Life Science M&As Create New Risks

Caroline Clouser , Tristan Gabriel


April 1, 2015

life science m&a

Over the past year, the pace of mergers and acquisitions has quickened in the life sciences industry, including deals involving some of the world’s largest pharmaceutical companies. Healthcare mergers and acquisitions set new records for the number of deals and spending in both the fourth quarter of 2014 and for the full year, Health Care M&A News reported. For all of 2014, at least 1,299 deals were announced, edging out the previous record of 1,287 in 1997. Spending rose to $387.4 billion, well above the prior record of $268.5 billion in 2006. In addition to traditional M&A activity, some of the transactions have involved “inversions,” in which a U.S. company re-domiciles in another country.

As companies acquire new businesses or re-domicile, they should be mindful not to overlook the risks that these changes bring, whether from local regulations necessitating changes to their insurance programs or heightened political risks in less stable regions. At the same time, companies should recognize that existing exposures such as product liability will continue to pose significant challenges regardless of their corporate address.

International Insurance Complications

Whatever the motivation for the increase in international transactions, changes in corporate structure, including re-domiciling, may significantly complicate risk management and risk financing. The new headquarters country may have very different insurance regulations and tax requirements. Companies that continue to rely only on traditional insurance policies purchased and issued in the United States may find that their U.S.-based insurer cannot legally do business in the company’s new home country, which could impact claims handling and payment. Risk managers should also be aware that there may be tax consequences related to insurance premiums allocated internally throughout the organization. These and other compliance questions could lead to scrutiny by an increasingly sophisticated and well-informed network of insurance regulators around the world.

As U.S. companies move to become foreign-based multinationals, they should recognize that their insurance programs might require significant restructuring. Risk managers will want to ensure that their new insurance programs are compliant with the laws and regulations of the new domicile. Also, in an era of increasing global tensions, political risks should not be overlooked, as shifting political boundaries may give rise to complications in areas such as regulations and insurance coverage for clinical trials and product liability.

Product Liability Risk

In addition to increased complexities in developing insurance programs following international corporate restructuring, companies need to be aware of the heightened risk of litigation surrounding mergers and acquisitions in general. Class-action suits may challenge both the acquiring and the acquired organizations on the soundness of the transaction. Particularly in the life sciences arena, mergers can bring added complications as products that are in the development pipeline may not deliver on their initial promise or might fail to obtain regulatory approval. Litigation could also stem from safety issues that arise after a product is developed.

The risks may be heightened for more mature corporations that are paying significant sums of money to acquire development-stage companies with no track record. Because such suits often give rise to claims under directors and officers policies, risk managers should work with their brokers to determine if there is adequate insurance coverage for the exposures associated with these types of transactions.

Along with M&A, product liability remains a frequent source of litigation risk for life science companies, and defense costs continue to rise, most notably, for companies named in class actions. The global nature of the industry may heighten the exposures for life sciences companies as they manufacture and market products in different countries due to differing laws and regulations. Product liability claims generally focus on design defects, manufacturing defects and failure to warn about potential side effects. Those risks will most likely increase as more pharmaceutical companies take a direct approach to consumer marketing as an alternative to traditional marketing to medical professionals.

In addressing these risks, multinational pharmaceutical companies need to carefully consider whether their manufacturing procedures, or those of contract manufacturers meet Current Good Manufacturing Practice regulations enforced by the U.S. Food and Drug Administration and similar regulations in all countries where they market drugs. Further, companies should pay close attention to the legal costs associated with defending lawsuits.

Managing Global Risks

In a worldwide market, life sciences companies should consider a global approach to risk management. For companies that operate in multiple countries, it is crucial that their insurance coverage complies with the regulations of each country, particularly those that require admitted insurance. Companies may want to consider a global insurance program combined with locally admitted policies as necessary.

Claims capabilities are another key component of a comprehensive insurance program. Risk managers need to look for solutions that allow them to track claims handling and payments on a worldwide basis. Having immediate access to all claims and payment information should limit surprises and regulatory issues if local insurance or tax officials inquire about claim payments or premium accounting. Risk managers and their brokers must ensure that their global program and local policies are structured appropriately to mitigate these risks.

As more life sciences companies merge with foreign companies or go through inversions, they need to make sure their coverage and claims handling needs can be met. For this reason, careful consideration should be given to whether the insurer has a true global footprint, experience in the countries in which they do business and the claim capabilities to achieve optimal results. As more life science companies seek to take advantage of international opportunities, they need to make sure their risk management strategy keeps pace with new and ever-changing global risks.
Caroline Clouser is executive vice president at ACE Medical Risk and oversees the underwriting, ­marketing and operations of ACE USA’s medical risk business, with added responsibility for the life ­sciences division.
Tristan Gabriel is senior vice president of ACE USA and is responsible for the management of the operations of the ACE life sciences division.