Concept or Concrete? Are you buying insurance based off of a concept that your broker is proposing or off of facts? If you have perfect coverage with no gaps that is fine concept is fine, but otherwise you should be thinking about buying off of fact.
What do I mean by fact? As a broker, I review prospects policies and report to them what isn’t covered that easily and inexpensively could be covered. I am not talking about small issues, but issues that could dramatically impact a company’s balance sheet, six and seven figure coverage gaps. You probably believe you don’t have these coverage gaps and you wouldn’t be alone. I would say 60-70% of prospects we talk to believe they have no coverage issues or minor issues, but for 95% of the companies we have performed a coverage audit for we found at least one or more 6 figure coverage gaps.
Most brokers will come in and say we want to do this and that for you. They won’t actually do what no one, not even brokers, want to do and that is read your policies and tell you what you have and what you don’t have. Guess what? That is what we do and that is why we can sell on fact. We tell you what is good, bad and ugly and then how we can fix it.
One last nugget from my trip to Boston:
I hope everyone has a great weekend!
I was pleasantly surprised by how much l learned at the McDermott Will & Emery Life Sciences Deal-making symposium last week. I don’t say that by inferring I know a lot, in quite the opposite, but what I mean is that a lot of conferences and events are the same content but with different names for each panel. This conference was different, I took more notes than I can ever remember and walked away thinking I better understand the challenges that are faced in life science deal making. I also realized what a small part insurance is but if used properly can help get a deal across the finish line.
The event was a mix of attorneys, investors and of course companies in the life science space. There were also a few service providers (my company, Alliant, being one of them) that helped underwrite the event as you would expect. Investors included angel investors, family offices, corporate venture, private equity and venture capital, so a little bit of everything.
So what were the takeaways? Here are some of the highlights:
- Vertical Integration can be a challenge as there are anti-trust issues
- Legal bar for getting deals done is getting higher. Due Diligence quality is going up but the quantity is going down.
- Reps & Warranties coverage is now part of almost every deal and for the most part makes getting deals done easier. However, it does bring another party (insurance company) into the equation which can add some challenges (Shameless plug – I can help place this coverage for you)
- The recent Akorn/Fresenius decision was surprising and could have implications for other deals down the road. This case allowed Fresenius to exit the deal because of a Material Adverse Change, believed to be the first time a court has allowed this. You can read about it here.
- Having strong patents is very important and can be instrumental in getting a deal done. Alliant spoke on a panel and discussed patent insurance which for most of the audience was something they never heard of or even knew existed (another shameless plug – I can also help you understand this coverage and place it on your behalf).
- Non-dilutive funding is out there, but don’t become a slave to it.
- If you are a company raising money you should you know the answers to these questions – How much? What is the money for? What is the valuation of the company? What is the inflection point that you are hoping to reach?
A learned a bunch more, but wanted to share some of the hig
hlights, at least for me, about what I learned. A big thanks to McDermott for hosting the event and letting us at Alliant partake.
Last week I had the pleasure of spending a few days in Boston attending two separate life science events, Device Talks and McDermott Will & Emery’s Life Sciences Dealmaking Symposium. Although I love spending time in Boston, which is booming, I wish these events had been another week as I was not at home for my wife’s birthday (FaceTime is nice but it doesn’t replace the real thing). Fortunately, I have a super supportive wife and I tried making up for it, but one more time…happy birthday! Today, I want to focus on the Device Talks event and what I learned.
Because the two events overlapped I was only able to attend Device Talks on Monday and Tuesday. As you probably guessed, the event was focused on medical device companies. There were a wide range of companies there, from the largest device companies to early stage companies and everything in between, along with investors and service providers. There were three concurrent tracks – Ecosystem, Technology and Investment – that you could pick and choose from depending on what interested you. For Tuesday I attended only the Investment sessions and was very pleased with the content.
I attended two of the sessions, the first focused on the use of Strategic investors and the second focused on the risks facing companies as the mature. It seems to me that most of these events now have a panel on strategic investors or corporate venture and rightfully so as this is a large source of capital. Some takeaways were that strategics have a time horizon of 24-36 months when they make an investment. For the majority of products they want the product to be in the market and producing revenue within that time frame or they will not be very interested unless your product is a completely new product. They essentially were saying that they want the product to be as derisked as possible. They are also looking to fill holes within their portfolio. They may do a deal simply to fill in a gap that their competitors can offer and might be less about the economics of the deal. If they can prevent their competitor from getting shelf space and getting a foot in their door for their other products then smaller deals to prevent this scenario could make sense for them.
The second session was about thinking about the risks emerging companies might face and how to overcome those when seeking investment or acquisition. The panel was a mix of investors and attorneys. This panel started out discussing that M&A deal activity is down as far as dollars are concerned compared to 2017 but if you took out the mega deals in 2017 the average deal size is actually up. Similar to Corporate VC’s, investors are looking for companies to be more accretive to revenue faster and this is especially true when compared to biotech. Interesting tidbit, biotech companies are sitting on an average of two years’ worth of cash. The panel had the following suggestions to help derisk your company/product:
- Reimbursement is and will continue to be very important. Investors want to know companies have a track for reimbursement and it was suggested that you bring in reimbursement specialists early because it can be a stumbling block for getting a deal done.
- Along the same lines, bring in a regulatory specialist early.
- When raising money, make sure your goals are aligned with your investors and they are a good fit for what you want to accomplish, there is a lot of money out there so don’t necessarily take the first check that you are offered.
- Be honest and transparent when engaging with investors or a company that might acquire you. The starting price is usually the top number you can get and if skeletons are found in the closet it could derail the whole deal or reduce the price. If you lay out issues from the get go before a number is agreed upon you will be in a much better position long term.
- Listen, keep your ears open. The industry is constantly innovating and you want to be able to adapt. Don’t be afraid to take advice (I think this could be applied to most industries).
The second panel was excellent and unique in the makeup of the panelists, more attorneys than you would expect but all with diverse backgrounds and specialties. Although I only attended half of the event, I learned a lot and would recommend if you are an emerging company that you attend this in the future. There is a lot to learn and a good mix of companies that would be worth meeting.
Today’s question is, “Why do I need to value my Building or Contents at replacement cost?”
We ask our clients to compile a fair amount of information and one of the pieces of information we ask for are property values. There are three common responses we get when the replacement cost is not provided:
- Appraised Value or Market Value, this is occurs more frequently with buildings, not so much contents.
- Accounting value – The original value minus the amount the client has depreciated to date.
- The value of the property they care about. Certain buildings or furniture they don’t care about and have no interest in insuring they leave it or say it is worthless.
We should really be insuring for the full replacement cost of everything or you could be penalized. There are exceptions to this rule such as a large property schedule that is geographically spread or you have a product that has a large delta between replacement cost and selling price. Why should we value at full replacement cost?
- You could have a coinsurance clause which penalizes you for not insuring to value. The insurance company will essentially penalize you proportionally to the amount you under-insured.
- Even though your building might be old, the insurance company will pay to replace it, they don’t take into account the fact that your roof was 20 years old so you shouldn’t either.
- Insurance companies base their premiums on the probable maximum loss. Just like you, they don’t believe most losses will be a complete loss but partial and they base their premium on that probable maximum loss. That means the higher values you get the lower rate your rate should be.
Coinsurance should always be deleted from your policy, but I see enough policies and find plenty of prospects still have the coinsurance clause in their policy that I wouldn’t be surprised if you had it in your policy.
The valuation that your insurance company is using should be replacement cost but we do see other ways to do it, sometimes it makes sense but sometimes it doesn’t. For instance, actual cash value (replacement cost minus depreciation), agreed value, and selling price (captures the difference between selling price and replacement cost, important when the delta is significant) are all examples of different ways that the insurance company could value your property and it can even be a mix.
The important thing is that you provide the values that match how the insurance company values your property if you suffer a loss. The valuation method they use will be in the policy.
Are we in a biotech IPO bubble? Two things have clearly happened over the past few years within this sector. First, pre-money valuation has gone way up, roughly a 130% increase from the 2012-14 period which was a comparably active period to today. Secondly, a larger percentage of companies are Phase II or earlier. That means they are further away from generating revenue and in fact may never even have a product that is approved by the FDA. For an even more in-depth take a look at the particulars of the current IPO market check out this recent article in Forbes.
The similarities are easy to draw between the period we have now and the dot.com bubble. Let’s take a look:
- Both periods had companies going public with no revenue. I understand this is how biotech works, it is very capital intensive to move a drug forward, but a parallel could still be drawn since the biotech companies going public now are further away from the point of generating revenue.
- A lot of similar companies are going public based on some common theme. In 2000 it was e-commerce sites, think pets.com or any other product.com you can think of. Today, many of the biotech companies are oncology companies. Can there be room for all of them?
- People are clamoring to get invest in these companies. Look at the size of the rounds biotechs are raising before going public and then look at the day one pricing of the dot-com companies. I would argue that VC money was not nearly as plentiful in the late 90’s so a connection between the two can be made.
There are definitely differences as well. First, a biotech is a much different type of company and the founders understand it is a long and difficult process with the chance of becoming rich not necessarily their driving force. I think it could be said that many dot-com companies were founded on the hopes of getting rich. Biotech companies objective is to help people by curing a disease or at least making it more tolerable. Finally, we are not seeing the market caps of established companies continue to rise at the pace we did of the dot-com companies like we did in 2000 where you could throw a dart and any tech company you happened to hit would make you money.
I could go on about the similarities and differences but I do believe this is a bubble. I hope it turns out I am wrong and this is the new normal. Biotech companies need money to continue to develop their product and the public market is a great way to raise money. If the public market closes it makes it harder to continue moving a product forward and also can make it tougher to raise money in the private market. Investors in the private market like knowing there is a way to exit and an IPO can be one of those ways outside of an acquisition.
I would love to hear what other people think. Is this a bubble? Why or why not? Are we simply seeing the glut of IPOs because investors in the private companies see a way to monetize their earlier investments? Let me know your thoughts.
There is a lot of news recently that relates to D&O insurance recently and I thought I would do a quick run-down for you.
First we have Tesla and Elon Musk. If you haven’t seen or heard, Musk and Tesla were each fined $20 million for Musk’s tweet saying they were going private and that funding was secured. It turns out that neither of this statements were accurate. In addition, Musk was forced to relinquish his seat as chairman of Tesla. This penalty made clear that comments made on social media will have repercussions for companies. I doubt this is the end of this saga as there will most likely be shareholder litigation.
Will this cause D&O underwriters to greater examine the Twitter, Facebook and Instagram accounts of public company leaders? Typically, a D&O underwriter is most concerned about the finances of a company and the direction they are going in but could this change over time? We will see have to wait and see.
In other news from California, the legislator passed a law requiring public companies to have at least 1 woman on their board by the end of 2019. By 2021 companies with at least 5 board members must have two women and boards with six or more members must have at least three women on their board. Right now 25% of public companies based in California have no women on their board. Companies that fail to meet these requirements will face penalties. You can learn more about this here.
Finally, in probably the least surprising news, the insurance companies that were affiliated with Harvey Weinstein have declined coverage and have argued they do not need pay for his defense. A number of carriers have declined coverage so far with Travelers and Chubb being the most noteworthy. There are a number of policy provisions cited in their reasoning to decline coverage, including the sexual abuse & molestation exclusion and that Mr. Weinstein’s actions were outside his duties as a director and/or officer.
This week’s common question is – “Why do I need cyber insurance if I don’t sell anything and therefore don’t take personal information from clients?”
In the past this was asked by pretty much every company that did not sell directly to consumers but the tide is definitely shifting where almost every company needs some cyber coverage. Cyber coverage is unique in that covers losses you incur (first party) and losses to third parties do to your negligence. Some of the coverages include:
- Notification Costs (1st party)
- Extra Expense and Business Income (1st party)
- Cyber Extortion Costs (1st party)
- Forensic Costs (1st party)
- Settlements and Damages related to a breach (3rd party)
- PCI fines (3rd party)
- Legal Defense (3rd party)
This is just sample of what a cyber policy covers and is not inclusive. Some claims examples:
- If you have employee information you have what is referred to as personal identifiable information and if that is compromised you would need to notify those possibly impacted and pay for credit monitoring.
- A malicious party could use you as a gateway into hacking into a larger organization, much like what happened with the Target breach. Here the hackers got into Target’s system through the HVAC contractor.
- If you have trade secrets a hacker could steal those secrets and then extort you. Your supply chain could be disrupted causing a business income loss much like we saw with Merck last year.
These are a few examples of claims that could happen to any company regardless if they have a commercial product or not. Cyber insurance is relatively inexpensive and the risk is there for everyone. If you are not at least getting quotes I strongly suggest you do as every day the world becomes more dependent on IT.