The Rules of Acquisition
This is a continuation from my previous post, so if you have not read it, take a look HERE. I’m going to get into some of the business concepts first, because as a Quality/RA/R&D professional, having a good understanding of the business will only help you be better at your job. We live in a capitalistic society, and if your company is not profitable, you won’t have a job.
First off, could Abiomed/J&J have prevented this warning letter? Well maybe. If they had a better plan and execution after Day 1, then they would have at least been in a better position. (Note, Day 1 is the term for the first day after an acquisition is finalized and the acquired company is now part of the acquiring company.)
Let’s first look at J&J and their decision to buy Abiomed. J&J is going through the process to split up into smaller companies, so that was probably a factor here, but I’m going to ignore that for now as it’s not too pertinent to this discussion. However, J&J already had some cardiovascular devices to treat diseases like atrial fibrillation (AFib) and stroke. So Abiomed was a good business to buy to expand J&J’s footprint for treating cardiovascular disease.
Rule of Acquisition 7: Buy a company which augments your current company and goals.
Abiomed’s big product is their Impella devices, which provide temporary support to the heart when it is needed. This can be patients with coronary artery disease or other issues when the heart has undergone trauma, and it needs temporary support to help pump blood.
From a business side, and this is not just for medical devices, it helps to have a “full bag” when trying to sell something to someone. The more needs that a salesperson can meet for their client, the more sales that person will make. In J&J’s case, since they already sold devices to cardiologists, by adding in the Abiomed devices, their sales reps now have more tools in the bag, and they can, ideally, sell more and make more money.
At the time of the aquation, J&J’s EVP Ashley McEvoy stated, ““The completion of this acquisition allows Johnson & Johnson MedTech to expand our portfolio in the high-growth cardiovascular markets …”
Abiomed itself has been around for a while, it was founded in 1981. They initially focused on creating an artificial heart, and they implanted the first ever in 2001. In 2004 a new CEO came in, Mike Minogue, and he didn’t think the artificial heart market was the best, so he had the company pivot and focus on heart recovery devices.
They changed their focus and eventually become profitable in 2011 (profitable meaning that more money came in than they spent). For a company to take 30 years to become profitable is, well, intriguing.
Abiomed went public in 1987, so it is pretty surprising that they kind of putzed around for that long. Abiomed’s stock price really took off in 2018 after securing some FDA clearances and usage in the marketplace. By the time J&J was ready to buy in in 2022, they had been doing pretty well. Their revenue in 2022 was just over $1 Billion, compared to $770Million in pre-covid 2019. At the time, from a business perspective, it was a move that made sense for J&J.
Rule of Acquisition 72: There is more to a company than just their financial statements.
On to the Quality side of the discussion. It is good to keep in mind that the FDA treats big companies and small companies much differently. For FDA inspections, they are just not as tough on smaller companies. That does make sense; since they are smaller, their exposure to public health is smaller and hence the FDA is not going to invest as much time and energy into those inspections. I hate it when a larger med device company is looking at buying a smaller one, someone says “They passed their FDA inspection, so everything there must be fine!” That is not true at all.
Rule of Acquisition 99: A passed FDA inspection means nothing.
But J&J, being one of the biggest med tech companies in the world, is held to a higher standard by the FDA. Hence, once Abiomed became part of J&J, their compliance bar immediately went much higher. The FDA is aware of this, and very much cares to see that the acquired company adjusts its ways to embrace this.
After an acquisition, the FDA essentially gives the acquiring firm some time to fix what needs to be fixed. This is incumbent upon the firm having a good process to integrate the new firm and fix any issues they find. A lot of this is going to rest upon the due diligence process and internal audits done post-acquisition.
So, let’s walk through what should happen…
Due diligence is done to determine if it is worthwhile buying the company. This often involves a lot of finical review, but some will include quality documentation. Due to the nature of insider trading and other concerns this is done by a small team who have specific confidential expectations about their activities. This is often not a fully in-depth review, but just to kinda get a feel of the state of the company and if there are any big issues to be aware of.
Rule of Acquisition 248: Due diligence is just the beginning.
I have been a part of a few acquisition teams, and honestly they are quite fun and cool. Everyone gets excited about a potential acquisition, and if the business side makes a lot of sense, there can often be a big push to get the deal done. In those cases, the due diligence may not be as thorough, or not as impactful in the final decision. Also, the firm being acquired may not give the due diligence team access to everything; they want to sell the company for as much as they can. If the buying company really wants to buy them, they might be OK with not seeing everything.
After acquisition, now that the acquired company is part of your bigger company, it’s now your problem.
Rule of Acquisition 261: You buy it, your problem.
Now that the big company has access to everything, a thorough internal audit needs to be done. This is to identify issues that need to be fixed. And this should not be a cursory review, this needs to go deep. This should include individuals beyond the internal audit team, but the individual process owners who ideally really know the processes and what needs to be happening.
As an example, from the Abiomed warning letter, the J&J process owner for MDRs should have looked at their MDR procedures and make sure they were OK. In this case, they would have found that the procedures look good. Next, they would want to look at records that would have the highest product risk or compliance risk. For MDRs that is to check on time MDR reporting, and a review of the non-reportable decisions. This does not need to be a 100% review, but a sizable statistical sample size. In the case of the Abiomed finding for improper MDR no decision rationale for user error, if a sample of those non-reportables were reviewed, there would be a very good chance that one of the incorrect non-decisions would have been found. If that were the case, then the review would have been expanded to look at all of those decisions, and possibly more.
Rule of Acquisition 381: Proper Planning Prevents Poor Performance.
At this point, the firm is sitting on a “get out of jail free” card. The FDA likes to see that things are in control, and you are trying to make things better. What should happen is all the findings from due diligence and internal audit are identified, a plan to rectify them is created, and the plan is executed on time. This can take a lot of resources, and ideally that would have been accounted for as part of the decision to buy the company.
In the MDR example, the company should have followed these steps:
Identify the issue with the non-reportable MDRs
Place that finding in the Integration Quality Plan
Identify the actions to fix the issue (filing the MDRs and potentially staff training)
Provide a timeline to complete the actions
Complete the actions on time
This is not all that different from a CAPA or other internal audit findings. If the company had followed the steps above, then at least for the MDR findings they most likely would not have gotten a finding from the FDA.
This goes the same for the other issues identified in the warning letter. J&J should have done a regulatory review to see what the products were cleared for and determine if the products were still within that scope. Also looking at complaints to see if any recall actions need to be done, and if any technical bulletins were really recalls.
Like I said before, the aim is to demonstrate control to the FDA. In the ideal state above, J&J found the issue and fixed the issue. At worst the FDA might give a 483 finding for late MDR reporting, but it probably would have stopped there and not been escalated to a warning letter. This same concept would have worked for the non-reporting of recalls and the other process failures that the warning letter identified.
Rule of Acquisition 402: Keep your friends close, keep the FDA closer.
But at the end of the day, the FDA can’t get too upset with the acquiring firm for finding and fixing problems that happened before they bought the company. The FDA inspector would be happy to see this, which leads to a good relationship with the FDA and prevents warning letters.
Rule of Acquisition 438: Once you bought it, keep your focus on it.
Often these integrations are not done well because it takes a lot of resources to do this correctly. On their own, it takes a lot of resources to manage quality processes well. Often the individuals tasked with these projects have a day job, and they just don’t have the time in their day to do it all. Hence having a specific team for integrations is a luxury that most companies just don’t have.
Rule of Acquisition 452: Whatever problems you think a company has before you buy it, multiple it by 3.
People get excited about these acquisitions and want to get it done, but they will often turn a blind eye to problems that might be there. You can’t see all the issues during due diligence, and there are often more issues that will need resources. This needs to be factored in during the buy decision. If the business case is not profitable for a large integration team, then it is not a good business decision to buy the company. There is only so long that you can blame issues on the company pre-purchase until it becomes your problem. Get in there quick, find the issues and fix them.
Rule of Acquisition 472: Stockholders don’t care about quality issues until they care about quality issues.
With Abiomed getting a warning letter, they are having to invest a lot more resources into remediating and fixing the issues the FDA found for them. This is at least twice as expensive as if they found the issues themselves. Wall Street often does not like it when a company spends more money than it needs to … and this can directly impact the stock price.
In conclusion, medical device integrations are difficult and take resources. Teams need to start working on integration activities early and often to ensure that the acquired company is providing safe and effective products to their customers. A moderate investment up front can save a lot of money and headache down the road. And of course, if you are looking to acquire a company, feel free to reach out to Medical Device How for support and unbiased opinions.
Reference: “The Rules of Acquisition” are a concept from the greatest TV show of all time, Star Trek. It is a set of rules for the Ferengi, who are a hyper capitalistic society, and the rules drive how they should conduct business. I have adopted it here as rules for medical device acquisitions. I hope all you Trekkies enjoyed it, I know you’re out there.
