology and biomedical fields. The Human Resources Group offers a variety of ways to connect with your colleagues. This is an excellent way to learn up-to-date information from professionals within our industry. You do not need to have an HR title in order to attend these meetings; you simply need to perform the human resources function for your company.
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The goal of the WBBA Clean Science Group is to have a variety of representatives of the region's life science community dialoguing about solutions to minimize the impact of our scientific pursuits on the region. We also want to educate each other on the systems that are currently available to reduce, reuse, and recycle, and the associated costs of such systems. Biotech is an industry reliant on sterile, one-use products to ensure high quality research. This process generates a lot of waste. Is biotech doing everything it can to reduce waste, and increase recycling? Are we sacrificing the health of our planet for the health of people? Is there a way to create science that is clean and healthy for both the planet and for the people we are trying to heal? Are you interested in dialoguing about creating clean science? If so, then join the WBBA Clean Science Group on LinkedIn. We would like to have participation from various groups in the lab including facilities, operations, and lab managers. Together, we can help heal people, progress science and have a healthy place to live.
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DEPENDENCY AND SUPPLY CHAIN RISK
Today’s life science companies have complex supply chains. We have learned from the losses resulting from last year’s flooding in Thailand that some manufacturers’ supply chains are so complicated that many of the intricacies are not fully understood or appreciated until after an interruption has occurred. Many drug and device companies have elected to operate as “virtual” organizations, relying on outside business relationships to supply materials and services. For example, a drug company may source its active pharmaceutical ingredient (API) from a supplier that ships directly to a contract manufacturer who then ships the finished product to a distributor. It is imperative that life science companies spend some time thinking about supply chain risk. The key question is, “What would happen to my business if one of my key suppliers or distributors shuts down?”
Hypo Pharmaceuticals is a publically traded pharmaceutical company that has had regulatory approval for its rheumatoid arthritis drug for three years. As expected, the drug is selling well and represents 50% of Hypo’s annual revenues. The stock is performing well as a result of brisk sales and year-over-year double digit growth. Hypo has a single source contract for the drug’s API supplied by a company located in a neighboring state. Hypo made the decision not to scale up its own Current Good Manufacturing Practices (cGMP) manufacturing facility so it also relies on a contract manufacturer (CMO) to produce the final product. Hypo has not arranged a secondary source for either the API supplier or the CMO because the cost to certify a second source was too expensive.
One day the CEO of Hypo receives the dreaded call: the API supplier’s main plant has burned to the ground and will not be able to supply the API for Hypo’s lead product. They estimate that it will take a year to rebuild their plant and three more months to get the new plant recertified as cGMP. Hypo stands to lose significant profit because it does not have an inventory of API and it will take at least six months to find and certify another supplier at a cost of about $500,000. Hypo’s CEO telephones his finance department to ask, “Do we have insurance to cover this loss of revenue? And what happens if our shareholders suffer a loss in stock value and sue us because we can’t sustain our sales growth?”
Business Interruption insurance covers loss of business income resulting from a covered loss at the insured’s location. No protection is provided to indemnify Hypo for loss of business income resulting from a loss at an unrelated business entity’s property unless the policy has been specifically extended and endorsed to include “Contingent Time Element” coverage, also known as “Dependent Property” coverage. Hypo’s CEO is told that their property insurance had not been endorsed to include loss at a “dependent property”, so there is no coverage for this loss of business income or any additional/extra expenses incurred in attempting to mitigate the impact of the fire on Hypo’s operations.
To make matters worse, the CEO learns that Hypo’s directors and officers liability policy excludes losses caused by Property Damage and has a specific “failure to maintain insurance” exclusion. Hypo will have no insurance to pay the cost to defend their anticipated shareholder suit.
Hypo could have acquired insurance coverage that would mitigate both of these financial losses.
While traditional Business Income and Extra Expense coverage provides loss of income due to a loss at the insured’s property, the form can be endorsed to include loss of business income sustained due to the suspension of operations during the period of restoration of a supplier. “Suspension” is a defined term in most policies and means “the decrease or cessation of your business activities as a result of the physical damage caused by an insured peril to insured property.”
So even though Hypo’s sales from its other products continue, they would have coverage for the loss of business income from the product whose sales ceased.
Additionally, if Hypo decides to seek a replacement API provider, the expense to certify the new supplier could be covered as an “extra expense” or an “expense to reduce loss” because it represents a cost that mitigates the loss. Life science companies will also want to modify the Dependent Property endorsement so that the definition of “period of restoration” includes the time required for government authorities to certify the rebuilt plant as cGMP. Without this modification, indemnity could cease when the dependent property “could be repaired, rebuilt or replaced with reasonable speed and similar quality.”
Property insurance underwriters will typically want to provide a sub-limit for dependent properties because they cannot fully underwrite the risk of an unrelated location. This sub-limit is often not adequate to cover the risk exposure. If Hypo wants to purchase appropriate limits, it may be required to provide the same underwriting information (to the extent it is available) for the unrelated entity that it does for its own property and to schedule the dependent property as a named location on its own property policy.
Hypo should have made two changes to its directors and officers liability policy. First, “the failure to maintain insurance” exclusion should have been deleted from the policy. This request is commonly granted by D&O underwriters. Second, the Property Damage exclusion should be modified to grant a carve-back for suits resulting from a stock drop as a result of a property damage claim. The actual property damage claim would be excluded from D&O coverage but the resulting shareholder suit would be a covered cause of loss.
Each of these losses could amount to millions of dollars and impair a life science company’s ability to grow the company and continue valuable research and development of lifesaving drugs. Implementing the proposed solutions provides the balance sheet protection that allows life science companies to continue operations and raise the necessary capital to continue their important work.
If you would like additional information about this topic or others in the life sciences area, contact:
Willis of Seattle
Willis serves over 450 life sciences organizations in North America. Our clients range in size from early stage start-up companies to global pharmaceutical giants.
Additionally, Willis has resources in 162 countries to provide local services and support for those companies with operations overseas. Our experience includes all industry sub-sectors including: Therapeutic Research & Development, Medical Device Companies, Contract Research Organizations, Contract Manufacturers, Medical Suppliers, Generic Drug Manufacturers, and Nutraceutical Companies.
The observations, comments and suggestions made in this report are advisory and not intended nor should they be taken as legal advice. Please contact your own legal adviser for an analysis of your specific facts and circumstances.
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