At the beginning of the global pandemic, not many people expected that an effective COVID-19 vaccine would be developed in less than a year. Most vaccines take at least 10 years from concept to approval. Yet, less than a year after the World Health Organization declared the coronavirus a global pandemic, vaccines were being distributed. Pharmaceutical companies rushed to create these life-saving vaccines, with Pfizer, Moderna and Johnson & Johnson all receiving Emergency Use Approval from the FDA to market their products. This was a true demonstration for life science companies that moving from concept to market can happen at lightning speed, with patient safety and efficacy paramount to the process.
The three COVID-19 vaccines that are currently available in the U.S. weren’t developed through mergers and acquisitions. However, there are other vaccines in development that received a boost from acquisitions. For instance, Merck acquired vaccine maker Themis in June 2020, creating an even bigger team to work on their COVID-19 vaccine. Novavax acquired Czech Republic-based Praha Vaccines and the two companies are working with vaccine producer Serum Institute of India to develop a coronavirus vaccine.
Mergers and acquisitions aren’t unusual for pharmaceutical, biotech and other life sciences companies. In fact, life science companies often seek to acquire products and services that are currently on the market or about to be brought to market. This is especially true if those new products and services will allow them to:
- Acquire new skills or technologies
- Deepen product pipelines
- Create efficiencies or savings
- Lead to product, distribution or geographic expansion
Before the pandemic hit, 2019 was a record year for life science mergers and acquisitions.1 And now, many experts are predicting mergers and acquisitions will become even more prevalent this year as companies reassess their operations following the global pandemic.
However, as companies acquire new businesses or products, they will also need to assess any potential risks, including:
- Product liability exposure
- Potential regulatory changes
- Supply chain disruptions
Insurance can help life science companies find the stability they need so that they can continue to innovate and grow, while still delivering safe and efficacious products.
Product Liability Risk
Product liability continues to be the most common legal and reputational risk for life sciences companies. It can often be a hidden risk during a merger or acquisition. Once a company or product has been acquired, the buyer could be held liable for claim activity that happened before acquisition. Every deal carries significant risk and opportunity, so due diligence is essential before completing any transaction. It’s also important to remember that some presumed liabilities are commonly not covered by standard liability insurance coverage, such as liability assumed by contract. So, taking the right actions upfront helps to protect your bottom line.
To limit successor product liability risk, it’s important for the buyer to take the following steps before any merger or acquisition:
Determine if there are outstanding liability claims against the company to be acquired. This includes any of its subsidiaries. Review the company’s claim and litigation history to assess potential near-term and historical risk. Be mindful of any prior issues; including serious adverse events and litigation with other-similar-products that could lead to future claims. Keep in mind that claims can materialize several years after a product is initially manufactured, distributed, sold or used.
Assess historical FDA activity including recalls, adverse events, import refusals, inspections and findings/observations from third-party registrars. Potentially misleading statements made by an acquired company to the FDA during the approval process for its products should be thoroughly examined. Misleading statements could result in injured consumers, as well as civil or criminal liability. It can also cause civil or criminal liability under the False Claims Act.
Evaluate any outstanding debt or liabilities and determine if there are any unpaid claims. The acquisition contract should clearly state which entity retains liability for the company’s past work.
Review adverse event trends and the potential risk of mass tort litigation. This should include trends not just related to the entity, but also the product classes in general. Consider using third-party analytical experts who specialize in parsing FDA data obtained under the Freedom of Information Act rather than an internal analysis. Third-party analytics often use algorithms that address the life science area’s unique characteristic of voluminous adverse event reports and combine the results with scientific literature review to provide a more complete or nuanced picture of future risk related to product liability.
Regulatory Risks
As you’re keenly aware, life science companies operate in a highly regulated industry. Beyond the FDA, life science companies often need to follow rules set by the:
- Department of Health and Human Services
- Justice Department
- Federal Trade Commission
- Centers for Medicare & Medicaid Services
- U.S. Attorneys General
To limit regulatory risk, buyers should consider taking the following steps:
Determine if the company has all the required FDA clearances, approvals or authorizations to manufacture and distribute its product or service. Without the required authorizations, the company may have limited value. For instance, the buyer needs to assess if the company owns all the necessary intellectual property rights, including patents, trademarks, trade names and copyrights. If the company is still developing a product or service, be mindful that the new product or service might not yet have the necessary approvals.
Investigate if there are any pending regulatory changes that could impact the company and its ability to manufacture or distribute a product or service. Remember, products or services that are still in development may not have the necessary approvals.
Evaluate the company’s data privacy policy and its marketing practices. Many life science companies use data and analytics tools to market their products. So, be aware of any new upcoming data privacy regulations. Assess whether the company has been complying with industry guidelines and regulations related to data privacy.
Supply Chain Risks
Before a merger, it’s a good idea to consider any potential supply chain disruptions. Buyers should:
- Identify source of components and raw materials
- Identify sole sourcing pathways
- Prior performance history with an emphasis on quality and delivery
- Find out whether there is a risk of not getting raw materials
- Determine which suppliers are interconnected
There are also steps that buyers can take to limit supply chain risks, such as:
Mapping out supplier locations. Before completing a sale, make sure you know important information about the suppliers, such as:
- Contact names and information
- Products or services supplied
- Whether any products or services are proprietary
- Presence and adequacy of the Quality Agreement
- Contract termination date
Identify any single-source suppliers. This means a single supplier has the business, despite there being other companies who do the same thing. It’s also a good idea to identify any sole-source suppliers who provide unique materials that can’t be obtained elsewhere. Both types of suppliers could limit your ability to find alternative material sources. They can also prevent you from meeting higher demand for a product or service.
Plan for any possible supply chain disruptions that could delay products or services from getting to market. It’s important to participate in a simulation exercise to see how your life science business needs to adapt to any disruptions.
How The Hartford Can Help Life Science Businesses
We have over 30 years of experience working with life science businesses. We know you face unique risks that other industries don’t, and we offer the coverages to help keep you better protected from them. We’ve made it our business to better understand life science businesses so we can offer insurance solutions that are specialized to your industry.
For more information, work with your agent or broker to learn about our insurance coverages.
The information provided in these materials is intended to be general and advisory in nature. It shall not be considered legal advice. The Hartford does not warrant that the implementation of any view or recommendation contained herein will: (i) result in the elimination of any unsafe conditions at your business locations or with respect to your business operations; or (ii) be an appropriate legal or business practice. The Hartford assumes no responsibility for the control or correction of hazards or legal compliance with respect to your business practices, and the views and recommendations contained herein shall not constitute our undertaking, on your behalf or for the benefit of others, to determine or warrant that your business premises, locations or operations are safe or healthful, or are in compliance with any law, rule or regulation. Readers seeking to resolve specific safety, legal or business issues or concerns related to the information provided in these materials should consult their safety consultant, attorney or business advisors. All information and representations herein are as of May 2021.
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