Event Driven Takeaways
- The dispute between Akorn and Fresenius will be focused on whether Akorn has violated any FDA regulations and the impact on operations of bringing the company into compliance.
- While Fresenius has not yet revealed the evidence supporting its claims, a review of the FDA’s enforcement of its current Good Manufacturing Practices may shed some light on how the case could unfold.
- Generally, the data integrity violations Fresenius alleges fall along a spectrum ranging from potentially minor to issues that could have a major effect on Akorn’s revenues.
- Judge Travis Laster, who is presiding over the case in Delaware Chancery Court, has indicated that the results of outside investigations are not likely to impact the court’s evaluation of the parties’ proof at trial. Fresenius has claimed that the FDA is putting pressure on Akorn to complete these investigations.
- The parties are currently engaging in discovery and will exchange expert reports next month. Pretrial briefs are due July 3 with the trial scheduled for the week of July 9.
The crux of Fresenius’ claim in support of terminating the merger is that Akorn has violated the FDA’s current Good Manufacturing Practices, or cGMP, to such a degree that remedying the violations will have a crippling effect on operations. As a result, Fresenius maintains, the evidence will prove that these violations amount to a materially adverse effect on Akorn’s operations. As
previously analyzed by Event Driven, a material adverse effect is the necessary showing for terminating the merger agreement on the basis of FDA-related violations.
The documentary evidence upon which Fresenius relies is the result of its own review and the findings of other third-party investigations that allegedly prove that Akorn failed to “comply scrupulously” with the FDA’s cGMP, including data integrity requirements. According to Fresenius, the FDA is putting pressure on investigations conducted by outside consultants engaged by Akorn to conclude. While Fresenius asked Judge Laster to delay the trial until after these reviews are complete, the judge rejected this request on the grounds that the investigation results are “not going to be binding on the court as a fact-finding matter.” Relatedly, Judge Laster stated at the May 4 initial status conference that “the facts are set as of the alleged repudiation decision on April 22.”
Even though the FDA does not appear to have launched an official investigation into the various issues that Fresenius raises, a review of: (1) the range of severity associated with certain FDA violations; and (2) FDA investigatory activities more generally, could help shed light on what to expect as the evidence develops leading up to the trial.
FDA Violations Vary in Severity
To prevail, Fresenius will need to show that the severity of Akorn’s data-integrity violations and non-compliance with FDA’s cGMP requirements indeed threaten Akorn’s business operations and future earnings potential in a material way. As Akorn explained at the status hearing, Fresenius must show that the violations are “a substantial threat to the overall earnings potential of the company in a durationally significant manner.” Akorn claims that Fresenius is focused only on drugs that are not expected to generate revenue, thus making any associated violations immaterial. Fresenius, in contrast, claims that violations associated with the specific drugs it identified are just the “tip of the iceberg.”
A close look at Fresenius’ counterclaim reveals that the company is aiming to prove that Akorn’s FDA violations are indeed systemic in nature, affecting multiple sites including its manufacturing facilities in Decatur, Ill., Somerset, N.J., and Vernon Hills, Ill.
Even if Fresenius has supporting evidence of systemic violations, conversations with several experts who specialize in FDA compliance issues reveals that not all cGMP violations are treated equal. Incorrect laboratory notebook entry or chronological inconsistency regarding clinical data entry - issues that Fresenius mentions in its counterclaim - often figure in the lower end of the severity spectrum, depending on the circumstances. This means that companies are often able to offer remedial measures to adequately address the FDA’s concerns.
However, willful practice to fabricate data with active management involvement, also alleged by Fresenius, can lead the FDA to take stronger actions against the company and the drugs involved. Specifically, Fresenius claims that Akorn indulged in data fabrication with respect to azithromycin and five other drugs. On the surface, these allegations and Fresenius’ supporting arguments indicate the possibility that Akorn has engaged in serious wrongdoing. That said, if specific examples of these practices are restricted to just azithromycin and five other drugs as could be inferred based on the specificity of Fresenius’ claims, then FDA’s actions could be limited to these drugs alone and, therefore, may not impact Akorn’s entire pipeline portfolio. This is a significant distinction because Akorn maintains that it has not assigned any future revenues to these six drugs. Furthermore, as Event Driven analyzed previously, net revenue potential from these six drugs might only amount to roughly 7% of the company’s 2017 net revenues.
Fresenius’ allegations, that could be more systemic in nature, center around Akorn’s notebook-entry practices, which figure lower down in the severity spectrum. Therefore, even if Akorn is found liable for this type of infraction, the company may be able to offer corrective measures that will prevent any prolonged threat to its existing and future portfolio of drugs. But executing these remedial measures - even if they entail relatively small changes to the company’s standard operating procedures and its IT systems - could take take upwards of one year.
Fresenius’ argument that Akorn’s fraud and data integrity violations will take “years to build a fully operational testing and manufacturing operation that can generate the reliable data required by the FDA” may not be misplaced, however. If the FDA, or other third parties conducting investigations, find critical, widespread cGMP violations across the Akorn’s manufacturing sites, the FDA will be expected to issue a warning letter, which is typically how the agency initiates an investigation after uncovering a violation.
A review of FDA’s warning letters and close-out letters, which indicate FDA compliance, for the last several years reveals that the length of time to complete close-out is
roughly two years, depending on the nature of the violations at issue and the remedial measures necessary. However, there have been numerous instances where companies have failed to offer credible remedies to enable the FDA to issue a close-out letter. For example, some companies that received FDA warning letters in 2014 and 2015 are yet to receive a close-out letter, indicating that in some circumstances, it is not straightforward to resolve FDA concerns.
Perhaps the most serious and potent allegation from Fresenius revolves around trial injections. Generally speaking, in the context of laboratory drug testing, a trial injection refers to the injection and testing of a substance as a trial run to generate data in support of an FDA application. According to Fresenius, Akorn’s data shows that it has conducted tens of thousands of trial injections. Akorn, itself, has conceded that its investigations identified “certain instances of trial injections being conducted at Akorn’s Vernon Hills, Somerset and Decatur facilities.” Trial injections amount to serious wrongdoing and often lead to a warning letter from the FDA.
According to a
report from Unger Consulting on data integrity enforcement actions, between 2000 and 2015, the FDA issued three warning letters to companies engaging in the practice of “trial injections.” One of the three companies is Fresenius. The other two are Wockhardt and Apotex. Apotex, which received the warning letter in January 2015 was able to achieve
close-out, only two years later in December 2016. The other two are yet to receive a close-out letter from the FDA.
FDA Investigation Activities
The various types of FDA investigatory actions also may shed some light on the range of violations that Akorn may have perpetuated and the extent of any remedial efforts that the company could need to undertake. For example, for all warning letters issued by the FDA, the agency issues a close-out letter when all observations have been appropriately resolved, and the FDA is satisfied with the company’s response and corrective actions.
On the basis of publicly-available data alone, and discounting Fresenius’ allegations, it is not clear at present if the FDA currently has serious concerns about operations at Akorn’s facilities or whether it will have such concerns after the third-party investigations the agency is allegedly pressuring are complete. Event Driven analyzed the FDA’s
Form 483 Inspection Database to see if recent FDA inspections raised any red flags. While the company’s Decatur, Ill., facility did receive an Official Action Initiated, or OAI, classified inspection in 2016 (before the parties signed the merger agreement), FDA inspections at Akorn’s facilities ever since have either been classified as No Action Initiated (NAI) or Voluntary Action Initiated (VAI).
An OAI inspection classification occurs when significant objectionable conditions or practices are found and regulatory action is warranted. A VAI inspection classification, on the other hand, occurs when the FDA finds serious deficiencies but the company’s response is sufficient to satisfy the agency’s concerns. An NAI inspection classification means no objectionable conditions or practices were found during the inspection.
In general, but not always, an OAI classified inspection means that a warning letter is highly likely, but there is no guarantee that one will be issued. In the case of an OAI classification, FDA takes into account the nature of the products produced and whether a warning letter will lead to a drug shortage of a critical need product. In rare instances, a VAI classification may result in a warning letter, but in general, FDA will follow up on the corrective actions proposed in the firm’s response at the next inspection.
Akorn has not received any warning letter from the FDA after the agency conducted an OAI-classified inspection at its Decatur facility in June 2016. In fact, all FDA inspections since at Akorn’s U.S.-based facilities have either received a NAI or a VAI classification.
Event Driven’s conversations with FDA-compliance experts also revealed that 483 site visits cover “all facets of manufacturing,” including data integrity issues and electronic audits. While it is possible that data integrity issues may have invited several inspections at Akorn’s U.S.-based facilities, a VAI or NAI classification indicates that the issues may be “solvable” and not as serious so as to invite severe regulatory action that would cripple the company’s business.
The lack of current investigations, of course, could be the result of the FDA not being aware of the issues Fresenius has uncovered, or even due to the agency being misled by Akorn, as Fresenius claims. As the lawsuit nears trial, it will be interesting to see if the FDA itself opens any sort of investigation into the allegations raised by Fresenius. If so, any FDA inspection could potentially take any one of the various forms described above.
Event Driven’s coverage of this matter can be found
HERE.
--Shrey Verma and Matt McLellan