Growth in biotechnology and other life sciences industries is spurring initial public offerings and merger and acquisition activity that expands companies' risk exposure, insurance executives said.

Their views were aired last week when Willis North America, a unit of London-headquartered insurance brokerage firm Willis Group Holdings, sponsored a Web seminar examining the insurance needs such corporations should consider to protect their growing assets.

Mary Beth Borgwing, senior vice president, life sciences practice leader in New York for Willis North America, noted that the life sciences industry, which covers a range of disciplines involving pharmaceuticals, biomedical and biotechnology applications, is experiencing tremendous growth at this time. She cited an Ernst & Young report that feels the segment will be a $100 billion industry before the end of the decade.

What this means is a lot of financial maneuvering to take advantage of developments either through IPOs or M&A activity. For individual companies, pointed out Albert Hwang, principal, health care investment banking for Bank of America, this means that when they make developments that show efficacy they then need to find additional capital to continue the development.

However, these promising developments also place companies in a situation where they become open to takeover by larger companies, he pointed out. Either way, these financial transactions help fuel the development for life science companies that otherwise would shut down due to lack of capital.

The IPO and M&A climate creates risk exposures the companies need to guard against, noted Adam Cantor, senior vice president, executive risk practice for Willis.

He said the primary driver behind the lawsuits life science companies face come from shareholder advocacy issues.

According to Mr. Cantor, the life sciences industry accounted for between 10- and 17 percent of total securities litigation in 2003 and 2004, but represented only 2 percent of all public companies. Insurance, he stressed, is an issue these companies cannot neglect, adding, “You don't want to buy someone else's claims. You don't need that.”

In an M&A situation, the primary defense is close examination of the targeted company.

“The key to proper handling is due diligence,” he said. “The more you look at it, the better you are served.”

Another consideration these businesses need to make is the variety of different insurance available to cover a multitude of risks. These covers could include reps and warranty coverage and directors and officers, as well as others.

He advised that businessowners consider purchasing higher limits of D&O coverage while they are still in private hands in advance of a future IPO because favorable higher limits can be difficult to obtain once that decision is made.

In M&A opportunities these companies might also consider change in control provisions in their insurance transfers to cover any long-tail exposures. He said that businesses should purchase coverage protecting them for up to six years to meet the statute of limitations.

When it comes to filing claims, care needs to be exercised in the language used and information supplied. He advised that clients need to work with their broker to ensure they are not placed in a position where companies can dismiss the claim.

“Keep it in mind,” he said,” insurance is really critical to doing your M&A deals.”

Special Reports /

Life Science Industry Needs Insurance Security

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