Akorn Was Warned About Problems Before Merger, Executive Says

(Bloomberg) -- A consultant warned Akorn Inc. before its merger with Fresenius SE about production-line problems that raised questions about the integrity of data it provided to drug regulators, an Akorn executive testified as a trial over the failed $4.3 billion deal began.

The consultant, hired to review procedures and operations at Akorn’s Decatur, Illinois, facility in 2016, found cameras recording drug vials coming down a line didn’t properly store pictures used to check cleanliness and safety, Kim Wasserkrug, an Akorn vice president, told Delaware Chancery Court Judge Travis Laster.

Fresenius officials contend manufacturing problems at the Decatur plant and others, along with Akorn’s submission of allegedly phony data to federal regulators, are justifications for nixing the $34-per-share deal. Akorn has countered in court papers Fresenius is blowing minor mistakes out of proportion to create a pretext for canceling the combination and Wasserkrug supported her company’s position in Monday’s testimony.

Laster will decide after the week-long trial whether Fresenius properly walked away from the Akorn deal in April. Some analysts have predicted the deal could still close at a lower price. Anna Pavlik, an analyst at United First Partners, told investors July 6 that Akorn has an 80 percent chance of persuading Laster to reject Fresenius’s request to walk away from the deal.

Wasserkrug, who oversees quality control, testified about various issues Akorn faced at its main plant in Decatur and a facility in Somerset, New Jersey.

In 2007, for example, the U.S. Food and Drug Administration found problems keeping vials sterile at the Decatur plant. Regulators also sent a warning letter about some of the company’s promotional strategies in 2012, she said. The Akorn executive said the company addressed the problems.

Akorn hired a consultant from Cerulean LLC after the FDA questioned the company’s operations to train employees and evaluate the company’s risks, Wasserkrug said. That consultant flagged the camera problem, she added.

The drugmaker wasn’t concerned about the cameras because the consultant didn’t know employees checked the vials before they were filled, the vice president said. Still, the company came up with a plan to address the miscues the consultant found, Wasserkrug said.

Stability Testing

Fresenius also has questioned other procedures at the company, accusing Akorn executives of pressuring employees to “manipulate or modify” data about stability testing done on drugs at Akorn plants. That testing checks the quality of a drug over a period of time. Officials of Bad Homburg, Germany-based Fresenius said results of those tests couldn’t be verified during due diligence for the merger.

The would-be suitor alleges Akorn executives sought to cover up its operational and testing problems in hopes of getting the merger completed. Fresenius executives also accuse Akorn of fraud. Wasserkrug disputed that, saying the Akorn scientists were following company procedure in setting up tests.

“I wouldn’t call it fraud -- that means they had malicious intent,’’ she said. “If there’s gap in procedure, that’s not fraud.’’

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Under cross-examination, Wasserkrug acknowledged a 2016 FDA audit found problems with Akorn’s computer system that haven’t been addressed more than two years later. But she downplayed Akorn’s computer woes, saying they were “consistent with what I’ve seen at other companies.’’

Wasserkrug also acknowledged Akorn’s top executives canceled audits of the company’s data issues after the merger was announced in 2017. Andrew Gordon, Fresenius’s lawyer, said the German company’s pre-merger review found 22 issues had been left unfixed. Wasserkrug said she didn’t know why they weren’t addressed.

Fresenius contends former Akorn workers played fast and loose with drug testing and submitted phony results to the FDA as part of applications for approval to sell new products.

Gordon said Fresenius’s review of the company’s testing found three of Akorn’s recent drug submissions to the FDA included data that had been manipulated or falsified. Wasserkrug said Akorn’s probe into its testing procedures won’t be wrapped up until October.

The case is Akorn Inc. v. Fresenius Kabi AG, 2018-0300, Delaware Chancery Court (Wilmington).

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