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Risk in Context

How Biotech Companies Can Use Analytics to Manage Growing Shareholder Litigation Risks

Posted by Paula Bennett July 18, 2016

Shareholder suits are a significant concern for virtually all businesses, but they’re particularly acute for biotech companies, which are almost three times as likely as those in other industries to face securities class-action lawsuits.

Increasing Risks

The number of securities class actions filed in 2015 (234) across all industry sectors was more than any year since 2008; 19% of those cases were against health technology and services industry.

The probability of a securities claim against biotech companies with a market capitalization of $250,000 to $1 billion is higher (4.2%) than that of health technology companies (3.8%) and nearly three times the probability for companies in all sectors (1.6%), according to Marsh proprietary analytics. Average settlements from shareholder litigation for biotech companies with the same market capitalization can range from $12 million to more than $25 million, excluding expensive defense costs.

Biotech companies — and their directors and officers whose personal assets could be in jeopardy — face greater risk and more complex D&O risk than businesses in other sectors. They operate in a challenging risk environment and are vulnerable to shareholder suits stemming from public setbacks. Biotech products are often sensitive to regulatory developments and disclosure issues that could delay or prevent a product from hitting the drug market. These and other exposures can affect stock value, leading to shareholder litigation.

Managing the Risks

So how can you reassure your directors and officers that their assets are protected while ensuring that risk capital is used as efficiently as possible?

Data and analytics can help you understand your company’s potential exposures to shareholder litigation so you can evaluate the appropriate amount of risk to transfer. For example, by using risk models based on risk profile, peer benchmarking, and a set of predictive financial variables, you can better manage the potential risk of shareholder suits.

Such models can help you understand:

  • The probability of a claim: What’s the likelihood that your company will suffer a securities-related claim over the next 12 months?
  • A range of settlement outcomes: In the event of a claim, how much would it cost you?  
  • Risk bearing capacity: Can your balance sheet tolerate unexpected losses? What about your executives?

Biotech companies may not be able to eliminate the threat of a shareholder lawsuit, but such insights about your exposure can help you determine how to structure your directors and officers (D&O) liability insurance program. Analytical tools can help you select the appropriate limits for D&O coverage and differentiate yourself in the insurance marketplace. And knowing your company’s risk profile before approaching insurers can help you decide how much risk to transfer and the pricing you can expect.

Paula Bennett

Managing Director, Marsh’s FINPRO Practice