PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT This memorandum has been prepared by counsel at the request of the client and contains legal analysis, mental impressions, and conclusions protected by the attorney-client privilege and the attorney work product doctrine. This memorandum should not be disclosed to any third party without the prior written consent of counsel.
MEMORANDUM
TO: Oliver Mackenzie, Partner; Harrison Wexford, Partner
FROM: Derek Okonkwo, Associate; Megan Chu, Associate
DATE: May 16, 2024
RE: Insurance Due Diligence Review — Veridian Biosciences, Inc.
MATTER: Penterra Pharmaceuticals Corp. — Proposed Acquisition of Veridian Biosciences, Inc. (Matter No. 1018-00008)
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I. Executive Summary
This memorandum sets forth the results of our review and analysis of the insurance program maintained by Veridian Biosciences, Inc. ("Veridian" or the "Company") in connection with the proposed acquisition by Penterra Pharmaceuticals Corp. ("Penterra" or "PPC") of one hundred percent (100%) of the outstanding capital stock of Veridian for an aggregate purchase price of Nine Hundred Million Dollars ($900,000,000) in cash, to be consummated pursuant to the terms and conditions of that certain Stock Purchase Agreement by and among Penterra, Veridian, the Sellers named therein, and Apex Shareholder Representative, LLC, as the Sellers' Representative (as amended, restated, supplemented, or otherwise modified from time to time, the "SPA").
The purpose of this memorandum is to identify, analyze, and assess: (a) the scope, adequacy, and material terms of each policy in Veridian's current insurance portfolio; (b) the implications of the proposed change-of-control transaction on each such policy, including whether policies will convert to run-off status, terminate, or require carrier consent to continue; (c) the availability and estimated cost of tail or extended reporting period coverage where applicable; (d) the adequacy of coverage limits in light of Veridian's ongoing clinical operations; and (e) the coordination between Veridian's insurance program, the indemnification provisions of the SPA, and the buyer-side representations and warranties insurance being procured by Penterra.
Scope. In conducting this review, we examined all insurance policies, binders, certificates of insurance, endorsements, declarations pages, premium invoices, loss histories, and related correspondence provided by Veridian through the virtual data room established for this transaction (access granted March 11, 2024). These materials were supplemented by follow-up due diligence requests directed to Zalcourt Archer & Cole LLP, counsel to Veridian and the Sellers, through Rebecca Whitmore, Partner, and Jonathan Pratt, Senior Associate, at that firm. We also coordinated with Prescott Whitfield Insurance Brokers, Inc. regarding the underwriting requirements for the buyer-side representations and warranties insurance policy.
Overall Assessment. Based on our review, Veridian maintains a generally reasonable insurance program for a clinical-stage biotechnology company of its size and operational profile. The Company employs approximately 148 individuals across offices and laboratory facilities in Massachusetts, California, and Maryland. Veridian's principal office and primary research facility are located at 550 Gateway Drive, Cambridge, Massachusetts 02142. The Company has three pipeline candidates leveraging its proprietary VeriTCE (Veridian T-Cell Engager) bispecific antibody platform, with VRD-4187 as the lead clinical candidate. As of the date of this memorandum, Veridian has no product revenue (FY2023 Revenue: $0; FY2023 Net Loss: ($87.3 million)), with cash and cash equivalents of $112.4 million as of March 31, 2024. Total venture capital raised through Series A through Series D financing rounds amounts to approximately $420 million.
Key Issues Identified. Notwithstanding the general adequacy of Veridian's insurance program, we have identified the following key issues requiring attention in connection with the proposed transaction:
1. Change-of-Control Implications. The proposed stock acquisition constitutes a "change of control" under virtually all of Veridian's insurance policies. The implications vary by policy type and trigger, but the most significant concerns relate to the Directors and Officers Liability Insurance, the Clinical Trial Liability Insurance, and all other claims-made policies, which may automatically convert to run-off coverage upon closing, terminate, or require carrier consent to continue.
2. Clinical Trial Liability Coverage Adequacy. Veridian's lead candidate, VRD-4187 (a bispecific T-cell engager targeting DLL3 for the treatment of small cell lung cancer), is currently being evaluated in the Phase II Marlowe Asset Management-2 trial (ClinicalTrials.gov Identifier: NCT05837291; IND No. 154832). The trial has enrolled 387 patients across 42 clinical sites in the United States and the European Union. Given the known immunological risks associated with bispecific T-cell engager therapeutics — including cytokine release syndrome ("CRS"), immune effector cell-associated neurotoxicity syndrome ("ICANS"), and other severe immune-mediated adverse events — the adequacy of current clinical trial liability coverage limits warrants careful evaluation.
3. Tail and Run-Off Coverage. For all claims-made policies that will convert to run-off upon the change of control, Penterra should procure or require the procurement of tail or extended reporting period coverage to protect against pre-closing acts that may give rise to post-closing claims. The aggregate cost of such tail coverage should be factored into the overall transaction cost analysis.
4. R&W Insurance Coordination. Penterra is procuring buyer-side representations and warranties insurance through Prescott Whitfield Insurance Brokers, Inc. from Atlas Indemnity Insurance Co. (Policy No. AIC-RWI-2024-07892). Coordination between this R&W policy and Veridian's underlying insurance program is necessary to avoid coverage gaps, confirm priority of recovery, and address subrogation provisions.
This memorandum should be read in conjunction with the broader due diligence work product generated in connection with this transaction, including, without limitation, the Regulatory and FDA Compliance Due Diligence Memorandum (dated May 20, 2024), the Litigation and Contingent Liabilities Due Diligence Memorandum (dated May 18, 2024), the Environmental Due Diligence Memorandum (dated May 15, 2024), the Employment and Benefits Due Diligence Memorandum (dated May 22, 2024), and the intellectual Property Due Diligence Memorandum (dated May 14, 2024), each of which is cross-referenced herein where relevant.
II. Methodology and Documents Reviewed
A. Data Room Materials
Penterra was granted access to the virtual data room maintained by Veridian's counsel, Zalcourt Archer & Cole LLP, on March 11, 2024. The insurance-related materials were organized in Room 8 — Insurance of the virtual data room and included the following categories of documents:
• Current policy declarations pages for all active insurance policies maintained by Veridian;
• Complete policy forms, including all endorsements, riders, and amendments for each active policy;
• Insurance binders and certificates of insurance issued to third parties (including landlords, clinical trial sponsors, and contract research organizations);
• Premium invoices and evidence of payment for all current and immediately preceding policy periods;
• Claims histories and loss runs for each policy line, covering the five-year period from January 1, 2019 through March 31, 2024;
• Broker correspondence, including placement memoranda, marketing submissions, and renewal proposals prepared by Veridian's insurance broker;
• Insurance allocation schedules and summaries prepared by Veridian's finance team;
• Certificates of insurance issued to Veridian as an additional insured under third-party policies (including certificates from contract research organizations, contract manufacturing organizations, and clinical site institutions); and
• Miscellaneous correspondence between Veridian and its insurance carriers regarding coverage inquiries, policy amendments, and claims.
We conducted two rounds of supplemental due diligence requests to Zalcourt Archer & Cole LLP. The first request, transmitted to Jonathan Pratt on April 8, 2024, sought supplemental policy schedules for the Directors and Officers Liability Insurance (including the excess tower), complete loss runs for the clinical trial liability policy, confirmation of the status of any pending or threatened claims against any policy, and copies of any carrier correspondence regarding change-of-control provisions. The second request, transmitted on April 29, 2024, sought confirmation of premium payment status for all policies, copies of any notices of circumstance filed under any claims-made policy, and written confirmation from Veridian's broker regarding the availability and estimated cost of tail coverage for all claims-made policies. Responses to both requests were received and incorporated into this memorandum, with the exception of certain outstanding items noted in Appendix D hereto.
B. Interviews and Inquiries
In addition to our review of documentary materials, we conducted the following interviews and inquiries, each through counsel in accordance with the agreed-upon due diligence protocol:
• Steven R. Kessler, Chief Financial Officer, Veridian. We participated in a telephonic discussion with Mr. Kessler on April 12, 2024 (facilitated through counsel) regarding Veridian's insurance procurement practices, the selection and retention of insurance brokers, the process for evaluating coverage adequacy, premium payment history, and general claims experience. Mr. Kessler confirmed that Veridian's insurance program has been managed since the Company's inception by Wellington & Pryor Insurance Advisors, LLC, a Boston-based specialty insurance brokerage firm, and that coverage has been maintained without interruption since the Company's Series A financing in 2017. Mr. Kessler further confirmed that all premiums are current and that no policies are subject to pending cancellation or non-renewal notices.
• Rachel Stein-Goldberg, General Counsel, Veridian. We participated in a telephonic discussion with Ms. Stein-Goldberg on April 15, 2024 (facilitated through counsel) regarding pending or threatened claims against any insurance policy, the Company's approach to D&O coverage in connection with the proposed transaction, and any prior communications with carriers regarding change-of-control provisions. Ms. Stein-Goldberg confirmed that, other than two workers' compensation claims and one general liability incident (each described in Part IV below), Veridian has no pending or threatened claims against any insurance policy. Ms. Stein-Goldberg further stated that the Company's board of directors has discussed the need for D&O tail coverage in connection with the proposed transaction, and that the board expects the procurement of a six-year tail policy as a pre-closing deliverable.
• Amanda Chen-Kowalski, Managing Director, Prescott Whitfield Insurance Brokers, Inc. We coordinated with Ms. Chen-Kowalski on an ongoing basis regarding the underwriting requirements for the buyer-side representations and warranties insurance policy being procured from Atlas Indemnity Insurance Co. Ms. Chen-Kowalski confirmed that the R&W insurer's underwriting process requires disclosure of all material insurance policies maintained by Veridian, all pending or threatened claims, and all known circumstances that could give rise to claims. We provided relevant diligence information to Ms. Chen-Kowalski in accordance with the information-sharing protocol agreed upon by the parties, subject to appropriate confidentiality restrictions.
C. Scope Limitations
The following limitations apply to the analysis set forth in this memorandum and should be taken into account by the recipients:
• We have not independently verified any information with Veridian's insurance carriers. Our analysis is based solely on the policy documents, loss runs, broker correspondence, and other materials provided by Veridian and its counsel through the virtual data room and in response to our supplemental due diligence requests. We have relied upon the completeness and accuracy of such materials. To the extent that any material policy terms, endorsements, claims, or coverage limitations have not been disclosed to us, our analysis may be incomplete or require revision.
• This memorandum does not constitute insurance brokerage advice, and we are not acting in the capacity of insurance brokers or agents. Penterra should consult with its own insurance broker — including Prescott Whitfield Insurance Brokers, Inc. and any other advisors Penterra deems appropriate — for post-closing coverage assessments, integration planning, and any decisions regarding the procurement, renewal, or modification of insurance coverage.
• Our analysis of coverage adequacy is based on our understanding of market practices for similarly situated clinical-stage biotechnology companies and does not reflect actuarial analysis or loss modeling. Penterra should engage qualified actuarial or insurance advisory professionals if a more quantitative assessment of coverage adequacy is desired.
• Certain items remain outstanding as of the date of this memorandum, as set forth in Appendix D. We will supplement this memorandum upon receipt of those items if material to our conclusions or recommendations.
III. Summary of Veridian's Insurance Program
A. Overview Table
The following table summarizes all active insurance policies maintained by Veridian as of the date of this memorandum. Complete policy details, including endorsements and special conditions, are set forth in the policy-by-policy analysis in Part IV below and in the Schedule of Veridian Insurance Policies attached as Appendix A.
Total Annual Premium (All Policies): Approximately $1,380,100.
B. Overall Assessment
Veridian's insurance portfolio is generally consistent with the coverage programs maintained by similarly situated clinical-stage biotechnology companies operating in the United States with international clinical trial activity. The Company's coverage priorities appropriately reflect its clinical operations focus, with particular emphasis on clinical trial liability, directors and officers liability, and cyber liability — the three areas of highest risk for a venture-backed biotechnology company with no product revenue and active clinical programs.
Several characteristics of Veridian's business profile are relevant to the assessment of its insurance program:
• Financial Profile. Veridian is a pre-revenue, clinical-stage company. For the fiscal year ended December 31, 2023, the Company reported total revenue of $0 and a net loss of ($87.3 million), driven primarily by research and development expenditures of $64.1 million and general and administrative expenses of $23.2 million. As of March 31, 2024, the Company reported cash and cash equivalents of $112.4 million, providing an estimated operational runway of approximately 15 to 18 months absent additional financing.
• Capital Structure. The Company has raised total venture capital of approximately $420 million through four rounds of financing (Series A through Series D). The Company's major institutional investors include Crestline Ventures, LP (28.3% ownership), Boreal Health Partners Fund III, LP (19.7% ownership), and Apex Growth Equity Fund II, LP (14.1% ownership). Each of these investors holds a board seat through its designated representative (David Ng for Crestline, Sarah Dalmqvist for Boreal, and Marcus Doyle for Apex). An employee stock option pool of 9.8% of the Company's fully diluted capitalization has been established.
• Operational Profile. Veridian employs approximately 148 individuals across three locations: its principal office and research facility at 550 Gateway Drive, Cambridge, Massachusetts (approximately 110 employees); a satellite research office in San Francisco, California (approximately 25 employees); and a clinical operations office in Bethesda, Maryland (approximately 13 employees). The Company's operations center on the development of its proprietary VeriTCE bispecific T-cell engager platform, with three pipeline candidates in various stages of development.
• Clinical Operations. Veridian's lead candidate, VRD-4187, is a bispecific T-cell engager targeting DLL3 for the treatment of extensive-stage small cell lung cancer ("ES-SCLC"). VRD-4187 is currently being evaluated in the Phase II Marlowe Asset Management-2 trial (NCT05837291; IND No. 154832), which has enrolled 387 patients (194 treatment arm, 193 control arm) across 42 clinical sites in the United States and the European Union. Two additional pipeline candidates — VRD-5823 (targeting CLDN18.2 for gastric cancer, in IND-enabling studies) and VRD-6190 (targeting PSMA for prostate cancer, in preclinical development) — are in earlier stages.
Against this backdrop, the aggregate annual premium of approximately $1.38 million is within the range we would expect for a company of this size and operational complexity. The coverage limits are generally adequate, with the important caveats noted in Parts IV, V, and VI below regarding clinical trial liability adequacy and change-of-control implications.
IV. Detailed Policy-by-Policy Analysis
A. Directors and Officers Liability Insurance ("D&O")
1. Policy Details
Veridian maintains a two-layer Directors and Officers Liability Insurance program consisting of a primary policy and a single excess layer, with combined limits of $20,000,000 in the aggregate.
Primary Layer:
• Carrier: Meridian Specialty Insurance Company ("Meridian Specialty")
• Policy Number: MSI-DOL-2023-44719
• Policy Type: Claims-made Directors and Officers Liability Insurance, including Side A (non-indemnifiable loss), Side B (corporate reimbursement), and Side C (entity securities coverage) insuring agreements
• Policy Period: November 1, 2023 through November 1, 2024
• Retroactive Date: January 15, 2017 (coinciding with the Company's date of incorporation)
• Coverage Limits: $10,000,000 per claim and $10,000,000 in the aggregate for all claims during the policy period, including defense costs within the limit
• Retention: $500,000 self-insured retention applicable to entity-side coverage (Side B and Side C claims only); no retention applicable to individual insured persons under Side A
• Annual Premium: $287,500
• Named Insureds: Veridian Biosciences, Inc., and its past, present, and future directors, officers, and management employees (as defined in the policy)
Excess Layer:
• Carrier: Harborview Excess Insurance Corp. ("Harborview Excess")
• Policy Number: HEI-XDO-2023-08317
• Policy Type: Follow-form excess Directors and Officers Liability Insurance
• Policy Period: November 1, 2023 through November 1, 2024, coterminous with the primary layer
• Coverage Limits: $10,000,000 excess of $10,000,000, for a combined program limit of $20,000,000
• Retention: Follow form (applicable only after exhaustion of the primary layer)
• Annual Premium: $143,750
• Named Insureds: Follow form with the primary policy
The current directors and officers covered under the D&O program include: Dr. Julian Marek (Chief Executive Officer and Co-Founder, holding 8.4% equity on a fully diluted basis), Dr. Priya Chandrasekaran (Chief Scientific Officer and Co-Founder, holding 6.2% equity on a fully diluted basis), Steven R. Kessler (Chief Financial Officer), Dr. Anne-Marie Fontaine (Vice President, Regulatory Affairs), Rachel Stein-Goldberg (General Counsel and Corporate Secretary), and three investor-designated board members: David Ng (designee of Crestline Ventures, LP), Sarah Dalmqvist (designee of Boreal Health Partners Fund III, LP), and Marcus Doyle (designee of Apex Growth Equity Fund II, LP).
2. Change-of-Control Provisions
The Meridian Specialty primary D&O policy contains a change-of-control provision at Section VIII(C) of the policy form. This provision states, in relevant part:
"In the event of a Change of Control of the Company, the coverage afforded by this Policy shall, with respect to any Wrongful Act occurring or allegedly occurring after the effective date of such Change of Control, automatically and without the requirement of notice to the Insurer, be converted to run-off coverage, which shall apply solely to Wrongful Acts occurring or allegedly occurring on or before the effective date of such Change of Control. The run-off period shall be the remaining unexpired portion of the Policy Period."
The policy defines "Change of Control" to include, among other events, the acquisition by any person or group of persons of more than fifty percent (50%) of the outstanding voting securities of the Company. Penterra's proposed acquisition of 100% of the outstanding capital stock of Veridian clearly satisfies this definition.
The Harborview Excess policy follows form with the primary Meridian Specialty policy with respect to change-of-control provisions. Accordingly, both layers will automatically convert to run-off coverage upon closing, providing protection only for wrongful acts occurring on or before the closing date.
Critically, upon conversion to run-off, the remaining policy period (i.e., the time between the closing date and the November 1, 2024 policy expiration) would serve as the only available reporting period for pre-closing claims, unless an extended reporting period (tail) is separately procured. Given that the anticipated closing date is in late June or early July 2024, this would provide only approximately four to five months of run-off reporting time — a wholly inadequate period given the six-year statute of limitations applicable to many potential claims.
SPA Implications. Section 9.2 of the SPA addresses post-closing indemnification of Veridian's directors and officers for pre-closing acts. The Fundamental Representation survival period under the SPA extends for the full applicable statute of limitations plus sixty (60) days. We note that the SPA should be reviewed to confirm whether it includes an express obligation on the part of Penterra to procure or maintain D&O tail coverage for pre-closing acts. If such an obligation is not already included, we recommend its inclusion as a pre-closing covenant or closing deliverable.
Recommendation. We strongly recommend that Penterra require, as a condition to closing or as a pre-closing covenant of the Sellers, the procurement of a six-year tail D&O policy providing run-off coverage for all pre-closing wrongful acts of Veridian's directors and officers, including the three investor-designated board members. Based on market pricing for tail policies of this nature, we estimate the tail premium at approximately 200% to 300% of the annual primary layer premium, or approximately $575,000 to $862,500 for the primary layer alone. Including the excess layer, the total tail premium could range from approximately $862,500 to $1,293,750. Veridian's broker, Wellington & Pryor Insurance Advisors, LLC, should be engaged to obtain binding quotations from Meridian Specialty and Harborview Excess. Responsibility for payment of the tail premium should be addressed in the SPA.
3. Coverage Adequacy
The combined $20,000,000 program limit (inclusive of defense costs) is within the market range for private, venture-backed biotechnology companies with aggregate venture capital raised of $420 million. Industry benchmarking data suggests that companies in this capitalization range typically maintain D&O limits of between $15 million and $30 million, depending on the company's risk profile, board composition, and stage of development.
We note the following considerations regarding the adequacy of coverage limits:
• Transaction-Related Claims. The proposed $900 million acquisition may give rise to stockholder claims alleging breach of fiduciary duty by Veridian's directors and officers in connection with the transaction. While Veridian is a private company and therefore not subject to the same level of stockholder litigation risk as a public company, dissenting stockholders or optionholders could conceivably assert claims related to the transaction price, process, or disclosure. The D&O policy should be reviewed to confirm that it does not contain a transaction-related exclusion that would bar coverage for such claims.
• Securities Claims. The Side C (entity securities coverage) insuring agreement provides coverage for securities claims against Veridian itself. We note that the policy contains a securities exclusion for claims arising from public offerings of securities. Because Veridian is a private company and has not conducted any public offering, this exclusion is not presently relevant but should be monitored if any pre-closing securities issuance activity occurs.
• Regulatory Proceedings. The policy contains a regulatory proceedings exclusion with a carve-back for defense costs only. Given that Veridian's clinical operations are subject to extensive FDA and EMA regulatory oversight, we recommend confirming that this carve-back provides adequate coverage for defense costs associated with any pre-closing regulatory investigations or proceedings.
4. Claims History
Based on our review of the loss runs provided by Meridian Specialty (covering the period from the policy inception date of January 15, 2017 through March 31, 2024) and the loss runs provided by Harborview Excess (covering the period from the inception of the excess layer on November 1, 2020 through March 31, 2024), there have been no claims made, no claims paid, and no notices of circumstance filed under either the primary or excess D&O policies during the entire coverage history. Rachel Stein-Goldberg confirmed during our April 15, 2024 discussion that there are no pending or threatened D&O claims against any director or officer of Veridian.
This clean claims history is consistent with the Company's pre-revenue, private-company status and relatively short operating history. We note, however, that the absence of historical claims does not mitigate the need for adequate tail coverage in connection with the proposed transaction, as transaction-related claims frequently arise only after closing.
We cross-reference the Litigation and Contingent Liabilities Due Diligence Memorandum (dated May 18, 2024) for a comprehensive analysis of all pending and threatened litigation matters involving Veridian, including any matters that could implicate D&O coverage.
B. General Liability Insurance ("GL" / Commercial General Liability)
1. Policy Details
• Carrier: National Guardian Insurance Group ("National Guardian")
• Policy Number: NGIG-CGL-2024-55203
• Policy Type: Occurrence-based Commercial General Liability Insurance, written on an ISO CG 00 01 form (or substantial equivalent)
• Policy Period: January 1, 2024 through January 1, 2025
• Coverage Limits:
• $2,000,000 per occurrence
• $4,000,000 general aggregate (applies per location)
• $2,000,000 products-completed operations aggregate
• $1,000,000 personal and advertising injury per occurrence
• $1,000,000 damage to premises rented to the insured (any one premises)
• $10,000 medical expense (any one person)
• Deductible: $10,000 per occurrence, applicable to bodily injury and property damage claims
• Annual Premium: $42,300
• Named Insured: Veridian Biosciences, Inc.
• Additional Insureds: Gateway Drive Associates LLC (landlord of 550 Gateway Drive, Cambridge, MA 02142), added by endorsement per the requirements of the lease agreement
2. Coverage Scope
The Commercial General Liability policy provides standard CGL coverage for Veridian's operations, including:
• Bodily Injury and Property Damage Liability (Coverage A): Coverage for sums that Veridian becomes legally obligated to pay as damages because of bodily injury or property damage to which the insurance applies, caused by an occurrence that takes place in the coverage territory during the policy period.
• Personal and Advertising Injury Liability (Coverage B): Coverage for personal and advertising injury caused by an offense committed during the policy period, including claims for libel, slander, disparagement, wrongful eviction, and violation of a person's right of privacy.
• Products-Completed Operations (Coverage A, as applied to products and completed operations hazard): Although Veridian has no marketed products, this coverage is relevant to any clinical trial materials or investigational products distributed by the Company, as well as any completed services provided to third parties.
• Medical Payments (Coverage C): Coverage for medical expenses incurred by third parties injured on Veridian's premises, without regard to fault.
The coverage territory includes the United States, its territories and possessions, Puerto Rico, and Canada. Coverage also extends to claims arising from products or work completed in the coverage territory that are brought against Veridian anywhere in the world.
3. Key Exclusions and Endorsements
We note the following material exclusions and endorsements:
• Professional Liability Exclusion (Endorsement CGL-EXC-04). The policy excludes coverage for bodily injury, property damage, or personal and advertising injury arising out of the rendering of or failure to render any professional services, including clinical or medical services. This exclusion is standard and is intended to delineate coverage between the CGL policy and the Company's dedicated Clinical Trial Liability Insurance.
• Pollution and Environmental Exclusion (Standard ISO Exclusion f). The policy contains the standard total pollution exclusion, excluding coverage for bodily injury or property damage arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants. This exclusion is relevant given Veridian's laboratory operations involving biological and chemical materials. We cross-reference the Environmental Due Diligence Memorandum (dated May 15, 2024) for an analysis of Veridian's environmental practices and compliance, including the handling and disposal of biological agents, chemical reagents, and hazardous waste at the Cambridge and San Francisco facilities.
• Expected or Intended Injury Exclusion (Standard ISO Exclusion a). The policy excludes coverage for bodily injury or property damage expected or intended from the standpoint of the insured.
• Employment-Related Practices Exclusion (Endorsement CGL-EXC-07). The policy excludes coverage for bodily injury arising out of any employment-related practices, policies, acts, or omissions, including but not limited to wrongful termination, discrimination, harassment, and retaliation. Such claims are intended to be covered under the Company's Employment Practices Liability Insurance.
• Additional Insured Endorsement (Endorsement CGL-AI-01). Gateway Drive Associates LLC, the landlord of Veridian's Cambridge facility, is added as an additional insured with respect to liability arising out of Veridian's use or occupancy of the leased premises at 550 Gateway Drive, Cambridge, MA 02142.
4. Change-of-Control Implications
As an occurrence-based policy, the Commercial General Liability policy does not present the same change-of-control concerns as claims-made policies. Coverage under an occurrence-based policy is triggered by when the bodily injury or property damage occurred, not when the claim is made. Accordingly, the CGL policy should continue to respond to occurrences that take place during the policy period, regardless of whether the claim is made before or after the change of control.
We have reviewed the policy for assignment restrictions and note that the policy contains a standard provision (consistent with ISO CG 00 01) stating that the policy may not be assigned without the written consent of the insurer. However, courts have generally held that such anti-assignment provisions do not apply to the assignment of rights under an insurance policy after a loss has occurred, and in the context of a stock purchase (where the named insured entity continues to exist), the policy should remain in full force and effect without the need for an assignment. Nonetheless, we recommend that Penterra provide notice to National Guardian of the change in ownership as a matter of good practice and to preserve the relationship with the carrier for renewal purposes.
5. Claims History
The loss runs provided by National Guardian for the period from January 1, 2019 through March 31, 2024 reflect one reported incident:
• Incident Date: March 7, 2023. A visitor to Veridian's Cambridge facility sustained a minor slip-and-fall injury in the lobby area. First-party medical payments of $2,340 were paid under Coverage C. No bodily injury liability claim was asserted. The incident is classified as closed.
There are no open or pending claims under the CGL policy. The claims history is unremarkable and consistent with a low-risk premises liability profile.
C. Clinical Trial Liability Insurance
1. Policy Details
• Carrier: Bioguard Specialty Underwriters Ltd. ("Bioguard"), a London-based specialty insurer authorized to transact insurance in the relevant jurisdictions through Lloyd's Syndicate 4287
• Policy Number: BSU-CTL-2023-90147
• Policy Type: Claims-made Clinical Trial Liability Insurance
• Policy Period: September 1, 2023 through September 1, 2024
• Retroactive Date: March 1, 2022 (corresponding to the commencement of clinical activities under the VRD-4187 Phase I study)
• Coverage Limits:
• $20,000,000 per claim (inclusive of defense costs)
• $40,000,000 aggregate for all claims during the policy period
• Self-Insured Retention: $250,000 per claim
• Annual Premium: $412,000
• Named Insured: Veridian Biosciences, Inc.
• Additional Insureds: None specifically endorsed; however, the policy extends coverage to Veridian's employees, officers, and directors acting within the scope of their duties in connection with the covered clinical trials
2. Coverage Scope
The Clinical Trial Liability policy provides coverage for damages and defense costs arising from bodily injury to clinical trial participants (including patients, healthy volunteers, and study subjects) caused by or arising from the administration of investigational products in the course of clinical trials conducted by or on behalf of Veridian.
The policy specifically covers the following clinical programs:
• VRD-4187 (lead candidate): Bispecific T-cell engager targeting DLL3 for ES-SCLC. Currently in Phase II evaluation under the Marlowe Asset Management-2 trial (ClinicalTrials.gov Identifier: NCT05837291; IND No. 154832, granted by the FDA on June 14, 2022). The trial is a randomized, open-label study enrolling patients at 42 clinical sites across the United States (28 sites) and the European Union (14 sites, located in Germany, France, Spain, the Netherlands, and Italy). As of the data cutoff date of April 1, 2024, 387 patients have been enrolled (194 treatment arm, 193 control arm).
• VRD-5823 (second pipeline candidate): Bispecific T-cell engager targeting CLDN18.2 for gastric cancer. Currently in IND-enabling preclinical studies; no clinical trial activity has commenced. This candidate is scheduled to enter Phase I by Q1 2025 (subject to IND clearance). The Clinical Trial Liability policy does not currently cover VRD-5823 clinical activity, as no IND has been filed. A policy amendment or new coverage placement will be required upon commencement of clinical dosing.
• VRD-6190 (third pipeline candidate): Bispecific T-cell engager targeting PSMA for prostate cancer. Currently in early preclinical development. No clinical trial activity is anticipated within the current policy period. This candidate is not covered under the Clinical Trial Liability policy.
The coverage territory extends to clinical trials conducted in the United States and the European Union, consistent with the geographic scope of the Marlowe Asset Management-2 trial. The policy specifically endorses coverage for EU trial sites, including compliance with applicable EU clinical trial insurance requirements (discussed further in subsection 4 below).
Coverage extends to investigator sites and principal investigators to the extent that their acts or omissions in conducting the clinical trial give rise to liability that would also be attributable to Veridian as the clinical trial sponsor. The policy does not provide direct coverage to investigators or clinical sites as named or additional insureds, and investigators are expected to maintain their own professional liability coverage through their institutional affiliations.
3. Adequacy Assessment — Critical Analysis
This is the most significant insurance coverage issue identified in connection with this transaction. The adequacy of the Clinical Trial Liability policy limits must be assessed in light of the specific risk profile of VRD-4187 and the scope of the Marlowe Asset Management-2 trial.
Drug Mechanism and Known Risks. VRD-4187 is a bispecific T-cell engager — a class of immunotherapy agents that redirects T cells to engage and kill tumor cells. This mechanism of action, while therapeutically promising, is associated with well-documented and potentially severe immune-mediated adverse events, including:
• Cytokine Release Syndrome ("CRS"): CRS is a systemic inflammatory response triggered by the activation of T cells and is a known class-related risk for all T-cell engaging bispecific antibodies. CRS can range from mild (Grade 1-2) to life-threatening (Grade 4-5) and may require intensive care unit ("ICU") admission, vasopressor support, and treatment with anti-cytokine agents such as tocilizumab. In the Phase I study of VRD-4187 (per data available in the virtual data room), CRS was observed in approximately 62% of patients, with Grade 3 or higher CRS reported in approximately 8% of patients.
• Immune Effector Cell-Associated Neurotoxicity Syndrome ("ICANS"): ICANS is a neurotoxic syndrome associated with T-cell activation, characterized by confusion, aphasia, encephalopathy, seizures, and cerebral edema. ICANS was reported in approximately 15% of patients in the Phase I study, with Grade 3 or higher events in approximately 3%.
• Other Immune-Mediated Adverse Events: Additional risks include hepatotoxicity, pancytopenia, tumor lysis syndrome, and severe infection secondary to immunosuppression.
Trial Scope and Exposure Analysis. With 387 patients enrolled across 42 clinical sites in the United States and the European Union, the potential for multi-claimant adverse event scenarios is significant. In a worst-case scenario involving a cluster of severe CRS or ICANS events at one or more clinical sites, multiple claims could be asserted simultaneously, rapidly eroding the per-claim and aggregate limits. We note the following specific concerns:
• The $20,000,000 per-claim limit, while reasonable for individual adverse events, may be insufficient for severe cases involving prolonged ICU stays, permanent disability, or death, particularly in jurisdictions with high damages awards (e.g., certain US states).
• The $40,000,000 aggregate limit, when measured against 387 enrolled patients (with the treatment arm of 194 patients receiving VRD-4187), provides an effective per-patient aggregate allocation of approximately $206,000 (treatment arm patients only) or $103,000 (all enrolled patients). If even a small percentage of treatment arm patients (e.g., 5-10%) experience severe adverse events giving rise to claims, the aggregate limit could be exhausted rapidly.
• Defense costs are included within the per-claim and aggregate limits (rather than being in addition to limits), which further reduces the effective indemnity coverage available.
Recommendation. We recommend that Penterra carefully evaluate whether the current clinical trial liability limits are adequate in light of the foregoing risk analysis. Specifically:
(a) Penterra should request from Veridian's broker, Wellington & Pryor Insurance Advisors, LLC, a quotation for increased clinical trial liability limits, potentially to $50,000,000 per claim / $100,000,000 aggregate, or such higher limits as may be available in the market. Given the premium implications, this evaluation should be conducted as part of the post-closing insurance integration process.
(b) In the interim, Penterra should confirm whether the Pinnacrest Excess Insurance Co. umbrella policy (discussed in subsection I below) sits above and follows form with the Clinical Trial Liability policy. If the umbrella does follow form, the combined limits may provide an additional $25,000,000 of coverage above the $40,000,000 clinical trial liability aggregate. However, as discussed in subsection I, we have identified uncertainty regarding whether the umbrella scheduled the Clinical Trial Liability policy as an underlying policy.
(c) If VRD-4187 progresses to a Phase III trial following the acquisition, which would involve substantially larger patient populations, the clinical trial liability limits will need to be reassessed and almost certainly increased.
4. EU / International Requirements
Several EU member states require mandatory clinical trial insurance as a condition of conducting clinical trials within their jurisdictions. The EU Clinical Trials Regulation (Regulation (EU) No. 536/2014), which became fully applicable on January 31, 2022, requires that clinical trial sponsors ensure adequate insurance or indemnification coverage for trial participants, although the specific requirements vary by member state.
Based on our review of the Bioguard policy endorsements and the data room documentation regarding EU trial site approvals, we note the following:
• Germany: The German Medicines Act (Arzneimittelgesetz, or AMG) requires mandatory clinical trial insurance covering each trial participant. Bioguard has issued an endorsement (Endorsement BSU-EU-DE-01) confirming compliance with German mandatory clinical trial insurance requirements for the seven (7) Marlowe Asset Management-2 sites in Germany. The endorsement specifies minimum per-patient limits of EUR 500,000, consistent with the statutory requirement.
• France: French law requires that clinical trial sponsors maintain liability insurance covering participants. Bioguard has issued an endorsement (Endorsement BSU-EU-FR-01) for the three (3) French trial sites.
• Spain: Spanish regulations require clinical trial insurance with minimum per-patient coverage. Bioguard has issued an endorsement (Endorsement BSU-EU-ES-01) for the two (2) Spanish trial sites.
• Netherlands: The Netherlands requires mandatory clinical trial insurance (Besluit verplichte verzekering bij medisch-wetenschappelijk onderzoek met mensen) with specific minimum per-patient limits. Bioguard has issued an endorsement (Endorsement BSU-EU-NL-01) for the one (1) Dutch trial site.
• Italy: Italian regulations require clinical trial sponsors to maintain insurance or indemnification arrangements. We have identified that the Bioguard policy does not appear to include a specific Italian endorsement for the one (1) Italian trial site. This is an open item. We have included this in our supplemental request to Zalcourt Archer & Cole (see Appendix D) and recommend that Penterra seek confirmation that adequate coverage is in place for the Italian site prior to closing.
5. Change-of-Control Provisions
The Bioguard Clinical Trial Liability policy is a claims-made policy and contains a change-of-control provision at Clause 12 of the policy form. This provision states:
"In the event of a Change of Control of the Named Insured, being a transaction or series of related transactions resulting in any person or group of persons acquiring, directly or indirectly, more than fifty percent (50%) of the voting securities or equity interests of the Named Insured, this Policy shall, unless the Insurer provides prior written consent to the continuation of coverage on then-current terms, be deemed to provide Run-Off Coverage only, effective as of the date of such Change of Control, applying solely to Claims arising from Covered Events occurring or allegedly occurring prior to the date of such Change of Control."
Unlike the D&O policy (which converts automatically to run-off), the Bioguard policy allows for the possibility of continuation with the carrier's prior written consent. This is a significant distinction, as it potentially allows Penterra to maintain full going-forward clinical trial liability coverage under the existing policy, subject to Bioguard's consent.
Recommendation. We recommend the following approach:
(a) Seek Carrier Consent. Penterra should, through Veridian's broker or its own broker, approach Bioguard to seek written consent for the continuation of the Clinical Trial Liability policy on current terms following the change of control. Given that the Marlowe Asset Management-2 trial is ongoing and that a lapse in clinical trial liability coverage would be operationally unacceptable, obtaining this consent should be treated as a high priority.
(b) Tail Coverage as Fallback. If Bioguard declines to consent to continuation, Penterra should immediately procure a tail or extended reporting period under the Bioguard policy to cover pre-closing adverse events, and simultaneously procure replacement clinical trial liability coverage from an alternative carrier. The estimated cost of a tail policy for clinical trial liability coverage of this nature is typically 150% to 250% of the annual premium, or approximately $618,000 to $1,030,000.
(c) Pre-Closing Covenant. The SPA should include a pre-closing covenant requiring Veridian to cooperate with Penterra's efforts to obtain carrier consent or, failing that, to procure tail coverage. We recommend that the status of this matter be monitored closely leading up to the anticipated closing.
6. Claims History
The loss runs provided by Bioguard for the period from the policy inception date of March 1, 2022 through March 31, 2024 reflect no claims made and no claims paid under the Clinical Trial Liability policy. Bioguard has confirmed that no notices of circumstance have been filed.
We have cross-referenced this claims history with the clinical trial safety reports available in the virtual data room, including the VRD-4187 Investigator's Brochure (Version 4.0, dated January 15, 2024) and the Marlowe Asset Management-2 Data Safety Monitoring Board ("DSMB") reports through the April 1, 2024 data cutoff. While adverse events have been reported in the clinical trial (as would be expected), none have given rise to participant injury claims or litigation as of the date of this memorandum.
We note, however, that the absence of historical claims does not diminish the risk of future claims, particularly given the immunological mechanism of action of VRD-4187 and the ongoing enrollment and treatment of patients in the Marlowe Asset Management-2 trial. Claims arising from clinical trial adverse events may be delayed by months or years following the initial adverse event, as patients may not attribute their injuries to the investigational product until after the trial has concluded.
D. Product Liability Insurance
1. Policy Details
• Carrier: Continental Pharma Insurance Co. ("Continental Pharma")
• Policy Number: CPI-PL-2024-12038
• Policy Type: Claims-made Product Liability Insurance
• Policy Period: January 1, 2024 through January 1, 2025
• Retroactive Date: March 1, 2022
• Coverage Limits:
• $5,000,000 per claim (inclusive of defense costs)