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.
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.
One of the most common questions I get asked comes from Pre-Clinical Life Science companies is why do I need insurance?
I agree that pre-clinical life science companies have about as little risk as a company can have. Why they need insurance really comes down to contracts, investors and statutory regulations.
If the company enters into a lease the lessor will typically require general liability insurance. This insurance is very inexpensive and it usually makes sense to bundle this with property insurance as any additional cost would be negligible. The property insurance can include research equipment, scientific animals, office furniture, and R&D Business Income among other things. A typical policy can start under $500 depending on the total value of your property.
If you have employees you will be required by the state you are domiciled in to have workers compensation insurance. This will cover your employees if they get injured at work for medical costs and lost wages. Again, this should be low cost and is based on your total payroll, benefits should not be included when calculating wages.
Product Liability insurance for pre-clinical companies is sometimes required if the technology is being transferred from a third party such as a university. It drives me nuts when third parties require a pre-clinical company to put this into place before a trial will commence because there is .001% exposure and it is expensive for my clients compared to the other coverages. If you cannot negotiate this out of the contract it is very important that your broker knows which carriers have flexibility on their minimum premiums for scenarios like this. If your broker tells you that the minimum premium is $4,000 they are mistaken.
D&O insurance, this would be needed if you have raised capital and have a board of directors. This coverage protects the personal assets of directors and officers of the company and outside board members typically require you have this in place.
These are the coverages that are usually required even when you are pre-clinical. If you are close to signing a lease or transferring tech I would recommend you have an insurance broker to review the insurance requirements in the contracts and ask them to pencil out what the economics would look like. Your broker should also be able to tell you if certain requirements are excessive to what the industry norms are so that you can try and negotiate them down.
Feel free to reach out to me here if you have questions or comments.
As always, I appreciate any feedback and if you have topics you would like me to talk about please send me an email. You can email me at firstname.lastname@example.org or email@example.com.
Every time I read a headline like the one I saw yesterday on the FiercePharma website, “FDA bans products from another Chineses API maker,” I cringe. This is not the first time I have written about these type losses and it won’t be the last as I believe supply chain risk is at or near very top of the risks life science companies face. These articles remind me how vulnerable life science companies are to supply chain risk. If you are sole sourced company and your API was coming from this plant or any other plant that was shut down by the FDA or was damaged in a fire it would cripple your business. Most likely your stock price would be crushed, people would be fired, and confidence in your company would be destroyed among other things.
There is no good that can come out of a situation like this, but there are ways to salvage this situation. First, a company can be dual-sourced. This is typically the best solution but it takes time and money so it is not always feasible. The second solution, admittedly not as good as dual sourcing, would be to insure the risk.
One way to insure it is through Contingent or Dependent Business Income (CBI). This coverage can be found in your property policy and should not be confused with Business Income, the intent of both are similar but they are not the same. I have seen new clients believe the terms are interchangeable or that their business income covers financial losses as a result of claim at a third party location but that is not the case. CBI covers financial loss you incur because of a covered peril (think fire, wind, lightning, etc.) at a third party location. Insurance companies are cautious to provide this coverage because these locations are not controlled by the insured. Many insurers require these third party locations to be listed on the policy. That can cause problems depending on where these sites are located. For instance, locations outside the US might not be covered or certain perils such as wind could be excluded if your manufacturer is in Florida to name just a few red flags. If structured properly, and I emphasize if, this can be a viable solution for physical losses to third party manufacturers and suppliers.
The issue described in the article was not a disruption due to a physical loss but was instead a regulatory issue. Non-Damage Business Income (NDBI) basically provides coverage when a manufacturer suffers either a regulatory or voluntary shutdown. If the FDA shuts down your main manufacturer or supplier and you suffer a business income loss you could find coverage under an NDBI policy. These are typically stand-alone policies and are not cheap, but when you have one product and are sole-sourced it makes sense to explore. I often see CBI not covered adequately but that pales into comparison in to how rarely I see regulatory business income covered at all.
Business Income is an issue I harp on over and over again because it is such a big risk for life science companies. Unlike a product liability claim that can take years to litigate, a business income loss will impact cash flow almost immediately and as we all know, cash it the life blood of any company. Through the use of risk management and properly structuring your insurance program we can greatly reduce this risk.
You may have recently seen that Spineology lost a patent infringement case against Wright Medical. Spineology sued Wright Medical in 2015 for infringing on their patent and the case went back and forth on appeals, finally ending in July of 2018 with Spineology on the losing end. A high-level synopsis can be found here.
I bring this to your attention because patents are the life-blood of many companies in the life science industry and yet many companies are vulnerable to either having their patent infringed upon or being forced to defend their patent. The cost for either is never cheap. The case went on for three years and one can only imagine how much money was spent in legal fees. What so few companies know is that there is actually an insurance policy that can insure your patents, it can be set up to both defend and enforce your patents.
Why is patent coverage important and what are the benefits? Here are a few reasons:
- If you are and R&D company with no revenue you may not have the financial strength to protect your patent.
- There are plenty of patent trolls that have bought low-quality patents and use these patents as a basis for demanding royalty payments from you and a patent policy can help defend against these trolls.
- If you are trying to raise money you can inform investors that you not only have a patent but it is insured which will give them some added comfort.
There are many other reasons to look at patent insurance, but one reason not to dismiss it is because you have hired great IP attorneys. Having quality IP attorneys is important and recommended, in fact it could help lower the cost of IP insurance, but it can’t help protect you against a third party infringing upon your patent, having to defend your patent, and patent trolls.
What many clients are surprised to learn is how easy it is to determine the economics of the coverage and whether it makes sense to move forward and put it into place. Many times the initial application can be completed in 15-30 minutes which allows us to get pricing indications. The worst case is the pricing does not make sense but at least you can report to your board of directors that you did the due diligence on how to protect your patent. The best case scenario is that you have taken the right steps to protect the patent and the terms and pricing of the insurance reflect that, resulting in an easy decision to put coverage in place.
Cornerstone Research always puts out great data and this report on Securities Class Action Filings for the first half of 2018 is no exception. I recommend you check out the full report which you can find here.
These visuals really speak for themselves but the big takeaway is that if you are publicly traded company the chances of being subject to a Securities Filing are rising. In 2017, 8.4% of exchange listed companies were subject to a filing and in 2018 it is projected to be 8.5%.
If you are a member of the S&P 500 the chances of a filing are even higher at 9.6%.
Breaking this down even further, the industry you are in can change the odds dramatically as the chart below demonstrates.
The clients I work with are in the Life Science and Healthcare space and this is how filings breakdown in that group.
I believe companies need to believe a Securities Class Action filing is inevitable and should prepare accordingly. Of course, one way to prepare is buying having a broad Directors & Officers Liability in place, but risk prevention is even more important.
Once again I recommend you check out the full report from Cornerstone Research which you can find here.