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Due Diligence in Life Sciences Mergers & Acquisitions

December 01, 2015 (38 min read)

By: Reb Wheeler, Mayer Brown LLP

LEXIS PRACTICE ADVISOR RESEARCH PATH: Mergers & Acquisitions > M&A by Industry > Life Sciences M&A

THE LIFE SCIENCES INDUSTRY HAS BEEN AMONG THE MOST active sectors for mergers and acquisitions in recent years. There are a variety of issues that are uniquely or particularly relevant to life sciences companies and their products that will have important implications for evaluating, structuring, and negotiating transactions in the industry. It is especially important that counsel working on life sciences M&A deals understand these issues when conducting due diligence. While some aspects of legal due diligence in these deals will be more or less the same as in any M&A transaction, there are certain areas of due diligence that tend to assume particular significance in a life sciences acquisition. This article explores a number of such considerations, including (1) product-specific issues, such as intellectual property, marketing approvals, post-marketing obligations, and licensing and collaboration relationships; and (2) enterprise-level issues, such as compliance and supply chain considerations.

For present purposes, the “life sciences” sector is generally considered to include pharmaceuticals, health-oriented biotechnology products, and medical devices. Not all of the considerations discussed in this article will be relevant (or relevant in the same way) to participants in these different industry segments. This article is also focused on U.S.-specific issues in transactions involving U.S. targets. Many U.S. life sciences companies, of course, conduct business and have personnel and assets in multiple countries; international and cross-border issues will therefore often be an important focus in life sciences M&A deals as well.

Product Life Cycle and Market Exclusivity

Pharmaceutical companies and biotech firms often think about their products in terms of their life cycle. In the most common case, in the United States, a novel pharmaceutical or biotech product’s life cycle begins during its development— well before its approval by the FDA—and proceeds through a period during which the product enjoys an exclusive position in the marketplace and into a phase in which market share is ceded to competing generic or “biosimilar” products that can be substituted for the innovator product. The goal of innovator or “brand” companies is to maximize the period during which the product enjoys market exclusivity and to delay entry of generic or biosimilar competition for as long as possible. These considerations inform many aspects of a pharmaceutical or biotech company’s business and products, as the discussion below illustrates. It is often helpful, therefore, to bear these life cycle considerations in mind when undertaking product- focused due diligence on a life sciences target.

The most significant factors bearing on market exclusivity are intellectual property rights and regulatory exclusivity periods. Practitioners advising participants in life sciences M&A deals need to understand these different sources of rights in order to help their clients properly assess a product’s legal positioning and negotiate and document transaction structures, different approaches to consideration, and other terms that appropriately take into account these key factors that bear on a product’s life cycle.

Life cycle management is less of a consideration for medical device companies. Medical devices do not benefit from the kinds of regulation-based market exclusivity that is available to drugs and biologic products and thus do not face generic competition in the same way that drugs and biologics do. Patent and trade secret protection can, however, have significant bearing on a medical device’s market posture.

Intellectual Property

The intellectual property (IP) underlying a drug, biologic, or medical device, and the legal rights associated with that IP, are key determinants of whether and how long a product is likely to enjoy an exclusive market position. Relevant intellectual property rights include:

  • Patents. Patents are particularly important to life sciences companies given that they allow the holder to preclude others from making, using, selling, offering for sale, or importing the claimed invention during the patent term. Life sciences companies’ products are often covered by a number of different patents covering various aspects of the product or its manufacturing or use. In addition to composition of matter patents claiming the actual formulation of a drug or the technical specifications of a device, patents covering manufacturing processes, methods of use, and even distribution systems may also be obtained. Novel pharmaceutical and biologic products, and medical devices that must undergo clinical trials by virtue of a premarket application process, may be entitled to an extension of their patent terms pursuant to the Drug Price Competition and Patent Term Restoration Act of 1981 (98 Stat. 1585, 98 P.L. 417, 98 Stat. 1585) (the “Hatch-Waxman Act”). The extension, designed to make up for the portion of the patent term lost during the clinical trial and approval process, can be for up to five years, provided, however, that the extension cannot result in an overall remaining patent term in excess of 14 years.
  • Trade Secrets. Trade secrets can also be important, particularly where patent protection may not be possible or where the innovator seeks to protect an invention beyond the term of a patent.
  • Trademarks. Though not typically as determinative a factor of market share as patent rights or trade secret protection, branding is also an important part of marketing innovative life sciences products. As such, trademarks should also be evaluated as part of due diligence.

Diligencing intellectual property issues associated with a drug, biologic, or medical device can become very technical and complicated. Any such effort should focus on a number of factors, including the following:

The nature and validity of the intellectual property and the target company’s rights in the IP. Among other things, consideration should be given to the following:

  • Subsisting Patents: What, if any, subsisting patents claim the product or its manufacture or use and what are their remaining terms?
  • Pending Patent Applications: The likelihood that any pending patent applications claiming the product or its manufacture or use will be granted and whether and how the claims asserted in those applications might be narrowed.
  • Strength of Claims: The strength of the claims included in patents and patent applications and the likelihood that they might be challenged by a generic or biosimilar entrant or that a competitor might be able to engineer around them.
  • Patent Term Extension: For products that have not yet been approved, the prospects for patent term extension pursuant to the Hatch-Waxman Act, as described above.
  • Supplemental Claims/Additional Patents: Whether there are opportunities to supplement the claims of existing patents or seek additional patents in respect of other aspects of the product.
  • Trade Secret Protection: To the extent that the target relies on trade secret protection, the strength of its security and confidentiality procedures for safeguarding the secrecy of those trade secrets.
  • Trademarks and Trade Dress: For marketed products, whether applications to the U.S. Patent and Trademark Office for the registration of trademarks or trade dress in respect of important branding elements of the product have been filed and allowed and, if so, the classes of use for which registration has been sought, as well as the target’s practices relating to marking, quality control, and enforcement.
  • Third-Party Infringement: Any allegations by the target that third parties have infringed or otherwise violated its intellectual property rights, including the status of any pending litigation involving such allegations.

Freedom to operate. Particularly for product candidates that have not yet reached the market, it is important to assess the risk that the product’s manufacture and/or commercialization might infringe a third party’s intellectual property rights. Although it may not be practical to conduct fulsome freedom to operate analyses for each of a target company’s products and product candidates, such analyses may be warranted for the most important products or candidates. Due diligence should also focus on any past or pending claims or allegations that the target is infringing a third party’s intellectual property and the terms of any settlement or other resolution relating thereto.

Third-party rights. An important part of conducting due diligence on a target company’s IP is tracing the heritage of that IP and confirming that the target possesses all the rights it purports to possess in that IP. Practitioners should be on the lookout for the following situations:

  • Incomplete Assignment of IP Rights: Individuals involved in the conception of an invention were not party to invention assignment agreements or such invention assignment agreements did not effectively assign all rights to the purported IP owner, which could mean that the target is not the sole owner (or even an owner) of the relevant IP.
  • Acquired IP: IP was acquired by the target company or its predecessor from a third party, in which case counsel should review all relevant transfer documentation and confirm that the transfers have been properly recorded with the U.S. Patent and Trademark Office and applicable foreign equivalents.
  • Collaboration IP: IP was the product of a collaborative development effort by the target company and a third- party, in which case it is important to carefully review the terms of the collaboration agreement and other related agreements in order to assess ownership of the intellectual property, any limitations that may apply to the target company’s use of or ability to transfer the IP, and the rights that the third party may have in the IP, as further discussed below.

Regulatory Exclusivity Periods

In the case of drugs and biologics, the other key determinant of a new product’s prospects for market exclusivity in the United States, in addition to its patent coverage, is the regulatory exclusivity afforded to it in relation to its FDA approval. Developing new drugs and biologics commonly takes many years and involves enormous investments of money and resources. At the same time, innovators often apply for patents early in the development process. As a result, it is not uncommon for a number of years of the term of the patents covering a novel product or related process to have elapsed by the time the product is approved for sale. Congress has passed legislation to address this issue and ensure that innovators will have some period of exclusivity during which they will be able to market novel products free of generic competition in order to recoup their investment in a product’s development. One such legislative fix is the patent term extension program provided for under the Hatch-Waxman Act, as described above. Other legislation has provided for additional periods of statutory exclusivity during which the FDA may not approve (and in some cases, may not accept) applications for competing generic or biosimilar products. It is important for counsel to understand these different possibilities for market exclusivity in order to assess (1) what forms of market exclusivity attach to a given product, (2) how much time remains on such exclusivity terms, and (3) whether there are possibilities for obtaining additional forms of exclusivity.


In the United States, pharmaceuticals and biologics must, in most cases, be approved by the FDA before they can be marketed to the public. Novel pharmaceutical products are typically approved pursuant to a new drug application (NDA). Generic pharmaceuticals are typically approved through a more streamlined process pursuant to an abbreviated new drug application (ANDA). In the case of conventional drugs, several types of statutory exclusivity are available, as follows:

  • New Chemical Entity (NCE). NCE exclusivity is available for new drug products. NCE exclusivity means that the FDA cannot approve or even accept an ANDA or an NDA relying on §505(b)(2) for a generic product relying on the same active moiety during a period of five years after approval of the innovator drug’s NDA.
  • Clinical Investigation (CI) Exclusivity. CI exclusivity is available in some circumstances in which a product has an existing approved NDA and the sponsor conducts certain qualifying new clinical trials that support a change in the product’s dosage form, a new indication, or a change from prescription status to over-the-counter. If CI exclusivity attaches, the FDA is precluded from approving an application for a competing generic for a period of three years following approval of the supplemental NDA relating to such change or new indication, but not from accepting such an application.
  • Orphan Drug Exclusivity. Products that target treatment of an indication that affects fewer than 200,000 patients in the United States and products for which the development costs are likely to exceed product sales may be designated orphan drugs. In that case, the product will enjoy seven years of market exclusivity following approval, during which the FDA will be precluded from approving an application for a competing generic product (but may accept such an application for filing). Companies pursing orphan drugs are also eligible for certain research grants and tax credits, which make orphan drug designations even more sought after.
  • Pediatric Exclusivity. To encourage testing of drugs and biologics on children, the FDA sometimes requests that manufacturers undertake certain clinical studies in pediatric populations. Manufacturers who undertake pediatric trials in response to the FDA’s request benefit from an additional six months of exclusivity beyond whatever other exclusivity (including by virtue of patent terms) covers the product. Such additional exclusivity period covers all formulations, dosage strengths, and indications of the same drug.

Existing exclusivity and patent terms applying to marketed conventional drugs can be assessed relatively easily by referring to the FDA’s publication, Approved Drug Products with Therapeutic Equivalence Evaluations (the “Orange Book”), which is accessible online through the FDA’s website. See Drugs/InformationOnDrugs/ucm129662.htm. The Orange Book is searchable in a variety of ways and identifies the types of exclusivity attaching to listed drugs and when that exclusivity, as well as patent coverage, expires.

In the case of products in development for which an NDA has not yet been approved, a buyer will need to assess the current state of development efforts, when the NDA is likely to be filed (if it has not yet been filed) or where it stands in the approval process (if it has been filed), and whether an orphan drug designation or pediatric exclusivity may be available.


Biologics are approved pursuant to a biologic license application (BLA), and biosimilar products are approved pursuant to an abbreviated BLA process. The Patient Protection and Affordable Care Act of 2010 (124 Stat. 119, 111 P.L. 148, 124 Stat. 119) (the “Affordable Care Act”) established a separate regulatory exclusivity regime for biologicals. Under that regime, a biologic using a novel biological structure is entitled to data exclusivity for 12 years, meaning that the FDA will not accept an application for a biosimilar product claiming comparability to the applicable innovator biologic for a period of 12 years from approval of a BLA in respect of the innovator biologic. As with “small molecule” drugs, biologics can be eligible for a six-month extension with qualifying pediatric studies and can receive orphan designations.

The FDA has recently released the “Purple Book” (the formal name is Lists of Licensed Biological Products with Reference Product Exclusivity and Biosimilarity or Interchangeability Evaluations), which, in some respects, is to biologics what the Orange Book is to traditional drugs. See http:// HowDrugsareDevelopedandApproved/ApprovalApplications/ TherapeuticBiologicApplications/Biosimilars/ucm411418.htm. The Purple Book is significantly more limited in its scope, however. Accordingly, for now, practitioners will need to evaluate the BLA and patents covering biological products in order to assess exclusivity.

Medical Devices

Unlike pharmaceuticals and biologics, medical devices do not benefit from any regulatory market exclusivity provisions. Accordingly, market exclusivity for medical devices will typically be determined by intellectual property and other barriers to entry, as discussed above.

Generic and Biosimilar Competition

As a public policy counterweight to market exclusivity for pharmaceutical and biologic products and the benefits exclusivity affords innovator companies, U.S. law has established pathways for generic and biosimilar products to reach the market once patent protection and regulatory exclusivity of the innovator, or “reference,” product has expired and sometimes earlier. As noted above, the timing of generic or biosimilar competition will almost always be a key consideration for buyers when assessing the value and prospects of a pharmaceutical or biologic product. It is therefore important for counsel to understand and be able to evaluate the prospects for and timing of generic competition for products involved in an acquisition.


In the case of pharmaceuticals, the Hatch-Waxman Act permits manufacturers of generic versions of approved drugs to utilize more streamlined applications for marketing approval. Most generic drugs are marketed under an ANDA. An ANDA filer is not required to carry out either animal or human trials to demonstrate safety or efficacy; rather, it must demonstrate that the generic product is “bioequivalent” to the reference product in that it performs the same way as the reference drug. This is typically established through far more limited clinical trials than are required for new chemical entities.

As noted above, there are two key barriers to generic competition for pharmaceuticals: regulatory exclusivity and patents protecting the innovator drug. As discussed above, the type of regulatory exclusivity attaching to a particular innovator drug will dictate whether and when the FDA can accept or approve an ANDA in respect of a generic version of that drug. Applicants must address the issue of patent coverage by certifying in the ANDA one of the following with respect to the patents protecting the reference drug: (1) that no patent covering the reference drug was submitted to the FDA; (2) that all patents covering the reference drug that were submitted to the FDA have expired; (3) that the applicant seeks approval only once the applicable patents covering the reference drug expire; or (4) that the patent is invalid, unenforceable, or will not be infringed by the manufacture, use, or sale of the drug product for which the abbreviated application is submitted (a “Paragraph IV certification”).

The Hatch-Waxman Act requires that an ANDA filer must notify the holder of the NDA for the reference drug of its filing and further provides that the act of filing an ANDA with a Paragraph IV certification is an act of patent infringement such that the NDA holder has standing to initiate a patent infringement suit against the ANDA filer. If the NDA holder does so within 45 days after notice of the ANDA filing, the Hatch-Waxman Act establishes a 30-month stay during which the FDA cannot approve the ANDA unless the patent at issue expires or a court rules that there is no infringement or that the patent is invalid. If none of these occurs prior to the expiration of the 30-month stay and the regulatory exclusivity period covering the reference drug has lapsed, the FDA will be permitted to approve the ANDA for the generic product. If patent infringement litigation is still pending at the time of approval, however, any commercial launch of the generic product would be deemed “at risk” in that the generic company would face a substantial damages award in the event that it ultimately loses.

The Hatch-Waxman Act provides an important incentive for generic manufacturers to find their way through these regulatory and patent hurdles. The first manufacturer to file an ANDA for a generic version of a particular reference drug is generally awarded a 180-day marketing exclusivity period during which no other generic version of the same reference drug can be sold in the United States. This gives the “first-to- file” generic company a distinct advantage in terms of both pricing and market share over future generic entrants.

Given the high stakes involved in the timing of generic competition for a given drug, it is important that M&A practitioners understand the various dimensions of the generic approval process so that they are able to assist buyers in determining how to appropriately factor the specter of generic competitors to a target’s key products into their assessment of those products’ value and future prospects. The existence or prospect of generic competition may also be taken into account in various deal terms, as discussed below.


Biosimilar products are to biologics what generics are to traditional “small molecule” drugs, but obtaining FDA approval of a biosimilar is a significantly more time consuming, costly, and uncertain undertaking than obtaining approval of a generic drug. As the name implies, biosimilars are not exact replicas of the innovator biologic products. This creates a complicated situation for regulators endeavoring to develop streamlined approval pathways for biosimilar products while still ensuring their safety and efficacy are equivalent to that of the innovator biologics. This is a relatively new and still evolving area of law and policy in the United States and other countries.

The legislative basis for an approval pathway for biosimilars in the United States was established as part of the Affordable Care Act in 2010 and the FDA has published guidance relating to the approval of biosimilars in 2012 and 2014. Under this guidance, manufacturers are permitted to rely to some extent on safety and efficacy data filed in respect of the reference biologic, but the biosimilar still must be shown to have no significant clinical differences from the reference biologic. Because a biosimilar will never be exactly the same as an innovator product, demonstrating the requisite level of similarity will typically require a combination of structural analyses, functional assays, and data from animal and human studies. The FDA has significant discretion over what it will require for a particular biosimilar.

There are other differences between the approval process for a traditional generic product and a biosimilar. For example, biosimilar applicants are not required to make patent certifications and are not subject to an automatic 30-month stay if infringement litigation is initiated. They are, however, required to provide certain notices to the holder of the BLA for the reference product. As with generic products, the first applicant for a biosimilar version of a particular reference biologic is, however, entitled to a period of marketing exclusivity during which no other biosimilar based on the same reference product may be sold in the United States.

Because of the evolving nature of the approval process for biosimilars and the challenges associated with obtaining FDA approval for a biosimilar, competition from biosimilars is not yet the threat to biologic products as competition from generics is to traditional drugs. It seems inevitable that will change, though, as regulators catch up with the science of biotechnology and manufacturers become more adept at replicating and manufacturing biosimilars. It therefore also seems inevitable that M&A practitioners will need to understand and keep up with this important and developing dimension of the life sciences industry in order to assist clients pursuing acquisitions of biotech targets in properly evaluating and planning for the likelihood and potential timing of biosimilar competition.

Licensing and Collaboration Agreements

In-licensing of intellectual property and product development collaborations in various forms are very common in the life sciences industry. Such arrangements can give rise to a range of considerations and traps for the unwary acquirer. Among other things, as part of due diligence, buyers and their counsel should assess the following in the context of in-licensing and collaborative development transactions:

  • Allocation of Rights. Licensing and collaboration agreements often have elaborate provisions that allocate rights to develop and commercialize products using licensed or developed intellectual property and other resources between the parties. These provisions typically allocate rights based on both geographical territories and field of use (e.g., for particular therapeutic areas (like immunology) or particular diseases (like Hepatitis C)). Terms such as rights of first refusal and similar concepts that create the potential for an expansion or shifting of one party’s rights may also be included. These provisions should be carefully reviewed to ensure that the buyer has a fulsome understanding of where and how a target’s product or technology that is the subject of a licensing or collaboration arrangement may be exploited. An additional consideration is whether the counterparty could gain access to the buyer’s preexisting IP after an acquisition, through a license grant that extends to the target’s affiliates, for example.
  • Diligence Obligations Imposed on the Target. Licensing and collaboration transactions commonly involve a requirement that the licensee or collaborator commit to exercise a certain level of diligence in carrying out its responsibilities under the collaboration, in respect of development activities, pursuing marketing approvals, or commercializing the product(s). Often these obligations are based on heavily negotiated definitions of “Commercially Reasonable Efforts” or “Reasonable Best Efforts.” These may be either inwardly focused (e.g., a commitment to use a level of effort comparable to that which the party would use in relation to its other products) or outwardly focused (e.g., a commitment to use a comparable level of effort that participants in the industry would generally use in relation to a comparable product). Buyers and their counsel should consider how these obligations will be construed post-closing. For example, would an inwardly focused diligence obligation pick up the efforts of buyer and its affiliates after an acquisition of the target? Is the diligence obligation consistent with buyer’s intentions relating to the product or collaboration at issue? Perhaps buyer views a particular indication for which one of target’s products is being developed as not commercially viable. The diligence obligations in the contract pursuant to which target has in-licensed that product may limit buyer’s ability to abandon development of that indication. More generally, the status of target’s relationship with its licensing and collaboration partners should be assessed. Such relationships are fertile ground for differing expectations and potential disputes, particularly when the stakes are higher for one party than the other or when one party is ceding significant control over an asset to the other party.
  • Non-Compete and Similar Limitations. Non-competition, exclusive dealing, and similar covenants in licensing and collaboration agreements should be carefully assessed. Such covenants frequently either expressly bind affiliates (such that they could bind a buyer and its pre-closing affiliates) or establish protocols for dealing with competing products in which an acquirer may have an interest (such as mandating a divestiture of the competing product within some period after closing, or providing for a shifting of rights under the agreement if the product is not divested within the specified time period). Such terms warrant careful attention to ensure that buyer is not signing up to commitments that will have undesirable consequences for its existing products or business or result in loss or diminution of rights to a product that it is counting on retaining after the acquisition.
  • Change of Control and Assignment Provisions. Licensing and collaboration agreements often include change of control clauses. Frequently, such clauses are highly negotiated and permit a counterparty to terminate the agreement or trigger a change in the contract terms if the buyer meets, or fails to meet certain criteria. For example, such provisions may be applicable in the context of an acquisition of the target company by a competitor of the collaboration partner or licensor; or they might come into play if the acquirer does not meet specified minimum financial criteria. Assignment clauses should also be carefully reviewed. Generally, an acquisition of a target company through a purchase of its equity or a merger or other statutory combination will not trigger a contractual prohibition on assignment unless the provision is crafted so as to deem such a transaction to be an assignment. Assignment clauses are much more important in the context of an asset purchase transaction. In the context of a patent license agreement or a collaboration agreement involving a license to a third party collaborator’s patents, it is important to remember that common law principles relating to assignment of contracts may be trumped by federal common law principles relating to transferability of patents. In many states, most contractual rights are assignable without consent absent an express contractual limitation to the contrary. In contrast, patent rights are generally not transferrable without the patentee’s consent, such that if a contract does not expressly permit assignment of the contract, the license rights under the contract will likely not be assignable without consent.

Product Development Considerations

Bringing a new drug or biologic and certain types of medical devices to market is typically a very lengthy process fraught with legal and regulatory pitfalls. In addition to assessing the prospective market exclusivity the product is likely to enjoy once it is approved, there are a number of elements of the development process that acquirers and their advisors should be mindful of during the due diligence process, including the following:

Requisite Approvals. Before a developer can begin clinical trials for a drug or biologic product involving human subjects, an investigational new drug application (IND) must be submitted to the FDA. Clinical studies of medical devices require a comparable filing called an investigational device exemption (IDE). Due diligence should include a review of target’s open IND/IDE applications to ensure that ongoing clinical trials are being conducted in accordance with valid INDs/IDEs and that the target is adhering to the terms of such INDs and IDEs.

  • Contract Research Organizations. Many companies engage third-party contract research organizations (CROs) to carry out clinical trials for their products. It is advisable to review the target’s agreements with CROs to understand risk allocation provisions, insurance requirements, publication rights for investigators, and confidentiality obligations, among other things.
  • Confidentiality and Intellectual Property. To the extent that third parties are involved in product development efforts, it is important to review agreements with those parties to ensure that they include appropriate confidentiality obligations and to assess the parties’ respective rights to intellectual property arising from those efforts. It is also important to ensure that employees involved in the development of owned IP are subject to valid invention assignment agreements effectively assigning their rights in the underlying inventions to the target or have otherwise made such assignments.
  • Other Third-Party Rights and Obligations. Many drug development processes do not begin and end exclusively within the control of the same party. Situations where development work has been transitioned to the target from another party or has been undertaken in collaboration with another party will require careful consideration.

Regulatory Obligations Relating to Marketed Products

Completing development and achieving FDA approval or clearance is in many ways just the beginning of a product’s regulatory life. Life sciences companies are subject to a wide range of regulatory requirements specific to their products. It is important to involve regulatory specialists in any due diligence investigation of a life sciences target. A discussion of all the possible regulatory issues that can bear on a transaction is beyond the scope this practice note; however, the following are among the more significant considerations:

  • Post-Marketing Commitments. As part of its approval of a new drug or biologic product, the FDA will sometimes require an applicant to undertake additional “Phase IV” clinical trials or other studies to further assess the product’s safety and efficacy, in specific populations or otherwise. It is important for buyers and their advisors to review such obligations and any reports to the FDA of their progress or outcome to understand what efforts and costs are involved and what implications their outcome may have for the product.
  • Labeling Requirements. As part of a product’s approval, the FDA will approve its label, which includes detailed prescribing information, warnings about side effects, contraindications, and other information. Once the product is on the market, additional requirements can sometimes be imposed. For example, if there is a pattern of a particular serious adverse event occurring, the FDA may require that the manufacturer include a “boxed” warning highlighting that risk on the label. It is important to understand any such evolution in product labeling after its launch. The addition of a boxed warning after a product has been on the market suggests that there could be a basis for product liability claims associated with the side effect that had not previously been described or highlighted.
  • Risk Evaluation and Mitigation Strategies (REMS). In situations where the FDA identifies a particular risk associated with a product that it determines cannot be sufficiently addressed with product labeling, it may direct the manufacturer to undertake a risk evaluation and mitigation strategy, or REMS, to mitigate such risk. REMS can take many different forms, and may involve medication guides or packaging inserts, a communications plan, elements to assure safe use (ETASU), an implementation system or some combination of these elements. REMS can become significant and costly commitments. In some cases, they can also pose an impediment to a product’s commercial success. For example, ETASU elements can involve putting on physician training programs and certification programs for pharmacies, which can have the effect of limiting the community of those capable of prescribing the product and filling prescriptions. As part of due diligence, any REMS or potential REMS should also be carefully assessed.
  • Recalls, Market Withdrawals, Safety Alerts. In circumstances where it is determined that specific quantities of products that have entered the market have been compromised or “adulterated” by virtue of a problem with the manufacturing process or otherwise, a manufacturer will typically undertake a recall or market withdrawal to remove the product from the marketplace. Usually the company takes such steps of its own volition, but in extreme cases, the FDA may direct that a recall or other corrective action be initiated. In circumstances where the FDA perceives a serious risk associated with a product, it will issue a safety alert that is posted to its web-based MedWatch adverse event reporting system and disseminated through other relevant channels. Buyers and their counsel should evaluate any recalls, market withdrawals, safety alerts, or similar events that a target company has experienced.

Product Liability

Product liability claims are, of course, a big concern for companies in the life sciences industry. Evaluating existing product liability claims and potential sources for future claims should be an important part of any due diligence effort for a life sciences transaction. Where there is a history of claims or significant concern over future claims, it may be worthwhile to get the perspective of a product liability litigator as part of the diligence process. Things to consider include the following:

  • Nature of Past Claims. To the extent the target has experienced product liability claims, do they relate to unrelated episodic issues or are they indicative of a more fundamental problem, such as a design flaw or systemic quality problem?

Class Actions. Are any claims arising from similar circumstances likely to be aggregated into one or more class action suits?

  • Adverse Event Reporting. Adverse event reporting should be reviewed with an eye toward identifying serious problems, or patterns of problems, with the target’s products that could lead to claims. Particular attention should be paid to any serious or recurring adverse events that are not within the scope of the side effects or warnings contemplated on the relevant product’s labeling.
  • Changes to Labeling. Similarly, as noted above, a change or pending change to a product’s label to include additional cautionary guidance could signal the possibility of claims associated with harm suffered by consumers of the nature addressed by the label change.
  • Misleading Statements. Is there any indication that the target may have made misleading statements to the FDA in its application for approval of any of its products or otherwise in connection with the approval process? If so, such statements could support not only civil liability to injured consumers, but also potentially civil or criminal liability under the False Claims Act (31 USCS § 3729).
  • Insurance. Consideration should be given to the target’s insurance coverage for product liability claims, including its claims history.


In addition to the regulatory hurdles that life sciences companies face in shepherding their products through the regulatory approval process and complying with product- focused regulations after approval, industry participants are also subject to extensive regulation of their operations. Various compliance regimes address a range of issues likely to be relevant to a target company, including how its sales force markets its products, its manufacturing operations, its pricing and price reporting in relation to different health care payers, and how it handles patient information. Non-compliance can be costly in terms of not only fines, but also restrictions on a target company’s activities and increased regulatory oversight. Regulatory compliance matters a buyer should assess during due diligence include the following:

Sales Force Considerations. One of the biggest sources of potential liability for a life sciences company is compliance missteps by its sales force. Among other potential problems, issues can arise in the form of:

  • submitting inaccurate government reimbursement forms, or causing or enabling healthcare providers to do so, which can lead to civil or criminal fraud claims and enforcement actions by federal and state regulators, including under the False Claims Act;
  • improper payments, benefits, or incentives to healthcare providers, which can lead to civil or criminal liability under the federal Anti-Kickback Statute (42 USCS § 1320a-7b);
  • violations of the U.S. Foreign Corrupt Practices Act (15 USCS § 78dd-2) resulting from payments or gifts to foreign officials in order to obtain business or accommodations; and
  • promotion of products for “off-label” uses—uses for indications other than those for which the product has been approved—and use of unapproved promotional materials, all of which can lead to civil or criminal enforcement actions by regulators and civil lawsuits by consumers.

Due diligence of these kinds of compliance issues should include, among other things:

  • an assessment of whether the target’s sales force compensation structures give undue incentives for unlawful activities;
  • a review of any completed or pending regulatory investigations, enforcement actions, and lawsuits involving conduct of the target’s employees;
  • a review of the policies and procedures and training programs the target company has in place for its sales force and other personnel;
  • an assessment of how the target has handled prior compliance problems;
  • an assessment of the target’s compliance functions and their role and authority within the organization;
  • if the target uses a contract sales force, a review of the terms of its agreement with the provider; and
  • consideration of whether any identified deficiencies are “one-off” problems or indicative of a more widespread problem.

Requirements of Physician Payments Sunshine Act. The Physician Payments Sunshine Act (42 USCS § 18001) imposes public reporting obligations on many life sciences companies in relation to any transfer of anything of value to physicians or teaching hospitals. Disclosure must include the nature of the transferred items, the reason for the transfer, the identity of the recipient, and the reporting entity’s product associated with the transfer. Non-compliance with these reporting obligations can result in the imposition of significant fines. Moreover, such required disclosure may reveal instances of violations or potential violations of the federal Anti-Kickback Statute or the False Claims Act, paving a smoother path for investigations and enforcement actions. Acquirers should carefully assess a target’s policies and procedures for complying with these requirements, any instances of non-compliance, and the results of any compliance audit by the Department of Health and Human Services (the agency charged with enforcing these rules).

HIPAA Considerations. The Health Insurance Portability and Accounting Act (45 CFR 164.502) (HIPAA) imposes stringent requirements for the handling of Protected Health Information or “PHI,” as well as civil and criminal penalties for non-compliance. HIPAA and related privacy regulations are a significant area of concern for life sciences companies that are privy to health information of individuals, particularly as their requirements converge with the issues associated with data security in the era of “big data.” Due diligence should include an assessment of:

  • the nature of PHI that has or may come into the target’s possession, for example, in connection with clinical trials or by virtue of patient assistance programs;
  • the target’s technological systems, policies, and procedures for handling and maintaining the security of PHI;
  • the findings of any internal or external audits that have been undertaken in respect of target’s technological systems that process PHI and follow-up reports of steps taken to address any shortcomings identified; and
  • whether target has experienced any data breaches involving PHI and, if so, how they were handled.

Inspections. The FDA carries out various types of inspections of facilities engaged in the manufacture of drugs, biologics, or medical devices. They can be routine or “for cause” and they can be narrowly focused or fulsome. An important part of due diligence is reviewing the reports of these inspections and particularly any notices of identified non-compliance with FDA requirements, which are reported on Form 483. To the extent that a manufacturer has received Form 483s, it is important to review subsequent communications between the company and the FDA to confirm that the identified problems were adequately resolved or are on a path to resolution. Form 483s are publicly available on the FDA’s website. More serious issues or continued deficiencies can lead the FDA to issue a warning letter, which can be the predicate to more serious enforcement action, including mandating the shut-down of a facility. Warning letters are also publicly available on the FDA’s website.

Adverse Event Reporting. Drug and biotech companies are obligated to implement systems to monitor adverse events involving their products that are reported to them and others with whom they do business. Once identified, the company must report the adverse event to the FDA Adverse Event Reporting System (FAERS). Medical device manufacturers are subject to a similar regime—medical device reporting (MDR)—in respect of malfunctions, deaths, and serious injuries involving their devices. The FAERS system is accessible to the public. Similarly, MDR reports are accessible through the FDA’s Manufacturer and User Facility Device Experience (MAUDE) database. Due diligence should include a review of the nature and extent of adverse events reported in respect of the target’s products on the FAERS system or MAUDE, as applicable. Extensive and/or a series of adverse events could signal a risk of product liability claims or regulatory action, such as a required labeling change. It is also important to evaluate a target’s compliance with its adverse event reporting obligations as part of an overall assessment of the effectiveness of its compliance functions.

Settlements with Regulators. In the highly regulated life sciences industry, it is not uncommon for participants to enter into settlement arrangements with regulators as part of the resolution of investigations or enforcement actions. Such settlements, which often take the form of Corporate Integrity Agreements (CIAs), can impose a range of different limitations or specific requirements on the company’s operations, as well as increased regulatory oversight through audits and reporting obligations. Acquirers should carefully review the requirements imposed under settlements of regulatory investigations or claims, as well as the target’s experience and performance under any CIA to which it may be subject. What policies and procedures have been implemented to comply with the requirements of the CIA? Has the target’s compliance been audited? If so, what was the outcome? Counsel should also evaluate any implications the CIA or any other settlement may have on the target’s ability to consummate the contemplated transaction.

New Frontiers. In the current environment, as pharmaceutical and other life sciences companies search for new ways to expand their offerings and justify the cost of their products to payers, many are finding themselves enmeshed in new areas of regulation and, in some cases, finding that the regulatory landscape for some new products and services is undefined at best. For example, many companies are becoming involved in patient assistance and monitoring programs for patients using their products. Such programs often give rise to questions of whether the company is practicing medicine or nursing within the meaning of state laws and whether additional licensing may be required. Many medical device companies are faced with a host of new issues associated with the wealth of data generated by biometric devices that access the Internet. Data privacy issues become particularly salient in that context. There are many other examples of changes like this that are resulting in a blurring of the boundaries between life sciences and healthcare, and giving rise to new regulatory questions and challenges that counsel should be mindful of.

Supply Chain

A functioning supply chain is part of the lifeblood of most life sciences companies. Manufacturers of not just finished products, but also active ingredients, excipients, and packaging components are subject to extensive FDA regulation. As a result, switching from one supplier to another is often not as simple as it would be in other industries. Switching suppliers, or even to a new facility of the same supplier, will often necessitate establishing the new site with the FDA as an approved supplier for the product or component involved, which can be a complicated and time consuming process. There can also be practical difficulties associated with transferring the technical process for producing a product or a component. Manufacturing antibodies for a complex biologic is often not something that is easily replicated by a new manufacturer in a new facility, for example. For these and other reasons, it is very important that due diligence in a life sciences M&A transaction include a careful review of the third-party relationships and agreements involved in the target’s supply chain. Particular attention should be paid to the following:

  • Manufacturing and Supply Agreements. Ideally, a target will have long-term supply agreements for any products that it does not manufacture itself and for key active ingredients and other components. The absence of agreements with any key suppliers should be flagged as a potential concern. For those manufacturing agreements that are in place, consideration should be given to terms dealing with, among other things:
  • exclusive purchase obligations, including the circumstances in which the target can obtain its requirements from another supplier and the supplier’s obligations to assist in establishing an alternate supplier in that circumstance (or in anticipation of the possibility);
  • limitations on the supplier’s ability to supply competitors with the same or comparable products;
  • the parties’ respective obligations for assessing conformity of the supplied product or material with specifications and the target’s recourse in the event supplier supplies non- conforming product;
  • obligations to maintain safety stock to mitigate the effect of any supply disruption;
  • term and renewal provisions; and
  • termination rights, particularly in the context of a change of control.
  • Quality Agreements. Although not strictly required by U.S. law, the FDA has made clear that it expects drug and biologic companies to have in place quality assurance agreements with their suppliers setting out the parties’ respective obligations for ensuring compliance with good manufacturing practices. Due diligence should include a determination of whether the target has entered into suitable quality agreements with each of its suppliers and if it hasn’t, why not.
  • Audits of Suppliers. Life sciences companies often have the right to audit their suppliers and to receive copies of reports of audits by the FDA and other regulators. Reports of internal or governmental audits can reveal concerns with suppliers and are therefore another useful item to include in a due diligence review.


Life sciences companies and their products are subject to a variety of legal issues and regulatory regimes that are distinct from those in other industries. In order to conduct an effective due diligence exercise for an acquisition in the life sciences sector, it is important for counsel to understand the product-specific and enterprise-level considerations described in this article.

Reb Wheeler is a partner at Mayer Brown LLP and is global co-chair of the firm’s Life Sciences industry group. His practice focuses on mergers & acquisitions, joint ventures, private equity, securities, and other transactional matters. Reb has extensive experience advising participants in the pharmaceutical, biotech, and medical device sectors, ranging from new ventures and investors to some of the world’s largest pharmaceutical and biotech firms.

LEXIS PRACTICE ADVISOR RESEARCH PATH: Mergers & Acquisitions > M&A by Industry > Life Sciences M&A