Regulatory compliance and quality assurance must be thoroughly evaluated in the fast-paced world of pharmaceutical transactions, mergers, acquisitions, and partnerships.

Due diligence plays a pivotal role in identifying potential risks, ensuring product integrity, and safeguarding long-term business success. Here, we explore the critical quality and compliance due diligence factors, highlighting common challenges and best practices.

Why Quality & Compliance Due Diligence Matter?

Quality and compliance deficiencies can present significant legal and financial risks in pharmaceutical transactions.

A failure to conduct proper due diligence can lead to regulatory enforcement actions, product recalls, consent decrees, or even litigation, as demonstrated in cases like the Akorn v. Fresenius merger dispute. Ensuring compliance with FDA regulations and global quality standards is essential to maintaining product safety and business stability.

Key Risks in Quality and Compliance Deficiencies

• Regulatory Non-Compliance: Under 21 CFR Part 211, manufacturing facilities must adhere to Good Manufacturing Practices (GMP). Non-compliance can result in warning letters, import alerts, or legal penalties.
• Data Integrity Issues: Inaccurate or manipulated data can invalidate regulatory filings, leading to FDA scrutiny and loss of business credibility.
• Operational Disruptions: Poor quality controls can result in product failures, recalls, or supply chain interruptions, which can impact financial stability.
• Legal Consequences: Violations can result in criminal prosecution, injunctions, and financial penalties, damaging a company’s reputation and shareholder value.

Essential Areas of Focus in Quality Due Diligence

1. Manufacturing & Supply Chain
   • Assess facility compliance with GMP and contemporary manufacturing standards.
   • Evaluate the reliability and track record of third-party contract manufacturers.
   • Investigate product failure rates, deviations, and batch record history.
   • Examine the facility’s infrastructure, equipment maintenance, and workforce expertise.
   • Determine if the manufacturing process aligns with current regulatory expectations.
   • Review the robustness of quality agreements with third-party manufacturers.
2. Field History & Pharmacovigilance
   • Review product safety profiles, adverse event (AE) reporting, and recall history.
   • Ensure a robust risk management framework is in place for monitoring post-market performance.
   • Analyze historical trends in safety signals and risk mitigation strategies.
   • Verify compliance with Risk Evaluation & Mitigation Strategy (REMS) programs for high-risk products.
3. Regulatory Compliance & Inspections
   • Examine past FDA inspection history, including 483 observations, warning letters, and enforcement actions.
   • Assess internal audit programs and corrective action effectiveness.
   • Evaluate relationships with regulatory agencies and responsiveness to compliance issues.
   • Determine if prior enforcement actions have been adequately remediated.
4. Data Integrity & Governance
   • Verify the integrity of electronic and paper-based records.
   • Confirm adherence to 21 CFR Part 11 for electronic data management and security.
   • Evaluate the company’s history with whistleblower complaints or data integrity breaches.
   • Assess IT infrastructure and controls to prevent data manipulation.
   • Determine if data governance committees oversee compliance with data integrity regulations.
5. Corporate Commitment to Quality
   • Determine if the target company has a strong quality culture and has dedicated investment in compliance personnel and systems.
   • Assess management oversight, governance structures, review boards, and decision-making transparency.
   • Examine whether internal audits and mock regulatory inspections are regularly conducted.
   • Verify if quality performance metrics are integrated into corporate governance strategies.

Case Study: Akorn v. Fresenius – The Cost of Inadequate Due Diligence

In the landmark case of Akorn v. Fresenius, data integrity failures at Akorn led to Fresenius terminating a $4.75 billion merger agreement. Whistleblower allegations revealed widespread fraud, prompting regulatory scrutiny and a dramatic decline in Akorn’s market value. This case underscores the necessity of thorough due diligence in evaluating data integrity and compliance risks.

Best Practices for Executing Quality Due Diligence

• Conduct Pre-Due Diligence Research: Review FDA enforcement records, warning letters, and company history before initiating a transaction.
• Assemble Experienced Teams: Utilize professionals with FDA regulatory expertise to assess quality risks effectively.
• Go Beyond Paper Reviews: Onsite audits provide a deeper understanding of manufacturing conditions and compliance culture.
• Establish Clear Review Criteria: Define deal-breakers related to compliance and quality risks early in the due diligence process.
• Ensure Transparency and Accountability: Encourage open disclosures and require remediation plans for identified risks before proceeding with a transaction.
• Develop a Due Diligence Workplan: Customize the scope based on the complexity of the transaction and potential regulatory risks.
• Review Third-Party Relationships: For compliance, evaluate contract manufacturing organizations (CMOs), suppliers, and laboratories.
• Assess Historical Trends: Investigate long-term quality system performance, including recurring deviations and compliance gaps.

Conclusion

Quality and compliance due diligence is not just a regulatory requirement but a strategic necessity for pharmaceutical transactions. A robust due diligence framework can prevent costly missteps, ensure regulatory alignment, and protect business interests in the long run.

Integrating quality assessments into M&A strategies allows companies to make informed decisions and effectively mitigate potential risks, a strategic necessity for pharmaceutical transactions.

A robust due diligence framework can prevent costly missteps, ensure regulatory alignment, and protect business interests in the long run. By integrating quality assessments into M&A strategies, companies can effectively make informed decisions and mitigate potential risks.

Contact us below to learn how we can help with Quality and Compliance Due Diligence in Pharmaceutical transactions.