A US judge has allowed Fresenius to scrap its planned $4.75 billion takeover of generic drugmaker Akorn, finding that the German healthcare company didn’t breach its merger agreement by pulling out of the deal after the target made false representations about the state of its data.
Vice Chancellor Travis Laster in Delaware’s Court of Chancery concluded on 1 October that Akorn had repeatedly violated US Food and Drug Administration data integrity standards, which force generic drugmakers to be able to prove the origin, transmission and content of data they submit while seeking approval to market products.
Fresenius had agreed to buy Akorn in April 2017, but sought to end the deal in April 2018 due to Akorn’s unexpectedly poor financial performance, and concerns that its data integrity compliance was poor and likely to cost tens of millions of dollars to fix once the deal closed.
Akorn sued just one day later, asking the Delaware state court to stop Fresenius from backing out of the deal and force the buyer to make its best efforts to complete the merger, including to secure antitrust approval. Fresenius countersued arguing that the manufacturer had violated the merger agreement.
According to Vice Chancellor Laster’s ruling, Fresenius started investigating Akorn’s data integrity after receiving a whistleblower’s letter in October 2017, and a further, longer letter a month later. The judge said the investigation “uncovered serious and pervasive data integrity problems” at Akorn, and that the company then “oversold” its effort to fix the problems in a subsequent presentation to the FDA – with one of the company’s own expert witnesses testifying at trial that Akorn was “not fully transparent” with the regulator.
Vice Chancellor Laster detailed multiple problems at Akorn, and said the head of its quality function Mark Silverberg was “not a suitable individual to be responsible for Akorn’s quality efforts”. The judge said he believed that Silverberg had knowingly filed a response to an FDA request for information that contained fabricated data in order to avoid any scrutiny of Akorn’s deficiencies until the deal closed, “when it would be Fresenius’s problem”.
The judgment said prior to the merger agreement Akorn had received several warnings about the state of its data, including from FDA compliance consultancy Cerulean Associates, which in 2016 had found issues at a manufacturing plant that included a failure to put in place sufficient controls to prevent data loss and unauthorised changes to electronic data.
After Cerulean found more issues at a second plant, Akorn made no effort to schedule time for the consultancy to complete its investigation and cancelled a third visit. “I infer that they did not want Cerulean to identify any more data integrity gaps that could jeopardise their efforts to sell the company,” the judge wrote.
Akorn “did not do anything meaningful” to deal with Cerulean’s issues until March 2018, when Fresenius’s investigation sparked by the whistleblower letters uncovered Silverberg’s false response to the FDA, Vice Chancellor Laster said. He went on to find that Akorn “took the steps necessary to establish the formal structure of a quality function”, but that there was “a gulf between appearance and reality”.
The judge said Akorn felt it needed to “get ahead of the problem” by committing to the FDA that it would deal with its issues; but by the time the Akorn v Fresenius trial began in July 2018, Akorn still lacked a remediation plan “because it was still in the process of figuring out all of the deficiencies that the company needed to address.”
During the subsequent litigation, Fresenius said fixing the issues would cost $254 million and a further $1.9 billion hit to the combined company’s valuation; Akorn, meanwhile, said remediation would cost $44 million and have no further effect on the company’s value.
The judge said Akorn’s figure was “not credible” and was unsupported by any witnesses who could testify on how it was developed. He said a responsible remediation plan would look more like what Fresenius had proposed – taking up to four years, with Akorn unable to generate any revenue in the first year.
However, he concluded that Fresenius’ plan was a worst-case scenario that involved fixing all of Akorn’s products; he said a full investigation would be more likely to find that only some products needed work, with the level of disruption being less extensive than Fresenius anticipated.
Vice Chancellor Laster ultimately concluded that Fresenius had validly terminated the merger agreement due to Akorn’s conduct. He dismissed Akorn’s claim that Fresenius had materially breached its obligations under the agreement by delaying US antitrust clearance.
In a statement on 1 October, Akorn said it continues to believe Fresenius’ attempt to end the deal breaches their agreement. The company said it plans to appeal against the judgment.
