Compliance Mistakes That Kill Pharma and Biotech Deals

Darshan Kulkarni explores why compliance isn’t just a side issue—it’s often the ultimate dealbreaker in pharma and biotech transactions.

When buyers look at acquiring a company in life sciences, they’re not just acquiring assets, patents, or promising pipelines. They’re also taking on the company’s regulatory baggage. If that baggage includes off-label promotion, billing fraud, improper trial oversight, or weak documentation, the deal could be dead on arrival.

Darshan explains how regulators—particularly the DOJ and FDA—expect compliance to be fully integrated into M&A due diligence. The DOJ’s Corporate Compliance Guidelines make it clear: compliance needs to be evaluated both before the acquisition and after the acquisition, because any lapses can lead to penalties, successor liability, or even personal liability for executives and investors.

He highlights that compliance red flags don’t just stall deals—they can change valuations, shift negotiation leverage, or cause buyers to walk away entirely. On the other hand, strong compliance systems can actually enhance a company’s attractiveness, helping reassure investors and acquirers.

Darshan also breaks down how OIG and FDA expectations, successor liability rules, and even global compliance standards all converge to shape the M&A landscape in life sciences. And for private equity? The message is simple: compliance isn’t a checkbox—it’s deal insurance.

The key takeaway? In life sciences M&A, compliance can make or break your investment. If you get it right, you buy not only a company but also credibility and long-term sustainability. If you get it wrong, you might inherit a regulatory nightmare that no deal price can fix. 

Transcript

Darshan 0:00

Today, we're going to talk about why compliance isn't just a box you check off during a MA transaction in the life sciences. It's often the deciding factor on whether a deal goes through it all. We're going to touch on the DOJ's corporate compliance guidelines. We're going to talk specifically as they relate to MA, for example. We're going to talk about some of our real world experience dealing with this issue and then dig into FDA and OIG expectations around due diligence, successful liability, and even individual liability. In pharma and biotech deals, as we all know, you're not just buying the IP. Everyone knows you're buying this IP. You're even buying the labs potentially and even access to the people. However, you're also buying regulatory baggage. If compliance is sloppy, you may be inheriting unreported safety issues, off-label promotion risks, billing fraud, or clinical trial misconduct. Again, these aren't theoretical. They can lead to multi-million dollar penalties, years of monitoring, and again, importantly, reputational damage. That's why private equity investors who traditionally worried about ebidor margins and pipeline strength now think about compliance officers. If you don't, DOJ, FDA, and OIG can have and will do it for you. And you won't like their version of due diligence. The Department of Justice has been very clear. MA transactions don't give you a get out of jail free card. It's corporate compliance program guidance put out in 2023 and updated in 2024. The DOJ specifically calls out mergers and acquisitions. The expectation is that buyers will do two things. They'll look at pre-acquisition due diligence and post-acquisition integration. Let's talk about pre-acquisition due diligence. Look under the hood. Understand the target's compliance culture. Look at their past violations, look at the internal controls, look at their risk exposure. What kind of audits were they doing? Were those audits good enough? What kind of KAPA program did they have? Post-acquisition, don't just sign the deal and walk away. The DOJ wants to see a real plan. They want you to integrate compliance and retrain staff and address past deficiencies. In fact, they actually come out and say that you might want compliance on the board during the MA transaction itself. They want them to be part of table stakes. The DOJ even says that they will consider whether a buyer took compliance seriously when deciding enforcement. Let me translate that for you. Your liability, your risk profile, and even your penalties can be tied directly to how well you handle compliance in the deal.

SPEAKER_00 2:32

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Darshan 2:40

Let's apply this to the royal world. Let me give you an example of a client we actually had. This client was looking to be acquired. The numbers were attractive and the pipeline was strong, but the compliance reviews showed lack of controls. This means questionable marketing practices, concerning research processes, and more. In this case, the deal survived. That's only because the buyer demanded an escrow. He adjusted the purchase price and imposed strict pre- and post-closed compliance reforms. On the other hand, not everyone's that lucky. I've seen deals collapse outright because compliance red flags were too big. Think about improper clinical trial billing. Look at unreported adverse events or look at suspected kickbacks. No matter how attractive the revenue, if the compliance risks overshadow the upside, the deal simply isn't worth it. So let's make sure that you're prepared. Now let's talk about the FDA and OIG. These agencies aren't just sitting on the sidelines. They expect acquirers to do their homework as well. The FDA is laser focused on truthful marketing, clinical trial integrity, and adverse event reporting. If you acquire a company that has cut corners, you inherit their problems. If they fail to report adverse events, you are now responsible. If they've been promoting off label, those promotional materials are now yours. The Office of Inspector General cares deeply about billing and reimbursement compliance. This means clinical trial billing, Medicare Medicaid fraud, or anti-kickback issues. Here's the kicker. OIRG looks to success reliability. Just because misconduct occurred before you bought the company does not mean that you are off the hook. Let's talk about that success reliability. Success or liability is the idea that sins of the seller can follow the buyer. The government's eyes, changing ownership does not erase the underlying misconduct. If you buy a company with compliance violations, regulators can and will hold you responsible for cleaning them up and sometimes paying for them. Then there's individual liability. Think about the park doctrine, the Yates memory, and other subsequent DOJ pronouncements. Executives, board members, and even investors can be held accountable. This is especially if they knew or should have known about the misconduct. Private equity, this means that your role as an owner is not passive. If compliance lapses happen under your watch, you or your firm could be in the crosshairs. Follow our page on LinkedIn. So what are the key takeaways for private equity owners? Number one, compliance is a valuation issue. A shaky compliance program can and will reduce enterprise value. It may change deal structure or may actually kill the deal entirely. Due diligence must be specialized. Bring in people who understand the FDA and OIG nuances, not just financial auditors. Number three, expect success or liability. Build protections into your deal structure, whether we're talking about escros, indemnities, reps and warranties, or integration timelines. Number four, post-close matters. Regulators judge you not just on what you found before signing, but how quickly and effectively you fixed after. And number five, protect yourself as individuals. Document your due diligence. Ask the tough questions, make sure that compliance plan is real, not theoretical. For P in life sciences, compliance is not a side note, it's the deal breaker. DOJ's corporate compliance guidelines make it clear you can't buy your way out of compliance problems, but you can buy yourself a way into them if you're not careful. If you take one thing away from this episode, let it be the following compliance due diligence is not a cost center, it's deal insurance. And the firms that treat it that way are the ones still standing after the FDA, DOJ, or OIG come knocking. Call, click, or email.