Compliance Isn’t a Deal Killer… Until It Is - Interview with Stephanie Trunk

Life sciences M&A is picking up again, but today’s deals look nothing like they did two years ago.

In this episode, Darshan Kulkarni sits down with Stephanie Trunk, Partner at ArentFox Schiff, to unpack what’s really driving renewed deal activity and what buyers are still missing in diligence. From U.S. manufacturing incentives and drug pricing exposure to China risk, DOJ enforcement, compliance culture, and AI, this conversation goes beyond headlines and into deal reality.

If you are buying, selling, or advising life sciences companies, this episode is a must-listen.

Key Topics Discussed

• Why life sciences M&A slowed down and why it’s back
• The shift from mega-deals to asset-specific acquisitions
• Why U.S. manufacturing location now affects deal value
• Accelerated approvals and “Buy America” incentives
• Drug pricing risks buyers can no longer ignore
• ASP, inflation rebates, Medicaid rebate cap removal, and 340B pressure
• Political risk in drug pricing and government scrutiny
• China partnerships, data transfer rules, and biosecurity concerns
• Direct-to-patient models and new HIPAA exposure
• Using Sunshine Act and other public data in diligence
• Compliance programs, culture, and successor liability
• Why compliance issues still rarely kill deals
• The emerging role of AI in diligence and enforcement
• The IP diligence problem no one wants to solve

Why This Episode Matters

Life sciences deals are no longer just about science and revenue projections. Manufacturing geography, pricing exposure, compliance culture, data security, and enforcement risk now directly shape valuation and post-close outcomes.

Ignoring these issues does not make them go away. It just shifts the risk to the buyer.

Guest

Stephanie Trunk
Partner, ArentFox Schiff
Life Sciences | CMS | OIG | Reimbursement | Fraud & Abuse

Stephanie advises pharmaceutical, biotech, and device companies on regulatory risk, government pricing, and transaction diligence.

📧 stephanie.trunk@afslaw.com

 🔗 ArentFox Schiff Life Sciences Blog

Host

Darshan Kulkarni
Founder, Kulkarni Law Firm
Host, DarshanTalks

📧 darshan@kulkarnilawfirm.com

 🔗 LinkedIn: Darshan Kulkarni

Subscribe & Connect

If life sciences compliance, enforcement, or deals matter to your business, subscribe for more conversations like this.
 Questions or ideas for future episodes? Reach out anytime.

Transcript

SPEAKER_00 0:00

We might even have a conflict on how that makes it recorded because Chinese government is there. We need to know. Hey guys, welcome to another episode of Caleb. I'm here with the incredible Stephanie Trunk.

SPEAKER_02 0:12

I specialize my practices on all things life science. Just incredibly, incredibly broad, if you think about it, in a global economy. Where we even have Chinese companies that have mod manufacturing sites in the United States.

SPEAKER_00 0:26

I'm here with the incredible, the amazing, the not at the beach, Stephanie Trunk. And my name is Darshankel Carney. But Stephanie, before we get started, you want to introduce yourself?

SPEAKER_02 0:37

I'm Stephanie Trunk. I'm a partner at Errant Fox Schiff outside of Washington, D.C., not at the beach. And I specialize my practice on all things life science from the CMS and OIG lens. So think reimbursement and fraud and abuse.

SPEAKER_00 0:52

We didn't see much in the context of MA for like a year, year and a half. Like things were happening, but at a very, very subdued rate. And then things have changed. I'm seeing an uptick right now. What do you think changed?

SPEAKER_02 1:04

Me too, me too. Um, same, same as you, Darshan. And and I I couldn't really tell you. I think there's been, you know, when we had the change in administration, or maybe leading up to the change in administration, a little bit of nervousness about what that was going to look like, especially in the life sciences realm, and probably with with good reason, as we've seen some kind of strange things coming on, and especially around the area of drug pricing and some of these deals that we see going on with between the White House and manufacturers. But I think at some point in time, um, I think the business had to go on. And I think I think because of that and and the need to grow or change. But I am with you in the last few months, I've definitely seen more MA shopping of assets, whether it be drugs or whole companies or devices, what have you. Um, so I definitely think it's picking up again.

SPEAKER_00 1:58

I'm now seeing more strategic. I'm gonna only buy this asset class as opposed to your entire company right now. The other thing I'm seeing is a more strategic perspective, which is um we're seeing companies going, you know what, we are going to buy into companies based in the US because we know that the Trump administration wants to see more purchasing and more cons uh more sort of uh advocacy within the US. Yeah, exactly. So so I I think that might be the other element, which is you buy up the companies that are already manufacturing within the US. Is that uh resonating for you?

SPEAKER_02 2:38

Yeah, I mean that makes that makes a lot of sense.

SPEAKER_00 2:40

Yeah. So do you think it's gonna land up being more of the smaller companies that are being bought out as opposed to the mega deals we saw in the past, where you have global supply chains?

SPEAKER_02 2:52

That's that's a another good question. Um, I mean, I think we're always gonna see smaller companies being bought up, especially, you know, if you're a single drug company, for instance, and you have a desirable product, you can see that, and and you have a mega company like a Pfizer that needs to make make its you know, make its earnings. We're also seeing some of these more strategic kind of acquisitions like manufacturing facilities in the United States or maybe buying contract um manufacturing organizations rather than using the an unaffiliated C CMO.

SPEAKER_00 3:28

I think single drug companies may find themselves selling now. And the reason is um a lot of these initial phase companies were depending on the the original model. The original model was we're gonna get a bunch of NIH funding and we're gonna get a bunch of overhead and we're going to land up um getting it ready for a purchase in a phase one, phase two type of uh situation. Instead, uh Trump administration coming in and saying, We're not gonna give you those large overheads, we're going to push back, we're gonna drop the cost of drugs. Um you're gonna see these these companies that were aiming for higher valuations suddenly go, I'm not sure I can get those valuations anymore. So it's it may be smarter to pivot out and and sort of refocus in a different way. So I don't know where it's gonna where it's gonna land up, but I think those previous the previous model of having 50 companies all pursuing sort of getting to a phase ones, that model may not survive in the same way.

SPEAKER_02 4:32

Sometimes I think instead of focusing on just start, you know, getting into a clinical trial and kind of trying to bring a concept from scratch, um, that we see the let's purchase something established, right? Um, and maybe in part that's due to some of the uncertainty that we see coming out of the administration. You know, we hear about yes, we want accelerated drug approvals, but then then we hear, no, we need more manufacturing in the United States. We need, you know, it's it's a little schizophrenic. So I think I think because of that, that might be leading companies to say the safer route might be to buy something that already exists rather than try to make make something happen in a pipeline.

SPEAKER_00 5:16

I think that's exactly right. I think I'm also seeing you you mentioned a really interesting thing which with the accelerated drug approvals, because the Trump administration just came out and said if you manufacture in the US, we're going to give you accelerated drug approval, almost like the uh orphan drug status pathway. And the first nine of them just got awarded, which I think is really interesting as well.

SPEAKER_02 5:39

So Yeah, and it'll be interesting to see how accelerated it is, especially given the shutdown.

SPEAKER_00 5:46

Um, for those people who don't know, we're recording right now during the administration shutdown. You're you're seeing a lot of federal authorities, for example, during the shutdown, they came out and said that the CDC, a lot of people got fired at the CDC. But that shouldn't have an impact, I would argue, on MA transactions. What are the big Trump administration factors that uh companies that were doing MA transactions two years ago probably need to think about that they weren't thinking about two years ago?

SPEAKER_02 6:17

Yeah, that's a great question. And I I think that that is a really good question. And I I will say, yeah, like considering where you're manufacturing, you know, we were talking about orange ring, but like country of origin, right? Um, the country of origin of your drug, what and not only where it's where your API is from, right? But also where are you physically pounding the pill. Uh, I think both matter more than ever now. And we've got kind of a little bit of a divergence between what customs kind of considers country of origin for a drug versus what uh the VA might consider country of origin for a drug for purposes of selling on the federal supply schedule or under the federal government contract. So you've got to really pay attention and to both. And then of course, it all ties into this emphasis, the onshoring and the idea of buy America, right? And and if if you thinking about the worth of that asset, if you're able to say that either both or want, you know, API and the pill is finished in the United States, or uh at least one is, and how that might impact your positioning in terms of not only tariffs and tax, but you know, like we just talked about, whether that puts you in the front of the line for accelerated drug approval.

SPEAKER_01 7:36

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SPEAKER_02 7:44

This isn't really a new thing, but uh something that's come up is a lot more for me in due diligence from a pricing lens, is thinking about pricing, which, you know, sometimes that used to be people wouldn't even pay attention to government price reporting until after they bought the company. But I have more, I've had more and more questions about government price reporting, whether that be average sales price, and are we able to reset average sales price in some way? And how could we do that? Um, considering now we have inflation rebates under Medicare. So thinking about that and thinking that through and its impact financially on the asset. And of course, the good old Medicaid uh cap removal, we used to have a cap on Medicaid rebates that actually went away under a statute that was passed under Trump 1.0, um, that has become more and more of a focus. And I think sometimes that's why I see certain products up for sale as well, because they're kind of trapped with the, they're no longer as profitable to the legacy company because of the, you know, increased Medicaid rebates, low 340B price, and all those things. So I'm seeing a lot more focus on pricing. And then of course, just thinking about how it fits into the bigger conversation about drug pricing. You know, is this gonna make me get on the, you know, it do I get to a size or is it such a drug that I'm gonna be on the radar of the administration, whether that be for direct negotiation later down the road under the Inflation Reduction Act for Medicare D, or just in general? Like, am I gonna be the 18th manufacturer that gets a letter from the Trump administration that says, hey, we think you need to lower your prices? What are you gonna do for us in order to avoid tariffs or what have you? So it's been, you know, it's been an interesting time. And I think people are being more thoughtful uh in due diligence, which I always think is is valuable. So what about you? What about you, Darshan? Anything new from the FDA or the enforcement lens that people are focusing more on now, given the change of administration?

SPEAKER_00 9:44

I think it's it's been broader for me. So I'll start with, for example, I just did a uh transaction with a client, um, and they were they had a they had a pre-existing partnership with a Chinese company. And that raises all kinds of flags because you're going, the um the Trump administration's not happy with China, but they also have come to realize that they need China quite a bit. So, how do you, for example, uh deal with the bulk data rule? And how do you transfer data for adverse events to China because you're gonna have to report that and at the same time comply with uh the data security rules that go along with it? Um, for those people who don't know, there's this whole new rule that's not coming from OCR, for example, not from uh the the um Health and Human Services. Instead, it's coming from the Department of Justice. And they're saying that patient information is uh something that the Trump administration cares a lot about. And whether you're talking about about biometrics, you're talking about adverse events, um, they have to be managed very, very carefully. And the reconciliation part of it, you might even have a conflict on how that information gets recorded because the Chinese government will say, we need to know if our label needs to be updated. Um, so if you're doing a transaction globally, keep that in mind. The the US Biosecurity Act, they're looking now at how are you going to partner with it from an IP perspective. And that's right. We don't really know how it's going to play out because it's still the first version of it.

SPEAKER_02 11:16

What it would do is basically not allow you to have any touch to a Chinese company anywhere like in the chain of making a drug, right? Yeah. And that's incredibly broad, if you think about it, in a global economy, where we even have Chinese companies that have manufacturing sites in the United States.

SPEAKER_00 11:35

Exactly right. I'm seeing small diagnostics companies and multi-like global, multinational companies all dealing with uh direct-to-patient stuff. And they're going, how do we directly sell to the patients? So if you have that structure in place, how do you manage patient information? Because companies have always said, we don't want patient information, we don't want to be involved, we don't want to be in that business at all because we don't want to be subject to HIPAA. And yet now with with these engagements, there and there are like a billion different ways these things get done. But um you you want this direct relationship with the patient. So I think that's the future where you are going to have that direct relationship. Um but how that gets managed is gonna become a whole new thing. You you mentioned sourcing, which I think is gonna become a um a really interesting piece. Um, you actually said this in the previous conversation before we started recording, but connecting it to the Sunshine Act, because I know talking to a lot of my DOJ friends, they're looking at Sunshine Act and they're going, we're gonna mine publicly available data. Why wouldn't we? Um you you take that same information, you tie it to uh the um the controlled rule uh the complete response letters, CRLs, that are now publicly available. Um, that's gonna raise all kinds of questions, but that maybe you should be doing research on before you purchase a company. And that's gonna raise its own sort of concerns. Um, you you take promotional compliance just to add on to that. Um you look at the engagement with influencers, and you're seeing a lot of that happening recently. Um, compliance there is gonna become a major concern. And then there's obviously the GMP issues that go along with it. Who owns the product? When is there a change in title? Um who and I see this all the time with manufacturers, they kind of go, our distributors say it's okay, except you actually have the liability. So you're people aren't doing the analysis to go, um, who's responsible for selling the product, who needs to be registered in the different states. And if that registration isn't done properly, who's actually responsible? Because states, my experience, tends to be they typically, and that's not always the case, but they typically aren't the most aggressive ones. The DOJ will do something, and then states will say, we'll just pile on because we don't have to pay for the same costs. Um, so that's been a really interesting thing for me. Um, as I continue. Anything else that stood out for you as as we continue?

SPEAKER_02 14:12

You brought up a good point of publicly available data. And I think it's really important in doing due diligence that you're looking at that in tandem with doing your diligence review. Yeah. Right. So if if you're if if you're getting all these quality reports, for instance, in a data room and they're saying everything's great, but then they have you know a warning letter, you you should be able to map the fact that if they have a warning letter to what they're what they've got in the data room. And I think this comes up a lot in my realm in sales and marketing practices matching to Sunshine Act reporting. Because if they're doing all these speaker programs and they're paying all these doctors to be speakers or their meals, that better be tracking to the Sunshine Act reporting. And if it's not, there's some sort of disconnect and there's got to be a a reason for that. Um, and it could be a very big uh red flag on compliance, right? That could be hiding things or not reporting things. So I think that that's a that's a you know a good safeguard is to always be kind of going through the data room, but also be doing your own research on things that are publicly available at the governmental at the governmental level and otherwise. And you know, getting back to Sunshine, this is a really interesting one, comes up a lot with device due diligence. Sometimes smaller companies get into device, they were tech companies, then they started making like a monitor, right? And it's used to read scans or something. And then all of a sudden they're they're in a healthcare company and they don't even realize that they have a reimbursable device product and that has triggered the obligation to Sunshine Act Report. So that would be a good one. Like it's you know, a good example of you're doing device due diligence and there's no sunshine act reporting, and the question becomes why. Um, so yeah, definitely using those public sources is always a good uh check on your own due diligence work.

SPEAKER_00 16:11

I think there's been an uptick in fraud and compliance enforcement from the DOJ. The DOJ is coming out and saying that we're we want you to have a compliance program. Yes. And the truth is, I don't know any companies that actually have these compliance programs in place. However, if you don't, you're gonna land up having potential successor liability. And um, unless you go out there and self-disclose, which not many companies are doing, even though there's a really good opportunity to do this right now, given that they're saying, we'll we'll put out non-prosecution on the table, which, and you're not seeing enough of that. We've seen a couple of those non-prosecution agreements that came out of it, but I think that that would be a smart move to consider in your back pocket as you're doing the due diligence uh transaction. Then if you look at the employment agreement, um, the employment pilot program, where they said that we want to see clawbacks. And you're not seeing enough of those um clawback program enforcement, which is if you have executives who are not uh being uh compliant, you need to have their employment agreements updated that says that for lack of compliance, we're going to take your bonuses back. You're just not seeing that. Um, another element, I think, is being aware of the whistleblower laws, uh, which the DOJ is now sort of hardcore pushing because we're gonna give whistleblowers the money and they're going to report on you. So, what does that actually mean? And then there's the successor liability that um that comes into play.

SPEAKER_02 17:49

We saw a little bit of a law in healthcare enforcement. I want to say like COVID time, right? And maybe it's just because it was COVID and everything was strange then. But it we did see a little bit of a law, but we there's definitely renewed emphasis, and and it's you were a spot on. It's interesting to see it coming, not only from OIG now, but from the like it's coming at us from all sides uh in terms of front abuse enforcement and compliance. So that is still an idea.

SPEAKER_00 18:19

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SPEAKER_02 18:22

I also think that's an under kind of reviewed area during diligence. Sometimes, you know, it's a check the box. Do we have the seven elements of a compliance program? Do we have policies? But uh really trying to dig in and understand culturally if you're buying the whole company, you know, is is there a culture of compliance there? And what does that look like? You know, do people go to the compliance officer? Or are there hotline calls? Are there at least logs of compliance concerns? Is that are they really is it really just a paper program or are they really monitoring and auditing and and just kind of figuring out, you know, who if if if is it really just a sales organization and they're kind of running the show and the rest of it's kind of behind the scenes, you know, if you're buying that whole company, you're gonna be inheriting that. Even even if you have a really compliant company, trying to pull them in and integrate them could be very difficult when you they're kind of a little bit more rogue. And and you certainly see that, you know, I mentioned the device space. Sometimes you see that in the device space just because they they grew up as an IT company. Um, so if you're a traditional life sciences company that's been in the space for a long time with a really robust cultural client, and then all of a sudden you're inherenting all these sales guys who are viewing themselves as techies, you you are gonna have integration problems. Not saying don't do the deal, just know that you're gonna have integration.

SPEAKER_00 19:44

A lot of the deals I'm seeing. Compliance is a nice to know, but they're not deal killers yet, surprisingly. People are still generally going, good to know. We'll insure against it, we'll even ask for indemnification. It's not gonna kill the deal. Is that still the perspective you're seeing? Or am I just dealing with that type of client?

SPEAKER_02 20:08

No, no, it's still the perspective I'm seeing. I don't think, I don't think we've like as I mentioned before, I'm starting to see more and more focus on drug pricing, which is because I think that was historically kind of an under uh under under uh under reviewed area prior to buying a company. But I I would agree. I I find that still it's pretty curs, it it can be pretty cursor in terms of compliance due diligence. And I I don't know why that is, given given the, as you so rightly pointed out, the potential exposure under criminal statutes related to compliance.

SPEAKER_00 20:42

The other thing that jumps out at me is the FDA between Makari and uh between Vinevrasad and everyone else. I find it fascinating that they're saying that we're going to be really, really focusing on clinical research and on healthcare fraud and on uh um promotional compliance. And interestingly, they're using AI. And I'm not seeing anyone talk about using AI in due diligence. I I think it's a little early. Um but but I'm curious on your perspective, do you think AI has a role in in due diligence as we continue?

SPEAKER_02 21:22

I at the very least, if you had a whole stack of contracts and a data room, you could use a tool to help you summarize them, right? Now, I always worry, I mean, I I I sometimes use AI to to do that or to compare testimony, yeah, right, like a depot to another interview and and see what the differences are. And sometimes it's good and sometimes it's not. And I think that that's that's kind of where we are with AI right now. You know, sometimes it's a good starting point, but I also know that it's wrong in certain instances. And so, I mean, I think you have to be mindful of that when you're doing diligence, that the summary, you know, you're you're kind of checking a little bit of the summary back to the originating document. But I do think there's a role there. Um in and we we certainly are eventually gonna see it. And I also think you're spot on. I do think the government is, I think Doge used it. Uh, and I think they are still using it. And and I'll give you an example. If a drug was reimbursed under Medicare Part B, the Medicare portion of CMS didn't necessarily know whether they had a Medicaid rebate, but I see that being mapped together. Um, and that's that's a good example, just automatic mapping of what's in the Medicaid system drug-wise to the FDA drug listing and and automated messaging if there isn't a match. Like those, and then you know, uh it sends an automated message, and maybe sometimes it's right and sometimes it's wrong, or there's a reason, but you're then the government gets more information from your response. So the government is definitely using it. I I imagine they'll start to use it more in enforcement. Maybe they'll match something up to the Sunshine Act database or or what have you, um, as as we go on in time. And I think I think we will also see tools be used to help summarize data in in data rooms related to due diligence.

SPEAKER_00 23:15

I'm gonna end this with a pet peeve of mine. And I'm curious if you share this pet peeve or it's been a non-factor for you for the most part, but um, whenever you do the IP due diligence, right? You always find the here's my list of patents and copyrights and blah, blah, blah. And I always go, okay, how many of those translate into anything that I'm actually buying? And you never get that translation, you never get that mapping. I own 50 patents, okay, and how many of those impact the five products I'm buying?

SPEAKER_02 23:46

Yeah.

SPEAKER_00 23:47

And I never see that. And I'm just curious, is that a is that just a pet peeve, or does everyone else sort of share some of those like you're like I'm a beneficial?

SPEAKER_02 24:00

But I think that is a that is an I think an excellent point. And I think that is one, that is an area where it also has relevance to like can you tie the patent to the FDA approval to the drug category and Medicaid, you know, like that's another area where we could see AI kind of coming into play. And maybe that, maybe there would be an AI tool that would help get over your pet peeve and map map up the patent to the drugs.

SPEAKER_00 24:29

Or appropriately, and maybe I've my experience is more that they don't want to because you might find out that the IP doesn't match up the actual regulatory uh purchases, and that's okay. That's completely okay. But then you go, I'm not paying you for the IP because it has no value for me. Instead, what I'm gonna buy is the exclusivity. I'm gonna buy the market share. Approval, the approval. Yeah. Those are that's the actual value I'm buying. And knowing that is, I think, important in purchasing a company. But before we go, Stephanie, um, because we're almost at the 30-minute mark, how can people reach you?

SPEAKER_02 25:06

Via email, stephanie.trunk at afslall.com, or you can Google me. You I come right up. Uh, and we do I do speak and write a lot on life science topics on our blog, and you can sign up for alerts from our blog uh from our website.

SPEAKER_00 25:22

Very cool. And you, Darshan. You can reach me at darshan d-ar-s-h a n at Kilkarnelaw firm.com. I really should find a way of making it shorter. Uh, that's darshan at Kilkarnelaw Firm.com. Or you can find me, for example, on LinkedIn. Um I think I'm the only Darshan Kilcarney on there. I could be wrong. And and we welcome questions, we welcome conversations, and um, I look forward to hearing from you guys. Thanks, everyone. Call click or email.