Drug, Device Companies Require Product, Trial Policies

The trials and tribulations of drug and medical device companies are numerous,financing, products that may not pan out, regulatory hurdles, competition.

Then there's insurance.

Insurance has gotten more costly for just about all companies in the wake of corporate scandals at Enron Corp. and others. Drug and medical device makers have to buy insurance to cover normal operations as well as to protect their officers and directors.

They also have to insure products that have the potential to help people, yet still carry risks. Some things,like regulatory rejection of a company's product,can't be covered.

Key policies for medical companies are product liability and clinical trial insurance, said Vince Anido, chief executive of Ista Pharmaceuticals Inc., an Irvine-based maker of eye drugs with 175 workers.

For drug makers, the cost of product liability insurance depends, he said.

"If it's traditional,like a tablet, or a liquid, or a topical of some sort,that has less risk than, say, an injectable," he said.

Ista's products include Vitrase, an injectable drug that's approved as a spreading agent for other medications, and Istalol, a beta-blocker eye drop for treating glaucoma.

The company, which had $1.8 million in sales last year and is focused on development, has about $5 million worth of clinical trial coverage, according to Anido.

The policies are needed, even though Ista and others get "the right paperwork, consent forms" from patients.

"You do have to insure the company in case something happens to a patient," he said.

Ista, which was started in 1992, now has a combined policy for product and clinical trial insurance, Anido said.

"But frankly, the limits are based on what we're selling," Anido said. "So, the more we sell, the higher the policies go."

Ista, a publicly traded company, had second-quarter sales of $2.8 million, versus $70,000 a year earlier.

The company's first commercial product, Istalol, was launched a year ago.

Vitrase is in clinical trials to treat vitreous hemorrhage, or back-of-the-eye bleeding.

"What we found was that for Vitrase, because it is actually injected in the back of the eye, that we had some explaining to do," Anido said.

The company's Vitrase-related trial insurance premiums were higher because of the injections, he said.

There aren't many insurers that understand the intricacies of clinical trials and are willing to underwrite them, said Peter Daly, a senior vice president with ABD Insurance and Financial Services, a Bay area broker with local clients.

Insurers providing clinical trial insurance include Hartford Financial Services Group Inc., St. Paul Travelers Cos., Chubb Corp. and American International Group Inc., according to Daly.

Prices for product liability coverage and clinical trial coverage vary, Daly said. Annual minimum premiums for $1 million of coverage start at about $15,000.

"Cost is always an issue," Daly said. "I'm not going to sit here and say, 'Oh, yeah, people pay it, no problem.' They don't pay it, no problem."

Instead, companies ask their insurance brokers to justify the premium costs and seek multiple quotes from carriers, Daly said.

Some insurers aren't comfortable about providing insurance for biotechnology companies because of what Daly called the underlying nature of the business.

"Many of the companies don't anticipate a profit for many years, if at all," he said. "It's kind of a disconnect when you stop and think of a typical business model,you make a product and make a profit."

Drug and medical device development takes time. And it can be pricey. Companies can spend $800 million and $1 billion and take five to eight years to bring a drug to market.

The payoff is profits that are higher than in other industries, if a company makes it that far.

At the same time, Ista and other companies have to deal with all the same insurance requirements as other businesses do.

The company has $25 million in coverage this year for directors and officers, according to Anido.

"For a little company like us, we actually have excellent coverage," he said.

The insurance, designed to protect against fallout from accounting and other problems, has gotten more costly in recent years.

In getting insurance, Anido said Ista's brokerage, Marsh & McLennan Cos., requires executives to go on a "road show" with insurance brokers prior to buying a policy.

Lauren Silvernail, Ista's chief financial officer, and other company officials have gone out "to basically pitch insurance companies, telling them about the business, its prospects," before giving bids on director and officers' coverage, Anido said.

Companies that were willing to talk about themselves can get better pricing on policies, Anido said. n