Travelers senior development underwriter, Craig Mounser tells Insurance Times about the opportunities abound in insuring drug discovery companies for those who can appreciate the very specific risks involved, in a post-pandemic world this market is set to sky-rocket in value

Last year was a transformative one for research and development (R&D) drug discovery companies – and for their insurers.

As the pandemic has increased the urgency for vaccines and other medicines, it has magnified the unique challenges that underpin the work behind these drugs.

Can you recall a time in recent memory when the public has been this engaged in how vaccines are researched, developed and approved? At the same time, 2020 was a year of transition for insurers.

Those who remain committed to this specialised sector during a hardening market – and take the time to understand the special perils drug discovery companies face – stand to gain from the sector’s future growth.

According to Statista research, the global drug discovery market is expected to be valued at $71bn (£51.7bn) by 2025, up from $35.2bn in 2016. Tapping into these opportunities requires brokers to have a strong grasp of the unique exposures facing drug R&D companies.

Craig Mounser_Travelers

Craig Mounser, Travelers

Brokers can help firms assess how susceptible their operation is to interruption and then develop (and test and update) a back-up plan in case of disruption.

For example, an R&D  laboratory will likely rely upon valued specialist machinery and/or certified clean rooms. A broker can help the insured determine to what degree it relies upon these items.

Beyond that, brokers can ensure the company is appropriately covered, so that, in the event of a loss, it is able to proceed from the position it was in at the time of the loss.

The broker must ensure that the policy purchased by the insured covers not only loss of revenue, but also the continuous costs of paying the scientists, the cost of re-creating the study, any contractually obliged costs, and any increased costs of working.

Preserving income stream

In addition to understanding how aspects of drug discovery company operations pose ancillary risks, brokers can help protect their clients by accurately grasping – and structuring cover to preserve – their income streams.

Specialist insurers in this sector may offer cover that reflects (and protects) the pre-agreed milestone payments, which drug discovery companies receive from pharmaceutical companies on completion of a stage in the research.

If a drug discovery company experienced a fire a week before it was due to begin a Phase 1 trial – upon successful completion of which a milestone payment to fund its next phase of research would be paid – the insurer could effectively loan the milestone payment in order to sustain the research through its next phase.

The sum insured must be assessed differently, since the R&D property that scientists develop at a drug R&D company does not have intrinsic value beyond the context of the study. It is determined less by the cost of the raw materials and more by the cost of the scientists’ time and the expense involved to replicate the study.

Controlled environments

The business must adapt to protect the operation against such sensitivities. An event that might pose a minor problem for some other kind of business – like a small fire or flood – could be a debilitating one for a drug discovery company.

These studies are undertaken in incredibly sensitive environments – a small fire causing smoke to enter a clean room or a leak of water could contaminate the environment and result in an entire research study being scrapped.

The sensitivity of drugs in development, along with the urgency in bringing them to market, requires specialised risk management, business continuity and disaster recovery planning, as well as bespoke insurance protection.