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Intro (00:00):
You are listening to the Alliant Specialty Podcast, dedicated to insurance and risk management solutions and trends shaping the market today.

Rich Leavitt (00:08):
Welcome to this edition of Alliant's Life Sciences D&O Under The Microscope. My name is Rich Leavitt and I'm one of the leaders of our life sciences practice. Joining me are Steve Shappell, the leader of our legal and claims team, and Andrew Sousa, our leading life sciences D&O specialist. Andrew and Steve, welcome back to another edition of our show. I think we've all been hoping that the life science sector would've rebounded by now. While there are glimmers of strengths, such as developments in obesity care, the overall sector continues to face challenges across the spectrum of capital markets. Unfortunately, the biotech boom has been replaced by biotech bankruptcies. In addition to discussing how a lack of access to capital is impacting D&O on both the placement and claims fronts, we'll also seek to answer three questions. One, has the capital market bottomed out? Two, how are life sciences claims trending? And three, are there specific coverages that buyers and boards should be considering? Andrew, we'll start with you. In your role as a D&O advisor and placement specialist to life sciences companies, ranging from pre-IPO to mature multinationals, what's the tenor of conversations you've been having with buyers and boards regarding their ability to access capital markets and its impact on their business?

Andrew Sousa (01:26):
It's a challenging time for the life science industry, specifically biotech companies. We're speaking with many companies who are having a difficult time accessing capital. The fundraising environment is very challenging and then there's the combination of a lack of deals happening with pharma. More than ever, we're speaking with companies who are seeking strategic alternatives and dissolutions and wind-downs are way up, and even the amount of biotech bankruptcies is well above historical averages. We saw 28 in 2023 thus far.

Rich Leavitt (01:57):
Thanks, Andrew. Steve, are there any warning signs that diminished access to capital is or could lead to investor-driven litigation against directors and officers?

Steve Shappell (02:07):
I think so. One of the themes we see constantly in tracking shareholder class action litigation, for example, and derivative litigation, is the volatility and the financial events, capital issues, capital structure issues triggering litigation. When the market's great and everybody's got plenty of capital, getting 10%, 20% returns on investment, shareholder litigation drops off; we can track it. And when those events change, and we have bankruptcies and shortage of capital, litigation follows, and it's a reality that we and the underwriting market can predict.

Rich Leavitt (02:44):
Steve, as a follow on, can you discuss how securities claims are trending, especially relative to other industry sectors? Do life sciences companies still have targets on their back.

Steve Shappell (02:54):
Yes. Life science has had targets on its back for a long time. The only sector industry that gets sued more frequently than them is technology and unfortunately, technology tends to have a lot of smaller, newer public companies that draw that litigation. But after technology, the next most frequent is the life science industry. It has a massive bullseye on its back. I'd love to deliver some good news on shareholder class action litigation. There is none. Is it catastrophic news? No. We don't have catastrophic news where we're going to go from 200 shareholder class actions in 2022, to 300 class actions in 2023. But we're trending up. We have more shareholder class action litigation filed year to date in 2023 than we did in all of 2022, and we still have another month.

The trend is increased litigation, and this is a meaningful number because one of the things we've seen in the last few years, when we see shareholder litigation trending up, it's meaningfully trending up where we're seeing less merger objection lawsuits filed as shareholder class actions than we used to. So, if I say there's going to be 215 shareholder class action suits in 2023, that's a big deal because if I compare that to five years ago, where 10% or 15% of the shareholder class action litigation were merger objections, they're different beasts. And so non-merger objections, shareholder litigation is very significant, very real, very expensive litigation. So that's probably on the frequency trend, the thing I'm seeing. When I look at, specifically for life science companies, last year there were roughly 45 shareholder class action suits involving life science entities, and we probably exceeded that number this year when I've done the quick math in preparation for this call. So again, the good news is we don't have 60 or 70 shareholder class actions in this sector, but the bad news is it's not down.

Rich Leavitt (04:59):
Ever the ray of sunshine, Steve, thank you.

Steve Shappell (05:01):
It's brutal, right? I would love to see the litigation drop.

Rich Leavitt (05:05):
Andrew, given the slow growth in the sector and ongoing lack of IPO activity, how is the D&O market responding to an ongoing decrease in demand?

Andrew Sousa (05:15):
The D&O market remains very competitive, which has primarily been driven by an increase in the new capacity who entered the market. Most insured are continuing to see rate reductions. In many instances we were able to improve coverage and even in some cases, we're able to achieve retention rate reductions. So it's definitely a good time to be an insured and entering the public company D&O market.

Rich Leavitt (05:38):
I'm glad some good news continues to be on the horizon. Thanks, Andrew. Steve, we talked about securities class actions. Can you give us an update on derivative actions? It seems as if they're increasingly becoming a well-used tool for the plaintiff's bar to extract quicker, less contested securities settlements.

Steve Shappell (05:57):
Yeah, we've seen a consistent flow of derivative litigation and derivative litigation's interesting litigation for those people who don't know what it is versus a shareholder. Derivative litigation is litigation by a shareholder to put money back into corporate coffers, that was a result of directors breaching their fiduciary duty. They're very difficult claims. And we see those come particularly where there is no meaningful movement in the share price. You know, there's an announcement, there's an event, there's a fine, there's a penalty, a drug fails, and the stock price doesn't move. And that's a good day for an issuer because there's no massive, $1 billion, $2 billion damages as a result of movement of stock price. But what happens is derivative litigation gets filed because there are expenses and issues created for the exposure of the entity.

Steve Shappell (06:55):
In the old days you used to see a lot of derivative litigation filed simultaneously with shareholder class action, and it just kind of latched on. And it was almost as if, because you got yourself sued for securities fraud, you've cost the company money and you should have to give that money back. And we resolved them together for nominal amounts, if any shareholder class action lawyers shared their fee. But it's become a bigger deal where they're standalone, and we're seeing more and more of these. Do we see 200 a year like we're talking about shareholder class action litigation, absolutely yes and absolutely no. So there's a lot of derivative litigation, but most of it stays under the radar. It's really tough.

There's a lot of great defenses to derivative litigation, so you don't see a whole lot of press about these massive shareholder derivative suits because they're relatively small and they get resolved usually with the vast majority dismissed, or they get resolved for some therapeutics. But we're seeing more and more significant shareholder derivative claims get settled for very real money. And I religiously tracked this, and we had Tesla's derivative litigation, for example, settled for $735 million, and I got mine organized by severity and $310 million, $300 million derivative settlement, a $286 million. So this is becoming far more frequent that we're having these massive settlements, even though it's not the same frequency as a shareholder litigation. It's happening and it's real, Rich.

Rich Leavitt (08:38):
Well, for Tesla, that's still chump change for Elon, but certainly interesting. Steve, somewhere tied into all this are entity investigations and whether it's on the securities class action side or how that starts out, can you provide a little bit of color on that? Because I want to switch over to Andrew on the coverage side, but if you could set the table a little bit, that would be appreciated.

Steve Shappell (09:03):
Entity investigations are an interesting phenomenon. One of the things we deal with a lot, most shareholder class actions will involve some component of the SEC; there's a massive disclosure, there's a massive loss, and the SEC will conduct an investigation. And one of the things that happens with an SEC investigation is it's early, often and expensive. And so the SEC comes in very, very aggressively, months if not years before you're spending significant fees to defend shareholder litigation and they're demanding production of tens of millions of documents and it gets very expensive. And there's a lot of friction for decades in the marketplace about is there going to be balance sheet protection. We have a derivative lawsuit, you got a shareholder class action and you have the SEC, but the insurance company's not going to cover the SEC even though it's all related and the work's going to be used in all the other defense of claims.

And there's some serious challenges to it. And so one of the things that we've done more than a decade ago is go in and get entity investigative cover that exists at the same time that there's a shareholder class action or a derivative suit to avoid this friction. And it's pretty frequent. When you look at some of the statistics, you'll see a very significant percentage of shareholder class actions that settle, have corresponding SEC enforcement actions and investigations. It's very common, it's very predictable. And as we know, it can be insured.

Rich Leavitt (10:40):
Thanks Steve. Andrew, given Steve's comments about the cost and the likelihood, almost certainly, of entity investigation, why are buyers and boards foregoing this coverage in their D&O programs?

Andrew Sousa (10:54):
I think it's a combination of a lack of understanding of what's covered under a public company, D&O policy and price, as entity investigation coverage is not free. So a traditional public company, D&O policy provides coverage for individuals for an SEC investigation. However, the policy does not typically provide coverage when the entity is named in a securities investigation. So there's a number of different ways to structure entity investigation coverage, but the additional premium is typically 10% to 30%. And it depends on risk profile. But with a favored D&O market environment, it's definitely not a bad time to think about redeploying some of the premium savings toward adding this coverage to your D&O program.

Rich Leavitt (11:36):
Andrew and Steve, thank you both for sharing your unique insight into the life sciences D&O realm. Takeaways for buyers and boards as we head into 2024: 1. add entity investigation coverage, especially given the decrease in D&O premiums; 2. D&O markets continue to be favorable, so your expectations should be material improvements in premiums and possibly retentions; and 3. the capital markets will rebound. And if we knew exactly when, we wouldn't be here today discussing D&O with you. Most importantly, best wishes for the holidays and for a happy, healthy and prosperous new year. And remember, ride the wave before the tide turns.

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