Fresenius Had Testing Woes Similar to Akorn, Unit Head Says

(Bloomberg) -- A Fresenius SE executive acknowledged his company has grappled with testing problems similar to those the German health-care company cited as a basis for pulling out of a $4.3 billion deal to buy U.S. generic drugmaker Akorn Inc.

Mats Henriksson, chief executive of a Fresenius unit, testified Thursday that U.S. Food and Drug Administration inspectors in 2013 questioned drug-injection testing and test-result storage at one of the firm’s plants in India. It took the company two years to address those problems, Henriksson told Delaware Chancery Judge Travis Laster.

If Fresenius is forced to go through with the combination, the health-care conglomerate would take steps to recall all Akorn products tied to the questionable test results and spend four years changing operational procedures, Henriksson said. It would cost Fresenius an estimated $254 million, he said.

Fresenius officials have criticized Lake Forest, Illinois-based Akorn for using the exact same tests at some of its facilities and questioned whether the drugmaker’s computer security was too lax to guarantee the reliability of its test results.

Company officials say Akorn’s testing miscues, along with operational problems that drew FDA sanction, justified canceling the $34-per-share deal. Akorn counters Fresenius is using minor mistakes as a pretext for backing out of the deal.

The German company’s shares dropped the most in two months on Friday, trading down as much as 3.7 percent to 66.2 euros in Frankfurt.

Altered Akorn Test Data Cited as a Reason for Canceled Deal

“The big difference is that we were talking about one site for Fresenius,” Henriksson said. “At Akorn, we were talking about problems with research and development and at multiple sites.”

Laster must decide whether Fresenius properly walked away from the Akorn buyout in April or whether the German company must finalize the deal.

Once the FDA flagged testing problems at the Kalyani plant in West Bengal, India, Fresenius officials shut down the facility and stopped distribution of all products made there, Henriksson said. It brought in consultants to investigate how the testing problems occurred, he said.

The FDA found the company’s computer software wasn’t properly overseeing injection tests of drug ingredients and wasn’t allowing quality checks. “Out-of-specification or undesirable results were ignored and not investigated,” regulators noted in a warning letter. “Only passing results were considered valid,” they added.

Fresenius complained about similar shoddy testing methods used at Akorn, noting its former head of quality control altered test results and then submitted them to the FDA. Officials of the Bad Homburg, Germany-based company also uncovered examples of falsified entries in lab notebooks and destroyed testing notes.

Under cross examination, Henriksson conceded Fresenius executives began to weigh pulling out of the merger in September 2017 after Akorn had two quarters of disappointing sales. Fresenius officials should “build a legal case” to justify a withdrawal from the combination, the company’s senior management noted in an email.

“That was one avenue we had to march,” Henriksson said. While scuttling the merger was one option, the executive said he was focused on plans for rejuvenating Akorn rather than destroying the combination’s potential value.

That email came about two weeks before a whistleblower sent a letter to Fresenius executives alerting them to falsified test data Akorn had submitted to the FDA in a new drug application. Fresenius later learned Mark Silverberg, Akorn’s former head of quality control, had fudged test results on an antibiotic on which the company was seeking FDA approval.

Nathan Sheers, a Washington-based lawyer hired by Fresenius to investigate the depth of Akorn’s data-integrity woes, told Laster he found problems “across the board” at the drugmaker. He said the firm’s computer system has such systemic problems Akorn officials couldn’t substantiate their drug-testing data, the attorney said.

Once the FDA gets the full picture of Akorn’s operational snafus, Sheers said regulators are likely to “throw the book” at the generic drugmaker and may recommend criminal prosecution of some executives.

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

©2018 Bloomberg L.P.

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