Warning: Drug Development May Have Side Effects

Drug-Testing Mouse

Much good comes from the development of pharmaceuticals, biologics and other novel therapeutics. However, as with almost any venture, where there is reward there is the risk of negative side effects.

Solid risk management and seasoned judgment will help mitigate or drastically reduce risk and may improve the returns both from a financial and safety perspective but… if the drug industry had a warning label, it would probably caution us to consider the following.

Watch for Heavy Reliance on Collaboration

Collaboration in the drug development arena is essential. When academia, government and private industry collaborate, we are all better off.  The scientific challenges are complex and the regulatory requirements and funding required to bring a drug to market are substantial, and this requires many institutions to work together.

The complexities of these relationships, however, can lead to a complex web of liabilities in the event of an injury. If, for example, a patient is injured in a clinical trial, is it the liability of medical doctor, the institutional review board (IRB), the site administrator, the sponsor, the contract manufacturer and/or some other third party? How do the contracts between these entities transfer risk, and how does each entity insure the risks, if at all?

Consider the Risks of Outsourcing of Critical “High-Value” Activities

Given the economic efficiencies of outsourcing, more and more commercial research is outsourced. In fact, some emerging R&D companies are “virtual” and choose to outsource all aspects of development from discovery to formulation to pre-clinical toxicology to clinical trials.

Along with outsourcing comes a loss of control and potentially greater risk, especially in the clinical trial stage.  If the services of a third-party researcher or manufacturer are not closely monitored, and if the contracts are not written to adequately protect or indemnify the sponsor (drug developer) from liability, the sponsor and its financial investors may feel the pain.

Property Risks may be Elusive and Significant

The cost of a mouse used for a pre-clinical study may only be a couple of bucks. But what if the mouse was the 10th generation of a genetically altered strain that was years in the making? If the mouse died in the middle of August when the refrigeration went out, how much would it cost to replace? How would this affect pending clinical trials and ultimate commercialization of the drug? Would the company lose funding for failure to reach a milestone on time?

Mice and other lab animals are not the only materials at risk. R&D labs are often times full of materials or pharmaceutical ingredients that are susceptible to spoilage from changes in humidity or heat.  How secure is the supply chain for the active pharmaceutical ingredient (API) and final formulation once the trials have begun? Could one adverse event derail the entire project?

Developmental Risk

Drug development is highly speculative.  Studies have shown that only about 1 in 10 drug candidates make it from phase 1 to approval, with biologics only showing a slightly higher success rate. The cost to bring a new drug to market is estimated to be in the billions. There are many reasons for failure including scientific hurdles that have not been cleared, regulatory hurdles, and financial hurdles.

Insurance may not be an appropriate a solution for developmental risk. Underwriters will generally not take on business risk, unless they are offered the unlimited upside—in which case they are no longer insurers but rather investors!

However, many of the other risk sources noted above can be addressed by a well-designed insurance and risk management program. The good news is that many of the large global insurers have developed specific policies to help address the unique needs of drug developers, including sponsors, clinical research organizations and others who are involved in the industry.


About Steve Schoenberger

Steve Schoenberger is Vice President of Corporate Property & Casualty, based in Willis’ Boston office. He joi…
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