As the calendar turned to 2024, we came across the usual end-of year looks back and projections ahead. Our feed saw a number of rosy forecasts for mergers and acquisitions in FDA-regulated industries. Interest rates may be on the way down, which in turn may mean that more capital will free up and thus more deals may be in the offing. If this all holds true, it will follow the upward trend of the 2023 year in deals.
In a “hot” deal market, its worthwhile reiterating the fundamentals of regulatory due diligence that don’t change, no matter how attractive the deal or how short the window is to seize the opportunity. We’ve previously posted on the importance of regulatory diligence generally and DOJ’s recent Safe Harbor Policy for Voluntary Self-Disclosures of Criminal Conduct made in connection with M & A transactions. We won’t repeat ourselves, but we will summarize—regulatory due diligence and an understanding of historical regulatory compliance issues is a critical component of assessing whether a deal is what it seems to be.
Having the right diligence team is critical because proper risk assessment of regulatory risk requires a broad range of expertise. Assessing risks in regulated industry requires the appropriate depth and breadth of regulatory expertise. Diligence related to FDA-regulated industries often involves not only FDC Act review, but also federal and state False Claims Acts, and Anti-Kickback Statutes, along with other state and local laws and regulations. Moreover, it requires not only an understanding of what the laws say, but how what the government would be expected to do in the future based on the regulatory compliance history.
Proper risk assessment requires the expertise to ask the right questions and understand the answers. While there may be a diligence “template,” no two diligences are the same. Your diligence team should understand the nature and scope of the transaction to determine how to efficiently conduct the diligence to identify the critical issues that determine whether your interests are protected.
Your regulatory diligence team should be able to solve problems, not just identify them. Not every diligence issue is a dealbreaker. Your regulatory diligence team should understand the difference between a minor issue, a potentially concerning trend, and a red flag. Moreover, it should be able to offer you guidance on mitigating risk in the face of future uncertainty, including, when appropriate, self-disclosure.
Deals in FDA regulated space are among the most complicated of any industry, and diligence adds cost. But the cost of rooting out potential regulatory problems and assessing liabilities before the deal closes is almost always money well spent.