The drug industry’s megalithic multinationals known by name the world over – Pfizer, Bayer, Merck, etc – merge, divest and acquire in a continual churn but have generally rationalised and consolidated in recent years.
Production is increasingly outsourced and even their core research and development (R&D) businesses now collaborate closely with a plethora of government and independent research institutes.
These corporate giants tend to have substantial self-insured retentions, says Travis McIntosh, Life Sciences Specialist with Chubb Commercial Insurance, but the SMEs they contract in Australia for fulfilment of research, testing, manufacture and distribution provide a crowded market for insurance brokers who build up the right expertise.
Insurance for the medicines and biotech sector is growing increasingly complex and dynamic, and brokers need to consider every conceivable risk — to companies, consumers and even lab animals.
Contract suppliers and manufacturers comprise a dynamic and highly competitive local sector, where starting materials and chemical ingredients are part of a global supply chain that result in finished product.
Importers of pharmaceutical products are deemed in Australia to be manufacturers, and Product Liability cover is most relevant for them. Brokers should consider exclusions, warns Travis McIntosh: “Specialist carriers will by default exclude a range of products with known issues but a discussion with underwriters to ascertain controls can still lead to cover being granted.
Manufacturers with production facilities are obligated to comply with Good Manufacturing Practice (GMP – a code of standard operating procedures established to assure quality and safetyof pharmaceutical ingredients, medical devices and diagnostics, and enforced by legislation) as well as specifications and protocols stipulated by client companies.
“If the insured has a contract with a multinational, the broker needs to be across all the contract conditions,” says Stephen Hughes, Manager of Professional Services at Strathearn Insurance Brokers.
“There might be clauses about complying with the governing law of a particular US state where the client is based, and where they’re exporting to."
India’s rising pharmaceutical industry – specialising in low-cost production of offpatent drugs and active pharmaceutical ingredients – is taking a greater share of the contract manufacturing market.
This has resulted in some local producers moving to producing their own finished products.
In June 2010, Cochlear America agreed to pay a fine of $880,000 as part of a settlement with the US Department of Justice over allegations of kickbacks to physicians and providers.
“This involves significantly more risk than manufacturing for a pharmaceutical company on a contract basis, particularly where the finished product is exported to very litigious markets like the US,” Stephen Hughes says.
In June 2010, for instance, Cochlear America agreed to pay a fi ne of $880,000 as part of a settlement with the US Department of Justice over allegations of kickbacks to physicians and providers.
In September, Cochlear announced they were voluntarily recalling all Nucleus Cochlear Implant 500 devices after reports of the devices shutting down. “With product recalls, product liabilityinsurance is not sufficient on its own,” says Huges. “You need a recall policy and that’s expensive in itself.”
The R&D process involves preclinical – molecular/cellular experiments in lab test tubes and tests on animals – and clinical research in humans, which can take years.
“There is usually a 10-year lead time before a drug gets FDA approval but there are still things that can present risk post market,” says Stephen Hughes. “Risk at this stage is long-tail in nature – cover may be required for events that might have happened 10 years ago.”
Exposures tend to increase as the product matures in the R&D journey, says Travis McIntosh. “During cellular research in HIV medicine, storing HIV samples carries a risk around the virus escaping and there are high levels of physical containment for which the research unit has to be accredited.”
Contamination of experimental cell lines, whether from improper storage, other microorganisms or radiation, can also ruin years of research, so property policies should also consider this risk.
Cover may be required for events that happened 10 years ago.
This applies to scientific animals, adds McIntosh: “The company should have the animals valued – both for their cost of replacement and the R&D invested – and built into the property program, possibly with a sublimit cover.”
The insured should also work with fire brigades to ensure they have a fire plan due to biohazard areas. Extensive planning of systems to monitor temperature-sensitive conditions is necessary and must be insured, adds McIntosh.
Coverage for BI is also wise: “An R&D company isn’t earning income for a long time so it is reliant on venture-capital funds or the share market. In Australia the latter predominates, yet research companies have to list and continually disclose early compared to the US, and investors don’t always appreciate the long delay in return and can shift their finance elsewhere.”
Research results also can spell peril for listed companies. Announcing poor or unexpected findings can cause loss of share value; sometimes loan repayments can’t be made – potentially triggering D&O liability.
“Pharma is one area where one little problem can lead to a host of others and trigger several covers at once,” says McIntosh.
The recall of millions of over-the-counter and complementary medicines manufactured by Pan Pharmaceuticals in April 2003 is considered the largest in history, made international headlines and threw consumers, government and retail and supply industries into disarray for months.
Colin Henson was a Pan Board member so D&O liability was of particular relevance to him although, as a professional corporate director, it comes with the territory.
Australia’s regulator, the Therapeutic Goods Administration (TGA), called the immediate recall because it believed the products could cause serious harm or death from contamination resulting from deficient GMP.
The decision was a shock to Henson and the rest of Pan’s board because the factory had passed previous GMP audits and the recall of a faulty batch of a motion-sickness drug (Travacalm) a few months earlier had gone smoothly. The TGA later claimed they advised Pan’s major shareholder of their concerns over other deficiencies but neither party communicated this to the board.
“The Pan product recall was a massive exercise; product returned occupied premises the size of a football field,” says Henson, who was particularly sensitive about safety and security risks.
“We needed to ensure it was all accounted for, safely stored and destroyed. I supervised the destruction of returned product — particularly the pseudoephedrine,” he adds, cautious of its use in street drugs.
But the forced closure of Pan’s factory meant that within two months, administrators were appointed: “The Administrator called for claims, which came in from many parties. Because the board was not involved in Pan’s manufacturing processes and was unaware of the gravity of TGA concerns, ultimately it was considered blameless. The D&O insurer was kept informed of developments but there was no need to claim against D&O insurance,” says Henson.
Nonetheless, as the public face and acting Chief Executive of post-recall Pan, Henson’s reputation took some blows: “If the TGA or any other regulatory body has the power to determine the future of a company, it is essential that boards establish procedures to maintain direct communication with those authorities.”
The experimental drug TGN1412, designed to treat auto-immune disorders such as rheumatoid arthritis, is a prime example of the worst that can happen when studies go from animals to humans.
TGN1412 was first clinically trialled in six healthy humans in 2006 and within minutes of being injected with the drug, all the volunteers began having severe reactions and hours later were critically ill; some were hospitalised on organ support for weeks and one later had some of his fingers and toes amputated.
The developer TeGenero had a no-fault compensation clinical trial policy of a couple of million euros and settlement was under compensation guidelines, says Chubb underwriter Travis McIntosh.
However, lawyers pursued the contracted research unit, Paraxel, for flaws in the methodology of the research — in Phase 1 clinical trials the drug has only previously been tested on animals and cell lines, so the usual procedure is a first-in-man study where one volunteer is treated at a time, rather than six at once.
“Everyone was dosed at once but they then had the added problem of treating six patients suffering simultaneous side-effects, and the research facility was not equipped to handle that,” says McIntosh.
A no-fault clinical trials cover with a legal liability extension would be most appropriate, advises Craig Rowsell, Regional Manager of Newline Australia Insurance.
“Specialist insurers, of which there are but few, can write multiline policies that will provide cover from development/clinical trials stage through to manufacturing, sales and distribution, including export/import of finished products (product liability). Cover for products financial loss can also be included,” Rowsell says.
“Clinical trials covers not covered by a no-fault clinical trials policy may be covered under a Medical Malpractice policy, which usually aren’t no-fault. Any negligent act, error or omission — or allegation of such — can trigger it.
“But if someone in a clinical trial suffers a serious adverse reaction and all trial protocols were met and there was no negligent act, error or omission committed or alleged, the Med Mal policy may not respond. The no-fault clinical trails cover would.”
A French company had supplied a defective product to a global market. It had its own insurance and the claims-made policy limit was exhausted quite quickly in US claims. Subsequently the business went into receivership.
The Australian distributor’s policy was also triggered and responded to claims with no avenue of contribution or subrogation action against the manufacturer.
“If you’re sourcing products from an overseas manufacturer, you need to look at its financial stability, attitude toward risk mitigation, their manufacturing facilities – are they ‘state of art’? – and their prior product development track record.
“Do they have insurance? What are the levels of cover? Who is the Insurer? If they wind up, there may be no avenue for any form of contribution or subrogation from the manufacturer, so it is critical to understand the health of the manufacturer’s business,” says Newline Australia Insurance’s Craig Rowsell.
Follow us on:
When management liability really comes into its own.
A flexible approach to work and study is a winning strategy for broker Gemma Gould.
Key figures from motor fleet insurance share their views on the big issues currently affecting the sector
Australia’s largest insurance broker cluster group, Steadfast, is proposing a public float. What will it mean to the shareholder
members of the currently unlisted private company? We speak to Chairman and CEO Robert Kelly.
Designed by eroomcreative | Engineered for success by EmpireOne
