What Biotech Startups Need to Know About Risk Management

The Danforth Digest: Quick takes on running the business of life sciences

Is it ever too soon for biotech startups to consider a risk management plan? Is it sufficient to just secure insurance coverage?

View a conversation between Gregg Beloff, Co-Founder and Managing Director, and Ed Downey, Head of Enterprise Risk Management, for guidance specific to early-stage biotech companies.

Gregg Beloff: Before we dive into specific questions about insurance or risk management, could you talk about the difference between the two?

Ed Downey: Absolutely. The major difference is that insurance is just a means to pay for losses; it doesn’t prevent them. On the other hand, a risk management program looks at the potential for loss within the organization, identifies where that could occur, and either utilizes insurance to deal with those risks, puts mitigation plans in place, or considers outsourcing to other vendors. For example, when a small startup company is thinking about purchasing drugs or entering into contracts with contract manufacturing organizations (CMOs), they should be considering contingency plans. What happens if a batch fails? How long will it take to get a new batch run when most CMOs are running at over 100% capacity? It’s crucial to have the right contracts and plans in place.

Gregg Beloff: That’s a great point. It’s about the long-term viability and prospects of the company, not just immediate concerns. When do you think is the right time for a startup CEO to begin thinking about enterprise risk management?

Ed Downey: In my opinion, day one is the right time. Enterprise risk management should be integrated into the thought process of all decisions made in the company from the very beginning. Strategic planning should include a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) to assess the potential impact of various decisions and opportunities on the company’s risk profile.

Gregg Beloff: That’s excellent advice. Moving on to insurance, what insurance coverage is essential for an early-stage company, or what would you consider a must-have?

Ed Downey: For early-stage companies, there are a few key insurance coverages that are essential. First and foremost is Directors and Officers (D&O) insurance, which protects the directors and officers of the company in the event they are sued. Even if there are only a few investors at the outset, it’s important to have this insurance to protect personal assets. As the company grows and attracts more investors, the risk of shareholder disputes increases.

Gregg Beloff: What other insurance coverages should early-stage companies consider?

Ed Downey: Another critical coverage is cyber insurance. In today’s environment, no one is immune from cyber attacks. Cyber threats are often opportunistic and can target companies of all sizes, including early-stage startups. Having cyber insurance with a concierge level of service can be a lifesaver, as quick action is essential in the event of a cyber incident.

Gregg Beloff: Are there any other insurance coverages that startups should be aware of?

Ed Downey: Yes, workers’ compensation insurance is also important. It’s mandated to protect employees, and it’s essential for compliance. However, I recommend that companies use their payroll department or processor to purchase workers’ comp. This ensures that all necessary filings are done correctly and on time. But keep in mind that some states have monopolistic workers’ comp systems, which require direct dealings with the state itself. Make sure you have safeguards in place to handle these cases.

Gregg Beloff: Finally, many executives believe that having an insurance broker is sufficient. Why is it important to have an enterprise risk management specialist like yourself come in and represent the company?

Ed Downey: Insurance brokers are essential for securing insurance policies, but they typically focus on that aspect alone. An enterprise risk management specialist provides a 360-degree view of the entire operation. We can identify potential risks, build programs to minimize or avert losses, review contracts to ensure there are no coverage gaps, and help companies make informed decisions regarding risk. In short, we provide a holistic approach to risk management beyond just purchasing insurance.

Gregg Beloff: Thank you, Ed. It’s been incredibly insightful to learn about risk management and insurance considerations for early-stage companies. Your expertise in this field is invaluable.

Ed Downey: You’re welcome, Gregg. I’m glad I could share this information, and I hope it helps companies navigate the complex world of risk and insurance more effectively.