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According to professional liability coverage experts, risks ranging from stock gyrations to Food and Drug Administration testing protocol, to new exposure brought on by generic drugs have put buyers in a tough spot. Buyers are being asked to insure something that's bigger than they can buy insurance for.

Probably not.

Warrior noted that it was not uncommon for the stock of publicly traded drug makers to swing by $5 billion or $10 billion, as the company announced the latest developments of a product in the latter stages of clinical trials.

But those kinds of sudden changes, typically changes of more than 15 percent in the market capitalization of big drug companies, will attract the attention of the plaintiff's bar, noted Paul Lavelle, principal of LVL Claims Services.

Adds John Connolly, executive vice president of Willis Executive Risks, "As long as there's volatility associated with life sciences issues there will be D&O concerns."

The legal and insurance experts also said that new trends are expected to test the viability of traditional D&O policies as they pertain to drug makers.

With more generic drugs coming to market and challenging the lucrative brand-name blockbusters, for example, it's important to be vigilant against managers who can "massage the numbers" to make it look as if the generic versions are still capable of providing a consistent income stream for the drug maker, said Warrior.

Drug makers face yet new exposures in the manufacture of "long tail" drugs, medicines which are designed to be taken over many years as life spans get longer. The more products a company makes and markets, the more there is an "opportunity for things to go wrong," said Warrior.

Though the long-term outlook for big drug makers remains difficult for underwriters charged with drafting professional liability coverage contracts, there is good news as well, the experts said.

The average settlement in the life sciences sector is not much different than in other sectors, said Lavelle, and the rate of dismissal for securities class actions against drug makers is up in Massachusetts, New Jersey and California, where much of the life sciences industry makes its home.

And investigations into some of the practices of the pharmaceutical industry on the part of states attorneys general have yet to translate into more claims, said Lavelle.

But he cautioned that drug companies looking to mitigate the risk of developing drugs on their own by striking partnerships with bigger companies with more established sales networks or by entering into joint ventures of one kind or another could be in for a nasty surprise.

While such deals may help spread the risk and defray the development costs, it's a different story on the claims side. "Joint ventures are constantly a problem from a claims perspective," he said.

April 15, 2008

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